An end to global standards and codes?

In the wake of financial crises in the 1990s, the International Monetary Fund (IMF) and G7 officials, along with private sector financial actors, launched an effort to develop and promulgate a set of standards and codes to govern global finance. While this effort has witnessed some success during the past decade, it also has hit many stumbling blocks. The current capital markets crisis may undermine the US-led effort to impose a universal set of standards on developing countries.

The Global Standards Effort

One of the lynchpins of attempts at financial regulation during the past decade has been an effort by G7 governments (particularly the United States) as well as international financial institutions (IFIs) to create a set of global financial standards. These standards aim to govern a range of areas, including the provision of macroeconomic data, the regulation of national securities exchanges, and the promulgation of international norms for accounting.

The main impetus for the standards project was the financial crises of the mid- and late 1990s. Policymakers in the developed world ascribed the crises largely to problems of information, transparency, and corruption in emerging markets (1) rather than to any sort of inherent market instability. On this diagnosis, the solution was to continue capital account liberalization in developing countries but to couple this liberalization with an attention to regulation in a "sequencing" approach. (2)

As part of the G7's effort, the Financial Stability Forum (FSF) was established in 1999. The FSF serves as a coordinating body for a dozen "key codes and standards." While the FSF seeks to apply its standards to the universe of countries, it operates according to a club-oriented process. (3) The FSF consists of G7 governments (three seats per country, one each for the finance ministry, the central bank, and the financial regulator); international financial institutions (seven seats total for the IMF, the World Bank, the Bank for International Settlements [BIS], the Organisation for Economic Co-operation and Development [OECD], and the European Central Bank [ECB]); international regulatory bodies (six seats total for organizations focused on banking regulation, securities regulation, accounting standards, and insurance supervision); central bank expert committees (two seats); and single seats for the governments of Australia, Hong Kong, the Netherlands, Singapore, and Switzerland.

This "network of networks" (4) advances standards for financial sector operations (banking, securities); market integrity (money laundering, accounting); and transparency (data dissemination, fiscal and monetary policymaking). Some of the standards (bank regulation, money laundering, data dissemination) were based on efforts that existed previously. In other instances, the FSF has been the primary forum for developing rules, often coordinating the efforts of private, quasi-governmental, and governmental organizations. Governments of both developed and developing countries were encouraged to adopt these standards, usually mimicking practices based in major financial centers.

The new standards required not only changes in government policies vis-a-vis external actors (e.g., reduced barriers to investments from abroad), but also changes in domestic policies (e.g., accounting practices of firms and banking sector regulation). Another distinguishing feature of the new standards is the mix of public and private authority involved. (5) While the precise nature of regulation and supervision varies across the twelve standards and codes, there is significant reliance on the private sector. In some cases, private financial actors help to enforce the rules. In other cases, such as accounting and auditing, the private actors were active in the development of standards. In still other instances, such as the Basel II accords, private actors both provided input to construct the rules and helped to implement them. The predominant influence of the major states and the private sector in the standard-setting process marginalized many of the ultimate subjects of the rules, particularly developing country governments and firms.