February 10, 2015
Introduction to Financial Services: International Supervision
setting bodies. The international agenda and standard-
Overview
setting bodies operate on a consensual basis and have no
legally binding authority. Since national regulators (or other
The financial crisis of 2007-2008 and subsequent global
authorities) cannot enter into treaties with other countries,
economic turmoil underscored the interconnectedness of the
agreements made at international fora or by regulators at
global financial system as well as its weaknesses. In the
standard-setting bodies require domestic legislative and/or
wake of the crisis, leaders from the United States and other
regulatory changes before they are implemented.
countries have pursued a wide range of reforms to the
International financial institutions, primarily the
international financial regulatory system.
International Monetary Fund (IMF) provide overall
surveillance of national compliance with the agreed upon
At a basic level, the goal of international financial
international financial standards, among its other functions.
regulation is to maximize economic gains from integrating
global financial markets while minimizing losses from
Figure 1. International Financial Architecture
instability and financial crises. Over the past several
decades, global capital flows have grown rapidly, driven by
deregulation of national financial sectors, advances in
technology, and innovation of financial products and
instruments. While financial markets have become more
global, financial regulation remains territorial, exercised by
national governments over financial transactions occurring
within their geographic borders.
International financial stability is a policy objective that
transcends national boundaries. In the absence of an
international financial supervisory or regulatory body,
countries, for the past several decades, have negotiated
voluntary international financial standards and best
practices. However, despite decades of efforts among

national regulators to agree on and coordinate international
Source: CRS.
standards on accounting, securities, and bank capital
Group of 20 (G-20). The G-20 is an informal grouping
adequacy among the major economies, substantial
of nineteen countries (including the United States) and
regulatory differences exist among national regulations.
the European Union, which since 2009, has been the
Furthermore, the absence of an institution with the authority
primary political steering forum for international
to conduct prudential supervision of transnational financial
economic cooperation. G-20 leaders meet at annual
institutions may have contributed to the failure to prevent
summits. Finance ministry officials meet more
the 2007-2008 crisis and hampered efforts to contain the
regularly. The G-20 has no authority to impose rules on
spread of financial instability throughout the global
its member countries. Rather, finance ministers and
economy in the years following the crisis.
central bank officials work through the G-20 to agree on
Current Institutional Landscape
a global international financial regulatory agenda.
The Financial Stability Board (FSB). The FSB is a
In contrast to the rules-based system for governing
technical body, which was established by the G-20 to
international trade, centered on the World Trade
coordinate the G-20 agenda and set the priorities for the
Organization (WTO), international financial regulation is
international financial standard-setting process. FSB
fragmented, with regulatory and supervisory authority
members include the regulators from the G-20 countries
dispersed among a range of international and national
(and others), several international financial institutions
institutions (Figure 1).
and the most important standard setting bodies (e.g.,
accounting, banking, insurance). The FSB has no
The overall agenda-setting for international financial
supervisory authority or regulatory power to compel
cooperation and coordination is most associated with the
compliance with internationally agreed standards. The
Group of 20 (G-20) and the Financial Stability Board
primary U.S. representatives to the FSB are the Federal
(FSB). National financial authorities are the primary actors,
Reserve, the Securities and Exchange Commission
responsible for devising rules and providing oversight and
(SEC), and the Treasury Department. However other
supervision of financial institutions operating under their
U.S. agencies participate in FSB working groups and
jurisdiction. National financial authorities are also
activities.
responsible for participating in the international standard-
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Introduction to Financial Services: International Supervision
“We are committed to take action at the national
financial institutions, including a surcharge for financial
and international level to raise standards, and
institutions that the FSB has designated as globally
ensure that our national authorities implement
systemically important financial institutions (G-SIFIs),
global standards… that ensures a level playing
represent significant progress toward their goal of
field, a race to the top and avoids fragmentation of
developing a global macroprudential regulatory policy and
markets, protectionism and regulatory arbitrage.”
improved practices within countries.
G-20 Seoul Summit Document, November 11-12,
2010.

At the same time, the extensive volume of international
financial standards, as well as national and regional
Standard-setting bodies include international financial
implementing legislation, has grown increasingly complex
institutions such as the IMF, as well as many other private
and has hindered implementation, according to some
and public bodies. These include the following.
observers. While the United States has embraced, and in
many circumstances spearheads, the international financial
Basel Committee on Banking Supervision (BCBS).
reform agenda, inconsistencies remain between U.S. and
The BCBS, which is based at the Bank for International
international guidelines. For example, the Dodd-Frank Wall
Settlements (BIS), in Basel, Switzerland, formulates
Street Reform Act requires banks to develop alternatives to
standards, guidelines, and best practices in banking.
credit ratings for the purpose of evaluating their capital
Basel members are the national banking regulators. The
reserve requirements. Basel III, negotiated with the
United States is represented by the Federal Deposit
participation of U.S. regulators, by contrast, makes
Insurance Company (FDIC), the Federal Reserve, and
extensive use of credit ratings. In these cases,
the Office of the Comptroller of the Currency (OCC).
implementation of financial standards may be incomplete.
Committee on Payments and Market Infrastructure
(CPMI). The CPMI sets standards for payment,
Disagreement over the use of credit ratings, as well as the
clearing, and securities settlement systems. The Federal
G-SIFI designation process, has led some Members to raise
Reserve and Federal Reserve Bank of New York are
concerns that international agreements such as Basel III, are
members of CPMI.
in effect, superseding U.S. laws. Other observers argue that
the United States is placing itself at a disadvantage when
Financial Action Task Force (FATF). FATF develops
U.S. authorities implement international financial standards,
standards and policies to combat money laundering and
while others lag behind.
terrorism financing.
International Association of Deposit Insurers (IADI). Should the Institutional Landscape Be Reformed?
IADI develops standards for deposit insurance
institutions. The U.S. representative is the Federal
Some observers contend that there is a limit to the progress
Deposit Insurance Corporation (FDIC).
that can be achieved by relying on a network of voluntary,
non-binding international financial standards. During a
International Association of Insurance Supervisors
financial crisis, there is often great pressure on governments
(IAIS). IAIS is the international standard-setting body
to exercise “emergency power” to have more control of
for the insurance sector. The U.S. representatives
how the crisis is contained and how the losses are
include the Federal Insurance Office (FIO), Federal
distributed. Also, even large bankruptcies, such as Lehman
Reserve, and National Association of Insurance
Brothers, are still resolved on a national level.
Commissioners (NAIC).
International Accounting Standards Board (IASB).
Some observers argue the IMF and/or FSB should be given
IASB is an independent, privately funded UK-based
greater regulatory power over some international financial
organization, which has developed international
transactions, or at a minimum, greater authority to supervise
accounting standards. Since 2002, the U.S. Financial
and promote compliance with international financial
Accounting Standards Board (FASB) has been working
standards. Other observers argue that such efforts to
with the IASB on convergence with the U.S. Generally
centralize international financial regulation at the IMF,
Accepted Accounting Principles (GAAP).
FSB, or some new body are overly ambitious and likely to
face the same coordination and implementing challenges as
International Organization of Securities
the current standard-setting agenda. A more promising
Commissions (IOSCO). IOSCO develops and
approach, they argue would be to continue to pursue
promotes securities regulatory standards. The U.S.
policies to harmonize regulatory policies on the regional
representatives at IOSCO are the SEC and the
and international level.
Commodity Futures Trading Commission (CFTC).
Martin A. Weiss, mweiss@crs.loc.gov, 7-5407
Issues for Congress

Are International Financial Standards Effective?
IF10129
Members of Congress may wish to consider the efficacy of
the standards-setting effort. Regulators argue that recent
agreements, such as the Basel III capital requirements for
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