Another US Fiscal Crisis? FSB May Come to Rescue

As another financial crisis looms in the US (. . .the government runs out of money on October 1, and the US is about to hit a $16.7 trillion debt ceiling and go into default in mid-October), Lawrence Schembri, the Deputy Governor of the Bank of Canada spoke to the Certified Financial Accountants society (CFA) in Ottawa on September 24th about the necessity of the Financial Stability Board (FSB).

While Canada faired well relatively post-2008—likely the best of any advanced economy—the Governor explained our domestic economy must have a global perspective, because future financial crises must be tackled as a cooperative international effort in our highly integrated global economy. For that reason, the FSB plays a key role and may be crucial to financial stability around the world.

The FSB is a small organization, comprised of national financial authorities from 24 countries, including G-20 members and other nations such as Switzerland and Singapore. The FSB also incorporates larger international financial institutions such as the International Monetary Fund (IMF), the World Bank, and the Bank for International Settlements. As Schembri put it, the FSB “is an efficient and inclusive international organization that can act nimbly to coordinate the efforts needed to address serious financial vulnerabilities.”

FSB performs four main functions, which Schembri refers to as the “financial policy cycle”. The FSB:

1. identifies and assesses financial vulnerabilities;
2. develops the necessary policies or global standards to address those vulnerabilities;
3. monitors the implementation of those standards by national jurisdictions to ensure consistency; and
4. assesses the effectiveness of the regulations, including any unintended adverse consequences on financial markets.

The FSB has as one of its main objectives ending the possibility of financial organizations being “too big to fail” by identifying three ways to prevent failure:

i. higher capital requirements for large financial institutions that are deemed to be 
   systemically important;

ii. standards for the effective resolution of such institutions that eliminate the need for
    taxpayer bailouts and minimize the disruption to the financial system; and

^iii. more intense and more effective supervisory oversight.

To that end, the Office of the Superintendent of Financial Institutions (OFSI) in Canada has required its six largest banks to hold 1 per cent more capital and be more closely supervised because those banks were deemed systematically important.

Schembri concluded. “The FSB has fostered the necessary co-operation and has made solid progress in coordinating the development of appropriate global policies to address the main weaknesses exposed by the crisis.”

Let’s hope it can weigh in with vigor if the latest US brinkmanship darkens recent economic recoveries. The goal is that the FSB can mitigate the fluctuation in international production and consumption in those cases.