Volume 42 | Number 3 Summer 2007
Banking Law Reform and Users-Consumers in Developing Economies: Creating an Accessible and Equitable Consumer Base from the “Excluded”
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II. Evaluating Banking Sector Legal Reform for Developing Countries: The Past Fifteen Years
Banking sector legal reform as a mandate for domestic and international financial authorities of developing countries is clearly of recent vintage, and is largely the reactive byproduct of the major industrialized countries’ concern over financial crises and the quest for global financial stability during the 1990s,4 the new transitioning economies arising from the collapse of the Soviet Union, the enlargement of the European Union, and the ongoing onslaught of economic globalization—each of which are interconnected in various ways.5 More specifically, this reform over the past decade has been largely driven by the G7/G8 grouping of industrialized countries.
A. Modern Banking Sector Legal Reform as G7/G8 Mandated and as Part of NIFA
In terms of becoming a major concern of the IFIs, banking sector, and other financial sectors, legal reform as to developing countries began gaining credence and taking shape as part of the G7/G86 invention of the notion of a New International Financial Architecture.7 NIFA in fact is a misnomer of sorts and in some sense a public relations ploy to dress over an ongoing quandary of what to do with an international financial “non-system.”8 Yet, even if no true “architecture” had existed to be replaced by NIFA, and though NIFA is itself probably not a true architecture or system, a working base did come to exist through the NIFA, from which a new architecture and a next generation of banking and financial sector legal reform could be developed.
NIFA, as it has unfolded through the various G7/G8 annual summits over the past decade, has endeavoured to coordinate and direct a wide grouping of different, though related, international bodies that have their own mandates, jurisdictions, and powers: (i) multilateral agencies (IMF, WB, BIS, OECD);9 (ii) policy formulation groups (G7/G8, G10, G20);10 and (iii) international regulatory and standard-setting authorities and arrangements (IFAs) (Basel Committee, IAIS, IOSCO, IASC, JF, FSF).11 In addition, in various and increasing ways, NIFA has brought the private financial industry sectors into the equation.12 As such, NIFA might be viewed as an evolving policy construct moving towards a new governance structure which reflects a public-private partnership among governments, financial sector authorities, international financial institutions, and private international financial institutions in the search of a stable, viable global financial environment. However, the main focus of this “public-private partnership” is, for the most part, on global financial stability issues and on deepening financial markets rather than on broadening such markets in terms of greater financial inclusion or serving the socioeconomic development needs of the majority of the population of developing countries.13
At its 1994 Naples Summit, the G7 Heads of State made financial sector reform issues a major agenda item for its 1995 Halifax Summit.14 But it was really not until the Birmingham (1998), Cologne (1999), and Okinawa (2000) Summits that the NIFA began to be fleshed out.15 The G7 Finance Minister Reports in Cologne (June 1999) and Okinawa (June 2000) specifically followed up, in some detail, on the following NIFA components:
- Strengthened Macroeconomic Policy for Emerging Economies;
- Strengthened and Reformed IFIs;
- Accurate and Timely Informational Flows and Transparency;
- Strong Financial Regulation in Industrial Countries;
- Strong Financial Systems in Emerging Markets;
- Exchange Rate Policies;
- Sound Accounting Standards;
- Legal Infrastructure;
- Corporate Governance;
- Anticorruption/Money Laundering;
- Technological Innovation/Adaptation; and
- Risk Management.16
An integral element of all this would be a significant law-based dimension evolving around global principles and standards setting (codes) as to the following:17
- Banking Regulation;
- Capital Markets Regulation;
- Insurance Supervision;
- Corporate Governance;
- Financial Conglomerates;
- Payment, Settlement and Custody Mechanisms;
- Pension Funds and Collective Investment Schemes; and
- Accounting and Auditing Standards.
Though the G7 singled out treatment of emerging economies as to financial sector reforms, the bottom line appears to be that these economies needed to adopt and implement the unfolding “international standards and best practices,” with the IFIs playing a major role (directly and indirectly) in the implementation, transmission, and related technical assistance processes. Otherwise, the focus of the G8 heads of state and finance ministers at Birmingham, Cologne, and Okinawa as to developing countries was mainly on debt alleviation for the poorest of the developing countries and on integration of the developing world into the “global environment.”18 The underlying assumption appears to be that sustained global growth, increased trade, and investment liberalization will bring increased economic growth for developing countries and that a strengthened international financial system will foster such global growth.19
From 2000 to the present, the G8 appears to have been consumed with a proliferation of international political and security crises. As to financial sector reform, the use of Financial Sector Assessment Programs and greater IFI cooperation is encouraged, and there is increased concern as to financial crimes, corruption, and fighting terrorism financing.20 Debt relief for the poorest countries gained traction with the 2005 Gleneagles Summit.21
This author suggests that the thrust of the G7/G8 financial sector reform mandates over the past decade can be seen as geared to the following policy concerns:
- Financial Crisis Avoidance and Resolution;
- Financial Stability;
- Financial Services Liberalization; and
- Regional and Global Cooperation.
More recently, financial sector reform also has been driven by industrialized country concern for financial sector integrity, which has come to embrace the following:
- Anti-Money Laundering (drug dealing and other criminal activities);
- Combating Terrorism Financing;
- Anti-Corruption;
- Corporate Governance of Financial Institutions;
- Transparency and Accountability; and
- Greater Availability of Information and Enhanced Disclosure.22
While one can reasonably and in good faith rationalize that these focal points are directly related to the economic development processes of developing countries, the truth is that these concerns have been engendered as a result of industrialized country interests, and that in many of these instances the interconnection with substantive development goals of poverty reduction is indirect and sometimes tenuous at best.23
That said, the bottom line is that the role of the IFIs in the area of financial sector reform over the past decade has been mandated largely by the G7/8 global policy determinations and directives.
B. NIFA and the Role of International Standards: An Industrialized Country Initiative
As alluded to above, the G7/G8 directed a number of international organizations to develop and implement international prudential standards (“codes”) in order to encourage and improve confidence in and viability of domestic financial systems. Such standards were aimed at promoting sound financial institutions, minimizing systemic risk, and encouraging savings and investment activity through increased confidence in financial markets, both domestically and internationally. It must be noted at the outset, however, that these international principles and standards were to be just that: minimum internationally accepted guidelines that leave latitude in their implementation.24
The G7 Finance Ministers were impressed with the prior work of the Basel Committee and IOSCO on developing “international standards for prudential supervision” of banks, securities firms, and markets, as well as payment and settlement systems. In particular, the Ministers approved joint Basel Committee/IOSCO work on market risk and capital adequacy, as well as derivatives and futures exchanges—sophisticated areas of concern for the industrialized countries. The Ministers also recognized the cooperation among the bank, securities, and insurance supervisors through the Joint Forum and recommended better vehicles for increased institutional cooperation. With hindsight, one can see from this thread the subsequent increased importance and spread of international standards and codes and the later formation of the international standards coordinator, the Financial Stability Forum.25
Quite clearly, the development of international banking standards by the Basel Committee long predates the emergence of the NIFA. In fact, in 1974 the Ministers of Finance and Central Bank Governors of the “Group of 10”26 became concerned with possible development of international bank supervisory standards in response to the interrelated insolvencies of two small international banks (the German Bankhaus Herstatt and the American Franklin National Bank) that had resulted from excessive exchange rate risks and the lack of coordinated supervision by the concerned regulatory authorities to address this problem. Therefore, in 1975, they established what is now the Basel Committee.27 Regarding this incident, the governors of the Central Bank were not concerned about any specific systemic crisis. However, it dawned on them that there was no established mechanism for coordinating cross-border supervision of banking institutions that faced increased international risks in the new 1970s era of global floating exchange rates.28 In addition, the governor of the Bank of England was becoming concerned that capital adequacy of banking institutions was turning into an issue of international import; traditionally, bank regulators/supervisors were primarily concerned with institutional liquidity. As such, the first tasks of the Basel Committee were to consider cross-border supervision and capital adequacy. The objects of this focus were international banks of the industrialized countries comprising the membership of the Basel Committee.29
During the 1980s, the Basel Committee produced a revised framework, “Concordat,” for attempting to allocate international bank supervisory authority among the host and home regulator/supervisor; a rather sketchy version had been quietly put together in 1975.30 This framework was revised on several occasions during the remainder of the 1980s and the 1990s, largely as a reaction to specific bank failures exposing the framework’s inadequacies.31 Also, during the mid-1990s, it became apparent that the “international banking institution” was an incomplete notion for supervision of the large industrialized banks as they tended to operate more and more within the structure of banking and financial “conglomerates.” Thus, a supervisory framework for dealing with these conglomerates also was developed.32 This, in turn, led to a consideration of the issue of the “lead regulator” as to such conglomerates.33
The most significant efforts of the Committee from the 1980s to present have been on risk-based capital adequacy standards. After extended, and at times contentious, internal deliberations, a risk-based “Capital Adequacy Accord” was promulgated by the Committee in 1988.34 While a non-binding, non-official document, this Accord soon (through a complex, informal, and uncoordinated transmission matrix) became the international benchmark for bank capital adequacy within the developed and then-developing world.35 Prior to this Accord, the capital approach taken by most bank regulators/supervisors was a basic initial capitalization requirement and then an ongoing requirement of some form of fixed capital-based ratio (e.g., capital to assets).36 At the time, the 1988 Accord was thought to be a most complex approach, while today it is considered a basic, rudimentary framework when compared to the Committee’s current proposal, the Basel II Accord.37
In a sense, the 1988 Capital Accord opened Pandora’s box as to the future formulation of international bank standards. Once a risk-based approach became the guiding measure, it became logical for the Basel Committee to delve into a range of other risks, such as exchange rates, interest rates, and other market-based and operational risks. These activities resulted in a series of other detailed Committee pronouncements. Beginning in the late 1980s and continuing on to today, the Committee became concerned with money laundering38 and related counterterrorism regulatory standards.39 Then, in the late 1990s, the Committee began to address the issues of institutional governance more formally as to banking institutions.40
Under the NIFA context, international standards and codes have evolved, increasing as to subject-matter and continuing to be refined on the basis of global and industrial country experiences and expectations. In this sense, they represent the model components for a country’s “modern” financial system, and they may be utilized for multiple purposes. For example, an individual country may use international standards to reform its domestic financial system. These codes and standards may also comprise a part of IMF and Bank “conditionality” programs. Additionally, they might be employed by an IFI in fulfilling requests for technical assistance packages. Or, they might be used by the IMF in its ROSC-macroeconomic surveillance efforts, or, more flexibly, by the Bank to assess domestic financial infrastructures for development projects. No matter what the application, on-the-ground reform work over the past two decades has shown repeatedly that the introduction of standards and codes is a top-down model, that each country’s situation is sui generis, and that these standards and codes have not been designed as developmental access instruments.41