Thursday, February 25, 2010

International Regulatory Cooperation will never be Easy

Author: David Schwartz J.D. CPA David Schwartz J.D. CPA

In a recent speech by Norwegian central banker Svein Gjedrem, the case for broader involvement by smaller banks is laid out. Instead of the G20, Mr. Gjedrem argues that the 180-member International Monetary Fund should serve as the main decision- making body for the funding of systemic risk mitigators.

Norges Bank: The international community turns to the IMF in times of crisis, in part because it is an effective institution that performs the vital functions that are called for, but also for the very simple reason that the world has no one else to turn to. [However] International policy cooperation has thus moved out of statutory bodies and into groups of a select few, bypassing established channels and fora. Other countries do not participate, directly or indirectly, but are called upon to contribute to efforts that others have agreed. The G20 discusses and aims to agree on changes in IMF governance. The vast majority of the membership of the IMF has no voice or representation in these discussions, including all low-income countries and most emerging economies. [1]

However, this direction is not fully accepted. Even the IMF is not entirely enamored of an expanded role for itself. According to managing director Strauss-Kahn,

International Monetary Fund: We are not a global financial regulator—nor do we aspire to be! That is the responsibility of national regulatory and supervisory agencies.   Having said this, we do take very seriously our responsibility to support national and multilateral efforts to strengthen financial regulation. Besides contributing to the formulation of new regulations and providing technical assistance in this area, our key mandate is surveillance of the financial sector. We are therefore stepping up our monitoring of the adoption and implementation of new standards and regulatory changes. This is in line with the G-20’s request that our monitoring include the evolving framework of macroprudential supervision.” [2]

This apprehension is shared by the Deutsche Bank and other central banks in G-20 , who also oppose extending the reach of the IMF. For example, Dr Weber wrote in September 30th that the IMF’s standing is under review:

Deutsche Bundesbank: The necessary strengthening of the IMF as a quota-based institution is also important for the Fund’s legitimacy. The IMF is being accepted as an advisor and lender as long as its members feel to be fairly represented. Fair representation relates to the allocation of quotas and voting rights in the IMF, as well as to the representation in its decision-making bodies. Adapting the quotas and voting rights to reflect the changes in economic weight in the global economy was the key element of the April 2008 reform.

Dynamic emerging market economies, such as China, Korea, Mexico and Turkey, have been the main beneficiaries. However, the quota reform has regrettably not yet entered into force because many countries – including important G20 countries – have not yet ratified it. … The Executive Board of the IMF as well as some G20 members are seizing the current economic and financial crisis as an opportunity to seek to extend the IMF's mandate.

It is planned, for instance, to directly finance budget deficits with central bank money which the IMF has at its disposal; this amounts to monetary financing, which is prohibited in Europe for good reasons. Moreover, the IMF shall also obtain a role as a global insurer or guarantor covering  financial and economic risks of its member countries. Extending the IMF’s mandate in such a way would result in a fundamentally different business model for the IMF and would risk overstretching it. [3]

[1] Svein Gjedrem, Governor of Norges Bank (Central Bank of Norway), at the Peterson Institute for International Economics, Washington DC, 25 February 2010.

[2] Dominique Strauss-Kahn, Managing Director of the International Monetary Fund, Berlin, September 4, 2009

[3] “Legitimacy of IMF endangered,” Dr Axel A Weber, Frankfurter Allgemeine Zeitung, Deutsche Bundesbank, September 30, 2009