Financial Risks, Stability, and Globalization
Chapter

16 On International Cooperation and Standards and Codes

Author(s):
Omotunde Johnson
Published Date:
April 2002
Share
  • ShareShare
Show Summary Details
Author(s)
ANDRÉ ICARD

It is indeed a great privilege and a real pleasure to address this conference and contribute to this panel. Yesterday afternoon the last session ended with a number of questions related to standards and codes.

I would today like to reopen the debate and continue on the track opened by the previous session on the Financial Sector Assessment Program (FSAP), as I consider that the elaboration and implementation of standards and codes is at the center of the topic of this panel: “The Role of the IMF and the World Bank in Assessing and Promoting Financial System Soundness in a Global Setting.”

I will start by analyzing the way standards and codes have been elaborated so far to see whether the current practice is best suited to the situation. I will then turn to the question of implementation, which is indeed a broader and much more complex issue.

Elaboration of Standards and Codes

According to current practice, standard setters are the bodies that are the main actors and specialists in the domain involved, as shown in the appendix. For instance, the IMF sets up the standards on macroeconomic policy transparency (Special Data Dissemination Standard (SDDS), transparency in monetary and financial policies, practices in fiscal transparency). As for financial regulation and supervision, the standard setters are the Basel Committee for banking, International Organization of Securities Commissions (IOSCO) for securities, and the International Association of Insurance Supervisors (IAIS) for the insurance industry. Institutional and market infrastructure is a domain in which standards and codes require the contribution of several institutions, such as the World Bank (insolvency), the Organization for Economic Cooperation and Development (OECD) (corporate governance), the Committee on Payment and Settlement Systems (CPSS), (payment and settlement systems), and International Accounting Standards Committee (IASC) (accounting rules). This results in a multiplicity of standard-setting bodies, among which coordination becomes necessary.

The Financial Stability Forum (FSF) was created in part to address this problem. The FSF regroups, in addition to representatives of 11 countries, a large majority of the standard setters and international institutions. The FSF’s function is to ensure the cohesion of efforts in this area by

  • identifying gaps and avoiding duplication;
  • fostering cooperation among the various standard setters and the international institutions in standards formulation and implementation efforts; and
  • developing and maintaining the Compendium of Standards, which is available on its website.

If I were asked whether global institutions, in light of the comprehensive nature of their membership, have a comparative advantage and thus should play a greater leadership role in setting financial sector standards, I would answer no, as I think that standards should be set by those who have the best knowledge of and proximity to the matter being considered. I am not at all convinced that a kind of global standard setter would provide better organization than the current one, founded on the principles of direct reliance on relevant expertise, multidisciplinary approach, consultations, and coordination.

Having said that, does this mean that there are no problems left in the domain of standard and code elaboration? Certainly not.

  • A major concern is the one expressed yesterday evening by one of the participants at this conference about the multiplication of standards. The standards and codes compendium run by the FSF Secretariat includes more than 60 items. For instance, in addition to the Core Principles, the Basel Committee has issued 17 standards in the domain of general and cross-border supervision, capital adequacy, disclosure and transparency, risk management in the banking sector, etc.In order to simplify the approach to standards and codes for emerging market economies, the FSF has identified a list of 12 key standards most relevant for sound financial systems. These are listed in the Appendix. The 50 other standards listed on the compendium, while serving as important guidance or best practice in their own right, are elaborations on the recommendations set out in the key standards.
  • With such a long list of standards, can we consider that the task of elaborating them is completed? The answer would be yes if we were to consider that there were no gaps in the existing framework. That is not yet fully the case, however. Sound guidance is being developed for deposit insurance arrangements, but it is missing, for example, for other elements of the safety net. But the answer is certainly no if we take into account that standards need to be continually reviewed to remain relevant and up to date. We must maintain the momentum behind this effort especially as complacency is always hard to resist.

Implementation

Turning to the implementation of standards and codes, a distinction should be made between principles and practicability.

Principles

Regarding principles, one can refer to the work of a task force set up by the FSF that was asked to explore key issues and consider a strategy for fostering the implementation of standards relevant for sound financial systems. The task force identified three factors as being critical to fostering successful implementation of standards: ownership, incentives, and resources.

  • As for the ownership factor, one must recall that implementation is a sovereign decision, taken both in the national interest of strengthening financial systems and in the national self-interest of benefiting from a more stable international financial system. Two consequences must be drawn from this principle.
    • —For implementation, standards must be prioritized to take account of country circumstances. This cannot be done solely by the international financial institutions and standard-setting bodies. Direct and extensive involvement of the national authorities is necessary to strike an appropriate balance between domestic and international considerations.
    • —It is for national authorities to design and implement plans to achieve the standards. National authorities should be encouraged to publicly announce these action plans to foster ownership and add credibility.
  • The second key factor is incentives, both market and official. For market incentives to work, market participants must have access to information on economies’ observance of standards. There is thus a presumption in favor of publishing the assessment results. In this respect, progress in observance of standards must be assessed on an ongoing basis. A priority in this area would be to develop clear and detailed assessment methodologies for the key standards. Efforts are already under way in this respect. Market and official incentives is a domain that a task force of the FSF is currently exploring. However, the group will not address IMF and Bank facilities that remain in the full responsibility of these institutions.
  • The third factor is resources. Implementation of standards is resource-intensive. The task force encouraged standard-setting bodies to forge closer partnerships with the IMF and the Bank to better leverage their resources in assessing observance of standards.

Regarding ownership and resources, I would like to say a few words about an ongoing experience in the domain of banking core principles. The Bank for International Settlements (BIS) and the Basel Committee on Banking Supervision (BCBS) recently organized a workshop on implementation of the core principles, which attracted a large number of participants. IMF and World Bank representatives also attended the workshop. A methodology of self-assessment has been field tested for one year and the principles themselves are now three years old. Therefore, the goal was to see if there was room for improvement in the implementation process or need for revision of the principles and the methodology. The result of this exercise has shown impressive achievements on quality implementation of the core principles.

One important lesson that could be drawn from this experience is that standards work well and ownership can be promoted under the condition that there is an infrastructure to help. This infrastructure must come mainly from the standard-setting body, with the help of the IMF and the World Bank if they are not themselves the standard setters.

Practice of Implementation

An important point to make is that international financial institutions and regulatory bodies are now working well together to foster implementation, in particular within the context of the Financial Sector Assessment Program (FSAP) and Report of the Observance of Standards and Codes (ROSC) processes. If I were asked whether the IMF and the Bank should discontinue the work they have been doing until now in assessing and strengthening financial system soundness (and possibly leave it to others), my answer would be a strong no, for at least three reasons:

  • I do not think that there would be any other institutions able to take on this task and to do a better job;
  • I do not think that there are any other candidates to do so and if there are, they are certainly not located in Basel;
  • I think it would be a big mistake to dissociate macroeconomic and financial stability expertise from the domain of crisis prevention and resolution.

Here again, the right answer is cooperation and coordination among various bodies with different roles to play.

This does not mean, however, that I consider the implementation procedures currently followed as optimal: crisis prevention should be the objective of any financial reform, and ownership is a key condition in this respect. Improvements in these two domains are not only possible but also necessary. Let us consider the main implementation tools used by the IMF and the World Bank at present:

  • inclusion of structural changes in adjustment programs subject to conditionality;
  • the Contingent Credit Line (CCL); and
  • FSAP/ROSCs.

The inclusion of financial reforms in IMF programs subject to conditionality can be seen as an inevitable approach when financial distress strongly influences the macroeconomic policy framework.

However, one problem is that there are seldom other occasions to envisage preventive financial reforms. The CCL does not look attractive to potential candidates and the FSAPs/ROSCs have been until now mainly an assessment procedure and not a tool designed to directly influence financial structures. Under these conditions, and in the absence of procedures designed to address structural problems in a preventive manner, independently from the management of a crisis situation, the inclusion of financial reforms in adjustment programs appears as the main instrument available.

There are four drawbacks to this.

  • Waiting until a crisis occurs to take structural measures can hardly be considered a preventive procedure.
  • The time required to implement significant structural reforms in the financial domain is greater than the time required for macro-economic adjustment to take place; when the macroeconomic/external payments crisis is over, the commitment to reforms tends to disappear, and a risk of complacency then appears, as is the case at present in Asia.
  • Overloading crisis resolution programs pushes the countries to postpone their approaching the IMF and makes crisis resolution more complex.
  • The absence of an efficient prevention procedure does not facilitate the implementation of good assistance programs for financial reform.

Therefore, it seems necessary to introduce other ways to proceed. The lack of interest by potential borrowers in the CCL facility should be carefully analyzed and the facility reformed accordingly or cancelled. It is probably more damaging than helpful to maintain unchanged a facility aimed at prevention when those who could benefit from it consider it unattractive.

The FSAP and ROSC projects are major improvements and benefit from excellent cooperation between the IMF, the Bank, and the standard setters. Their prospective inclusion in the Article IV framework can be seen as a step in the right direction.

However, at present, FSAPs are principally a surveillance tool, resulting mainly in improved information on financial systems for the country’s authority and the staff of the two Bretton Woods institutions. They do not address how the identified vulnerabilities should be mitigated, and the incentive structure is not clear. This could be remedied if FSAPs were used by countries as a starting point for discussions with the IFIs and standard-setting bodies on priorities for and ways of addressing weaknesses, with the IMF and Bank catalyzing adequate expertise from other international bodies and national authorities in support of concrete action plans.

Ownership of such country action plans is a big element in this respect. So is public disclosure of action plans in order to underscore national authorities’ commitment to act as well as to generate external pressure on them to follow through.

Seen from this perspective, surveillance should not be an objective in itself but the foundation for the formulation of financial sector reform and development strategies. Is the current strong link to lending procedures the best way to proceed? Should we not build more on ownership? These are open questions.

The idea to disconnect somewhat structural reform programs from lending facilities was considered by the independent task force report “Safeguarding Prosperity in a Global Financial System—The Future International Financial Architecture.” Very recently, Peter Kenen, who was a member of this task force, made interesting suggestions on the occasion of a lecture that the Per Jacobsson Foundation organized in Lucerne. The main proposal he made was to limit conditionality to macroeconomic matters and to develop financial structure improvement within a contractual framework to be organized between the IMF and the interested government. This proposal appears to be worth considering.

While leaving this debate open, I would stress more generally that prevention and ownership in financial structure reforms are domains where progress appears at this stage both feasible and necessary.

Appendix: Key Standards for Sound Financial Systems
Policy AreasKey StandardsIssued by
Macroeconomic Fundamentals
Monetary and financial policy transparencyCode of Good Practices on Transparency in Monetary and Financial PoliciesIMF
Fiscal policy transparencyCode of Good Practices in Fiscal TransparencyIMF
Data disseminationSpecial Data Dissemination Standard/ General Data Dissemination SystemIMF
Institutional and Market Infrastructure
InsolvencyWorld Bank
Corporate governancePrinciples of Corporate GovernanceOECD
AccountingInternational Accounting Standards (IAS)IASC
AuditingInternational Standards on Auditing (ISA)IFAC
Payment and settlementCore Principles for Systemically Important Payment SystemsCPSS
Market integrityThe Forty Recommendations of the Financial Action Task ForceFATF
Financial Regulation and Supervision
Banking supervisionCore Principles for Effective Banking SupervisionBCBS
Securities regulationObjectives and Principles of Securities RegulationIOSCO
Insurance supervisionInsurance Supervisory PrinciplesIAIS

    Other Resources Citing This Publication