Dear Chairman Carney,
We, the undersigned, are writing to you on behalf of FSB Watch - a global network of academics, civil society organizations, think-tanks and individual experts that monitors FSB work and explains it to the public in G20 and non-G20 countries. On June 23, we met with FSB Secretariat staff for five hours of short meetings to exchange information, concerns and ideas.
Firstly, we are grateful to the FSB Secretary General, Svein Andresen, and the Secretariat staff for taking the time to meet with us. We are equally grateful for their passion and dedication to addressing the enormous challenges in coordinating global financial reform. Fulfillment of these tasks, notwithstanding the FSB staff’s excellent technical knowledge and experience, requires greater resources and political support from FSB member governments.
The FSB plays a crucial role in developing a more resilient and fair financial system - one that will restore public trust in banks, markets and the broader economy. Rebuilding this trust remains a great challenge. To achieve this, it is essential to ensure 1) greater responsibility and integrity within the financial sector; and 2) to develop and preserve responsiveness to the public interest during the financial reform process. Without trust, there will be little political motivation and even less accountability for countries to implement reforms. The FSB (and the regulators it convenes) must be mindful of this.
Expanding awareness, consultation and understanding of the FSB’s work can help build trust in and support for the global financial reform process. We are encouraged by our recent meetings, but more remains to be done.
Following our meetings, we developed a series of recommendations (see below) to identify where more attention is needed, highlight gaps and suggest alternative approaches. We cover the following issues: FSB Governance, Shadow Banking, Too-Big-to-Fail, Cross-Border Banking Resolution, OTC Derivatives, Legal Entity Identifier (LEI), Sovereign Debt and Trade in Financial Services. The content of these recommendations follow in separate text.
In closing, we would like to thank you for your leadership in pushing for a financial system with a stronger sense of responsibility, integrity and inclusion. We plan to continue to work with the FSB staff, national regulators and the public to ensure these characteristics shape decision-making.
Navin Beekarry Center for Law, Economics and Finance, George Washington University
Andrew Cornford Observatoire de la Finance
Jo Marie Griesgraber, Ph.D New Rules for Global Finance
Katarzyna Hanula-Bobbit Finance Watch
Markus Henn World Ecology, Economy and Development (WEED)
David Kempthorne, Ph.D Center for International Governance Innovation (CIGI)
Matthew Martin, Ph.D Development Finance International
Tiago Stichelmans Eurodad
Steve Suppan, Ph.D Institute for Agriculture and Trade Policy (IATP)
Myriam Vander Stichele SOMO (Centre for Research on Multinational Corporations)
Christopher Woods South African Institute for International Affairs (SAIIA)
Recommendations to the Financial Stability Board (FSB) and G20:
These recommendations are directed at the FSB, its member countries and the G20 in an effort to highlight the shortcomings and gaps in the current financial reform process. Some recommendations require political will to address them, others require dedication of more resources and some require both. GOVERNANCE
FSB should be achieving greater levels of transparency, by: Maintaining integrity of internal review process (peer and thematic reviews) but expand the process to allow for public comment Provide safeguards for integrity of regulatory review process Allow public comments on policy documents prior to Plenary approval process Regarding the review of FSB Structure of Representation: Criteria for FSB membership should be clear and publicly available Encourage member countries to appoint appropriate representatives from national agencies to participate in relevant standing committees Strengthen Regional Consultative Groups (RCGs): Establish G20/FSB fund to: 1) enable non-FSB members from developing countries to travel and participate in RCG meetings; and 2) support capacity of developing countries to implement new financial reforms All interested non-FSB member countries should be welcome to participate, unless explicit criteria exclude. The FATF styled Regional Groups provide a good example of greater inclusion and the benefits that stronger regional participation bring to regulatory implementation. The FSB should provide better avenues for EMDE markets to discuss regulatory issues and challenges that the face that have a systemic impact on their country and region, or that could have a systemic impact on the global financial system. The FSB has been immensely successful in facilitating the creation of financial standards to address regulatory gaps from the 2008 financial crisis. In providing avenues for EMDEs to discuss regulation issues within non-developed financial centers and for those markets to be able to communicate their concerns to the FSB will enable the FSB to identify and respond to emerging risks for the next financial crisis. Address exclusion of non-RCG members by identifying clear criteria and process for granting membership into RCGs. Improve reporting of RCG meetings: Delegate to non-FSB member co-chair of RCGs the responsibility to report on meetings - including RCG workshops or working groups. This would reduce burden on FSB Secretariat staff and strengthen RCG autonomy, reporting and "buy-in.” When unable to present the RCG report to FSB plenary meetings, non-FSB member co-chairs should be allowed to designate another non-FSB member from their respective RCG as a delegate to the Plenary. This responsibility should not be automatically transferred to the FSB member co-chair
Strengthen data gathering, monitoring capacity and analysis of Non-Bank and Non-Bank-Non-Insurance financial institutions. Be more proactive in identifying risks and be more vocal on those risks. Do not rely or wait for other actors/institutions to identify and report these risks. Improve security financing rules and standards. Monitor and restrict interaction between shadow banks and offshore affiliates. Strengthen rules against letter-box companies. Strengthen securitization and hypothecation rules (consent by lender, more retention, no re-securitization)
LEGAL ENTITY IDENTIFIER (LEI) In the spirit of greater transparency:
The FSB should, as a founding member of the LEI, ensure that the LEI Regulatory Oversight Committee (ROC) reports on LEI progress within a reasonable time following its previous meetings and well ahead of its next meeting. Now that the LEI Foundation has been established, the Foundation Board of Directors should report regularly on their meetings at the LEI Web site (www.leiroc.org)
The FSB should publish a progress report on policy options for cross-border trade data integration in advance of the next G-20 Finance Ministers meeting. The report should summarize comments on the Aggregation Feasibility Study Group consultation paper regarding conceptual and technological problems in data aggregation.
While bank regulators claim success in simplifying and rationalizing bank structure, there has been little or no true public transparency regarding progress in this area. National regulators should provide clear and detailed information to the public regarding ways in which banks have reduced their internal complexity and their size to make them less 'too big to fail.' Insert language into TBTF reports on bank size and complexity that identifies, if any, how such size and complexity create barriers to supervision and supervisory capacity (not particular reform but just to identify barriers) In this context, the FSB should also monitor top-down approaches at national and regional levels and, if necessary, their consistency with bottom-up approaches. FSB should complete thematic review on TBTF in practice before announcing that the TBTF framework/standards are complete - as anticipated by the end of this year.
CROSS-BORDER BANKING RESOLUTION
Resolution planning should be enhanced with an assessment process that: Enhances simplification of structures Reduces exposure Identifies derivatives holdings Should be a public and transparent process Better information sharing between all parties and jurisdictions involved Provides ways to guarantee public trust in times of a bank(ing) crisis Loss absorbency capacity should be linked with Basel committee rules and monitor national rules which prescribe additional capital requirements for this purpose. Crisis Management Groups should strengthen the participation of host countries
The FSB should consider the context and consequences of sovereign debt crises when developing standards and reforms in other areas of finance. In the FSB’s work on Credit Rating Agencies (CRAs), the FSB should consider the particular nature of sovereign debt markets and sovereign debt products. The FSB should promote rules and standards that reduce speculation in lending markets or that encourage safer securitization of debt products Incorporate the Principles of Responsible Borrowing and Lending into FSB recommendations for strengthening Specifically - the sale of bonds on the secondary market should require the authorization of the borrower. This is a problem since it is a special product that contributes to debt crises
TRADE IN FINANCIAL SERVICES
The FSB must analyze and publicly state its concerns about trade and investment agreements that contain language that potentially undermines financial regulation and the authority of national regulators.