Social Europe

politics, economy and employment & labour

  • Themes
    • Global cities
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter
  • Membership

The Spider Of Finance

Howard Davies 21st October 2014

davies bio

Howard Davies

The global system of financial regulation is extraordinarily complex. Partly for that reason, it is little understood. In order to explain it to my students at Sciences Po in Paris, I have devised a kind of wiring diagram that shows the connections among the different bodies responsible for the various components of oversight. It makes a circuit board look straightforward.

Many people show some spark of recognition at the mention of the Basel Committee on Banking Supervision, which sets capital standards for banks. They may also have heard of the Bank for International Settlements, the central banks’ central bank, in which the Basel Committee sits. And the International Organization of Securities Commissions (IOSCO), which sets standards for exchanges and securities regulators, has name recognition in some quarters. But when you get to the International Association of Insurance Supervisors, brows furrow.

There are many other groupings. The International Accounting Standards Board does roughly what you might expect, though the Americans, while members, do not in fact use its standards – which are now confusingly called International Financial Reporting Standards. But the IASB has spawned other committees to oversee auditing. There is even – reminiscent of Hermann Hesse’s last novel, The Glass Bead Game – an international body that audits the bodies that audit the auditors.

The Financial Action Task Force sounds dynamic, like a rapid-response team one might send to a troubled country. In fact, it is the part of the OECD that monitors the implementation of anti-money-laundering standards. Why it is part of the OECD when its remit is global is a mystery few can explain.

This elaborate architecture (and there is a lot more) was assembled piecemeal in the 1980s and 1990s. Until the Asian financial crisis, it was a web without a spider at its center. When Hans Tietmeyer, a former head of the Bundesbank, was asked by G-7 finance ministers to review its effectiveness, he recommended a new spider, known as the Financial Stability Forum (FSF), which would examine the financial system as a whole and try to identify vulnerabilities that might cause future trouble.

I was a member of the FSF for five years. I confess that I am rather afraid of spiders, but even an arachnophobe like me found little reason to be worried. The FSF was not a scary creature, and the individual regulators, national and international, were largely left to their own devices, with all of the unhappy consequences with which we have become acquainted.

Finance

Regulating financial markets still remains unfinished business as the political will is lacking.

Before 2007, there was little political interest in tougher global standards, and individual countries resisted the idea that an international body might interfere in their sovereign right to oversee an unsound banking system. So when the next crisis hit, the FSF was found wanting, and in 2009 the G-20 governments decided that a tougher model was needed – the Financial Stability Board. The FSB has now been in operation for five years, and is currently working on some new proposals to deal with too-big-to-fail banks, which will be on the menu of the forthcoming G-20 meeting in Brisbane (along with surf and turf, Pavlovas, and other Australian delicacies).

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.

© Project Syndicate

Howard Davies

Howard Davies, a 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.

You are here: Home / Politics / The Spider Of Finance

Most Popular Posts

Russia,information war Russia is winning the information warAiste Merfeldaite
Nanterre,police Nanterre and the suburbs: the lid comes offJoseph Downing
Russia,nuclear Russia’s dangerous nuclear consensusAna Palacio
Belarus,Lithuania A tale of two countries: Belarus and LithuaniaThorvaldur Gylfason and Eduard Hochreiter
retirement,Finland,ageing,pension,reform Late retirement: possible for many, not for allKati Kuitto

Most Recent Posts

Nagorno-Karabakh,European Union,EU,Azerbaijan,Armenia Azerbaijan exploits vacuum on Nagorno-KarabakhGeorge Meneshian
Abuse,work,workplace,violence Abuse at work: who bears the brunt?Agnès Parent-Thirion and Viginta Ivaskaite-Tamosiune
Ukraine,fatigue Ukraine’s cause: momentum is diminishingStefan Wolff and Tetyana Malyarenko
Vienna,social housing Vienna social-housing model: celebrated but misusedGabu Heindl
social democracy,nation-state Social democracy versus the nativist rightJan Zielonka

Other Social Europe Publications

strategic autonomy Strategic autonomy
Bildschirmfoto 2023 05 08 um 21.36.25 scaled 1 RE No. 13: Failed Market Approaches to Long-Term Care
front cover Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship

Eurofound advertisement

Eurofound Talks: does Europe have the skills it needs for a changing economy?

In this episode of the Eurofound Talks podcast, Mary McCaughey speaks with Eurofound’s research manager, Tina Weber, its senior research manager, Gijs van Houten, and Giovanni Russo, senior expert at CEDEFOP (The European Centre for the Development of Vocational Training), about Europe’s skills challenges and what can be done to help workers and businesses adapt to future skills demands.

Listen where you get your podcasts, or for free, by clicking on the link below


LISTEN HERE

Foundation for European Progressive Studies Advertisement

The summer issue of the Progressive Post magazine by FEPS is out!

The Special Coverage of this new edition is dedicated to the importance of biodiversity, not only as a good in itself but also for the very existence of humankind. We need a paradigm change in the mostly utilitarian relation humans have with nature.

In this issue, we also look at the hazards of unregulated artificial intelligence, explore the shortcomings of the EU's approach to migration and asylum management, and analyse the social downside of the EU's current ethnically-focused Roma policy.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

WSI European Collective Bargaining Report 2022 / 2023

With real wages falling by 4 per cent in 2022, workers in the European Union suffered an unprecedented loss in purchasing power. The reason for this was the rapid increase in consumer prices, behind which nominal wage growth fell significantly. Meanwhile, inflation is no longer driven by energy import prices, but by domestic factors. The increased profit margins of companies are a major reason for persistent inflation. In this difficult environment, trade unions are faced with the challenge of securing real wages—and companies have the responsibility of making their contribution to returning to the path of political stability by reducing excess profits.


DOWNLOAD HERE

ETUI advertisement

The future of remote work

The 12 chapters collected in this volume provide a multidisciplinary perspective on the impact and the future trajectories of remote work, from the nexus between the location from where work is performed and how it is performed to how remote locations may affect the way work is managed and organised, as well as the applicability of existing legislation. Additional questions concern remote work’s environmental and social impact and the rapidly changing nature of the relationship between work and life.


AVAILABLE HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube