International financial architecture

27 November 2008 | Inside the institutions

National and international financial bodies frequently overlap both in function and membership. Below are some of the main regulatory or influential bodies within the financial system. In most, the IMF is a participant, and in some, a central player.

The Financial Stability Forum (FSF )

The FSF was created in response to the 1999 Asian financial crisis. It aims to promote financial stability, improve financial market workings and lessen the effects of contagion. It does this by assessing the vulnerabilities affecting the financial system, identifying ways to address these, improving information exchange and co-ordination amongst authorities responsible for financial stability. It has no executive authority or powers to force reform.

It is composed of the G7 (with a tripartite membership consisting of the finance ministry, the central bank and a regulator) and one representative from five other major financial centres (Singapore, Switzerland, the Netherlands, Australia and Hong Kong), as well as representation from the IFIs (two each from the World Bank and IMF, one each from the OECD and BIS) and from international standard and regulatory groupings (two each from the Basel committee, IOSCO, IASB and IAIS). It has in the past been chaired by the general manager of BIS. It is located at BIS offices in Basel, Switzerland.

The Bank of International Settlements (BIS)

The BIS serves as a bank for central banks, and exists to foster international monetary and financial cooperation. It conducts research in areas of interest to central banks, supports the work of the Basel Committee, and assists central banks and other monetary institutions in the management of their foreign exchange and gold reserves. Approximately 6 per cent of global foreign exchange reserves are invested by central banks with the BIS. By March 2008, total currency deposits amounted to $348 billion. The banking services of BIS focus on stability and liquidity provision.

The BIS currently has 55 member central banks, all of which are entitled to be represented and vote in the general meetings, though voting power is disproportionate. Established in 1930, the BIS employs 557 staff, and is headquartered in Basel, Switzerland.

The Basel Committee on Banking Supervision (BCBS)

As part of its monetary and financial stability services, the BIS hosts the Basel Committee, which provides a forum for regular cooperation on banking supervisory matters. Its key concern is to ensure the adequate capitalisation of banks. As banks’ operations were increasingly internationalised, rich countries launched the committee in 1974 to create comparable and thus compatible systems of supervision to prevent financial instability. The committee created the controversial Basel I and Basel II sets of capital adequacy standards.

The committee is governed independently of the BIS. Committee members from the G10, which actually has 11 members (US, UK, Italy, Canada, France, the Netherlands, Switzerland, Germany, Belgium, Japan, and Sweden). There is no member from a developing country. The BCBS reports to a joint committee of central bank Governors and (non-central bank) heads of supervision from the G10 countries. The IMF, through its Financial Sector Assessment Programme (FSAP), monitors countries using the Basel committee’s core principles.

The Financial Action Task Force (FATF)

Established in 1989 after a G7 Summit, the FATF focuses on money laundering and terrorist financing. It has published a set of ´40 + 9 Recommendations´ as a guideline to combat the problem. It includes 34 members and is based in France. The IMF FSAP programme uses FATF principles.

The International Organisation of Securities Commissions (IOSCO)

The IOSCO is a forum for securities regulators from over 100 jurisdictions. Much of IOSCO’s work is descriptive; it includes guidelines to promote independence of stock and equities analysts and auditors, and comparative research on how hedge funds and credit agencies are regulated (or not) in different jurisdictions.

Its executive committee is more representative than the technical committee, which excludes both China and India from membership. It is in the latter that key decisions are made. The IOSCO group has established principles that form the benchmark of international regulation of securities markets, which are used by the IMF’s FSAPs.

The International Association of Insurance Supervisors (IAIS)

The IAIS came into being in 1994, and includes supervisors from over 130 countries and international organisations (IMF, OECD, World Bank). It aims to improve supervision of the insurance industry. It was not until the 1999 FSF meeting that the potential for disturbance of the financial system arising from the global insurance and reinsurance markets was identified. IAIS objectives were supplemented with the promotion of global financial stability. The sphere of reinsurance has on the whole remained unregulated, concentrated in offshore centres. Whatever supervision does take place is on the national level and often de facto through the credit agencies which undertake it.

The IAIS general meeting with all members has ultimate authority but an elected executive committee oversees the technical and budget committees. The IMF uses the IAIS standards and codes in its FSAPs.

The Joint Forum

The joint forum was established in 1996, to look at common issues arising in banking, securities and insurance sectors. 13 countries are members, and there are three institutional members: IOSCO, IAIS, and the BCBS. The forum is mandated to oversee the rise of financial conglomerates – firms who engage in all three activities- and conduct effective group-wide supervision. One member of the Basel Committee secretariat works part-time as the Forum’s secretariat.

Credit Rating Agencies

Credit rating agencies, such as Standard & Poor’s or Moody’s, are private businesses providing borrowers (whether corporate or sovereign) with credit worthiness assessments, including ratings on individual debt instruments such as derivatives. These in turn are used to assess the quality of banks or securities firms’ portfolios.

The agencies do not receive as much regulatory attention as banks. For example, formal requirements for US rating agencies were only reached in 2006. The three main credit ratings agencies are based in the US.

International Accounting Standards Board (IASB)

The IASB aims to create a single set of international financial reporting standards for companies. Accounting standards govern how companies report their accounts. Weak accounting standards are blamed for the ease with which global companies have been able to avoid and evade tax. It is a private institution, governed by a group of 22 trustees from businesses and accounting firms in major industrialised countries. It also includes trustees from the private sector in China, South Africa, Poland, Brazil and India.

What falls through the gaps?

Despite the plethora of financial bodies, some issues remain unaddressed, including:

  • Pockets of lightly regulated and usually low or zero tax areas called offshore financial centres
  • Highly leveraged private investors such as hedge funds and private equity funds
  • Interconnected and cross-border financial processes beyond the scope of one of the existing committees
Institution HQ Created Membership
Basel 1999 12 countries
5 international organisations
6 international standard setting bodies
Basel 1930 55 countries
Paris 1989 32 countries
2 international organisations
Basel 1974 10 countries
Madrid 1983 98 countries
11 independent jurisdictions
Basel 1994 100 + countries
10 + independent jurisdictions
4 international institutions
The Joint Forum
Basel 1996 13 countries
3 international standard setting bodies
London 2001 9 countries