The Spider of Finance

Howard Davies (Olycom)

There is not (yet) an international group that audits the FSB's effectiveness. But if there were, what would it say about the FSB's performance so far, under the leadership of Mario Draghi and then of Mark Carney, each of whom did the job in his spare time, while running important central banks?
On the asset side of the balance sheet, the auditors would be bound to note that the Board has done much useful work. Its regular reports to the G-20 pull together the diverse strands of regulation in a clear and comprehensible way. There is no better source of information.

They would also record that pressure from the FSB has accelerated the work of sectoral regulators. The second Basel accord took more than a decade to conclude; Basel 3 was drawn up in little more than 24 months (though implementation is taking quite long). The performance of the IOSCO and the IAIS has similarly been sharpened by the need to report progress through the FSB.
The Board has also issued some valuable warnings in its so-called “vulnerabilities” assessments. It has pointed to emerging tensions in the system, without falling into the trap of forecasting ten of the next three crises. And its peer review mechanism is prodding individual countries to strengthen their regulatory institutions.
Nonetheless, a frank assessment would acknowledge that this spider has so far caught few flies. To switch animal metaphors, it is a watchdog without teeth. It can neither instruct the other regulators what to do (or not do) nor force member countries to comply with new regulations.

Indeed, the entire edifice of global financial regulation is built on a “best endeavors” basis. The FSB's charter, revised in 2012, says that signatories are subject to no legal obligations whatsoever. Unlike the World Trade Organization, for example, no international treaty underpins the FSB, which means that countries cannot be sanctioned for failing to implement the standards to which they are ostensibly committed.
So a fair verdict would be that the FSB has done no more and no less than what its political masters have been prepared to allow it to do. There is no political will to create a body that could genuinely police international standards and prevent countries from engaging in competitive deregulation – and prevent banks from engaging in regulatory arbitrage. It seems that we must await the next crisis for that resolve to emerge. In the meantime, the FSB, with all of its weaknesses, is the best we have.

Howard Davies, former Chairman of Britain's Financial Services Authority, Deputy Governor of the Bank of England, and Director of the London School of Economics, is a professor at Sciences Po in Paris.

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