It proposes to: assess vulnerabilities affecting the financial system; identify and oversee action needed to address them; promote coordination and information exchange among authorities responsible for financial stability; monitor and advise on market developments and  policy implications; advise on and monitor best practices in meeting regulatory standards; undertake joint strategic reviews of the international standards setting bodies’ policy development work; set guidelines for and support the establishment of supervisory colleges; manage contingency planning for cross-border crisis management; and collaborate with the International Monetary Fund (IMF) to conduct Early Warning Exercises.

The FSB comprises of senior representatives of the national financial authorities from the G20 and other countries, international financial institutions, standards setting bodies, and committees of central bank experts. Mario Draghi, Governor of the Banca d’Italia, chairs in a personal capacity, supported by a small secretariat (9-10 staff members) based at the Bank for International Settlements in Basel, Switzerland.

There is considerable scepticism about the capacity of the FSB to manage this ambitious agenda.

Firstly the FSB is a mere successor to the Financial Stability Forum (FSF), with the same modus operandi and staff, albeit with broader membership. The FSF failed to identify and prevent the US financial crisis and the Eastern European crisis in a small homogenous membership of seven or so major central banks. Therefore it is not entirely clear how the FSB will succeed where the FSF failed with a far more heterogeneous membership of G20 plus countries, and three to four institutions from each country.

There are doubts about the independence and analytical capacity of the FSB. Nicholas Stern, points out that the institution, which conducts the analysis and judges the stability of the global economic system, must not have anything other than its own reputation riding on its assessment. Therefore it must be independent of the G20. However, the FSB is a secretariat, without independent analytical capacity.

This leads to the second concern that the FSB does not offer the type of independent ‘high powered’ analytical surveillance that is needed at the global level. It merely collects information from members and disseminates it. There is an inherent contradiction: country authorities that did not report adverse information in a small setting will likely be far more reluctant to share information in a wider G20-plus setting. The FSB members will not be prepared to share sensitive adverse domestic information, and therefore the discussions will not be substantive.

A third concern relates to governance of the FSB. The Westphalian principles governing international financial oversight are not adequate to address contemporary financial system problems, namely cross border crisis contagion and insolvencies. The self-interest of financial centers, such as London, fails to reflect the global agenda of actively regulating the global financial system, and will inevitably lead to another race to the bottom in regulatory forbearance. It is indicative of things to come that a European regional effort is unraveling with the UK resisting ceding power to the European Union regulatory agencies.

Will the FSB fail?

Not necessarily. In order to succeed it needs to lead in several areas. Most importantly, the FSB cannot be an insular organisation in Basel. It needs a more comprehensive vision, leveraging regional and country-based financial stability organisations. The first layers are national financial stability organisations in the G20-plus countries.

The debate on whether those functions belong in central banks is only starting and is outside the scope of this essay. For instance, in the US the Federal Reserve perceives the stability function to be directly related to the role of the central bank.

In Indonesia, the government has submitted to lawmakers a bill to provide it with extra authority and guidance in preventing possible systemic threats to the financial sector. Under the bill, the Financial System Stability Committee (KSSK), headed by the finance minister, with the central bank governor as a member, will have full authority to take measures in response to threats to the financial system.

Second layers in this architecture are regional financial stability organisations. The European initiative to set up a European Systemic Risk Board as a macro-prudential overseer and a European System of Financial Supervisors as a micro-prudential coordinator is a good example. Asians are discussing the possibility of establishing an Asian Financial Stability Dialogue (AFSD). Such regional organisations could conduct regional monitoring of key financial products, institutions and markets on the ground, and facilitate regional financial integration.

Finally, it is important to remember that the global payments imbalances played a key role behind the global financial crisis. After the Asian financial crisis many economies in the region started building foreign exchange reserves as self insurance, determined not to be caught again in the 1997 situation.

Going to the IMF would be political suicide because of the lingering bad memory of the ‘IMF crisis’ in the public mind. So these economies had every incentive to accumulate reserves by running large current account surpluses or intervening in the currency markets. Countries in the region would welcome the rebalancing of sources of growth and payments imbalances, if an Asian Monetary Fund (AMF) reduced financial turbulence and acted as a lender of last resort. A newly created AMF could work closely with the region’s financial authorities under the AFSD for conducting regional economic and financial surveillance.

The proposed international financial regulatory oversight is not suited to the realities of an interconnected financial system in the 21st century. More efforts are needed to ensure the success of the international financial regulatory architecture.

Masahiro Kawai is Dean of the Asian Development Bank Institute and formerly served as Deputy Vice Minister of Finance for International Affairs at the Japanese Ministry of Finance. Michael Pomerleano is Visiting Fellow at the Asian Development Bank Institute.

This is an edited version of an article that was first published here at the Financial Times.