At its most basic, the FSB is created by senior officials from the core as a structural reaction to the financial crisis spurred by a belief that policy actions must be taken to address the failings of the global financial market system. These actors, and their political leaders, had been working feverishly together for months by the summer of 2008 in an attempt to grapple with the rising crisis as it developed and intensified (Federal Reserve Bank of St. Louis, 2008). They participated in joint meetings, scores of calls, agreed massive currency swap deals, slashed interest rates, and took a series of extraordinary national monetary policy actions designed to address the crisis (Darling, 2011; Paulson, 2010; Sorkin, 2010). Together with finance ministers, central bankers were the defenders of stability and providers of a rapid policy response. Moreover, the crisis, as is often the case, exerted a clarifying effect, and brought the key actors closer together, simplifying issues, changing perspectives and
policy stances, and opening up win sets and speeding decision making and action in 2008- 2009 and since.
Two officials in particular, Tim Geithner and Mario Draghi, appear to be instrumental in the FSB’s creation, according to sources. As the crisis grew in 2007-2008, they consulted with an ad hoc grouping of senior central bankers and supervisors, for discussions at the margins of other official IMF and G7 gatherings to consider the options. The central banking community leadership dominated these informal discussions (Geithner at that time was a central banker and subsequently became U.S. Treasury Secretary).
The meetings included a ‘who’s who’ list of the world of central banking: The two leaders— Mario Draghi (as FSF Chair) and Tim Geithner—were joined by Mark Carney, Governor of the Bank of Canada; Jaime Caruana, General Manager of the Bank for International
Settlements (BIS); Philipp Hildebrand, Governor of Swiss National Bank; Mervyn King, Governor of the Bank of England; Jean-Claude Trichet, President of the European Central Bank; Adair Turner, Chair of the U.K. Financial Services Authority; Axel Weber, President of the Deutches Bundesbank; and a few others. The group was almost all central bank
governors, and many of them now tended to lean in favour of greater international regulatory discipline, higher capital, less leverage, more liquidity, and other solutions that, taken
together, signalled a possible re-regulatory paradigm shift. It is from these deliberations that the Board concept emerged (Interview 15, 2011).
The actors saw the crisis as an opportunity for institutional re-creation and international and national re-regulatory action, a reassertion of their power and authority over markets and firms (Interview 9, 2011). Aside from the evident real economic costs of the crises, failure to seize control of the reform agenda could have led to an alternative structure, with the IMF taking a larger role in regulatory matters, as occurred in response to the Mexican and Asian crises of the 1990s. Instead, by championing a more exclusive Board led by the same small group of national central bankers and supervisors, the community’s members kept the regulatory policy-making response still within their control, as the functional exclusion of finance ministries from the leadership decision-making process from 2009 to 2011
underscores. This technocratic elite community would be pivotal at the outset and throughout the policy responses during 2009-2012.
During 2008 and until creation of the Financial Stability Board by the action of the G20 leaders in London in the spring of 2009, the central banking community, and predominantly this small, largely Western, subsegment of it, discussed options. It was clear to many of these actors that ‘there needed to be an international group whose remit was to take a top-down view of the entire financial system’ (Interview 15, 2012, p. 2). Their solution: A renamed, enlarged, empowered FSF to mirror the leadership forum above it. Thus, the epistemic community met informally, digested options, and formed a consensus on how to proceed, institutionally and in terms of policy choices. In doing so, they ‘seek out the forum most favourable to their interests’ (Raustiala and Victor; 2004, p. 280). This forum was a reformed, enlarged, and renamed FSF. The FSF itself had been created in 1997 by a former grouping, the G22, in reaction to a previous, less severe financial crisis cycle (Cartapanis and Herland, 2002) of crisis, response, reform, and relapse.
In the autumn of 2008, the central banking community projected these recommendations upward as expert advice to G20 leaders desperate for effective policy actions which could resonate with their expressed political commitment and real need to reassert collective and national state control over markets. The FSB structure that the G20 agreed, advised by the central banking community, would prove to be instrumental in the reform process.
The decision was made to change the name to the FSB, since this was seen as being stronger than a forum, because, ‘a forum sounds like you are discussing things, a board sounds like you are deciding things’ (Interview 9, 2011, p. 4). Making the name change also provided an institutional and psychological boost to the reform impetus. It avoided having the same body (the FSF) charged with handling the reform agenda. In remaking the forum, the central bankers could divert attention from their own culpability in the run-up to the crisis, since the focus would be on the new structure and process and not on the prior failures.
Thus, a community from the core states duplicated and slightly expanded the G20 diplomatic structure via the creation of the overarching FSB to stand between the G20 leaders, deputies, and Sherpas (political operatives) and the standard-setting body (SSB) members (second-rank technicians and officials). The former had clear political constraints and lacked the technical know-how, but the latter lacked the authority to take robust action. Inserting in the middle a leadership body composed only of central banking and supervisory principals could provide both direction and authority to national agencies and technocrats, many of whom work for the central banks anyway.
The same European and North American principal central bankers and supervisors who conceived of the Board would go on to serve and lead this new forum. They would charge themselves with overseeing a broader, deeper work stream (Interview 15, 2012). With a new name and enlarged membership to reflect the composition of the G20 leaders’ forum, the Chairman of the FSB, Mario Draghi, who also chaired the predecessor FSF, could swiftly press regulatory changes and reforms. Numerous sources note that many of the solutions the FSB would propose had been previously identified by the FSF in 2008 (Interviews 9 and 11, 2011; Interview 12, 2012; see also Smaghi, 2008). Post-crisis, the reforms could be pursued with greater international and institutional vigour and more success, with more explicit political backing provided by the G20 summit process. Draghi, an accomplished political operator, would design a forum that would have many of the characteristics of an institution. Over the next four years, it would be further strengthened and solidified in its structures and role and become the central new actor in the coordination of international financial and regulatory diplomacy.