Carney’s new gig: Congratulations or condolences?

Mark Carney’s appointment last Friday as chairman of the Financial Stability Board, the world’s top banking watchdog, is a central banker’s dream. Plus, he’ll have an old school friend from his Oxford days serving as second-in-command. Great gig, right? Well…

About the FSB: The Financial Stability Board is the updated version of the Basel, Switzerland-based Financial Stability Forum, which was created in 1999 by the G7 to improve information-sharing among finance ministers and central bankers in the aftermath of the Asian financial crisis. The FSB itself came to life ten years later, after the global financial crisis, when its membership was extended to all G20 members. It now includes representatives from more than 20 countries, a number of prominent international bodies, including the European Commission, and the world’s most important institutions in charge of setting international standards for the global financial market.

In part, the FSB helps design new regulations for banks and other financial institutions that aim to avoid another 2008-style meltdown. In part, as Carney put it in a CBC interview, the institution’s job will be that of “policeman” in charge of ensuring that countries follow the rules.

The nasty fine print: The FSB’s chairmanship is surely enormously prestigious, and it will serve Carney well as a megaphone. Still, if the institution is supposed to be the top cop of global finance, it’s like Dirty Harry armed with a billy stick. The tough guy attitude is there, but not the firepower.

For now, in fact, the most the FSB can do to punish a country that does not follow the new rules is resort to the so-called naming and shaming. It doesn’t help that, in order to assess compliance with international standards, the institution relies on peer reviews approved by consensus. In practice, it means any member country under review can simply veto criticism, according to Eric Helleiner, chair in international political economy at the Centre for International Governance Innovation and a professor in the department of political science at the University of Waterloo.

Another problem, says Helleiner, is that the FSB wants to uphold rules for everybody–but not everyone gets a say about those rules. Whereas the World Bank, the International Monetary Fund and the World Trade Organization have near universal membership, the FSB brings together just 24 countries.

The bright side: Things are looking up. So far, the FSB has been carrying on with only 20 employees, all borrowed from other organizations. At the latest meeting in Cannes, though, leaders of the G20 group of world economies promised to award it legal standing, meaning that the institution will finally get a budget of its own, and the power to hire permanent staff (and perhaps cough up a paycheque for the chairman, too).

And the FSB isn’t quite as powerless as it seems. When it comes to financial markets, explains Helleiner, the name and shame tactic tends to work better than in most other contexts. It’s not just as if Amnesty International wrote up some damning human rights report hoping to foist moral pressure on the dictators of the world (which sometimes works anyways). It’s more like Standard and Poor’s downgrading the creditworthiness of a country–the markets take notice.