Most commentators on the global financial crisis concur that some form of international coordination is needed to overcome the crisis. Many also agree that the international financial architecture requires an overhaul. However, there is less agreement on the form a new governance regime should take, i.e., whether it should be centralized or decentralized; if centralized, whether the IMF, the UN, or similar organization should be the anchor; and if decentralized, whether decentralization should be based on location or other criteria.

Although the crisis is far from over, it is not too early to begin the process of conceptualizing a new governance regime. Developing a normative agenda now can help determine the form central interventions by IFIs in countries that lack the resources to protect themselves should or should not take. Moreover, developing a normative agenda might foster debates among countries irrespective of whether they were invited to join the upcoming G20+ meeting. It would also alleviate the pressure for this heterogeneous group of countries to come up with a one-fits-all solution.

The new governance regime for the global financial market place I propose comprises of multiple, decentralized, yet inter-linked, governance networks with membership based on risk rather than region. It is based on the notion that different countries have different risk profiles and should be allowed to develop and/or choose their preferred governance regime accordingly; that coordination among countries with similar risk profiles increases their bargaining power to establish and maintain a governance regime that suits their needs; and that any governance regime should be both adaptable and largely self-enforcing. In comparison, centralization preempts inclusiveness in the formulation of governance standards because of coordination problems among large numbers of countries; it also benefits more powerful players who tend to dominate process as well as outcomes. There are still some tasks that require centralized coordination, in particular global risk monitoring, dispute settlement, and insurance (see below).

Elements of this new regime should consist of:

• Multiple Financial Governance Networks (FGNs): FGN’s with different risk profiles should be established that reflect countries’ risk preferences with regard to financial activities conducted on their territory and the ability of institutions in those countries to cope with volatile capital flows (i.e. a country’s risk profile). Geography should not be the defining criteria for membership in a given FGN. The reason is that countries within the same geographic region may display very different risk profiles and/or risk preferences. Moreover, geography as the defining factor for governance precludes entry and exit. It also exposes countries to regional contagion effects and potentially to regional hegemons. Instead, countries should be allowed to enter and exit; and FGNs should be allowed to admit and expel members depending on risk profiles and established standards.

• FGN based governance principles for capital controls and regulation: Each FGN should develop governance principles on capital controls, the regulation of financial services as well as instruments that reflect the risk profiles and risk preferences of its members. FGNs will screen their members regularly for compliance with the established standards. Existing international organizations can play an important role in coordinating the establishment of FGNs by developing a first set of minimum standards. They may also help individual countries to meet the risk criteria of their preferred FGN. However, the development of detailed standards and their adaptation over time should be in the hands of FGNs and their members. This will facilitate information sharing and learning among FGN members and reduce problems associated with standardizing on a single, but potentially flawed, model.

• A FGN Arbitration Tribunal: A (permanent or ad hoc) tribunal should be established to resolve disputes between members and FGNs over entry and compliance with FGN criteria.

• A Global Risk Monitoring Board: This board, staffed with independent experts should be tasked with monitoring systemic risk in global financial markets and the exposure of different FGNs to such risk. The Board should report on a regular basis and publish its reports. The Global Monitoring Board should make recommendations for adjusting insurance premia of FGNs in accordance with changing risk patterns. (See below).

• A Global Insurance Fund: The purpose of the fund would be to cope with future crises. Each country will pay an annual premium based on the risk profile of the FGN it belongs to and weighted by the size of that country’s economy. The requirement to insure against additional risk would mitigate against a race to the bottom as a result of regulatory competition among FGNs. It should also help address the fallout from negative spill over effects that result from policies some FGNs might pursue. The Fund should be able to adjust risk premia based on the recommendations of the Global Risk Monitoring Board.

This proposal was submitted to the Policy Network for inclusion in the “Handbook of Ideas” for the forthcoming Progressive Governance Conference on 27 March 2009 in Chile.

Katharina Pistor
Columbia Law School