International Financial Standards and Codes (S&Cs)

In the debate on reform of the international financial architecture, the discussions on the introduction of standards and codes (S&Cs) has gained momentum. The World Bank and IMF have paid attention to and invested resources in initiatives to promote S&Cs. The main examples are the IMF’s Reports on the Observance of Standards and Codes (ROSCs) and the joint IMF/World Bank initiated Financial Sector Assessment Program (FSAP). In addition developed countries have pushed for the establishment of the Financial Stability Forum (FSF). The FSF has identified 12 S&Cs which are considered essential for maintaining financial stability.

The progress made in the debate on S&Cs is partly the result of recognition among most developed and developing countries that S&Cs provide a potentially valuable tool to promote international financial stability. This recognition is based on the common presumption of both industrialised and developing countries that S&Cs should be compatible with specific circumstances in developing countries such as the stage of development. Developing countries should have ownership in the definition and implementation of S&Cs. Other issues relevant to developing countries in the debate on S&Cs are related to ensuring that:

• Compliance with S&Cs remains voluntary
• Technical assistance is provided to help developing countries in dealing with international financial S&Cs
• S&Cs do not become conditional for support from international financial institutions.

Voluntary compliance

In policy documents, developed countries (including EU member states) support the idea that compliance with S&Cs should be voluntary. Assessment of compliance through e.g. the IMF’s ROSCs and their publication should also be voluntary. Developing countries welcome this position of the developed countries, although they have concerns to whether assessment of S&Cs is really voluntary. They fear that markets will force developing countries to ‘voluntarily’ assess their S&Cs and publish them. For instance, if a country does not give permission to publish data on S&Cs, market participants might take this as a sign of institutional weakness and decide to invest in a country where information on S&Cs is available.

Technical assistance

Developing countries have urged rich nations to provide technical support in assisting them to implement international financial S&Cs. Some countries and organisations have responded to these calls from developing countries. For example, the World Bank, the IMF, Canada, Switzerland have together with EU members Sweden, the United Kingdom and the Netherlands launched the Financial Sector Reform and Strengthening (FIRST) Initiative to support capacity building for S&Cs.

Conditionality

The largest concern for developing countries with S&Cs is that future support from the IFIs and possible official bilateral donors might partially become conditional to compliance with S&Cs. These worries have for instance been expressed by the G24 member states. The importance of this issue became also clear in the speeches of representatives from developing countries during the 2003 IMF/WB Meetings. Their colleagues from the developed countries did not really address the issue of conditionality. Not all developed countries openly reject conditionality; some developed countries even indicate to support conditionality. French, British and Dutch officials have indicated that the S&Cs might become part of conditionalities for financial support from the IMF in the future. The IMF already has one initiative for which compliance to certain standards, or at least efforts towards compliance, is mandatory. This initiative is the Contingency Credit Line (CCL) which the IMF established in 1999. The CCL would supply credit to countries in financial difficulty in order to prevent an escalation of the situation. Applicant countries need to meet certain S&Cs. Up to now, no countries have made use of the CCL.

Policy documents and speeches

International codes and standards: challenges and priorities for financial stability, Cardona, M., Farnoux, Directorate General Economics and International Relations, Banque de France in: Financial Stability Review, Banque de France, November 2002

This document underlines the need to consider specific circumstances in developing countries and to provide technical assistance. However, it also advocates to make country assessments a criterion for IMF conditionality beyond the CCL.

For the document click here.

Statement by Chief (Dr.) J.O. Sanusi, Chairman of the G-24 Third Meeting of the International Monetary Financial Committee, G-24, April 2001

In this statement the G24 countries highlight the recognition of country-specific circumstances and stages of development in regard to the observance of S&Cs. Also, they stress the need to keep the S&Cs voluntary. They reject the possible incorporation of S&C-compliance into conditionalities of whatever kind.

For the document click here.

Issues in implementing international financial standards and codes, Reddy, Y.V., Deputey Governor of the Reserve Bank of India, June 2001

This speech addresses S&C-issues relevant for developing countries. Among others, the speaker advocates maintaining the voluntary approach and discards negative incentives such as sanctions.

For the document click here.

Speech given by Chancellor of the Exchequer Gordon Brown to the Federal Reserve Bank, New York, Brown, G., November 2001

In his speech, UK’s Exchequer Gordon Brown urges rich and poor countries to speed up the promotion on S&Cs in order to create a more stable economy. He believes that in the future S&Cs will become conditional for support from the IFIs.

For the document click here.

Links

Reports on Observance of Standards and Codes (ROSCs)

This site gives a description of the ROSCs and links to the ROSCs which have been made open to the public.

Financial Sector Assessment Program (FSAP)

The FSAP site contains information about the programme.

Financial Stability Forum (FSF)

This site provides information on the activities of the FSF.  

Financial Sector Reform and Strengthening (FIRST) Initiative

This site contains details of the FIRST Initiative including practical information for developing countries on how to apply.

IMF’s factsheet on Contingency Credit Line (CCL)

The aspects of the CCL and related information is given through this section on the IMF web site.