Financial Stability Board

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The Financial Stability Board, successor to the Financial Stability Forum, was created at the 2009 G-20 London summit, and includes all G-20 major economies, FSF members, Spain, and the European Commission.[1]

Contents

Overview

The FSB has been established to address vulnerabilities and to develop and implement strong regulatory, supervisory and other policies in the interest of financial stability. It comprises senior representatives of national financial authorities (central banks, regulatory and supervisory authorities and ministries of finance), international financial institutions, standard setting bodies, and committees of central bank experts.

Mario Draghi, Governor of the Banca d'Italia, chairs the FSB in a personal capacity. The Board is supported by a small secretariat based at the Bank for International Settlements in Basel, Switzerland.[2]

Charter of the FSB

Article 2. Mandate and tasks of the FSB

  • (1) As part of its mandate, the FSB will:
    • (a) assess vulnerabilities affecting the global financial system and identify and review on a timely and ongoing basis the regulatory, supervisory and related actions needed to address them, and their outcomes;
    • (b) promote coordination and information exchange among authorities responsible for financial stability;
    • (c) monitor and advise on market developments and their implications for regulatory policy;
    • (d) advise on and monitor best practice in meeting regulatory standards;
    • (e)undertake joint strategic reviews of the policy development work of the international standard setting bodies to ensure their work is timely, coordinated, focused on priorities and addressing gaps;
    • (f) set guidelines for and support the establishment of supervisory colleges;
    • (g) support contingency planning for cross-border crisis management, particularly with respect to systemically important firms;
    • (h) collaborate with the International Monetary Fund (IMF) to conduct Early Warning Exercises; and
    • (i) undertake any other tasks agreed by its Members in the course of its activities and within the framework of this Charter.
  • (2) The FSB will promote and help coordinate the alignment of the activities of the SSBs to address any overlaps or gaps and clarify demarcations in light of changes in national and regional regulatory structures relating to prudential and systemic risk, market integrity and investor and consumer protection, infrastructure, as well as accounting and auditing.

Report of the Financial Stability Board to G20 Leaders

I. Establishment of the Financial Stability Board

At the London Summit, the G20 Leaders established the FSB with an expanded membership and a broadened mandate to promote financial stability. At its inaugural meeting on 26-27 June, the FSB set up the internal structures needed to address its mandate, including a Steering Committee and three Standing Committees:

  • for Assessment of Vulnerabilities;
  • for Supervisory and Regulatory Cooperation;
  • and for Standards Implementation.

The FSB also established a Cross-border Crisis Management Working Group, and an Experts Group on non-cooperative jurisdictions. With these structures, the FSB has taken forward its work to advance the London reform agenda:

  • The Steering Committee has overseen the progress and coordination of international policy development across the range of the London Summit recommendations and their consistent implementation internationally.
  • The Standing Committee on Assessment of Vulnerabilities (SCAV) has set up enhanced processes for identifying and assessing vulnerabilities affecting the global financial system and for proposing the policy responses needed to addressthem. The SCAV’s first assessment was presented to the FSB plenary in September and will be part of the joint International Monetary Fund (IMF)-FSB Early Warning Exercise.
  • The Standing Committee for Supervisory and Regulatory Cooperation has set out next steps to strengthen the operation of supervisory colleges, including the development of a protocol to improve information exchange and coordination among home and host supervisors. The Committee will be developing policy responses for addressing the problem of “too-big-to-fail” institutions.

The Cross-border Crisis Management Working Group is formulating and overseeing action to implement the FSB Principles for Cross-border Cooperation on Crisis Management endorsed by G20 Leaders at the London Summit. Firm-specific cross-border contingency planning discussions have been scheduled for all the main global financial institutions. The group is setting out the expectations and deliverables for these discussions.

  • The Standing Committee for Standards Implementation has begun work to develop a peer review mechanism to strengthen adherence to international prudential and regulatory standards, and to identify and incentivise improved compliance by non-cooperative jurisdiction. Its deliverables are described in detail in this note.
  • The FSB’s Working Group on Sound Compensation Practices has reconvened and is delivering to the Pittsburgh Summit guidance detailed specific proposals to strengthen implementation of the FSB Principles for Sound Compensation Practices endorsed by the London Summit.

FSB creates systemic risk list

"Thirty global financial institutions make up a list that regulators are earmarking for cross-border supervision exercises, the Financial Times has learnt.

The list includes six insurance companies – Axa, Aegon, Allianz, Aviva, Zurich and Swiss Re – which sit alongside 24 banks from the UK, continental Europe, North America and Japan.

The list has been drawn up by regulators under the auspices of the Financial Stability Board, in an effort to pre-empt systemic risks from spreading around the world in any future financial crisis.

Insurers are considered systemically important for a variety of reasons: they might, for example, have a large lending arm, such as Aviva, or a complex financial engineering business, akin to that of Swiss Re.

Supervision spotlight

Banks

US

Canada

  • Royal Bank of Canada

UK groups

  • Barclays
  • HSBC
  • Royal Bank of Scotland
  • Standard Chartered

Switzerland

  • Credit Suisse
  • UBS

France

  • BNP Paribas
  • Société Générale

Spain

  • BBVA
  • Santander

Japan

  • Mitsubishi UFJ
  • Mizuho
  • Nomura
  • Sumitomo Mitsui

Italy

  • Banca Intesa
  • UniCredit

Germany

  • Deutsche Bank

Netherlands

  • ING

Insurance groups

  • Aegon
  • Allianz
  • Aviva
  • Axa
  • Swiss Re
  • Zurich

AIG of the US, the failed insurance group, was proven to be a vast systemic risk last year, in large part because of its diversification from insurance into complex financial engineering.

Raj Singh, chief risk officer of Swiss Re, said: “The real interconnectivity for the insurance industry is more muffled in that there needs to be a dual trigger for there to be any big systemic effects.”

The list, which is not public, contains many of the multinational bank names that would be widely expected.

The exercise follows the establishment of the FSB in the summer and is principally designed to address the issue of systemically important cross-border financial institutions through the setting up of supervisory colleges.

These colleges will comprise regulators from the main countries in which a bank or insurer operates and will have the job of better co-ordinating the supervision of cross-border financial groups.

As a spin-off from that process, the groups on the list will also be asked to start drawing up so-called living wills – documents outlining how each bank could be wound up in the event of a crisis.

Regulators are keen to see living wills prepared for all systemically important financial groups, but the concept has split the banking world, with the more complex groups arguing that such documents will be almost impossible to draft without knowing the cause of any future crisis.

Paul Tucker, deputy governor of the Bank of England, and head of the FSB working group on cross-border crisis management, said recently that the wills – also known as “recovery and resolution” plans – would have to be drawn up over the next six to nine months.

National regulators, led by the UK, are known to have begun pilot-testing the living wills exercise with some of the listed banks in the past few weeks."

FSB "Early Warning Exercise"

Early Warning Exercise

The initial, “dry run” Early Warning Exercise (EWE) was presented to the International Monetary and Financial Committee (IMFC) meeting in Washington on 25 April. The IMF Managing Director and FSB Chairman noted that, despite an improving tone in markets, significant challenges remained in a number of areas, including strengthening bank balance sheets, restoring a market environment supportive of credit extension, establishing fiscal sustainability and setting out a clear path for regulatory reform.

In preparation for the next iteration of the EWE, to be jointly presented at the IMFC meeting in October, the IMF and FSB have further refined their analytical tools and processes. The two partners have agreed on a process of collaboration involving regular consultations and exchange of ideas and analyses. The FSB’s contribution will draw on the work of its Standing Committee on Assessment of Vulnerabilities (SCAV), which has identified a number of priority vulnerabilities together with proposals for policy responses to mitigate these risks. The IMF, through its membership in the SCAV and through regular contact between IMF staff and the FSB Secretariat, has contributed to this process and has also drawn on the SCAV’s work in developing its own assessments and analysis.

Going forward, the partners will draw on the experiences of the first two EWEs to further refine their methodologies and modes of collaboration as they prepare for the April 2010 presentation and subsequent rounds. The SCAV, which was only formally constituted in July 2009, will be able to make use of a full six-month cycle to conduct in-depth analysis of risks and policy responses. Issues that were identified in the October 2009 EWE will be investigated in more depth and progress on actions to mitigate previously identified concerns will be assessed.

FSB to link pay to capital, refrain from caps

"The Financial Stability Board is expected to unveil Friday a series of guidelines aimed at linking bank pay to a bank’s capital and liquidity position, but will stop short of imposing caps on bonuses, people familiar with the matter said. Under the FSB rules, which will be presented to a gathering of the world’s 20 leading economies in Pittsburgh, national banking supervisors should play a central role in assessing banks’ compensation plans, with a view to helping them preserve a strong capital base and a sound liquidity position.

This in turn should safeguard the overall stability of the global financial system, by curbing excessive pay packages that encouraged excessive risk taking many believe to be at the heart of the financial crisis, these people said.

These recommendations come as banks will face tougher capital requirements within the next two to three years under rules currently being devised by the Bank for International Settlements, an international group of banking regulators.

Although the FSB isn’t expected to spell out a list of sanctions for non-compliant banks, it should leave sanctions to the discretion of national banking supervisors.

At a meeting in London earlier this month, G-20 finance ministers failed to agree to impose a cap on bonuses, and instead asked the FSB to address the thorny issue by coming up with a list of global standards on banks’ remuneration.

The issue is contentious between the Europeans, who are pushing for a limit to bonuses as a proportion of a bank’s revenue or profits, and the U.S., which argues the best way to prevent future financial crises is to bolster banks’ capital cushions.

The FSB recommendations should provide a middle ground between the two stances, by telling banks to better align remuneration with firms’ long-term performance rather than short-term gain, but refraining from advising absolute pay caps.

To this end, the FSB is expected to recommend that banks defer a part of bonuses over several years, with a significant portion of bonuses being deferred for senior management, as well as pay an important part of variable remuneration in shares rather than cash.

Under the FSB guidelines, banks will be able to forfeit a portion of the bonuses pledged in case of bad performance under so-called claw-back arrangements, people familiar with the matter said.

The FSB report is also expected to ban guaranteed bonuses of more than a year.

FSB chair says banks will have time to adopt new capital requirements

"Financial Stability Board Chairman Mario Draghi said banks will have “plenty of time” to adapt to new rules on capital requirements and compensation agreed by the Group of 20 leaders last month.

“People shouldn’t be too scared that regulators will jump on them asking for changes,” Draghi, who is also governor of the Bank of Italy told reporters in Istanbul today. “There is plenty of time, plenty of time.”

Deutsche Bank AG Chief Executive Officer Josef Ackermann said yesterday that regulators should be cautious about raising bank capital requirements as restricting bank dividends or compensation to boost capital. Speaking to reporters in Istanbul, he also said that lenders must make sure bonus payments are “socially and politically” acceptable.

Draghi said today that officials have agreed “on the key measures to strengthen the Basel II framework” for capital requirements. The “new rules will be set out by year end, will be calibrated next year” and “ they will be phased in as conditions improve and recovery is assured with the aim of implementing them in the years 2011 and 2012.”

On the compensation issue, Draghi said that banks will have to implement a new set of global standards and “national supervisors will have to oversee that they have implemented them.” Banks should take advantage of fiscal and monetary stimulus to strengthen their capital now, Draghi also said."

FSB institutions

A list of institutions represented on the FSB can be found here.

  • Argentina
  • Australia
  • Brazil
  • Canada
  • China
  • France
  • Germany
  • Hong Kong SAR
  • India
  • Indonesia
  • Italy
  • Japan
  • Mexico
  • The Netherlands
  • Republic of Korea
  • Russia
  • Saudi Arabia
  • Singapore
  • South Africa
  • Spain
  • Switzerland
  • Turkey
  • United Kingdom

International Organisations

International standard-setting bodies and other groupings


FSB Framework for Strengthening Adherence to International Standards

I. Framework

The FSB is committed to strengthening adherence to international financial standards. Financial markets are global in scope and, therefore, consistent implementation of international standards is necessary to protect against adverse cross-border, regional and global developments affecting international financial stability. The FSB, working through the Standing Committee on Standards Implementation, will foster a race to the top, wherein encouragement from peers motivates all countries and jurisdictions to raise their level of adherence to international financial standards.

Encouragement will come in three forms.

  • First, FSB member jurisdictions will lead by example. FSB member jurisdictions have committed to implementing international financial standards and disclosing their level of adherence.
  • Second, FSB member jurisdictions will undergo periodic peer reviews to evaluate their adherence to international standards in the regulatory and supervisory area. Such evaluations will provide members with feedback from peers on the implementation and effectiveness of standards and policies. Moreover they will encourage non-FSB member jurisdictions to undergo similar evaluations.
  • Third, the FSB will establish a toolbox of measures to encourage adherence to international cooperation and information exchange standards by all countries and jurisdictions. Application of these measures will be based on transparent procedures to evaluate the degree of adherence of jurisdictions to the relevant standards.

II. Leading by example

FSB members’ adherence to international standards is essential to reinforce the credibility of the FSB’s efforts to strengthen adherence by all countries and jurisdictions. To lead by example, FSB member jurisdictions have committed to:

  • implementing international financial standards;
  • undergoing an assessment under the IMF-World Bank Financial Sector Assessment Program (FSAP) every five years;
  • disclosing their degree of adherence of international standards, notably by publishing the detailed assessments prepared by the IMF and World Bank as a basis for the Reports on the Observance of Standards and Codes (ROSCs); and
  • undergoing periodic peer reviews using, among other evidence, reports prepared as part of the FSAP.

All 24 FSB member jurisdictions have participated or are in the process of participating in the FSAP (Annex A). An initial FSAP was completed in 20 member jurisdictions (five of which also completed an FSAP Update) and is currently under way in a further three jurisdictions, while an FSAP was not completed in the case of one member jurisdiction.

III. FSB peer reviews

FSB member jurisdictions have committed to undergoing periodic peer reviews focused on the implementation and effectiveness of international financial standards and of policies agreed within the FSB. The peer reviews will build on – and avoid duplicating – existing assessment mechanisms, such as FSAPs and ROSCs. The added value of FSB peer reviews will come in significant part from the cross-sector, cross-functional, system-wide perspective brought by its members. Dialogue with peers will be a key benefit of the reviews.

FSB member jurisdictions have agreed to undergo both thematic and country peer reviews. Thematic peer reviews will focus on the implementation across the FSB membership of policies or standards agreed within the FSB, with particular attention to consistency in cross-country implementation and the effectiveness of the policy or standard in achieving the intended results. Country peer reviews will focus on the implementation and effectiveness of financial sector standards and policies agreed within the FSB in achieving the desired outcomes in a specific member jurisdiction, notably through systematic and timely follow up to relevant recommendations arising from an FSAP or ROSC.

FSB peer reviews will be based on reports drafted by small teams composed of experts from FSB member jurisdictions and international bodies, supported by the FSB Secretariat. The substantive review by peers will take place in the Standing Committee on Standards Implementation. The final responsibility for approving FSB peer reviews lies with the Plenary, as the decision-making body of the FSB. In keeping with the FSB’s commitment to lead by example, peer review reports will be published, along with any commentary provided by the reviewed jurisdictions for inclusion. Following publication of the report, jurisdictions’ implementation of agreed actions will be monitored by the FSB and, if implementation lags, peer pressure may be applied. Guidelines for the conduct of FSB peer reviews are set out in a Handbook for FSB Peer Reviews that will be revised and expanded as experience is gained.

Thematic and country reviews will move forward in parallel. The first thematic review is on actions taken by firms and national authorities to implement the FSB Principles and Implementation Standards for Sound Compensation Practices. This review will be completed by March 2010. The FSB aims to complete two more thematic reviews and three country reviews in 2010.

References

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