The Dangerous Illusion of International Financial Standards and the Legacy of the Financial Stability Forum

Abstract

In the aftermath of the Asian Financial Crisis, and the criticism directed towards the International Monetary Fund, in particular, for not having seen it coming, the Financial Stability Forum (FSF) was created in 1999 under a mandate from the G7 ministers of finance and central bank governors. The Asian Financial Crisis arose suddenly, spread rapidly and spared neither developed nor developing economies in the region, although some fared much better than others. In retrospect, the causes of the crisis were obvious and the consequences predictable. “Contagion” entered the financial lexicon.Thus the role of the FSF was to promote financial stability across national borders and provide an early warning system, identifying potential weaknesses or “vulnerabilities” in national financial systems, with a view to preventing a repetition of the localized financial chaos of 1997. The development of international standards for financial and other commercial regulation and the implementation of the Financial Sector Assessment Program or “FSAP” (designed to monitor and assess financial stability on a country by country basis) were two of the initiatives associated with the FSF. The Asian Financial Crisis, however, was just a tremor compared to the earthquake of the current Global Financial Crisis (GFC) which has shaken financial markets around the world less than a decade after the establishment of the FSF. That the FSF was a failure is patently obvious. It has been relegated to the dustbin of history with little ado. This paper will endeavour to identify some of the reasons for the failure of the FSF, with a particular focus on international standard setting and financial sector assessment initiatives, with a view to assessing the prospects of the reincarnation of the FSF, the new Financial Stability Board (FSB).