February 10, 2015
Introduction to Financial Services: International Supervision
The financial crisis of 2007-2008 and subsequent global
economic turmoil underscored the interconnectedness of the
global financial system as well as its weaknesses. In the
wake of the crisis, leaders from the United States and other
countries have pursued a wide range of reforms to the
international financial regulatory system.
At a basic level, the goal of international financial
regulation is to maximize economic gains from integrating
global financial markets while minimizing losses from
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
standards on accounting, securities, and bank capital
adequacy among the major economies, substantial
regulatory differences exist among national regulations.
Furthermore, the absence of an institution with the authority
to conduct prudential supervision of transnational financial
institutions may have contributed to the failure to prevent
the 2007-2008 crisis and hampered efforts to contain the
spread of financial instability throughout the global
economy in the years following the crisis.
Current Institutional Landscape
setting bodies. The international agenda and standardsetting bodies operate on a consensual basis and have no
legally binding authority. Since national regulators (or other
authorities) cannot enter into treaties with other countries,
agreements made at international fora or by regulators at
standard-setting bodies require domestic legislative and/or
regulatory changes before they are implemented.
International financial institutions, primarily the
International Monetary Fund (IMF) provide overall
surveillance of national compliance with the agreed upon
international financial standards, among its other functions.
Figure 1. International Financial Architecture
• Group of 20 (G-20). The G-20 is an informal grouping
of nineteen countries (including the United States) and
the European Union, which since 2009, has been the
primary political steering forum for international
economic cooperation. G-20 leaders meet at annual
summits. Finance ministry officials meet more
regularly. The G-20 has no authority to impose rules on
its member countries. Rather, finance ministers and
central bank officials work through the G-20 to agree on
a global international financial regulatory agenda.
• The Financial Stability Board (FSB). The FSB is a
In contrast to the rules-based system for governing
international trade, centered on the World Trade
Organization (WTO), international financial regulation is
fragmented, with regulatory and supervisory authority
dispersed among a range of international and national
institutions (Figure 1).
The overall agenda-setting for international financial
cooperation and coordination is most associated with the
Group of 20 (G-20) and the Financial Stability Board
(FSB). National financial authorities are the primary actors,
responsible for devising rules and providing oversight and
supervision of financial institutions operating under their
jurisdiction. National financial authorities are also
responsible for participating in the international standard-
technical body, which was established by the G-20 to
coordinate the G-20 agenda and set the priorities for the
international financial standard-setting process. FSB
members include the regulators from the G-20 countries
(and others), several international financial institutions
and the most important standard setting bodies (e.g.,
accounting, banking, insurance). The FSB has no
supervisory authority or regulatory power to compel
compliance with internationally agreed standards. The
primary U.S. representatives to the FSB are the Federal
Reserve, the Securities and Exchange Commission
(SEC), and the Treasury Department. However other
U.S. agencies participate in FSB working groups and
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Introduction to Financial Services: International Supervision
“We are committed to take action at the national
and international level to raise standards, and
ensure that our national authorities implement
global standards… that ensures a level playing
field, a race to the top and avoids fragmentation of
markets, protectionism and regulatory arbitrage.”
G-20 Seoul Summit Document, November 11-12,
Standard-setting bodies include international financial
institutions such as the IMF, as well as many other private
and public bodies. These include the following.
• Basel Committee on Banking Supervision (BCBS).
The BCBS, which is based at the Bank for International
Settlements (BIS), in Basel, Switzerland, formulates
standards, guidelines, and best practices in banking.
Basel members are the national banking regulators. The
United States is represented by the Federal Deposit
Insurance Company (FDIC), the Federal Reserve, and
the Office of the Comptroller of the Currency (OCC).
• Committee on Payments and Market Infrastructure
(CPMI). The CPMI sets standards for payment,
clearing, and securities settlement systems. The Federal
Reserve and Federal Reserve Bank of New York are
members of CPMI.
• Financial Action Task Force (FATF). FATF develops
standards and policies to combat money laundering and
• International Association of Deposit Insurers (IADI).
IADI develops standards for deposit insurance
institutions. The U.S. representative is the Federal
Deposit Insurance Corporation (FDIC).
• International Association of Insurance Supervisors
(IAIS). IAIS is the international standard-setting body
for the insurance sector. The U.S. representatives
include the Federal Insurance Office (FIO), Federal
Reserve, and National Association of Insurance
• International Accounting Standards Board (IASB).
IASB is an independent, privately funded UK-based
organization, which has developed international
accounting standards. Since 2002, the U.S. Financial
Accounting Standards Board (FASB) has been working
with the IASB on convergence with the U.S. Generally
Accepted Accounting Principles (GAAP).
• International Organization of Securities
Commissions (IOSCO). IOSCO develops and
promotes securities regulatory standards. The U.S.
representatives at IOSCO are the SEC and the
Commodity Futures Trading Commission (CFTC).
Issues for Congress
financial institutions, including a surcharge for financial
institutions that the FSB has designated as globally
systemically important financial institutions (G-SIFIs),
represent significant progress toward their goal of
developing a global macroprudential regulatory policy and
improved practices within countries.
At the same time, the extensive volume of international
financial standards, as well as national and regional
implementing legislation, has grown increasingly complex
and has hindered implementation, according to some
observers. While the United States has embraced, and in
many circumstances spearheads, the international financial
reform agenda, inconsistencies remain between U.S. and
international guidelines. For example, the Dodd-Frank Wall
Street Reform Act requires banks to develop alternatives to
credit ratings for the purpose of evaluating their capital
reserve requirements. Basel III, negotiated with the
participation of U.S. regulators, by contrast, makes
extensive use of credit ratings. In these cases,
implementation of financial standards may be incomplete.
Disagreement over the use of credit ratings, as well as the
G-SIFI designation process, has led some Members to raise
concerns that international agreements such as Basel III, are
in effect, superseding U.S. laws. Other observers argue that
the United States is placing itself at a disadvantage when
U.S. authorities implement international financial standards,
while others lag behind.
Should the Institutional Landscape Be Reformed?
Some observers contend that there is a limit to the progress
that can be achieved by relying on a network of voluntary,
non-binding international financial standards. During a
financial crisis, there is often great pressure on governments
to exercise “emergency power” to have more control of
how the crisis is contained and how the losses are
distributed. Also, even large bankruptcies, such as Lehman
Brothers, are still resolved on a national level.
Some observers argue the IMF and/or FSB should be given
greater regulatory power over some international financial
transactions, or at a minimum, greater authority to supervise
and promote compliance with international financial
standards. Other observers argue that such efforts to
centralize international financial regulation at the IMF,
FSB, or some new body are overly ambitious and likely to
face the same coordination and implementing challenges as
the current standard-setting agenda. A more promising
approach, they argue would be to continue to pursue
policies to harmonize regulatory policies on the regional
and international level.
Martin A. Weiss, firstname.lastname@example.org, 7-5407
Are International Financial Standards Effective?
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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