LONDON World leaders bolstered the Financial Stability Board on Tuesday, giving it a more active role ahead of key tests in implementing a raft of new rules.
The G20 summit in Los Cabos, Mexico, approved plans to put the FSB on a more independent footing and widen its remit over global standard setting bodies that make rules for banks, insurers and markets.
"The FSB should, as needed, to address regulatory gaps that pose risk to financial stability, develop or coordinate development of standards and principles," the FSB said in a paper approved by the G20 leaders.
As the 2007-09 financial crisis unfolded, world leaders turned a long-standing G7 body, the Financial Stability Forum, into the FSB with membership widened to include regulators and central bankers from all G20 countries.
But it still had no institutional independence, and its formal remit was mainly to coordinate the world's regulatory response to the crisis.
It did this by badgering three global standard setting bodies, the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors and the International Organisation of Securities Commissions, to deliver rules that meet G20 regulatory pledges on time.
The broader remit will give it a license to be more pro-active in initiating and shaping regulation, drawing its authority from its direct accountability to the G20.
The G20 on Tuesday backed a plan to turn the FSB, which is based at the Bank for International Settlements (BIS) in Basel, Switzerland, into an independent association under Swiss law.
Initially it would still be based at the BIS and rely entirely on that central bank forum for funding and services.
However, the FSB will conduct a review after five years on whether it should cut links with the BIS and have its own headquarters and levy a membership fee.
Nicolas Veron, an expert on financial policy with Brussels think tank Bruegel, said the reform won't necessarily mean a change to an already active FSB over the past three years.
"We are far from the FSB having enforcement powers and it remains fundamentally reliant on the cooperation of its members," Veron said.
"I don't expect major battles over this because I think there is a recognition the FSB is useful and has worked so far in a way that has not created major conflicts. It will remain evolutionary rather than revolutionary. The world is not ready for an all powerful watchdog," Veron said.
The G20 has agreed to a long list of pledges to reform financial markets after the 2007-09 financial crisis highlighted flaws in supervision that ended up with taxpayers in the European Union and United States having to bail out lenders.
Two key deadlines will test the FSB's ability to deliver.
By the end of this year, rules must be in place to radically change how the vast $640 trillion derivatives market operates by requiring trades to be centrally cleared and recorded.
From January, the new Basel III rules to force banks to hold core capital buffers of equivalent to at least 7 percent of their risk-weighted assets will be phased in over six years.
"Although risks to the financial system are elevated and the macro-economic environment is challenging, large parts of the financial system are sounder than they were before the crisis," FSB Chairman and Bank of Canada Governor Mark Carney told G20 leaders in a letter.
"But the system is still not as strong as it needs to be... So there are no grounds for delays in implementing financial reforms," Carney said.
The world's biggest banks had core capital ratios of 7.1 percent on average last year but will need to retain earnings over the next few years to meet the additional surcharge requirement, Carney added.
The Basel Committee will consult over the summer on how to identify the next batch of banks, insurers and key "shadow banks" that will also undergo tighter supervision and possible capital surcharges.
Surcharges were mandatory for all big banks, but Carney said there would be "an appropriate degree of national discretion" over which policy tools would be applied to the next tier down.
(Editing by Padraic Cassidy)