The Financial Stability Board: The G20’s answer to the Global Financial Crisis

Abstract

The collapse of the United States sub-prime mortgage and housing market in 2008 led to the largest financial crisis in modern history. It was described by Dominique Strauss-Kahn, the then Managing Director and Chair of the Executive Board of the International Monetary Fund (IMF) as the “worst economic slowdown since the Great Depression.¹ Large private banking institutions fostered a culture of low interest lending, encouraged by competitive market interest rate swaps and complex derivatives, leading to increased borrowing and subsequent default. As a result, 2008 also saw an 81 per cent increase in home foreclosures on the previous year² as well as the bankruptcy of one of the U.S.’ largest investment banks, Lehman Brothers Holdings Incorporated. With US$639 billion dollars in assets and US$619 billion dollars in debt, the bankruptcy of the Lehman Brothers Empire is the largest recorded in U.S. history to date.³ While tempered to some degree, the effects of the Global Financial Crisis (GFC) can still be felt today.

With a litany of varying factors contributing to the eventuality of the GFC, a variety of international organisations acting as regulatory agencies, such as the World Trade Organisation (WTO), the IMF, and the World Bank appeared to have had little effect in preventing its occurrence. Of particular significance was the Financial Stability Forum (FSF), consisting of major national financial authorities and international financial institutions, a subset of the Group of Seven (G7) and predecessor to the Financial Stability Board (FSB), which was brought into existence in 1999 to promote international financial stability. Soon after the 2008 market crash, and as a result of the 2009 G-20 London summit, the FSF was rebranded, given an increase in membership, established new aims and priorities and provided with a wider mandate to increase the accountability of it member states, with particular focus on their adherence to its new objectives.

The FSB was in part the G20’s response to the GFC. As well as outlining its functions and structure, the focus of this paper will assess the role of the FSB in light of the global governance regime. Although limited, the literature available on the FSB suggests that while vast improvements have been made to make the institution more democratically inclusive, they are far from satisfactory. It is instead suggested that the FSB acts as the G20’s executive branch, fulfilling its objectives, while circumventing accountability, transparency and public participation through its constitutional framework and documentation.

¹ International Monetary Fund Annual Report 2009 (International Monetary Fund, Annual Report, 2009) at 4.

² Les Christie “Foreclosures up a record 81% in 2008” (15 January 2009 <money.cnn.com>.

³ In re: Lehman Brothers Holdings Inc., et al. Chapter 11 Case No. 08-13555 (JMP) (Jointly Administered) Debtors’ Disclosure Statement for Third Amended Joint Chapter 11 Plan of Lehman Brothers Holdings Inc. And its Affiliated Debtors Pursuant to Section 1125 of the Bankruptcy Code. United States Bankruptcy Court Southern District of New York.