Financial Stability Board Becoming International Coordinator of Financial Reform Legislation

All major participants in financial reform, including the Obama Administration, the EU, and the G-20, all agree that the financial crisis was global and that the reform legislation must be globally coordinated. Since there seems little possibility of an international treaty, given sovereignty concerns, there is a strong consensus that the Financial Stability Board must be the entity that coordinates a global legislative and regulatory response.

The Obama Administration’s blueprint for reform and the G-20 have both endorsed the FSB for this international role. It is envisioned that the FSB would operate through the adoption of principles, such as the principles adopted by the Board on executive compensation, and would also monitor the consistency of legislation and regulations. But these goals may be somewhat problematic.

Even given the consensus-based approach involving the relevant national authorities, some subjects will simply be very difficult to handle fully in this fashion. Cross-border resolution may be one such issue, in the view of Fed Governor Daniel Tarullo. The Obama Administration has proposed legislation creating a resolution authority to wind down failed securities and commodities firms. International coordination of this legislation may prove difficult, said the Governor, due to differing bankruptcy laws.

There will likely be a period of working out the relationships among the various international bodies, particularly in light of the increased role of the FSB. Congress and other bodies will need to determine how extensively the FSB and its newly constituted committees should themselves develop standards, particularly where an existing international standards-setting body has the expertise and mandate to address the topic. Similarly, while simultaneous consideration of the same issue in multiple international bodies can sometimes be a useful way to develop alternative proposals, there is also the possibility that differing approaches may develop.

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