Institutional melding

Despite their differences, both the technocratic and the political views of reform hinge upon being able to refashion the lines of authority among public agents responsible for the operation of the global financial system, in order to realize a new fusion of institutional capabilities consonant with preventing and/or containing financial crises. The institutional melding which this calls for must involve an appropriate cross-section of international and national public authorities: the IMF as the lead architect of lending in situations of crisis; the Bank for International Settlements (BIS) as lead international regulator (especially through the Basle Committee of Banking Supervisors); the G-7 central banks as custodians of internationally-used currencies; key national regulators as primary overseerers of internationally-active private financial institutions; and relevant officials from large emerging markets representing those financial systems most at risk. Even a cursory consideration of this list of participants reveals the obstacles placed in the way of reform.

If we consider for example the question of how to enable the IMF and BIS to work together more effectively and with a shared purpose, there are three practical obstacles to be addressed. First, we have to consider the very different operational environments of these institutions. The IMF is an inter- governmental organization in which a high priority is placed on carrying the voting support of a broad array of individual governments for its programmes. This makes it an unwieldy organization which, once set upon a particular course of action, is not easily deterred. It is also a large organization with limited budgetary and resource flexibility.

Conversely, the BIS is a small organization by international standards, with approximately 400 staff employed in Basle, the majority of whom are primarily concerned with carrying out the BIS's traditional role as banker to the world's central banks. At most 100 of its staff are concerned with the mechanisms and modalities of global finance. It is also a self-financing independent institution, wholly owned by its member central banks, most of whom are de facto if not de jure independent in turn from their respective governments. This outright independence contrasts sharply with the IMF, and allows the BIS to take and implement decisions in a much shorter timespan than its larger and more bureaucratized cousin. Although we should not stress too strongly the different operational environments of these two institutions, we must acknowledge that they constitute a peculiar institutional barrier that requires active management for deeper cooperation between the IMF and BIS to occur.

A more critical obstacle is the very different foci of these institutions, which leads them to view the same problem through quite different lenses. The principal foci of the IMF include monitoring and advising governments on their public finances, the balance of payments and the overall efficiency of markets. In times of crisis the IMF can also play the role of quasi-lender of last resort, facilitating creditor/debtor negotiations and helping to stablize turbulent situations. Significantly, crises are viewed by the IMF primarily in light of the advice it routinely gives regarding public finances, balance of payments and developing effective and transparent markets. These are all broad-brush concerns, which are tightly linked in many ways, but which are fundamentally contingent upon levels of overall economic development in particular countries and subject to the peculiarities of timing. There are some who argue, for example, that while financial crises can be a symptom of problems in public finances, balance of payments or market distortions, it can also be a cause of them. Because of its broad-brush focus, however, the contextualization of crises often assumes a secondary significance for the IMF in terms of its programmatic responses.

The primary foci of the BIS, on the other hand, revolves much more narrowly around facilitating the operation of central banks and investigating and refining 'best practice' of financial market regulation. Those who have described the BIS as a kind of club are right in one crucial respect: it is as much a 'place' where central bankers go to discuss issues of mutual concern and share common experience, as it is an agent in its own right. Where the BIS does act, however, is in establishing benchmarks for the regulation of financial institutions which are active internationally. Through the Committee of Banking Supervisors, established in 1974? initially as the Cooke Committee, the BIS has been engaged in developing a set of de facto banking standards which both account for the variety of financial systems to be found around the world, but which nevertheless establish a minimum level of capitalization against risk for internationally-active banks.

As a result of this rather narrow remit, the BIS is much more highly focused on the viability of financial systems than is the IMF, and it views the problem of crisis precisely through this lens. Such a view is not of course antithetical to that of the IMF, but it does mean that some of the broader considerations which the IMF concerns itself with is not as pressing on the BIS. In other words, the IMF and the BIS begin from rather different starting points in their original assessments of financial crisis, and emphasize slightly different means as to resolve it. This is not because they are fundamentally incompatible institutions, but rather because they take their lead from different constituencies. Whereas the IMF usually pushes for the development of efficient and effective market structures always and everywhere, the BIS is more susceptible to entertain trade-offs between stability and efficiency that privilege the former as against the latter.

By far the biggest obstacle to a smooth institutional melding of the IMF and BIS, however, lies in the different positions these institutions occupy in the broader balance of power within the international financial architecture. As an inter-governmental organization constructed at the apogee of American influence after World War II, the IMF lies firmly within the American political orbit. It is part of the so-called Washington consensus, and some even argue that its days as an independent institution are over now that the US Treasury view has triumphed. Certainly this view gains strength if the role of the US in shaping the IMF's response to the Mexican peso debâcle and the on-going Asian financial crisis is considered in any depth. Within the broader balance of power, therefore, the IMF sits alongside the US as part of the structural power of the American global order.

While not at all detached from this political order, the BIS sits rather uncomfortably within it, due in part to its historical legacy of fraught US relations and due in part to its distinctly old-world, European character. The US has had an ambivalent relationship to the BIS since that organization was established in 1930 as part of the implementation of the Young Plan. For many years the US refused to take up its share of the BIS quota, and the New York Federal Reserve Bank (the international arm of the Federal Reserve System) routinely delegated its attendance at BIS meetings to JP Morgan, the influential New York investment bank. The US is now of course a fully-paid up member of the BIS, and the New York Fed Chairman, William McDonnagh (?), is currently the Chairman of the Committee of Banking Supervisors. Nevertheless, historical residues linger, and help to explain the antipathy which the BIS expressed to its allotted role in the 1995 Mexican rescue package, proposed by the US and supported by the IMF. Of slightly more significance is the European character of the BIS, not so much in terms of a cultural clash but rather in terms of a sensitivity towards the different needs and priorities of financial systems which are geared more towards banking and credit markets than capital markets. Aside from the UK, capital markets are relatively under-developed across Europe, and all European countries have been engaged in a long-drawn out struggle to balance the need to develop their capital markets as against the need to maintain sound and vibrant credit markets, which still provide the majority of credit to individuals and firms across Europe. The BIS is the sole remaining international financial institution in which Europeans can resist or at least provide some counter-balance to American views; and as such any attempt to fold it into or meld it with the US-dominated IMF is likely to meet with qualified resistance.

Outlining the obstacles standing in the way of closer cooperation between the IMF and BIS does not of course mean that achieving such cooperation is impossible. The inaugural meeting in April 1999 of the Financial Stability Forum provides substantial hope that institutional melding can occur. It remains to be seen, however, just how effective this new institutional development becomes, especially in light of the recent admission by the Basle Committee of Banking Supervisors that revisions to the 1988 Capital Adequacy Accord may be impossible to achieve. Different institutions, with idiosyncratic histories, mandates and characters, will always find it difficult to work together, especially when the political resolve to move ahead remains ambiguous.