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] See also Basel Committee on Banking Supervision.

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.

Basel 3 to have minimal economic effect

Executive summary

In December 2009, the Basel Committee on Banking Supervision (BCBS) proposed a set of measures to strengthen global capital and liquidity regulations. The aim of these measures is to improve the resilience of the financial system. The proposed reforms will generate substantial benefits by reducing both the frequency and intensity of financial crises, thereby lowering their very large economic costs.

A key factor determining banks’ responses to new capital and liquidity standards is the length of the period during which the new requirements are phased in. If the transition period is short, banks may choose to curtail credit supply in order to lift capital ratios and adjust asset composition and holdings quickly. A longer transition period could substantially mitigate the impact, allowing banks additional time to adapt by retaining earnings, issuing equity, shifting liability composition and the like.

Whether the transition is long or short, decisive action to strengthen banks’ capital and liquidity positions could boost confidence in the long-term stability of the financial system as soon as implementation starts. Giving banks time to use these adjustment mechanisms would almost certainly mitigate any adverse effects on lending conditions and, eventually, on aggregate activity.

Cognisant of the need to phase in the new regulations in a manner that is compatible with the ongoing economic recovery, the BCBS and the Financial Stability Board (FSB) set up a group to assess the macroeconomic effects of the transition to higher capital and liquidity requirements. This Macroeconomic Assessment Group (MAG) brings together macroeconomic modelling experts from central banks, regulatory agencies and international institutions; and is chaired by Stephen G Cecchetti, Economic Adviser of the BIS. The MAG’s work is intended to complement that of the BCBS’s Long-Term Economic Impact Group. Close collaboration with the IMF is an essential part of the process.

The MAG has applied common methodologies based on a set of scenarios for shifts in capital and liquidity requirements over different transition periods. These scenarios served as inputs into a broad range of models developed for policy analysis in central banks and international organisations (semi-structural large-scale models, reduced-form VAR-type models, DSGE models).

Ideally, one would like these models to capture the impact of the implementation of the new standards through all relevant mechanisms – including changes in lending spreads, short-term credit supply constraints and international spillover effects – and to take into account behavioural responses from banks and other market participants as well as monetary policy responses from central banks in line with their mandates. Unfortunately, standard macroeconomic models do not readily allow for direct investigation of the effects of prudential policy changes. While different models employed by the MAG capture many of the key aspects, there is no single model that incorporates all the relevant mechanisms.

In an effort to address the problem of model incompleteness and a greater than normal level of uncertainty about model specification, the study draws on results from a diversity of models and countries. Against this background, the presentation of the results focuses on the median outcome as a central estimate of the impact across models and countries, while also showing the range of responses obtained. These results can therefore be viewed as reasonably robust estimates of the costs of transition to the stronger standards in a representative case.

Main quantitative results

It is more expensive for banks to fund assets with capital than with deposits or wholesale debt.

This suggests that, while banks facing stronger capital requirements will seek to increase capital levels by retaining earnings and issuing equity as well as reducing non-loan assets, they may initially increase the interest rates they charge borrowers and reduce the quantity of new lending. Any increase in the cost and decline in the supply of bank loans Overall, the MAG’s estimates suggest a modest impact on aggregate output of the transition towards higher capital standards.

Taking the median across all the results obtained, a 1 percentage point increase in the target ratio of tangible common equity (TCE) to risk-weighted assets is estimated to lead to a decline in the level of GDP by a maximum of about 0.19% from the baseline path after four and a half years (equivalent to a reduction in the annual growth rate of 0.04 percentage points over this period). This figure of nearly two tenths of 1 percentage point per percentage point increase in the target capital ratio is the sum of 0.16%, the median GDP decline estimated for specific countries by national authorities, and 0.03%, which is the potential impact of international spillovers (reflecting exchange rates, commodity prices and shifts in global demand) as estimated by the IMF. It is important to note that these results apply to any increase in target capital ratios whether its source be higher regulatory minima, required buffers, changes in the definition of capital, the application of a leverage ratio, or some other change in standards.

The top panels of Graph 1 show the distribution of estimated GDP losses across all models (excluding the additional spillover effect) after 18 quarters for implementation horizons of two and four years. Focusing on the longer horizon in the right-hand panels, note that the vast majority of the estimation results are clustered around the median (with a range of 0.07–0.31% when the top fifth and bottom fifth of the distribution are excluded, in the four-year implementation case). A small number of estimates show a larger impact. These GDP effects reflect median increases in domestic lending spreads of about 15 basis points, and declines in lending volumes of 1.4%.

The median results are drawn from estimates based on a variety of modelling approaches. The majority of the models assume that tighter capital standards affect the economy as banks respond by increasing their lending spreads. A small number of models also allow for the possibility that banks constrain the supply of credit beyond what is reflected in the increase in spreads. Many models also assume that monetary policy responds to lower output levels and associated reduced inflationary pressures in line with central banks’ mandates. Comparing results across the models making these different assumptions offers insights into the potential importance of these mechanisms.1

  • Changes in lending spreads alone are estimated to reduce GDP relative to the baseline trend by roughly 0.16% in the four-year implementation case – about the same as the median decline across all results reported above.
  • Estimates of the impact of credit supply effects suggest a somewhat larger transitional impact of raising capital standards on aggregate output. Taking account of these effects, by incorporating indicators of bank lending standards into models, yields a median reduction in GDP of 0.32% after four and a half years (again, per percentage point increase in the capital ratio). Models that incorporate the impact of both higher lending spreads and supply constraints tend to yield some of the largest impact estimates displayed on the far left of the top panels of Graph 1, perhaps because they were calibrated based on past data that include episodes when deep recessions coincided with persistent banking sector strains. This underlines the importance of implementing new regulatory requirements in a way that is compatible with the ongoing economic recovery.
  • An easing of monetary policy reduces the estimated output losses. When it is assumed that the central bank responds to the incipient aggregate demand fall and reduced inflationary pressures precipitated by the regulatory changes, the central estimate of the maximum output loss shrinks significantly. Such offsets are especially pronounced in models that incorporate credit supply constraints, for which the GDP loss in the 18th quarter falls from 0.32% to 0.17%.

The effects estimated by the MAG are significantly smaller than some comparable estimates published by banking industry groups. For example, the MAG’s median estimate of the GDP impact is roughly one eighth the size of the estimate computed recently by the Institute of International Finance (IIF).2

The bottom panels of Graph 1 show the distribution of estimated GDP losses over time. Compared with the four-year case, a two-year implementation period is associated with a slightly larger maximum temporary output loss, which occurs earlier (after two and a half rather than four and a half years). Extending the implementation horizon from four to six years makes little difference. In both the two- and four-year cases, GDP recovers to around 0.10% below baseline eight years after the start of the regulatory change.

The MAG also examined the impact of tighter liquidity requirements, which were modelled as a 25% increase in the holding of liquid assets, combined with an extension of the maturity of banks’ wholesale liabilities. The estimations, which were run separately from those for higher capital standards, yield a median increase in lending spreads of 14 basis points and a fall in lending volumes of 3.2% after four and a half years. This is estimated to be associated with a median decline in GDP in the order of 0.08% relative to the baseline trend. It is important to emphasise that the estimates of the impact of enhanced liquidity requirements do not take account of their interaction with the capital rules. Because meeting one helps banks meet the other, the combined effect of both measures is almost certainly less than the sum of the individual impacts.

These results are presented in terms of the impact on a representative economy of generic changes in standards, namely a 1 percentage point increase in the target capital ratio and a 25% increase in liquid assets relative to total assets. The impact of the new regulatory framework on specific national financial systems will depend on current levels of capital and liquidity in those systems, and on the consequences of changes to the definitions used in calculating the relevant regulatory ratios. In many jurisdictions, banks have increased and are continuing to strengthen their capital positions and their holding of liquidity in response to market and supervisory pressure. As a result, many institutions are in the process of adjusting, and some will have met the new requirements even before any formal implementation of the new standards begins.

A simple example might help understand this result. Imagine a stylised bank with a balance sheet (where total assets equal risk-weighted assets) that has the following composition. On the liabilities side, there are deposits and debt, for which the bank pays an average of 5%, and capital, with a return of 15%. Assets are composed of two thirds loans and one third a combination of securities and cash (reserves). Now consider an increase in the capital ratio of 1 percentage point. This raises the cost of funds (the weighted average cost of capital plus deposits and debt) by 10 basis points. To maintain return on equity at 15%, the bank must recover this cost increase by raising the return on its assets. If this is done solely by raising rates charged to borrowers, since loans are two thirds of assets, it must raise lending rates by 15 basis points, very close to the MAGs estimate.

What is the impact of these 15 basis points on real output? The answer from the MAG work is that, ignoring international spillovers, such an increase results in a roughly equal decline in GDP. That is, for each 1 percentage point rise in the required target capital ratio, both the rise in lending spreads and the fall in the level of GDP (relative to the baseline) are around 0.15%.

Why the actual impact might differ

There are a variety of reasons why the actual impact of the transition towards higher capital and liquidity requirements on bank lending and GDP may well be smaller than the estimates MAG members have produced.

  • First, stronger banks are likely to face lower debt funding costs and required returns on equity as a result of their perceived greater robustness. Eventually this should reduce, or even eliminate, the need to either raise lending rates or curtail lending quantities.
  • Second, banks’ behaviour will almost certainly be affected by a strengthened regulatory environment. For instance, banks are likely to further improve operational efficiency and to reduce compensation costs in an effort to cut non-interest expenses. Banks are likely to shed non-loan assets in order to lift capital ratios, and will adjust their business models in response to strengthened liquidity standards.
  • Finally, the availability of alternative sources of finance, eg capital markets and retained earnings for non-financial corporations, is likely to weaken the impact of changes in credit growth on economic activity.

At the same time, there are also a number of non-modelled factors which could result in a greater impact.

  • For example, although the reforms will strengthen the banking sector as a whole, some banks may have to offer a higher return on equity to attract the required additional capital, especially if the transition period is short.
  • Second, as banks increase holdings of liquid assets to meet the new liquidity standards, the price of such assets may increase markedly.
  • Third, funding markets may take time to adapt to the longer-term liabilities that banks will need to issue.
  • Fourth, banks in some countries may face a rise in non-performing loans, absorbing capital and provisions in the near future. And finally, bank-dependent small and medium-sized firms may find it disproportionately difficult to obtain financing. A longer implementation horizon is likely to mitigate each of these possible effects.
Implications for the choice of the transition period

The model-based estimates suggest that two- and four-year implementation periods are associated with a broadly similar temporary GDP loss. In both cases, each percentage point increase in the target capital ratio results in a maximum deviation of aggregate output from the baseline trend in the order of 0.19 to 0.22% (including international spillovers). However, the longer the implementation period, the smaller any potential transitory effects on credit availability and GDP are likely to be. First, the maximum GDP loss is estimated to occur around the end of the transition period, which could be at a more mature and resilient stage of the current recovery. Moreover, a number of the behavioural and market adjustments noted above that are not modelled will tend to reduce the GDP impact over time. On the other hand, some financial institutions may seek to comply with the new standards sooner than required, which would reduce the relevance of the transition schedule set by regulators.

The adjustment costs will need to be balanced against the benefits accruing from the introduction of stronger standards in the final decisions on the reform package. Assessments of the potential significance of benefits and costs at the national level will be informed by the Basel Committee’s Quantitative Impact Study (QIS). The most important benefits – confidence in the long-term stability of a system where banks are better capitalised and more liquid – should start to accrue as soon as the reform measures start to be implemented. In any case, policymakers should carefully monitor the development of financial and macroeconomic conditions in planning and proceeding with the implementation of the new regulation.

Final review of the potential significance of benefits and costs at the national level will be informed by the results of the Basel Committee’s Quantitative Impact Study (QIS), which is compiling consistent information on the capital and liquidity positions of participating banks under the proposed regulatory standards. The MAG’s final report will assess the impact of the calibrated global standards in the context of the QIS results.

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 launches initiative for adherence to international financial standards

On March 10, the Financial Stability Board (FSB) launched an initiative to encourage adherence to international cooperation and information exchange standards in both the financial regulatory and supervisory areas.

According to the FSB, “financial markets are global in scope and, therefore, weaknesses in cooperation and information exchange can undermine the efforts of regulatory and supervisory authorities to ensure that laws and regulations are followed and that the global operations of the financial institutions for which they have responsibility are adequately supervised.” This initiative is designed to identify non-cooperative jurisdictions and provide assistance in improving their adherence to the international financial standards. Responding to a call by the G20 leaders at their April 2009 London Summit to take action against non-cooperative jurisdictions, the initiative is to similar initiatives by the Global Forum on Transparency and the Organisation for Economic Co-operation and Development, which promote international adherence in tax.

The process to evaluate adherence will evaluate compliance with international financial standards and identify areas for improvement. To foster adherence, the FSB will consider a “tool box” of measures to promote adherence, including policy dialogues, technical assistance, market incentives, restrictions on transactions by international financial institutions, and suspension of membership privileges.

FSB seeks public feedback on risk disclosure practices

Today, the Financial Stability Board, an organization formed to develop, promote and implement regulatory, supervisory and financial sector policies internationally, announced that it is seeking public feedback on the implementation of the risk disclosures suggested in the April 2008 Financial Stability Forum Report, "Enhancing Market and Institutional Resilience." 

The recommendations in the April 2008 report focused largely on enhancing disclosure related to structured products and other products deemed risky by market participants.  The FSB solicited feedback from members in June 2010 and is seeking additional input from the public, including investors, audit firms, financial institutions, industry associations and other stakeholders on "their practical experiences as users of the resulting disclosures or in implementing the risk disclosure recommendations."

Public submissions are due to the FSB by September 10, 2010.

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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