One of the legacies of the response to global financial crisis was supposed to be a renewed focus on international financial stability. A manifestation of this effort was the transformation of the Financial Stability Forum by the Group of Twenty (G20) into the Financial Stability Board (FSB) to oversee the development of global financial and regulatory standards. A “board,” of course, sounds more substantial than a “forum,” and the membership was expanded to include more G20 emerging market countries.

But the record of the FSB does not demonstrate an organizational commitment to changing the structure of international finance. Howard Davies summarizes its performance:

“…it is a watchdog without teeth. It can neither instruct the other regulators what to do (or not do) nor force countries to comply with new regulations.”

The FSB, of course, is an agent for its principals, the member governments. Davies places the responsibility for the lack of action on the FSB’s overseers:

“So a fair verdict would be that the FSB has done no more and no less than what its political masters have been prepared to allow it to do. There is no political will to create a body that could genuinely police international standards and prevent countries from engaging in competitive deregulation —and prevent banks from engaging in regulatory arbitrage.”

International financial stability is an international public good.  While domestic public goods are the result of failures in domestic markets, international public goods reflect failures of intergovernmental action. The lack of cooperation is due in part to a prisoners’ dilemma: each individual government has an incentive to shirk if it thinks that others will contribute to the provision of the public good.  Consequently, the good is underprovided.

Inci Ötker-Robe has written about other obstacles to collective action. These include problems in formulating and transforming knowledge into action, such as information asymmetries. As an example, she points to a lack of data across financial systems, which makes identifying risks and constructing early warning systems more difficult. Similarly, uncertainties about feedback loops that cross borders can allow financial fragility to escalate and trigger crises.

Ötker-Robe also writes about the incentives that discourage effective risk management. Diverging national interests, for example, prompt governments to protect their own financial systems rather than promote global welfare. (For an example, see the debate among regulators over capital requirements for systematically important banks.) She comes to a prognosis quite similar to that of Davies cited above:

“…the absence of global enforcement authorities with appropriate powers and accountability to forge global cooperation on the different areas of risk has hindered progress.”

What would it take for the situation to change? Ötker-Robe proposes implementing incremental steps to foster cooperation. These include financial transfers to governments to lower participation costs and increase participation. The IMF’s Managing Director Christine Lagarde has called for a new multilateralism, which would ”…instill a broader sense of “civic responsibility” on the part of all players in the modern global economy, including the private sector, and specifically financial sector players”. But if it is difficult for market participants to look past their private welfare, it is also difficult for governments to look beyond national interests, despite the domestic costs if global systems fail. Davies worries that it may take another crisis for the resolve to create international institutions with the necessary powers to be created. If the G20, which recently met in Brisbane, does not back its rhetoric with concrete actions, it might be a casualty of such a crisis.