Global Institutions after the Crisis

OXFORD – When Lehman Brothers collapsed and the global financial crisis erupted five years ago, many glimpsed a silver lining: the promise of more effective global economic governance. But, despite a flurry of early initiatives, the world remains as far from that goal as ever.

The Financial Stability Board (FSB), established after the G-20 summit in London in April 2009, has no legal mandate or enforcement powers, nor formal processes for including all countries. The International Monetary Fund still awaits the doubling of its capital (another early vow), while its existing resources are heavily tied up in Europe and its governance reforms are stalled. The World Bank has received a modest increase in resources, but it has yet to build capacity to lend rapidly and globally beyond existing borrowers and loan arrangements, and its income trajectory is diminishing.

Yet the need for effective global economic governance remains more urgent than ever. Banks and other financial firms roam internationally, greatly assisted by market-opening rules embedded in trade and investment treaties, but with no legally enforceable responsibility to provision adequately for their own losses when things go wrong. Instead, massive risks have supposedly been held at bay by voluntary standards promulgated by a patchwork of public and private “standard-setting” organizations.

The crisis proved that this was inadequate. The titans of Wall Street and the City of London were exposed as hugely over-leveraged. Extraordinary profits when their bets paid off increased their financial and political power – which they still enjoy – with taxpayers left to bail them out when their bets turned bad.