Introduction to Financial Services: International Supervision
Updated October 17, 2017
Introduction to Financial Services: International Supervision
Overview
supervision of financial institutions operating under their
Over the past several decades, global capital flows have
jurisdiction. National financial authorities are also
grown rapidly, driven by deregulation of national financial
responsible for participating in the international standard-
sectors, advances in technology, and innovation of financial
setting bodies. The international agenda and standard-
products and instruments. The financial crisis of 2007-2008
setting bodies operate on a consensual basis and have no
and subsequent global economic turmoil underscored the
legally binding authority. Since national regulators (or other
interconnectedness of the global financial system as well as
authorities) cannot enter into treaties with other countries,
its weaknesses.
agreements made at international fora or by regulators at
standard-setting bodies require domestic legislative and/or
While financial markets have become more global,
regulatory changes before they are implemented.
financial regulation remains domestic, exercised by national
International financial institutions, primarily the
governments over financial transactions occurring within
International Monetary Fund (IMF) provide overall
their geographic borders. In the wake of the crisis, leaders
surveillance of national compliance with the agreed upon
from the United States and other countries have pursued a
international financial standards, among its other functions.
wide range of reforms to the international financial
regulatory system.
Figure 1. International Financial Architecture
Background
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.
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.
Despite decades of efforts among national regulators to
agree on and coordinate international standards on
Source: CRS.
accounting, securities, and bank capital adequacy among
the major economies, substantial regulatory differences
Group of 20 (G-20). The G-20 is an informal grouping
exist among national regulations. Furthermore, the absence
of nineteen major economies (including the United
of an institution with the authority to conduct prudential
States) and the European Union, which since 2009, has
supervision of transnational financial institutions may have
been the primary political steering forum for
contributed to the failure to prevent the 2007-2008 crisis
international economic cooperation. G-20 leaders meet
and hampered efforts to contain the spread of financial
at annual summits. Finance ministry officials meet more
instability throughout the global economy in the years
regularly. The G-20 has no authority to impose rules on
following the crisis.
its member countries. Rather, finance ministers and
central bank officials work through the G-20 to agree on
Current Institutional Landscape
a global international financial regulatory agenda.
In contrast to the rules-based system for governing
The Financial Stability Board (FSB). The FSB is a
international trade, centered on the World Trade
technical body, which was established by the G-20 to
Organization (WTO), international financial regulation is
coordinate the G-20 agenda and set the priorities for the
fragmented, with regulatory and supervisory authority
international financial standard-setting process. FSB
dispersed among a range of international and national
members include the regulators from the G-20 countries
institutions (Figure 1).
(and others), several international financial institutions
and the most important standard setting bodies (e.g.,
The overall agenda-setting for international financial
accounting, banking, insurance).
cooperation and coordination is most associated with the
Group of 20 (G-20) and the Financial Stability Board
The FSB has no supervisory authority or regulatory
(FSB). National financial authorities are the primary actors,
power to compel compliance with internationally agreed
responsible for devising rules and providing oversight and
standards. The primary U.S. representatives to the FSB
are the Federal Reserve, the Securities and Exchange
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Introduction to Financial Services: International Supervision
Commission (SEC), and the Treasury Department.
agreements, such as the Basel III capital requirements for
However other U.S. agencies participate in FSB
financial institutions, including a surcharge for financial
working groups and activities.
institutions that the FSB has designated as globally
“We are committed to take action at the national and
systemically important financial institutions (G-SIFIs),
represent significant progress toward their goal of
international level to raise standards, and ensure
developing a global macroprudential regulatory policy and
that our national authorities implement global
improved practices within countries.
standards… that ensures a level playing field, a race
to the top and avoids fragmentation of markets,
At the same time, the extensive volume of international
protectionism and regulatory arbitrage.” G-20 Seoul
financial standards, as well as national and regional
Summit Document, November 11-12, 2010.
implementing legislation, has grown increasingly complex
and has hindered implementation, according to some
Standard-setting bodies include international financial
institutions such as the IMF, as well as many other private
observers. While the United States has embraced, and in
and public bodies. These include the following.
many circumstances spearheads, the international financial
reform agenda, inconsistencies remain between U.S. and
Basel Committee on Banking Supervision (BCBS).
international guidelines. For example, the Dodd-Frank Wall
Street Reform Act requires banks to develop alternatives to
The BCBS, which is based at the Bank for International
credit ratings for the purpose of evaluating their capital
Settlements (BIS), in Basel, Switzerland, formulates
standards, guidelines, and best practices in banking.
reserve requirements. Basel III, negotiated with the
participation of U.S. regulators, by contrast, makes
Basel members are the national banking regulators. The
extensive use of credit ratings. In these cases,
United States is represented by the Federal Deposit
Insurance Company (FDIC), the Federal Reserve, and
implementation of financial standards may be incomplete.
the Office of the Comptroller of the Currency (OCC).
Disagreement over the use of credit ratings, as well as the
G-SIFI designation process, has led some Members of
Committee on Payments and Market Infrastructure
Congress to raise concerns that international agreements
(CPMI). The CPMI sets standards for payment,
such as Basel III, are in effect, superseding U.S. laws. Other
clearing, and securities settlement systems. The Federal
observers argue that the United States is placing itself at a
Reserve and Federal Reserve Bank of New York are
disadvantage when U.S. authorities implement international
members of CPMI.
financial standards, while others lag behind.
Financial Action Task Force (FATF). FATF develops
standards and policies to combat money laundering and
Should the Institutional Landscape Be Reformed?
terrorism financing.
Some observers contend that there is a limit to the progress
that can be achieved by relying on a network of voluntary,
International Association of Deposit Insurers (IADI).
non-binding international financial standards. During a
IADI develops standards for deposit insurance
financial crisis, there is often great pressure on governments
institutions. The U.S. representative is the Federal
to exercise “emergency power” to have more control of
Deposit Insurance Corporation (FDIC).
how the crisis is contained and how the losses are
International Association of Insurance Supervisors
distributed. Also, even large bankruptcies, such as Lehman
(IAIS). IAIS is the international standard-setting body
Brothers, are still resolved on a national level. This has led
for the insurance sector. The U.S. representatives
some observers to advocate for reevaluating international
include the Federal Insurance Office (FIO), Federal
commitments and placing greater emphasis on national-
Reserve, and National Association of Insurance
level legislation.
Commissioners (NAIC).
Some observers argue the IMF and/or FSB should be given
International Accounting Standards Board (IASB).
greater regulatory power over some international financial
IASB is an independent, privately funded UK-based
transactions, or at a minimum, greater authority to supervise
organization, which has developed international
and promote compliance with international financial
accounting standards. Since 2002, the U.S. Financial
standards. Other observers argue that such efforts to
Accounting Standards Board (FASB) has been working
centralize international financial regulation at the IMF,
with the IASB on convergence with the U.S. Generally
FSB, or some new body are overly ambitious and likely to
Accepted Accounting Principles (GAAP).
face the same coordination and implementing challenges as
the current standard-setting agenda. A more promising
International Organization of Securities
approach, they argue would be to continue to pursue
Commissions (IOSCO). IOSCO develops and
policies to harmonize regulatory policies on the regional
promotes securities regulatory standards. The U.S.
and international level.
representatives at IOSCO are the SEC and the
Commodity Futures Trading Commission (CFTC).
Martin A. Weiss, Specialist in International Trade and
Issues for Congress
Finance
IF10129
Are International Financial Standards Effective?
Members of Congress may wish to consider the efficacy of
the standards-setting effort. Regulators argue that recent
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Introduction to Financial Services: International Supervision
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https://crsreports.congress.gov | IF10129 · VERSION 4 · UPDATED