Former Prime Minister Paul Martin was instrumental in the creation of the G20 and he also played a role in the creation of the Financial Stability Board, arguably the world’s top financial regulator. In the aftermath of the financial crisis the FSB has taken on an increasingly important role as top banking cop on the global stage, in charge of fixing regulation.
But like many observers Mr. Martin argues that the FSB in its current form has neither the manpower nor the legal clout to get the job done. Mr. Martin spoke to Financial Post reporter John Greenwood earlier this week.
Q: Does the Financial Stability Board have the necessary clout and manpower to do its job?
A: Just to give you a bit of background, in 1997 and 1998, when I brought the idea of the G20 to the G7 finance ministers, and basically sold it to all the g20 countries, at the same time that I did that another country — I cant remember who — brought forward the idea of the Financial Stability Forum [the forerunner of the FSB]. I was very supportive of the Financial Stability Forum and felt that it would be an essential instrument of the G20 finance ministers. What I argued at the time — and there were others who argued along with me — was that it should not be limited only to the G7 countries and a couple of others, number one. [Number two, I felt] that it should have a treaty basis, okay. There should be a basis in treaty between the countries, [so that the FSB was] not simply a creature of the G20 financem ministers. [I argued] that not only should it have excellent staff but it should have the best regulators in the world, people with great experience. You begin with national regulation but … somebody’s got to monitor it.
However, while I was successful on convincing them on the G20, the other people who were with me were unsuccessful in saying that we had to give the FSF more substance. And I really do believe that the failure to do that at that time is one of the reasons why we ended up with the crisis in 2008. In other words, the failure of bank regulation in the United States and Europe to a certain extent arose because the Financial Stability Forum was not given the tools to do the job.
Q: Where did the resistance come from?
A: It came from some of the European countries. And the United States could have pushed it more strongly. But it really was some of the European countries.
Over the years I [continued] to push for a stronger organization. But when times were good, the constant answer was, ‘Why would you need this kind of thing?’
Q: In 2009 the G20 leaders agreed to boost the powers and membership of the Financial Stability Forum which they re-named the Financial Stability Board. But you believe that still wasn’t enough and that it needs among other things a treaty basis. Can you talk about that?
A: It’s basically a question of authority. The Financial Stability Board is essentially restricted to the G20 members, plus a couple of others. But let me tell you something. There are a lot of countries in the world who are not part of the G20, who have banks, who have financial institutions, and so I think that their membership is too weak. And they have not given it anywhere near the strength and regulatory capacity and the expertise that it requires.
Q: But they have some of the world’s best regulators on the board. Isn’t that a key strength?
A: The job of a regulator is a full time job. Don’t misunderstand me, the people on the board have got great strength, alright, but they’re not the people who roll into a country. Basically the way the board is going to work, it will do peer review, so three countries will appoint their regulators who will go in and they will assess the country’s regulation. But if they start to find a lot of troubles, they then call on expert regulators to go in, and this is a full time job. Given the innovation and the imagination of banking institutions and shadow banking institutions in particular, its a mistake if you don’t really get down-on-the-ground regulators who are going in there to check out what’s on. Thanks to [Former FSB chairman] Mario Draghi and Mark Carney, a number of things have happened. Number one, they’ve found a way to reach out to the rest of the world but they haven’t given the rest of the world full membership on the FSB. It’s my opinion they’ve got to go further.