Abstract
The financial crisis has taught us many lessons. One of them is that financial institutions are only global in good times, they retrench to national frontiers when things turn sour. However, this state of affairs has to change if financial institutions and markets can credibly claim to be global. This suggests that international solutions are needed for international problems. In this context, I contend that the International Monetary Fund, the institution at the centre of the international monetary and financial system, is best placed to adopt a role as a ‘global sheriff’ (echoing the words of George Soros in the 2010 Davos meeting) with regard to international financial stability.
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- 1.
For an extensive analysis of the law of the IMF, its history and the challenges faced by the institution, see Lastra, Legal Foundations of International Monetary Stability, 2006, chapter 12–chapter 14. This paper draws on chapter 13 and chapter 14 of the book.
- 2.
See Lastra, Central Banking and Banking Regulation, 1996, chapter 2, for a distinction between supervision and regulation.
- 3.
- 4.
Lord Eatwell and Lancey Taylor have proposed the creation of a World Financial Authority in their book Global Finance at Risk: the Case for International Regulation, 2008; see also Alexander/Dhumale/Eatwell, Global Governance of Financial Systems. The International Regulation of Systemic Risk, 2005, as well as Ohler, International Regulation and Supervision of Financial Markets After the Crisis, EYIEL 1 (2010), pp. 3–29.
- 5.
See http://untreaty.un.org/ilc/texts/instruments/english/conventions/1_1_1969.pdf, in particular Articles 31 and 32 (Section 3, “Interpretation of Treaties”).
- 6.
See Lastra, Legal Foundations of International Monetary Stability, 2006, chapter 12 and chapter 14.
- 7.
For a brief summary of the functions of the FSB and the functions of the IMF see http://www.publications.parliament.uk/pa/ld200809/ldselect/ldeucom/106/106i.pdf, chapter 8 of the House of Lords’ Report.
- 8.
See Freis, “Global Markets and Global Vulnerabilities: Fighting Transnational Crime Through Financial Intelligence”, prepared remarks for the MOCOMILA meeting in Salamanca on 25 April 2008, available at http://www.mocomila.org/meetings/2008-freis.pdf.
- 9.
From the Fund’s point of view, surveillance is the key function. From the member countries’ point of view, financial assistance is the key. Countries in need (of balance of payments support) subject themselves to conditionality, surveillance and technical assistance as the price that must be exacted to obtain financial support. Members are not always keen to tighten their belts or the belts of their citizens to obtain the resources they need to address balance of payments difficulties, but they are well aware that non-observance of their financial obligations with the Fund will lead them into further trouble.
- 10.
See Decision of the Executive Board No. 5392-(77/63) of 29 April 1977 as amended. This decision implemented the new Article IV of the IMF Articles of Agreement, which at the time was still in the process of being ratified (The Second Amendment was approved in April 1976 and became effective in April 1978).
- 11.
See Decision of the Executive Board of 15 June 2007, on Bilateral Surveillance of Member Policies, available at http://www.imf.org/external/np/sec/pn/2007/pn0769.htm#decision.
- 12.
See Guitián, The Unique Nature of the Responsibilities of the International Monetary Fund, IMF Pamphlet Series No. 46, 1992, p. 9.
- 13.
Guitián, The Unique Nature of the Responsibilities of the International Monetary Fund, IMF Pamphlet Series No. 46, 1992, p. 11. “The focus of obligation on the part of members centers on the point and the terms of intersection of their national economies with each other – that is the balance of payments, the exchange rate and the exchange regime”.
- 14.
See http://www.imf.org/external/np/exr/facts/surv.htm, see also Bergthaler/Bossu, Recent Legal Developments in the International Monetary Fund, EYIEL 1 (2010), pp. 391–404.
- 15.
See also Guitián, The IMF as a Monetary Institution: The Challenge Ahead, Finance and Development, September 1991, p. 38.
- 16.
See Proctor, Mann on the Legal Aspect of Money, (6th ed.) 2005, p. 562.
- 17.
See Gianviti, Evolving Role and Challenges for the International Monetary Fund, in: Andenas/Norton (eds.), International Monetary and Financial Law Upon Entering the New Millenium. A Tribute to Sir Joseph and Ruth Gold, 2002, p. 46. He defines a “soft obligation as an obligation that does not require the achievement of a particular objective or even the exercise of best efforts or due diligence, but only a reasonable effort in light of all relevant circumstances. In contrast, soft law means that there is no obligation at all”.
- 18.
Gianviti, Evolving Role and Challenges for the International Monetary Fund, in: Andenas/Norton (eds.), International Monetary and Financial Law Upon Entering the New Millenium. A Tribute to Sir Joseph and Ruth Gold, 2002, p. 47.
- 19.
See Financial Sector Assessment Program (FSAP) at www.imf.org/external/np/fsap/fsap.asp; see also IMF Executive Board Review of the Experience with the Financial Sector Assessment Program, 6 April 2005 (PIN No. 05/47) at www.imf.org/external/np/sec/pn/2005/pn0547.htm; the reports prepared by the World Bank under the FSAP are called Financial Sector Assessments (FSAs).
- 20.
See “Reports on Observance of Standard and Codes” at www.imf.org/external/np/rosc/rosc.asp.
- 21.
Gianviti, Evolving Role and Challenges for the International Monetary Fund, in: Andenas/Norton (eds.), International Monetary and Financial Law Upon Entering the New Millenium. A Tribute to Sir Joseph and Ruth Gold, 2002, p. 49.
- 22.
Gianviti, Evolving Role and Challenges for the International Monetary Fund, in: Andenas/Norton (eds.), International Monetary and Financial Law Upon Entering the New Millenium. A Tribute to Sir Joseph and Ruth Gold, 2002, p. 49; according to Gianviti, ROSCs “bridge the gap between technical assistance and surveillance”. The FSAP reports and ROSCs “feed into surveillance, i.e., provide material which deepens the Fund’s understandings of the member’s circumstances”.
- 23.
See Lastra, Legal Foundations of International Monetary Stability, 2006, chapter 14.
- 24.
In the US, following criticism of the General Accounting Office regarding the existent of divergent approaches and bearing in mind that the determination of the soundness of a financial institution is not an “exact science”, the federal regulatory agencies adopted the Uniform Financial Institutions Rating System in 1978-79. For banks the rating system is commonly known as the CAMEL system.
- 25.
See http://www.imf.org/external/np/exr/facts/data.htm. The need for data dissemination standards has been highlighted by financial crises in which information deficiencies played a role. The standards for data dissemination consist of two tiers. The first is the SDDS which was established in 1996 to guide countries that have access, or might seek access, to the international capital markets. The second tier, the GDDS was established in 1997 to help countries provide more reliable data. It is open to all IMF members. Importantly, the GDDS is focused on improving statistical systems, whereas the SDDS focuses on commitments to data dissemination standards in countries that already meet high data quality standards. Both are voluntary, but once a country subscribes to the SDDS, observance of the standard is mandatory. Countries also agree to post information about their data dissemination practices on the IMF’s external website on an electronic bulletin board known as the Dissemination Standards Bulletin Board, DSSB. Further, they must establish an Internet site containing the actual data, called a National Summary Data Page (NSDP), to which the DSBB is linked.
- 26.
Article VIII Section 5 imposes an obligation upon members with regard to the reporting of information to the Fund. However, the requirements of Article VIII Section 5(b), which place member ‘under no obligation to furnish information in such detail about the affairs of individuals or corporations’ would certainly be a hurdle to surpass, since countries would only provide this information on a voluntary basis. Another legal requirement to take into account is Article XII Section 8.
- 27.
See Fraga, Crisis Prevention and Management: Lessons from Mexico, Essays in International Finance 200 (October 1996), pp. 54–55.
- 28.
The alternative route of an amendment to the IMF Articles of Agreement is likely to be a lengthy and convoluted process, since it needs to be approved by the Board of Governors and it becomes effective when it has been ratified by three-fifths of the members, having eighty-five percent of the total voting power (and with the US holding 17% of the voting power – effectively a veto power – it may be subject to the whims of the US Congress).
- 29.
Financial stability as a concept is a relatively modern one, since other concepts were used in the past to describe this objective; the term macro-prudential supervision is even more contemporary.
- 30.
The document ‘The Fund’s Mandate – The Legal Framework’ of 22 February 2010 is available at http://www.imf.org/external/np/pp/eng/2010/022210.pdf. The document, ‘The Fund’s Role and Mandate – An Overview’ of 22 January 2010, is available at http://www.imf.org/external/np/pp/eng/2010/012210a.pdf.
- 31.
Ibid (document of 22 January 2010).
- 32.
‘And while these powers [conferred upon the Fund] are often expressed in general terms, the degree to which their interpretation can evolve is limited by the plain meaning of the text, as supplemented by the travaux preparatoires (legislative history)’. See page 3 of document of 22 February 2010. See also Annex at the end of this paper.
- 33.
Ibid.
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Lastra, R.M. (2011). The Role of the IMF as a Global Financial Authority. In: Herrmann, C., Terhechte, J. (eds) European Yearbook of International Economic Law 2011. European Yearbook of International Economic Law(), vol 2. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-14432-5_5
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