Global Finance

Global Finance

Regulating market volatility and economic risk has become fraught with difficulty following the 2008 financial crisis that plunged developed economies into recession.

A regulatory regime basically crafted in the wake of a twentieth-century economic crisis-the Great Depression-was overwhelmed by the speed, scope, and sophistication of a twenty-first-century global economy.

-Barack Obama, President of the United States

Bretton Woods

Chairmen for each delegation at the Bretton Woods conference gather for a photograph. (AP Photo)

Creation of the Bretton Woods Institutions

The International Monetary Fund (IMF) was established to oversee the management of exchange rates and to provide short-term financing to help countries limit disruptions. The World Bank was set up to finance reconstruction and development, although over time it came to focus on development lending.

In July, forty-four countries signed the IMF and World Bank Articles of Agreement, drafted for the most part by the U.S. and British treasuries at a conference held in Bretton Woods, New Hampshire. The agreement marked the birth of the postwar international economic architecture. The financial architecture consisted of fixed exchange rates, with the dollar anchored to gold and other currencies pegged to the dollar. Exchange rate adjustments were possible if a country’s balance of payments were in fundamental disequilibrium. Member countries hoped this system would inoculate the world from the disastrous rounds of competitive exchange-rate depreciations and trade wars of the Great Depression era, and foster full employment and price stability.

Return of convertible currencies

To promote trade, the IMF's Articles of Agreement called for member countries to reestablish the convertibility of their currencies for current account transactions—that is, to make them freely exchangeable for foreign currencies. The United States and Canada followed suit as soon as 1945. Most of Europe did not adopt convertible currencies until 1958. Japan took until 1964. The early convertibility of the U.S. dollar helped establish the greenback as the world's primary reserve currency.

Although the return of convertible currencies boosted international trade, it also made it easier for capital to move across borders. This, in turn, complicated the task of central bankers, who had to keep a careful eye on foreign financial markets to avoid unexpected capital movements that would drain their currency reserves. Markets, however, were still far from completely integrated because most countries continued to maintain capital controls, which are government-imposed restrictions on the ability of capital to move in or out of a country—a practice the IMF explicitly allowed.

Delegates sit for the opening session of the Economic and Social Council High Level Segment.

Creation of the Economic and Social Council

The Economic and Social Council (ECOSOC) is mandated to coordinate the UN's activity in economic and social affairs, and to provide a central forum for discussing international economic and social issues. Today, ECOSOC suffers from operational ineffectiveness, rooted in its lack of authority regarding trade, finance, and macroeconomic policy issues that continue to be primarily discussed at Bretton Woods institutions, the World Trade Organization, and at Group of Twenty (G20) meetings.

The Securities and Exchange Commission proposes new oversight for hedge funds, traditionally investment pools for the wealthy. (AP Photo/Evan Vucci)

First hedge fund

Armed with an innovative strategy that combined leveraging and short-selling techniques used to profit from a decline in asset prices, sociologist and financial journalist Alfred W. Jones created the first hedge fund to mitigate risks in a bear market. The fund was fairly unknown until an 1966 article [PDF] in Fortune magazine detailing Jones’s technique paved the way for other financiers to adopt his investment strategy. The result was an upsurge in hedge funds, including George Soros’s Quantum Fund and Michael Steinhardt’s Steinhardt Partners.

In the ensuing decades, many hedge funds departed from the original objective of hedging against a downturn in the market to that of aiming for absolute returns. With the change in strategy, funds also began to use more innovative and sophisticated financial techniques to achieve the abnormal returns expected by investors. At present, hedge funds are a $1 trillion global industry. Their rapid growth has become a challenge for regulators, particularly in the United States, where hedge funds escape many of the regulations ascribed to the mutual funds industry.

Egyptian troops guard a petrol container company in the Suez Canal region. (AP Photo)

Suez crisis

In July, when Egypt nationalized the management of the Suez Canal, Britain, France, and Israel responded with military action. But the United States, which opposed this response, signaled that it would not support IMF and bilateral assistance to Britain unless Britain followed a UN General Assembly resolution calling for withdrawal from the canal. After Britain withdrew in the wake of pressures on the pound, the IMF lent unprecedented sums, not only to Britain, but to the other combatants as well. This was the first instance of what is called exceptional IMF financing [PDF], where arrangements other than the use of reserve assets, IMF credit and loans, and liabilities constituting foreign authorities’ reserves are used to deal with balance-of-payment crises. The Suez crisis established the IMF’s role as a financier of last resort and crisis manager, as well as demonstrating the influence of the United States as a leading shareholder.

European politicians sign the treaty for the European Common Market. (AP Photo/Str)

Treaty of Rome

The Treaty of Rome established the European Economic Community (EEC), advancing the notion of a common European market to increase economic prosperity and promote closer ties among members of the group. In less than forty years, the EEC would evolve into the European Union with the 1992 signing of the Maastricht Treaty.

A member of the vault staff at the Federal Reserve Bank in New York inspects gold bricks. (AP Photo)

Growing capital-mobility and balance-of-payment crises

The Bretton Woods system sought to reconcile exchange rate stability with domestic policies aimed at macroeconomic stabilization. This became more difficult in the 1960s as the restoration of current account convertibility and the development of euro-dollar markets in the 1960s and 1970s led to a rise in cross-border capital flows that sharpened the trade-off between exchange rate stability and monetary autonomy. During this period, the United States faced what became known as the Triffin Dilemma. A growing economy needed more reserves, and the fixed amount of U.S. gold reserves could not back up the $35-per-ounce rate. This led to pressures on the United States to either devalue against gold or to raise interest rates to defend its exchange rate. Raising interest rates, however, was not acceptable because of the pain it would inflict within the United States.

(AP Photo/Seth Wenig)

Central bank cooperation

For much of the 1960s, central banks tried to cooperate to limit dollar conversions into gold. For example, representatives of seven countries—known as the London Gold Pool—attempted to stabilize the price of gold. But some banks, notably the Bank of France, were less willing to cooperate. Over time, the lack of cooperation and strains on the system became too severe to achieve success.

The Ministerial Council of the Organization for European Economic Cooperation meets to study the creation of a "free exchange zone" in Europe. (AP Photo/Godot)

Birth of the Organization for Economic Cooperation and Development

The Organization for Economic Cooperation and Development (OECD) was born out of the Organization for European Economic Cooperation (OEEC), a forum for coordinating the distribution of U.S. Marshall Plan aid for the economic reconstruction of Europe. As European economies recovered and became increasingly independent of U.S. aid, the OEEC reinvented itself as the OECD, an international forum of developed countries for discussing international economic policy issues and research. Its Economic Outlook first appeared in 1967.

U.S. President Lyndon Johnson talks with Pierre-Paul Schweitzer, chairman of the executive board and managing director of the IMF at the IMF-World Bank annual meeting. (AP Photo/Bob Schutz)

Special Drawing Rights

In an effort to ease global economic imbalances resulting from the shortage in gold reserves, the IMF proposed issuing Special Drawing Rights (SDRs)—a fiat reserve currency, or legal tender authorized by governments, that awarded the same status as gold—at its annual meeting in 1967. The IMF ratified an agreement to allocate SDRs two years later at a rate proportional to each country’s IMF quota of funds, based on factors such as national income and involvement in international trade.

Tokyo evening newspapers give front-page banners to U.S. President Richard Nixon’s televised speech on the U.S. economy. (AP Photo/Naokazu Oinuma)

Closing the gold window

The Nixon administration, unwilling to sacrifice monetary and fiscal policy autonomy for the sake of exchange rate stability, suspended the free convertibility of dollars into gold in August 1971.

U.S. President Richard Nixon poses in his White House office on August 15, 1971, after delivering a televised address on the economy. (AP Photo/HWG)

Smithsonian Agreement

In 1970, U.S. president Richard Nixon started to seek dollar depreciation. This meant that all countries pegged to the greenback would have to revise their exchange-rate pegs upward. Most were reluctant, but eventually agreed to an 8 percent dollar depreciation after Nixon imposed a 10 percent import tariff on all U.S. trading partners. The new framework, reached at the Smithsonian Institution in Washington, DC, did not stop downward pressures against the dollar, however, and financial markets expected further depreciation.

This image from 1944 shows the Mount Washington Hotel and surrounding countryside in Bretton Woods, New Hampshire. (AP Photo)

End of Bretton Woods

After a 10 percent dollar depreciation failed to stabilize currency markets, governments let their currencies float. What was to be an interim arrangement marked the beginning of a new era in international monetary relations.

Oil Shocks

Robert S. McNamara, president of the World Bank, chats with Pierre-Paul Schweitzer, managing director of the International Monetary Fund. (AP Photo/Bob Daugherty)

First IMF metamorphosis: policy adviser

Deprived of its original mission as monitor of the Bretton Woods exchange rate system, the IMF took on a new role as a policy advisor to its member countries, providing guidance on monetary and fiscal policy as well as advocating microeconomic changes like privatization. Beginning in 1967, it began to produce broad projections of macroeconomic indicators for the largest international economies, an exercise that by 1973 had taken the name of World Economic Outlook.

Drivers and a man pushing a lawnmower line up at gas station in San Jose, California.

First oil shock

When the Yom Kippur War broke out in October 1973, Arab members of the Organization of Petroleum Exporting Countries (OPEC), an oil cartel, declared an oil embargo on the United States. The result was an unprecedented, generalized spike in oil prices as importers rushed to build up precautionary inventories. Oil prices increased fourfold by March 1974. Soon all oil-importing developed economies were dealing with a combination of stagnating production and high inflation, or stagflation. Industrialized countries responded with expansionary fiscal and monetary policies that would restore output levels by 1975. Unemployment, however, never returned to prerecession levels. Discordant macroeconomic policy responses to the oil shock ended any serious discussions of returning to a regime of fixed exchange rates.

West German Finance Minister Helmut Schmidt smiles at a press meeting where he praised the new monetary agreement after the devaluation of the U.S. dollar.


The Group of Five (G5)—which consists of the United States, France, Britain, Germany, and Japan—met for the first time in 1973 to discuss a new international monetary system. Finance ministers from Italy and Canada joined the group in 1986, forming the Group of Seven (G7).

Jaime Caruana, chairman of the Basel Committee on Banking Supervision, and Jean-Claude Trichet, chairman of the G10 meeting, speak at a press conference in Basel, Switzerland. (AP Photo/Keystone, Markus Stuecklin)

Birth of the Basel Committee

The failure of two prominent banks, Bankhaus Herstatt in Germany and the Franklin National Bank of New York, sent shock waves across financial markets. Both had significant foreign exchange and international businesses, but were regulated nationally. The banking crisis convinced policymakers that more systematic consultation and cooperation was needed. In 1974, the central banks and supervisory agencies of the Group of Ten (G10)—a group of eleven industrialized countries—created a new forum for intergovernmental consultations and cooperation: the Basel Committee on Banking Supervision.

The Federal Reserve Building in Washington, DC. (AP Photo)

Ratings agencies

In response to concerns over the health of investment dealers, the Securities and Exchange Commission (SEC) granted credit-rating agencies the status of a nationally-recognized statistical ratings organization, integrating them into the regulatory structure for the first time. Accredited agencies were assigned the task of determining how much capital broker-dealers were required to hold. The move was prompted by a need to determine capital charges for debt securities under the Net Capital Rule. The SEC determined that securities could receive a lower deduction if they were rated as investment-grade by a recognized national rating agency.

U.S. President Jimmy Carter answers reporters’ questions in an unscheduled briefing to discuss inflation. (AP Photo)

The dollar crisis

Seeking to drive down unemployment at home and spur global growth, the Carter administration adopted vigorously expansionary policies as other countries stood on the sidelines. The number of jobless Americans dropped substantially, but inflation rose and the price of the dollar declined in both nominal and real exchange-rate indices. This started a vicious cycle in which the growing gap between U.S. and foreign inflation rates created expectations of further dollar depreciation. Additionally, the weakening greenback kept U.S. price levels high by making imports more expensive and raising inflation expectations of wage-setters. The dollar crisis demonstrated that even in a regime of flexible exchange rates, governments needed to coordinate and take other countries’ decisions into account when formulating national policies.

The conference room of the chancellery when the Economic Summit opened. (AP Photo/MW)

Bonn Summit Agreement

In July, responding to the oil shock and high inflation of the 1970s, the main players of the Bonn Summit—the United States, Germany, and Japan—came to an agreement to coordinate macroeconomic policies. Japan and Germany, the main surplus countries, agreed to stimulate their economies through loose fiscal policy. The United States agreed to raise domestic oil prices to world levels by liberalizing its energy market, which reduced demand and prices for oil importers. The Carter administration also agreed to restrain spending and wage growth to combat inflation. The Bonn Summit is considered a rare case of successful international economic policy coordination in which the G5 countries agreed to adjust their respective national policies to advance international goals.

U.S. President Jimmy Carter said he would veto a tax bill that failed to meet his requirements. (AP Photo/Bob Daugherty)

Carter bonds

In response to dollar weakness in the late 1970s and to prevent a further fall, the U.S. Treasury began issuing bonds denominated in foreign currencies, particularly in German marks and Swiss francs via the Exchange Stabilization Fund. These bonds were named after U.S. president Jimmy Carter.

Iranians rally in November 1979. (AP Photo)

Second oil shock

The fall of the Shah of Iran in 1979 caused a threefold spike in oil prices in little over a year. After fighting with rising price levels in the early 1970s, central bankers were concerned that they would not be able to control inflation expectations. A rise in unemployment was required to moderate wage increases and duly followed.

Paul Volcker, as a nominee for chairman of the Federal Reserve Board. (AP Photo/Harrity)

Paul Volcker appointed to Federal Reserve

In August, U.S. president Jimmy Carter appointed Paul Volcker chairman of the Federal Reserve Board. Although the Fed’s policy of raising interest rates contributed to recession and high unemployment in the early 1980s, many now credit Volcker with ending 1970s stagflation and restoring confidence in the dollar.

Italian Premier Giulio Andreotti speaks with Labor Minister Vincenzo Scotti at the Chamber of Deputies. (AP Photo)

European Monetary System (EMS)

After the collapse of Bretton Woods, the European Economic Community established first the European Currency Snake and then the European Monetary System (EMS), centered on the Deutsche mark, in an attempt to bind its members closer together and to limit exchange rate fluctuations. Many hoped that this would be a step toward a monetary union.

Under the EMS, countries committed to keep their currencies within a 2.25 percent band, but capital controls were allowed to create space for orderly adjustment.

Debt Crisis

Mexico turned a symbolic corner by repaying the last of its restructured loans from the debt crisis of 1982. (AP Photo/Jaime Puebla)

Developing countries' debt crisis

Tighter monetary policy in the United States sharply increased the dollar-denominated debt burden in developing countries, both because it drove up interest rates and because the dollar itself appreciated. Primary commodity prices collapsed, reducing many developing countries’ incomes as their exports became cheaper. As a result, most countries were unable to keep up with their debt repayments as their central banks ran out of foreign reserves. Some were forced to restructure the terms of their loans, sparking a debt crisis.

The crisis first struck Mexico in 1982. Fearing that other Latin American countries would follow, creditors rushed to lower their risk exposure by refusing to lend more and by demanding quick repayments on previous loans in large debtor countries such as Argentina, Brazil, and Chile. Soviet bloc countries such as Poland were also hard hit, as were African countries, which became overdue on their International Monetary Fund (IMF) and World Bank loans. By 1986, more than forty countries had experienced serious financial strain, coupled with slowing growth or even outright recession. Fearing that a generalized default would bring down banking giants such as Citibank and Bank of America, developed-country policymakers and the IMF worked to persuade large bankers to defer debt repayment and continue lending.

The New York Stock Exchange trading floor as stocks plunge in the biggest one-day selloff in history.

U.S. stock market boom

The early to mid-1980s was a time of strong economic optimism in capital markets. From August 1982 to its peak in August 1987, the Dow Jones Industrial Average moved from an index value of 776 to 2722. The rise in market indices for the nineteen largest markets in the world averaged 296 percent during this period. The daily average number of shares traded on the New York Stock Exchange rose from the 1980 level of sixty-five million shares to 181 million in 1990 (compared with 3.5 billion shares in 2011).

U.S. President Ronald Reagan at a World Bank-IMF meeting.

Second IMF metamorphosis: financier of last resort, with strings

As the debt crisis unraveled, the International Monetary Fund (IMF) shifted its focus to developing countries. After floating became common practice, developed countries had less need for IMF assistance. Beginning in 1982, the IMF started to use contributions from developed countries and lend to the developing world. IMF loans were made conditional on a countries' willingness to reform their economies, usually in the form of painful and unpopular macroeconomic adjustments. This made the IMF the target for ill-will in the developing world. The IMF's structural adjustment program was dubbed the "Washington Consensus"—a term first presented in November 1989 by John Williamson, who used it to summarize policy prescriptions shared by Washington-based institutions, including the IMF, World Bank, and U.S. Treasury.

U.S. Treasury Secretary James Baker III speaks to reporters at New York’s Plaza Hotel. (AP Photo/Mario Cabrera)

Plaza Accord

U.S. exchange rate policy shifted in 1985 from celebrating the dollar’s rise to engineering an orderly fall in the dollar through global cooperation. Faced with a large current account deficit, U.S. treasury secretary James A. Baker organized a meeting with leaders from the G5 countries at the Plaza Hotel in New York to create a plan to push down the dollar. The move brought the greenback down by a trade-weighted average of more than 30 percent, with adjustments of more than 50 percent against the Deutsche mark and the Japanese yen. At the time, many viewed the Plaza Accord as a sign of economic power shifting from the United States to Japan.

French Finance Minister Edouard Balladur with U.S. Treasury Secretary James Baker and West-German Finance Minister Gerhard Stoltenberg inside the French finance ministry. (AP-PHOTO/bf/stf/Laurent rebours)

Louvre Accord

Fearing that the dollar had fallen too far, finance ministers from the G7 met at the Louvre Museum, Paris, on February 22, 1987, to coordinate their macroeconomic policies in hopes of stabilizing the value of the dollar. The United States agreed to reduce its budget deficit and, in return, Japan agreed to expand domestic demand through fiscal stimulus and interest-rate cuts. France and Germany agreed to stimulate their economies by cutting taxes. The effects, however, were short-lived. The dollar continued on a downward spiral a few months after the accord was signed and continued for the rest of 1987.

Securities Specialist Assistant Spencer Varian of Wedbush Securities watches stock prices plunge on his computer. (AP Photo/Lennox McLendon)

Black Monday

After a lengthy period of sustained growth, the Dow Jones Industrial Average plummeted over the course of five days, culminating in a 23 percent loss on a single day: October 19, 1987—Black Monday. The S&P 500 also dropped 20 percent, falling from an index value of 282.7 to 225.06 while the NASDAQ Composite lost more than 11 percent of its value. Some economists and financial speculators blamed the Louvre Accord and its attempts to stabilize the U.S. dollar at unsustainable levels as the main culprit for the unexpected stock market plunge.

On February 23, 1988, Federal Reserve Board Chairman Alan Greenspan said the country faces "formidable challenges" in keeping the economic recovery alive. (AP Photo/Ira Schwarz)

Basel I standards for capital holdings

In an attempt to reduce the threat that banking failure could pose to the financial system, Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom, and the United States drafted the Basel I agreement, setting minimum levels for a banks’ capital holdings based on risk exposure. The system, however, quickly attracted considerable criticism for being rudimentary in evaluating risk.

U.S. President George H. Bush points to a reporter during a news conference to unveil a plan to bail out U.S. savings and loan institutions. (AP Photo/Scott Applewhite)

Brady Plan

After year-on-year attempts to reschedule loan agreements and restore economic health in countries suffering from the debt crisis, U.S. treasury secretary Nicholas F. Brady pushed forward the Brady Plan, granting debtor countries debt relief in exchange for greater assurances on future repayments. The Brady Plan accelerated the growth of developing countries’ debt trading markets as each completed restructuring resulted in new and more easily tradable debt security. The new bonds encouraged the entry of mainstream investors in trading emerging market debt. By 1998 the restructuring of unsecuritized loans to bonds in developing countries had been completed, allowing many countries to engage in international capital markets.

Members of the Financial Action Task Force speak during a news conference about money laundering at the Organization for Economic Cooperation and Development.(AP Photo/Jacques Brinon)

Financial Action Task Force (FATF)

In an effort to curb international money laundering, the G7 created the Financial Action Task Force, an international body headquartered in Paris. Its mandate has recently been expanded to combat terrorist financing.

Heidi Marquardt and Erwin Epstein from East Berlin show their first hundred West German marks on the first day of the German monetary union.

European Monetary System crisis

The spending required to assist the floundering former East German economy on German reunification led to a speculative currency crisis in 1992, which put serious pressures on the European Exchange Rate Mechanism (ERM). In addition, the dollar's decline against ERM currencies put Europe at a competitive disadvantage. The ERM's inflexibility in not allowing currencies to fluctuate beyond 2.25 percent led to an economic crisis. Member countries were forced to raise interest rates and spend their reserves to defend their currencies from speculation. But on September 16, 1992, now known as Black Wednesday, Britain and Italy left the EMS. A speculative crisis in 1993 ensued, in response to which the margins of fluctuation were widened to 15 percent. This margin rendered the ERM essentially useless for regulating currency rates and signaled the collapse of the ERM as an anchor against exchange rate fluctuations.

Members of the German Party of Democratic Socialism protest in the Bonn parliament during a vote on the ratification of the Maastricht treaty.

Maastricht Treaty

After long negotiations, the Maastricht Treaty (the Treaty of the European Union) was signed on February 7, 1992, setting a timeline for economic and monetary integration and creating criteria countries needed to fulfill to participate in the European Monetary Union (EMU). Under the EMU, member states agreed to a single currency, the euro, and a common monetary policy.

Emerging Market Crisis

(AP Photo/Claudio Cruz)

Tequila Crisis

Five years after the Brady Plan allowed Mexico to move beyond its debt crisis and shortly after the passage of the North American Free Trade Agreement, Mexico came face to face with a second challenge, commonly called the Tequila Crisis or the December Mistake. Mexico had removed capital controls in 1989, allowing for short-term "hot money" investment. The success of the Brady Plan and the passage of NAFTA led to excessive market optimism, allowing Mexico to run large current account deficits. The Mexican peso, which was still pegged to the dollar, became overvalued. The country was then, throughout 1994, hit by a number of political shocks—the Chiapas uprising in the South, the assassination of politicians like presidential candidate Luis Donaldo Colosio, and electoral uncertainty. In the face of difficult financing, Mexico’s government began issuing dollar-denominated debt (tesobono) and exhausted its reserves to avoid devaluation. This, however, led to a maturity mismatch.

By the end of 1994, the country was on the verge of default, with only $6 billion in reserves and $29 billion in tesobonos due the next year. Mexico was unable to replenish its foreign reserves and maintain its fixed exchange rate, and eventually let the peso float, resulting in a devaluation of 50 percent within ninety days. An emergency financial rescue was orchestrated by the United States, under the Exchange Stabilization Fund and the International Monetary Fund (IMF). The IMF gave more financing to Mexico than it had to any other country previously. Nonetheless, Mexico saw a 6 percent decline in output and a twofold increase in unemployment. But financial markets were quick to welcome the country back, and Mexico managed to repay its U.S. debt ahead of schedule. The scale of the IMF’s response ushered in a new era of bigger bailouts.

A mother feeds her children in a slum in north Jakarta. (AP Photo/Charles Dharapak)

Asian financial crisis

Asia had experienced many years of rapid growth, leading to talk of an Asian Miracle. However, in the 1990s, in the wake of partial capital account liberalization, some countries saw private-sector investment booms (such as in domestic real estate), fuelling current account deficits. These countries predominantly had fixed exchange rates and financed their deficits by borrowing short-term funds denominated in foreign currencies. In 1997, Thailand, which had a large deficit, saw its currency, the Thai baht, come under pressure. It exhausted its reserves and eventually had to devalue and seek help from the International Monetary Fund (IMF). The devaluation of the baht triggered a reappraisal of risk and withdrawal of bank lending from other East Asian economies. The contagion spread to Indonesia and South Korea, which were forced to seek IMF financing. Malaysia avoided IMF help, if controversially, by imposing capital controls.

Strong disagreement remains over the causes of the crisis. Asian countries and notable economists generally believe that the crisis reflected instabilities in the international financial system and criticized the conditions tied to IMF bailouts. The IMF and G7 tend to emphasize Asia’s weaknesses at the time—close ties between banks and firms, weakly supervised and highly leveraged banks and corporations, and policies that encouraged foreign currency borrowing. In the years following the financial crash, East Asian countries introduced regulation to discipline their banks and sought shelter from future trouble by accumulating immense amounts of foreign currency reserves. Most returned to sustained economic growth in 1999.

Miners from Siberia sit at the Russian government headquarters in Moscow to protest the government’s failure to pay months’ backlog of wages. (AP Photo/Ivan Sekretarev)

Russian financial crisis

Investor panic over the Asian financial crisis spilled over to Russia in 1998. Here the collapse of the Soviet regime had brought chaos in the early 1990s. Corruption and organized crime ravaged the country’s resources because the government was too weak to collect taxes or enforce basic law. Although Moscow was finally able, with International Monetary Fund (IMF) assistance, to stabilize the ruble in 1997, it had not managed to rein in spending and raise tax revenue, financing the ensuing deficits through short-term government bonds. In 1998, falling prices and jittery markets made it difficult for Russia to borrow at reasonable interest rates. As capital continued to flee, it became clear that Russia needed help to maintain its exchange rate. In addition, the Clinton administration was fearful of the damage a Russian collapse might cause and did not want to see the Yeltsin government fall. In July, the IMF approved a $22.6 billion bailout package. The situation, however, did not stabilize and Russia froze some payments and restructured its debt.

A cash box with Euros in a shop in the western German city of Duisburg. (AP Photo/Michael Sohn)

Launching the Euro

The integration of Europe’s monetary union was inching toward reality in the spring of 1998 when the European Council recommended that eleven of the fifteen member states adopt a single currency by January of the following year. On December 31, 1998, the exchange rates between the euro and the currencies of member states that would adopt the euro were fixed. The euro launched on New Year’s Day in 1999, though only on a virtual basis for foreign exchange and electronic payments. Older currencies continued to be used domestically until the euro banknote was formally introduced on January 1, 2002.

The launch was considered a success and a milestone for Europe, signaling the path toward legitimate economic integration and political unity. The spring 1998 meeting also set the agenda for establishing the European Central Bank (ECB), which began to oversee monetary policy for the eurozone. The bank’s revenues derived from interest on investments in foreign-reserve assets, money-market instruments and securities, as well as from the allocation of euro banknotes in the European Union. The ECB’s primary objective was established as that of maintaining price stability.

U.S. President Franklin D. Roosevelt is shown at the White House as he signed the Glass-Steagall banking bill on August 23, 1935. (AP Photo)

Glass-Steagall Act repealed

The 1933 Glass-Steagall Act under the Roosevelt administration separated investment and commercial banking in an effort to avoid another depression. It was repealed in 1999 in landmark legislation approved in the Senate by a vote of 90 to 8 and in the House by 362 to 57. The new bill, the Gramm-Leach-Bliley Act, allowed commercial and investment banks to consolidate and also vastly reduced regulations for Wall Street. U.S. banks were already doing investment banking abroad, but the separation of commercial and investment banking had never been emulated globally. The Gramm-Leach-Bliley Act thus made U.S. financial regulation more akin to those in the rest of the world. The New York Times reported that the bill both "open[ed] the door for a new era on Wall Street" that advanced America’s competitive edge in the global economy and raised concerns about the destabilizing effects that the deregulation would have on the international financial system.

Germany’s Deutsche Bank Chairman of the Board Rolf-E.Breuer on a billboard-sized monitor upon the official takeover of the U.S. Bankers Trust by the Deutsche Bank. (AP Photo/Heribert Proepper)

Formulating Basel II

An increasingly globalized and structurally autonomous banking industry set the stage for renewed discussions on national and international regulatory frameworks for banks. Although Basel I had provided guidelines for capital adequacy in the early to mid-1990s, regulators demanded a more comprehensive set of rules to better meet an increasingly transnational climate prone to spillovers and contagion effects. The guidelines debate, however, was clouded by political discord between powerful interest groups and financial heavyweights. In June 1999, the committee managed to reach consensus on a revised capital adequacy framework based on three core pillars: maintaining minimum capital adequacy requirements that seek to refine the rules in the 1998 accord; supervising banks’ internal assessment process and capital adequacy levels; and ensuring effective information-sharing and disclosure to maintain free-market discipline. After more meetings and deliberations with nonmember groups, banks, and industry representatives, the revised framework was issued in 2004.

Activists protest the annual meeting of the IMF and World Bank. (AP Photo/Jerome Delay)

IMF development role fades

As the IMF’s natural clients in emerging Asia and Latin America repaid their loans and amassed their own defense strategies against financial crises, the IMF lent less and its budget dropped, given that lending is the fund’s main source of income. Competition also stiffened from private capital markets.

IMF Managing Director Michel Camdessus joins hands with Asian business leaders during his presidency of the IMF. (Courtesy Reuters)

Dot-com bubble

A rise in the value of blue-chip securities tied to the emerging and profitable Internet industry opened the door to insatiable speculation. After a period of unchecked growth, the dot-com bubble suddenly burst, leaving millions of investors worldwide in dire financial distress and bankruptcy. The decline began on March 10, when the NASDAQ index reached its peak, quickly followed by a multibillion-dollar selling spree of bellwether technology stocks. By the end of the week, the NASDAQ lost nearly 10 percent of its value.

Demonstrators fill Buenos Aires’s Plaza de Mayo to protest the IMF and a government plan to reignite Argentina’s stagnant economy. (AP Photo/Daniel Luna)

Argentina crisis

In 2000, Argentina began to feel the early signs of turmoil and its currency board, which managed the peso’s peg to the dollar, came under pressure. The country had increasing difficulty selling the bonds it needed to finance its fiscal and current account deficits. Despite IMF support, the crisis continued to deepen. An ongoing inability to access international bond markets and a growing bank run led Argentina to declare a bank holiday, default on its debt, and devalue the peso at the beginning of 2002. The default was the largest sovereign-bond default in history.

Although Argentina had for years embodied neoliberal economic policies promoted by the IMF, the country’s spiral into crisis spurred ferocious debate over such policies and the need for a more balanced international financial architecture.

Former Enron Chairman and Chief Executive Officer Kenneth Lay was indicted on criminal charges related to the energy company’s collapse. (AP Photo/Pat Sullivan)

Sarbanes-Oxley Act

The collapse of energy giant Enron contributed to an overhaul of U.S. accounting standards. The Sarbanes-Oxley Act, signed into law on July 30, 2002, is considered the most significant change to federal securities laws since the 1930s. The act provides stronger penalties for fraud and requires numerous reporting conditions for public companies that have resulted in stronger financial control procedures and greater independence for auditors.

Dozens of Turks wait in front of a municipal bread sale box to buy a loaf at half-price in Ankara’s most affluent Tunali Hilmi Street.(AP Photo/Burhan Ozbilici)

Turkey crisis

In early 2001, a political disagreement between the president and prime minister over how to respond to a banking crisis triggered a currency crisis as the lira came under severe pressure. Turkish liras were sold en masse in exchange for dollars and euros. After running down its reserves and raising interest rates in defense of the currency, Turkey was forced to devalue the lira. Chronic budget deficits and the cost of its banking bailout raised doubts about Turkey’s solvency. A successful IMF program, however, gave Turkey time to improve its public finances and avoid an Argentina-style default.

Global Economic Crisis

Berkshire Hathaway Chairman Warren Buffett gestures during a news conference at the end of a three-day annual shareholders meeting held in Omaha, Nebraska. (AP Photo/Nati Harnik)

Financial weapons of mass destruction

In the thirty years after 1975, the increased sophistication of financial instruments and the growing liberalization of global financial markets transformed the derivatives market: previously concerned with commodities such as grain and corn, it now focused on a broader range of items that included interest rates, exchange rates, and securities. The techniques used to hedge against risk also grew more complex. The evolution of the derivatives market presented numerous regulatory challenges, symbolized by the downfall of Barings Bank in 1995 after a rogue trader employed by the bank engaged in unauthorized derivatives trading that brought down the 200-year-old British institution. Several years later, finance mogul Warren Buffet issued a wake-up call in Berkshire Hathaway’s 2002 annual report [PDF], cautioning investors on the risks posed by financial derivatives, referring to them as time bombs and financial weapons of mass destruction.

Workers build a condominium complex in the southeast Denver suburb of Lone Tree, Colorado. (AP Photo/David Zalubowski)

Housing bubble bursts

The upswing in the real estate market came to a close in 2006, when home prices in the United States declined for the first time in eleven years. This housing bubble had led to thousands of Americans buying property at leverage ratios nearly equal to the purchase price. Globally, the real estate market had also been in a boom as buyers feasted on low interest rates and investors moved from equity markets to real estate. In 2006, prices in the United States plummeted, with declines continuing into 2007 and 2008 with global ramifications. This bust was the first sign of an ensuing financial meltdown.

A distributor hands out a newspaper featuring the sale of U.S. investment bank Bear Stearns to JP Morgan Chase. (AP Photo/Sang Tan)

On the brink

In July 2007, Bear Stearns, an investment bank long admired for its innovations in financial instruments, suffered the collapse of two of its hedge funds that were heavily invested in the subprime mortgage market (subprime mortgages had allowed individuals with bad credit to secure loans at a rate higher than the prime rate established by the U.S. Federal Reserve). The next year, the U.S. Federal Reserve granted the bank an emergency loan. Soon afterward, JP Morgan acquired the faltering investment giant at $2 a share—a fraction of its previous value of $172 a share.

In September 2007, only months after the Bear Sterns hedge funds collapsed, the U.K. mortgage giant Northern Rock announced a need for emergency funding from the Bank of England. The request incited a frenzy among customers who lined up to withdraw their savings. Three days later, the U.K. government stepped in and nationalized the bank.

A forest of cranes at the Dubai Marina in the United Arab Emirates. (AP Photo/Kamran Jebreili)

Sovereign wealth funds

During the financial crisis, cash-strapped financial institutions began to look at alternative sources of financing, opening the gates for sovereign wealth funds (SWFs) to provide vital lifelines. The emergence of SWFs granted greater influence to emerging-market economies. Although policymakers in the United States and Europe voiced suspicions over the lack of transparency and political motives surrounding SWF transactions, major financial institutions—including UBS, Merrill Lynch, Citigroup, Credit Suisse, and Morgan Stanley—benefitted from capital injections from the SWFs of the United Arab Emirates, Singapore, South Korea, and China.

President and Chief Executive Officer of Fannie Mae Herbert Allison, Jr., and Freddie Mac Chief Executive Officer David Moffett. (AP Photo/Kevin Wolf, File)

A global recession

Market corrections originating in the housing market continued to send shockwaves across the world of finance. When overstretched subprime borrowers could not meet mortgage payments, lenders proved unable to absorb the financial losses, leading to widespread bank failures. As credit flows dried up and demand dropped, the crisis spread around the world. This caused further bank failures, market instability, and drove the world into a global recession.

The International Monetary Fund, armed with U.S. and European cash, reacted immediately, providing some relief to countries affected by the global recession. The United States also provided unilateral support to Mexico, Brazil, Singapore, and South Korea through $120 billion in direct loans to their central banks. Coordinated efforts continued when six central banks—including the U.S. Federal Reserve, the Bank of England, and the European Central Bank—cut interest rates by half a percentage point, and China cut its rate by 0.27 percent. However, these measures failed to halt the financial crisis.

Iceland’s Prime Minister Geir Haarde answers questions on his country’s financial crisis during a news conference in Reykjavik, October 8, 2008. (Reuters/Bob Strong)

IMF intercedes in Iceland

Following the collapse of its major banks and a sharp devaluation of its currency, Iceland accepted a $2.1 billion bailout from the International Monetary Fund (IMF), the first such action by the IMF in a developed country since its support of the United Kingdom in the 1970s. In addition to IMF support, Iceland received $2.5 billion from its Nordic neighbors. In November 2008, the IMF sent an additional $4.6 billion after overcoming delays from Iceland’s unwillingness to repay the British and Dutch government for debts incurred during the crisis.

U.S. President George W. Bush welcomes world leaders to the White House for the start of the Summit on Financial Markets and the World Economy. (AP Photo/Lawrence Jackson)

Group of Twenty (G20) adopts Washington Declaration

A G20 summit hosted by U.S. President George W. Bush invoked the reworking of global financial institutions. The summit produced the Washington Declaration, which highlighted agreement on five main objectives: reaching a common understanding of the root causes of the global crisis, reviewing actions to address the immediate crisis and strengthen growth, achieving common principles for reforming financial markets, launching an action plan to implement those principles, and reaffirming a commitment to free-market principles. The summit also effectively redirected the locus of discussions on international financial stability and global economic matters from the restrictive G7 to the more representative G20.

U.S. Vice President Joe Biden stands behind U.S. President Barack Obama as he signs the $787 billion economic stimulus bill at the Museum of Nature and Science. (AP Photo/Darin McGregor, Pool)

Obama's economic stimulus package

Facing the worst recession since the Great Depression, newly elected U.S. president Barack Obama signed a $787 billion economic stimulus plan into law, calling it "the most sweeping recovery package in our history." The American Reinvestment and Recovery Act (ARRA) targeted low- and middle-income Americans and aimed to save or create 3.5 million jobs, provide social safety nets, rebuild infrastructure, and boost consumer spending. This effort followed President Bush’s Troubled Asset Relief Program (TARP) used to purchase assets and equity from struggling financial institutions.

However, experts have debated the success of the stimulus in slowing the economic contraction. Critics contend that the size of economic investment should have yielded further gains, and argue that ARRA’s poor performance is a result of improperly allocated funds as well as a misguided emphasis on infrastructure investment. Annual reports by the Obama administration counter that the stimulus raised employment levels and injected needed cash into the economy by providing tax relief to middle- and low-income households.

World leaders closed on a deal to jumpstart the sputtering global economy at one of the most important summits of recent decades. (Sipa via AP Images)

London G20 Summit and Finance Ministers' Meeting

Leaders of the world’s major economies met in London and pledged to tackle the global financial crisis with an extra $1.1 trillion in resources, largely targeted for the International Monetary Fund (IMF). The Group of Twenty (G20) industrialized and emerging-market economies revitalized the IMF, tripling its lending capacity to $750 billion and reshaping the institution’s role in six aspects: economic forecasting, policy advising, economic surveillance, global lending of last resort, providing help to low-income countries, and providing liquidity to the global economy.

The London Summit also created the Financial Stability Board (FSB), an international mechanism for coordinating regulatory policy on the systemic level among G20 member states and other institutions. The FSB serves to monitor international financial services firms, facilitate information sharing, and promote cooperative action.

Officials from Russia, China, Brazil, and India have said that they would invest in bonds issued by the International Monetary Fund to diversify their currency reserves. (AP Photo/Mikhail Metzel)

BRIC alliance

In advance of the first annual BRIC Summit, foreign ministers from Brazil, Russia, India, and China met for two days in a preparatory meeting. The principle aim of the gathering was to strengthen policy coordination to tackle the global financial crisis, in part through moving away from the U.S. dollar and toward a new monetary order in international trade. When the leaders met on June 16, 2009 in Yekaterinburg, Russia, however, the group made no direct reference to developing a new reserve currency to replace the dollar, and only reiterated sweeping calls for a common strategy on financial regulatory reform. South Africa joined the group in April 2011, and the alliance renamed itself BRICS.

Despite the alliance, the BRICS nations have not achieved consensus to influence major recent decisions by the international community. When the International Monetary Fund and World Bank elected a new chief in the spring of 2011 and April 2012, the countries could not agree on a single nominee from a rising power. In this instance, the BRICS alliance consensus could have potentially ended the long-standing tradition of a European head of the IMF and a U.S. leader of the World Bank.

Leaders from the Group of Twenty (G20) pose during the summit on September 25, 2009, in Pittsburgh. (AP Photo/Carolyn Kaster)

Pittsburgh summit

Leaders at the Group of Twenty (G20) summit in Pittsburgh agreed to elevate the G20 as the "premier forum for our international economic cooperation," acknowledging the rise of emerging economies and relegating the Group of Seven/Group of Eight (G7/G8) from its role as the top forum on global economic issues. The meeting renewed commitment to reform international financial institutions, including a quota shift of 5 percent at the International Monetary Fund (IMF). The heads of state also agreed to strengthen the international financial regulatory system, include emerging economies in the Financial Stability Board, and launch a new Framework for Strong, Sustainable, and Balanced Growth.

At the June 2010 summit in Toronto, G20 leaders agreed to strengthen the economic framework originally launched in Pittsburgh and introduced a new agenda [PDF] based on strong regulatory reform, effective supervision, and peer review. Additionally, leaders pledged to reform institutional capacity for tackling financial crises. However, comprehensive policy reform since the 2010 summits has not occurred. Emerging economies, in particular, expressed increased frustration with G20 rhetoric and inaction. More broadly, the deepening economic crises in Europe and the United States point to continued economic hardship for G20 nations as well as the inadequacy of international financial regulations.

Investors watch the opening of the Dubai Financial Market on November 30, 2009. (Reuters/Ahmed Jadallah)

Dubai debt debacle

On November 25, 2009, Dubai announced that it would delay debt repayments on Dubai World, a government-backed investment company. Global markets swooned at the news as wary investors in the United States, United Kingdom, France, Germany, Japan, and Hong Kong braced for another credit freeze. The crisis in Dubai highlighted the constraints on national governments to bail out nationally owned enterprises. Analysts feared that Dubai’s reluctance to guarantee Dubai World’s debt could set a precedent for other indebted governments. On December 14, the United Arab Emirates accepted a $10 billion handout from Abu Dhabi to help pay its debts.

Graffiti says "fire to the banks" during a rally against government austerity measures in Athens on April 22, 2010. (Reuters/John Kolesidis)

Greece bailout

On April 23, 2010, Greece accepted a bailout by the European Union (EU) and International Monetary Fund (IMF) aimed at granting Greece enough time to restructure its debts in the wake of the global financial crisis. The entire bailout package, worth nearly $147 billion (110 billion euros), requires Greece to install austerity measures and work toward cutting its deficit. Later, in July 2011, the eurozone provided Greece with an additional $157 billion (109 billion euros) through the European Financial Stability Facility.

Uncertainty surrounding the situation caused turbulence in global markets and domestic controversy among European nations responsible for funding the bailout—most notably in Germany, where it triggered heated debate in parliament. Although immediate disaster was averted, concern over the future of the eurozone as an economic entity continues.

An employee counts Renminbi banknotes at a branch of Bank of China in Changzhi on March 31, 2009. (Reuters/Stringer)

China currency control

Shortly before the June 2010 Group of Twenty (G20) summit in Toronto, China announced that it would release its currency, the yuan, from its two-year peg to the dollar. Since the introduction of the new Chinese currency policy, the yuan appreciated 12 percent in relation to the dollar between June 2010 and February 2012. China’s exchange rate continues to be a source of friction between that country and the United States.

While G20 finance ministers agreed to avoid a currency war, a heads of state meeting at the November 2010 Seoul summit did not take concrete steps to avert such a crisis. Earlier in the year, then-U.S. secretary of the treasury Timothy Geithner criticized China for purposefully devaluing its currency, stating that "China’s inflexible exchange rate has made it difficult for other emerging market economies to let their currencies appreciate." The United States continues to believe that for effective rebalancing to happen, global exchange rates need to be market-driven.

A flag flies outside of the New York Stock Exchange building in New York on May 6, 2010. (Reuters/Lucas Jackson)

U.S. regulatory overhaul

Signed into law by U.S. president Barack Obama on July 21, 2010, the Restoring American Financial Stability Act overhauls the U.S. financial regulatory system. The bill extends financial oversight through the Federal Reserve Bank; establishes a consumer protection agency to safeguard consumers from abusive practices; ensures derivatives are traded in open, transparent exchanges; prevents banks from proprietary trading; and imposes restrictions on large banks so that they can be bailed out at no cost to the taxpayer.

After months of investigation, Security Exchange Commission (SEC) officials estimated that it will take years to implement the suggested efficiency overhauls. Some preliminary legislation, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed in July 2010, also produces financial regulatory reform. However, the Boston Consulting Group, which is charged with identifying necessary reforms, warned that the SEC will not be able to fully execute its new responsibilities without significant funding and personnel increases. Without further provisions, experts predict the 2015 goals will not be met.

U.S. Chairman of the Federal Reserve Ben Bernanke delivers opening remarks at a Federal Reserve System symposium in Arlington, Virginia, October 25, 2010. (REUTERS/Jim Young)

Fed announces QE2 package

Seeking to energize the economy, then-U.S. Federal Reserve chairman Ben Bernanke announced a quantitative easing plan—known as QE2—to prompt lower interest rates and spur economic growth. The plan calls for purchasing $600 billion in long-term Treasury securities and reinvesting in proceeds to buy up debt. The adjustment to monetary policy has drawn criticism from home and abroad. Export nations, like China and Germany, see it as a way for the United States to lower its own currency values thereby creating a competitive advantage. Domestic critics, on the other hand, fear that the move may cause inflation.

In a televised address, Portuguese Prime Minister Jose Socrates requests financial aid from the IMF and European Union on April 8, 2011.(Ho New/ Courtesy Reuters)

Euro crisis spreads to Ireland and Portugal

The Greek financial crisis of 2010 proved to be the catalyst for a series of bailout packages within the European Union (EU). In November 2010, Ireland accepted a $90 billion bailout plan from the European Union and International Monetary Fund (IMF) aimed at bolstering national banks and restoring confidence in its faltering economy. Ireland introduced austerity measures following the plan’s release, sparking protests and political uncertainty surrounding the fate of the prime minister. In April 2011, Portugal followed suit and was forced to admit the need for outside help to jumpstart its financial recuperation. In addition to the $112 billion bailout plan, austerity measures were introduced that increased taxes and reduced social programs.

G20 Finance Ministers and Bank Governors meet at the IMF Headquarters in Washington, April 15, 2011.(Ho New/ Courtesy Reuters)

G20 approves global imbalances scrutiny

During an April 2011 meeting, finance ministers agreed to specific criteria to decide whether countries should receive special scrutiny from the International Monetary Fund (IMF). This served to follow through on Group of Twenty (G20) leaders’ pledges to pursue global rebalancing at a previous summit in Seoul, South Korea. Though the announcements lacked proposals for concrete action, their release launched assessments for corrective and preventative measures to be outlined in the action plan at the 2011 Cannes Summit.

Mexico’s finance minister Carstens poses with France’s finance minister Lagarde after a news conference in Mexico City. (Stringer Mexico/Courtesy Reuters)

International Monetary Fund Succession

Dominique Strauss-Kahn, the eleventh managing director of the International Monetary Fund (IMF), formally resigned on May 18, 2011, shortly before a New York court indicted him on charges of sexual assault against a hotel maid.

French finance minister Christine Lagarde and Mexican Central Bank chief Agustin Carstens were the lead candidates to fill his position. Their campaigns set off a fierce debate questioning the tradition of a European chief for the IMF. However, rising powers did not unify behind a single candidate from an emerging nation; only Canada and Australia joined a cluster of Latin American countries to ultimately support Agustin Carstens. For their part, Europe united behind the French candidate, and the U.S. treasury secretary officially endorsed Lagarde after remaining reticent for most of the debate. Lagarde was named the head of the fund on June 28, 2011.

The National Debt Clock hangs on a wall next to an office for the Internal Revenue Service near Times Square, in New York City. (Chip East/Courtesy Reuters)

United States credit rating downgrade

When the United States reached its $14.3 trillion debt ceiling in May 2011, the U.S. Treasury set an August 2 deadline for operating under extraordinary measures without defaulting on its financial commitments. After a bitter debate, the United States Congress approved a bill to raise the U.S. debt ceiling and to reduce future deficits. Saying the plan’s cuts of $2.4 trillion fell short of the necessary $4 trillion long-term savings, Standard and Poor’s (S&P) downgraded the U.S. credit rating from the coveted AAA to AA+ for the first time ever. The downgrade, coupled with fears of a slowing U.S. economy and the eurozone crisis, set off market panic. Stock markets suffered the worst drop since December 2008, though they later recovered in late 2011.

S&P continues to have a "negative" outlook on the financial situation in the United States. A bipartisan Congressional commission tasked with drafting a second round of budget cuts by November 23, 2011, failed, setting into motion a timetable of cuts, known as sequestration, which began in January 2013.

Leaders wave during a group photo for the BRICS Summit in New Delhi. (B Mathur/Courtesy Reuters)

BRICS propose new development bank

In March 2012, the Brazil, Russia, India, China, and South Africa (BRICS) bloc of nations gathered for their fourth summit meeting in New Delhi and proposed a new development bank. Frustrated with the current direction and western-biased international monetary institutions, the BRICS, who account for a quarter of the world’s economy, considered establishing a new international lender to fund infrastructure and sustainable development. Finance ministers from the five nations have been tasked with exploring the possibility, and the proposal will be revisited at the annual 2013 meetings.

Germany’s Chancellor Merkel signs a fiscal compact enshrining common debt rules during a European Union leaders summit in Brussels, March 2, 2012. (Francois Lenoir/Courtesy Reuters)

Deeper eurozone integration

After struggling through a series of efforts to spur economic recovery in the European Union and contain sovereign debt crises in a number of nations, twenty-five leaders from the region signed a historic fiscal pact on March 2, 2012. The plan aims to inspire investor confidence, spur growth, and reassure populations of wealthier nations that they would not be required to bankroll fiscal instability of the eurozone’s weaker members. One provision requires eurozone member states to follow specific debt-to-GDP ratios or incur financial sanctions. The agreement would have also introduced a European Stability Mechanism (ESM), a EUR 700-billion fund, in June 2012, but the permanent rescue fund’s activation was delayed by a challenge in the German Constitutional Court. On September 12, 2012, Germany’s Constitutional Court ruled that the country can join the fund, and Germany is expected to give presidential assent soon. The rescue fund is expected to be fully operational within a few weeks. The ESM is intended to permanently replace the European Financial Stability Facility, a coffer of emergency funds in case countries need assistance.

In addition, on June 29, 2012, eurozone leaders announced a plan for an effective single supervisory mechanism for all banks in the seventeen eurozone countries. The move marks a major step towards a banking union to accompany the monetary union. The proposal arose as a compromise to allow eurozone joint rescue funds to provide funds directly to struggling banks, rather than requiring national governments to seek funds for banks within their borders.

Poland’s central bank governor Marek Belka (left), World Bank President Robert Zoellick (center), and IMF Managing Director Christine Lagarde at the 2012 semiannual meetings of the IMF and World Bank. (Jonathan Ernst/Courtesy Reuters)

Nations pledge more funds for IMF

At the spring meetings of the World Bank and International Monetary Fund (IMF), the world’s finance ministers agreed to increase the IMF’s lending power by $430 billion. The IMF had originally sought $600 billion of resources from the twenty largest economies in order to strengthen the institution’s capacity to provide emergency liquidity during crises. Currently, most experts expect that the funds would be used to bolster eurozone countries struggling with sovereign debt crises. While the extra funds will bolster the IMF’s lending capacity, analysts doubt that the money will last—especially if Italy and Spain ultimately require bailouts. The official stance is that the extra money will not be set aside for the eurozone. But, according to Christine Lagarde, managing director of the IMF, "it is for all members of the IMF," and most officials understand that the eurozone is desperate for IMF support.

An unemployment office in Madrid. (Andrea Comas/Courtesy Reuters)

Eurozone crisis deepens

European leaders issued a rescue package of $157 billion (109 billion euros) in July 2011 when Greece failed to make its debt payments. As a condition for the emergency funds, Athens introduced further austerity measures that sparked widespread social unrest. Similar protests have erupted across Europe, most notably in Spain. EU officials have since concluded that Greece is unlikely to meet the terms of its bailout, and investors are increasingly concerned about the potential repercussions of a Greek default on Italy and Spain, the eurozone’s third and fourth largest economies. Despite vows from Germany and France to "do everything in their power to preserve the eurozone," Spain’s 24.6 percent unemployment rate underscores the fragile state of the region’s economy.

Since July 2011, ratings agencies have cut the French and Austrian rating to AA+ from AAA and downgraded Spain, Portugal, and Italy’s debt by two notches. The debt of Malta, Slovakia, and Slovenia was also downgraded by one notch. In July 2012, Moody’s Investors Service issued a negative outlook for Germany’s AAA credit ratings of risks for future bailouts.

Barclays Chairman Marcus Agius speaks before a parliamentary committee in London (Reuters TV/Courtesy Reuters).

The LIBOR scandal

In late June, the British bank Barclays agreed to pay $453 million to U.S. and UK regulators to settle allegations that it had manipulated the London interbank offered rate (LIBOR) between 2005 and 2009. LIBOR is the most widely used benchmark interest rate in the world, and has been used to determine interest rates globally for transactions ranging from corporate loans to mortgages to student loans. By one assessment, the sum of securities and loans tied to LIBOR amounts to $800 trillion—over fifty times the size of the entire U.S. economy. In addition to Barclays, fifteen other global financial institutions including HSBC, Citigroup, JPMorgan, Deutsche Bank, RBS, and UBS are also under investigation with the LIBOR scandal that caused millions of consumers to underpay or overpay interest on their debt. Investigations into several banks and individuals remain ongoing as settlements continue to be reached. The latest, in December 2012, saw UBS pay $1.5 billion to American, British, and Swiss regulators.

The leaders of the international financial institutions met to announce the steady recovery of the global economy and their plan to reduce global poverty (Yuri Gripas/Courtesy Reuters).

World Bank targets end of extreme poverty

Global finance officials endorsed a World Bank target to end extreme poverty by 2030 at the Spring Meetings of the World Bank and International Monetary Fund. The goal is to have only 3 percent of the world’s populations classified as being in "extreme" poverty (with average consumption below $1.25 per day) and creates poverty reduction strategies to serve the bottom 40 percent of the population of each country in the developing world. This effort will likely coincide with the United Nations effort to create a post-2015 development framework to replace the existing Millennium Development Goals.

Britain’s Prime Minister David Cameron at a concluding news conference after the G8 summit at Lough Erne in Enniskillen, Northern Ireland June 18, 2013 (Stefan Rousseau/Courtesy Reuters).

G8 Meeting in Lough Erne

The G8 meeting in Lough Erne from June 17-18 led to the Lough Erne Declaration. The Declaration, a consensus document between the eight states comprising the G8, called for information sharing between tax authorities of different states, increased efforts to combat protectionism, regulation of extractive industries, and increased transparency in moving profits overseas.

Issue Brief

Scope of the Challenge

For twenty-five years, globalization produced unprecedented levels of both economic growth and economic risk. Financial markets became more open, which allowed firms and governments to invest more freely. But as global finance grew bigger, it also grew more complex. Faster-flowing capital became more volatile and economic risk harder to track. Domestic regulators struggled to keep up with evolving financial practices, many of which they did not fully understand. To make matters worse, most national governments refused to cede regulatory authority to a global institution, limiting the extent of international oversight over global markets. International cooperation was based on a patchwork of ad hoc arrangements with limited scope and coercive power. This resulted in an explosion of systemic banking crises, with more than 120 [PDF] taking place between 1970 and 2007. By the spring of 2008, policymakers who were disheartened by the severe impact of these crises began expressing anxiety about the lack of effective regulation of the global financial system, which former U.S. treasury secretary Lawrence Summers said had generated "over one major crisis every three years."

The subsequent 2008 financial crisis shook the entire system, plunging the world’s developed markets into a recession. Since then, stimulus packages and bailouts have staved off a 1930s-like depression, but the ongoing crisis illustrates the need for a more comprehensive global finance regulatory regime. In 2010, the Group of Twenty (G20) and the International Monetary Fund (IMF) agreed on initial steps toward international regulatory reforms and liquidity support but the G20 has yet to live up to expectations. Fundamentally, two underlying weaknesses in the international financial regime remain. First, there are too many institutions and mechanisms—often with overlapping mandates but limited power. Second, despite this machinery of cooperation, building critical agreement often proves impossible. When states perceive a conflict with their immediate national interest, they repeatedly disagree on fundamental issues, hindering the prospects for cooperative regulation to truly reform the international system. Further crises loom large on the horizon.

International Financial Architecture: Strengths and Weaknesses

Overall assessment

 Overall assessment: Improving, but with hiccups

After the global financial system collapsed in 2008, policymakers around the world scrambled to respond. The Group of Twenty (G20) designated itself the world’s premier forum for economic cooperation, but has struggled to implement necessary reforms. The International Monetary Fund (IMF) was also retooled to better reflect shifts in the global economy. Similarly, regulators from twenty-seven countries forged new rules, known as Basel III, in an effort to prevent similar crises in the future. But despite these efforts, mitigating financial risk and coordinating global economic policy remains a challenge.

In 1944, world leaders gathered in Bretton Woods, New Hampshire, to craft a global financial regime based on fixed exchange rates. They hoped the regime would provide the financial stability needed to recover from the Great Depression and World War II. But by the 1970s, the postwar setup had become untenable. A key aspect of international economics is that countries cannot simultaneously have market autonomy, free capital movement, and fixed exchange rates. Once countries running a surplus refused to allow their currencies to appreciate, the United States decided it would rather unhinge the dollar from the gold standard than sacrifice its macroeconomic autonomy, ushering in a new era of floating exchange rates. This new regime produced tangible benefits, allowing major economies to combine national policy autonomy with open capital markets. (Emerging economies that valued stability could still peg their currencies to a major currency, though doing so often required large foreign-exchange reserves).

Meanwhile, floating exchange rates stimulated the development of capital markets, opening new opportunities for countries—rich and poor alike—to run large deficits. In the 1970s, major international banks financed deficits in less-developed countries by recycling petrodollars. In the 1980s, surpluses in Germany and Japan financed the U.S. trade deficit—which rose to the then-high level of 3 percent of U.S. gross domestic product (GDP).

During the last few decades of unprecedented economic growth and globalization, crises periodically interrupted the expansion of global finance, forcing the international community to develop mechanisms that could prevent or mitigate them. The IMF, and more recently the G20, provided a forum for world economic leaders to address these crises. Nevertheless, achieving consensus on effective collective responses has proven an enormous challenge. For its part, the IMF supplied emergency financing to troubled economies with a primary focus on developing countries, acting as a lender of last resort. In addition to financial assistance, the fund often worked to promote structural adjustment policies designed to reduce the state’s economic role and expand free markets.

However, with the 2008 global economic recession and subsequent eurozone crisis, the IMF assumed a newly active role in developed economies. However, even as the IMF became a central figure in crisis response, countries also resisted shifting too much power—especially regulatory power—to the fund and similar global institutions. Regulation remained national, though occasionally states coordinated their national regulations to avoid a race to the bottom. One such initiative was a new set of regulations proposed by the Basel Committee on Banking Supervision in September 2010. Known as Basel III, these regulations were created to stabilize national financial systems through strict liquidity controls and capital adequacy requirements. However, these regulations have been postponed twice thus far and are unlikely to be implemented before 2019, at the earliest.

Aside from its inability to prevent financial crises, the global financial regime has also been slow to adjust to tectonic shifts in the international distribution of economic power, particularly with regard to the rise of China, India, and other emerging-market economies. In the wake of the 2008 crisis, the G20 emerged as the most promising forum for policy coordination between developed and developing states. Its membership included stalwarts of the Bretton Woods system alongside burgeoning economic heavyweights like China and India. While the G20 produced an initially strong response to the crisis, it has struggled to bolster its initial success with strong implementation and further agreements. Policy disagreements emerged between developed and developing countries, as well as among major developing economies, which have distinctive interests and outlooks. In particular, the United States Federal Reserve’s policy of quantitative easing and questions regarding China’s currency manipulation represent continued threats to international financial cooperation. The continuing eurozone crisis, and in particular the financial and political turmoil in Greece, Spain, Italy, and Cyprus overshadow efforts to solve the debt crisis. Japan’s recent devaluation of the yen also led to fears of a currency wars between G20 countries. Instrumentally, there has been a long struggle to strengthen agreed-upon frameworks for financial regulations with a continually fragmenting international architecture of national and regional policies including a financial transaction tax in Europe, Dodd-Frank Act the United States, and Basel III requirements all being implemented to varying degrees.

The World Bank and IMF have also attempted to enhance the role of developing nations in policymaking processes. Both institutions have endorsed voice and quota reforms aimed at increasing the voting power and influence of developing economies, though implementation remains limited. Indeed, recent efforts to reform shares in the international financial institutions have progressed slowly. Even if the changes had occurred, the voting share of traditional advanced economies would only decrease by 2.6 percent. With that said, the World Bank, which released an external review [PDF] in October 2009 with proposals for governance reforms, successfully increased voting shares for developing and transition countries across its various groups: The International Bank for Reconstruction and Development (IBRD) increased voting shares by just over 3 percent, while the International Finance Corporation (IFC) and the International Development Association (IDA) raised voting shares for developing states by approximately 6 percent. In sum, although the reform in favor of developing countries enjoys broad international support, proportional representation remains a distant goal.

More often than not, however, advanced economies have not agreed on the right response to crises. Some believe that international institutions need more firepower to help tame global markets. Others worry provisions for crisis insurance would reduce incentives for investors and countries to avoid crises themselves. Some emerging economies, for their part, often trust in national self-help, building up large reserves, and in some cases limiting capital flows, rather than relying on global institutions.

Coordinating macroeconomic policies

Coordinating macroeconomic policies and exchange rates: A weak system since 1973

One major shortcoming of the global financial architecture is the lack of a robust mechanism to allow the world’s economies to coordinate their macroeconomic policies. This gap has become acute in recent years and encouraged massive structural imbalances leading some to question the future of the U.S. dollar as the primary global reserve currency. While the global financial crisis encouraged provisional efforts to rationalize currency exchanges, these have not been institutionalized.

During the Bretton Woods system, the dollar’s value was linked to gold and other currencies were pegged to the dollar—providing an international framework for monetary policy. But when Bretton Woods collapsed in 1971, no mechanism of multilateral coordination emerged to replace it. By 1973, the unprecedented buildup of foreign-exchange reserves by emerging-market economies led some countries to declare the emergence of a new Bretton Woods system marked by unilateral pegs to the dollar. The currency gap has become particularly acute in recent years, promoting massive structural imbalances between surplus and deficit countries. As a result, the United States, as an importer, consistently runs up current account deficits of $500 billion to $1 trillion while Asian commodity exporters rack up large surpluses. The current account surplus of China alone rose from $20.5 billion in 2000 to more than $190 billion in 2012.

The most recent financial crisis fostered unprecedented levels of macroeconomic cooperation among the world’s major economies. In the immediate aftermath of the crisis, many countries passed fiscal stimulus packages to foster economic growth. Subsequently, the Group of Twenty (G20) demonstrated its potential as an international focal point for macroeconomic coordination by embracing the Framework for Strong, Sustainable, and Balanced Growth [PDF] at its September 2009 summit in Pittsburgh. In adopting the framework, G20 members agreed to undertake close macroeconomic coordination, including of their macroeconomic and fiscal policies; harmonize the national stimulus plans and "exit" strategies; and correct longstanding imbalances between surplus and deficit countries, which had contributed to the crisis. To encourage progress on the framework—and permit G20 members to evaluate one another’s progress in achieving their espoused goals—the G20 established the Mutual Assessment Process (MAP), in close coordination with the IMF.

Thus far, the first three phases of MAP have been successfully completed. Before the June 2010 G20 Summit in Toronto, the IMF aggregated G20 nations economic policies, analyzed barriers to growth, and drafted "alternative policy scenarios" that would lead to further growth. In response, G20 nations launched a second stage of MAP to draft recommendations for international policy coordination, which were agreed upon during phase three in February 2011. The final stage, which began in April 2011, assessed member nations’ progress and guided the action plan at the November 2011 Cannes G20 Summit. The resulting Action Plan for Growth and Jobs highlighted international consensus toward the importance of tackling international unemployment. Specifically, the plan includes the creation of a G20 task force on employment with a focus on youth employment. Presently, however, "available data [PDF] for seventeen countries suggest the overall youth employment situation remains critical."

Beyond the G20, other international organizations like the Group of Eight (G8), the United Nations, and regional development banks provide venues for economic policy coordination. Still other institutions including the Organization for Economic Cooperation and Development (OECD), and the Bank for International Settlements (BIS) further cooperative action by providing governments with consultative forums, analytical support, and financial guidelines. Through dialogue in the aforementioned organizations, as well as through direct diplomacy, major economic powers have pursued monetary policy coordination. The United States Federal Reserve, Bank of England, European Central Bank, and People’s Bank of China implemented a round of coordinated interest rate cuts in late 2008, though analysts doubt whether their success will tame investor jitters. In late 2008, the Federal Reserve also gave European banks unprecedented access to U.S. dollars to hedge against consumer withdrawals.

Yet monetary policy is not only a cooperative tool—it also serves competitive purposes. Facing difficult economic conditions at home, states have used monetary policy to pursue national prerogatives. Issues of currency valuation have long caused tension between the United States and China, resulting in entrenched nationalist positions and lost opportunities for further macroeconomic alignment. The controversy has also caused bitterness among emerging economies like China and Brazil. Recently, the Japanese devaluation of the yen and French worries concerning the overvalued euro raised fears of competitive devaluations. In the G20 and elsewhere, these conflicting interests have become an impediment to meaningful action on financial reforms and overshadowed a recent meeting of bank governors finance ministers in Moscow.

Discord arises not only from the repercussions of international competition, but also from fundamental disagreement on how to rebalance the system. The United States believes that policy changes in major creditor countries, such as the appreciation of the Chinese yuan, can address the world’s imbalances without structural change. Competitors like China, however, advocate broader changes for the international financial architecture, including a shift away from dollar reserves.

Monitoring financial standards

Monitoring and regulating financial standards and financial activity: Insufficient consensus to prevent further global crises

Another major weakness of the global financial system is the lack of a coherent set of rules for monitoring, regulating, and standardizing financial activities, particularly at the cross-border activities of systematically significant actors. The current system entails an uneven patchwork of oversight efforts and entities, sometimes with overlapping mandates and jurisdictions. As a first step toward tackling this problem, the Basel Committee announced and a new set of Basel reforms for the banking sector. Known as Basel III [PDF], they aim to create a more coherent regulatory framework by increasing transparency in the financial markets, preventing diversion of resources, and tracking potentially excessive risks—with the intension of spotting rotten players (or practices) and quarantining them before they infect the entire system.

Prior to any regime being installed, participants must agree that they want to limit excessive risk-taking in the first place—a difficult precondition to set. One school of thought holds that regulations give investors false comfort and thus leads them to pay too little attention to the risks of lending to a regulated institution. Others argue that regulation introduces distortions that lead to bad investment decisions.

Financial policymakers first realized the need for more transparency and accountability in the mid-1970s. The first international banking crisis of the postwar era prompted the creation of the Basel Committee on Banking Supervision, which was charged with coordinating national banking supervisory policy. In the 1980s, the debt crisis revealed that many large international banks did not have the capital to absorb an outright default on their loans, leading to almost a decade of rescheduling—or revising repayment timeframes—to give the banks time to build up their capital. In an effort to avoid these crises, the Basel Committee adopted common standards for evaluating risk-weighted capital. After the Asian financial crisis, similar attention shifted to improving the quality of bank supervision in emerging economies. In 1997, the Basel Committee released its Core Principles for Effective Banking Supervision [PDF] and the IMF, in conjunction with the World Bank, began to systematically assess supervision in its macroeconomic health checks through the Financial Sector Assessment Program.

The Basel Committee announced its newest round of banking regulations, Basel III, in September 2010 as a response to the economic crisis. A month later, at the 2010 Seoul Summit, the G20 endorsed the new rules, emphasizing their function in stabilizing market fluctuations and lowering the financial risk and fallout emanating from the failure of large banks. The rules require banks to hold higher levels of tier-one capital and establish countercyclical buffers to offset potential fluctuation. Unfortunately, banking regulation moves slowly and are subject to repeated delays with Basel III now not going into effect until 2019 [PDF]—allowing known systemic risks to exist unregulated. While important to the global regulatory regime, the sclerotic pace of and delays to implementation make the Basel III regulations an unwieldy tool for much-needed reform.

Several similar arrangements emerged in the securities, insurance, corporate governance, accounting, and auditing sectors. Additionally, the Joint Forum of Financial Conglomerates and the Financial Stability Board (FSB) promote overall coordination and cooperation by regularly bringing together overseers of the global financial system. At the November 2011 Cannes Summit, the G20 strengthened the purview of the FSB, giving it legal standing and buttressing its financial institutions. The OECD and the World Bank have also pitched in, leading international discussions on corporate governance standards, insolvency, and bankruptcy.

Nonetheless, obvious flaws remain in the global regulatory structure. Regulation remains overwhelmingly national or regional with weak, external verification and assessment mechanisms. No organization has the power to enforce compliance with agreed standards—or to sanction countries that fail to live up to global standards. Even recent systemic regulatory measures like the Basel III banking reforms are subject to national implementation, the extent of which will determine the speed and strength of its entry into force on the international level. For example, Russia is only now, in 2013, approaching achievement of the Basel II regulations. The acceptance of global standards will remain subordinate to the perceived competitive edge of national financial sectors.

Additionally, important new financial players have fallen through the cracks. Central banks, finance ministries, and bank regulators, were surprised to discover the extent to which new actors in the shadow financial sector—which consists of unregulated special-investment vehicles and broker-dealers—had taken on the risks associated with subprime mortgages. There are increasing efforts to place these actors under new regulatory mechanisms—including EU restrictions on short selling, credit default swaps, and new taxes on financial transactions, as well as laws mandating greater transparency for hedge fund transactions and controls on executive compensation.

Managing financial crises

Managing financial crises: Progressing, but overarching concerns remain

Under the current global financial regime, the world has found itself vulnerable to severe financial crises but unable to manage them successfully. The International Monetary Fund (IMF) is ostensibly the premier fire-fighter in these circumstances and is charged with mitigating economic tensions in the aftermath of financial crisis. Even so, individual states have created their own dizzying array of bilateral and multilateral arrangements to help cushion against financial crises, as the eurozone crisis aptly demonstrates.

Excessive volatility in financial flows has become a hallmark of the global economy. In some cases, countries suddenly lose access to market financing and find that they can no longer finance substantial deficits. Likewise, short-term financing for financial institutions can dry up equally fast—be they special-investment vehicles that have to roll over short-term asset-backed commercial paper, U.S. broker-dealers that rely on the repo market to obtain financing from money market funds, or European banks that rely on the wholesale market. At the start of the global economic crisis, the reliance of Iceland’s banks on short-term borrowing in foreign currencies sent the country’s entire economy into a tailspin once instability in European markets began. Meanwhile, financial contagion affects weak and strong investments alike. Losses in one portion of a portfolio may prompt a leveraged institution to sell other assets, pushing the price of healthy assets down. Once investors begin confusing sound investments with unsound ones, financial institutions can lose confidence in one another and the system upon which their short-term borrowing costs rely.

To reduce this uncertainty, the IMF is the principle institution for managing financial crises. The IMF took on some of the functions of lender of last resort when currency crises swept the developing world in the 1990s. It created two emergency credit facilities, the Supplemental Reserve Facility of 1997, and the Contingent Credit Lines of 1999 to facilitate faster financing for governments and markets judged to already have relatively sound policies.

When developed nations required assistance during the most recent financial crisis, the IMF was able to draw upon these facilities and past experience. Following the model from the the developing world’s currency crises in the 1990s, the IMF created the Short-Term Liquidity Facility of 2008 to more rapidly inject capital into relatively stable financial systems. Again, in 2010, the IMF and the European Central Bank approved a package of $930 billion to provide stability to eurozone countries. In December 2011, the eurozone again sought IMF assistance to craft a new massive bailout fund of $260 billion, but when Britain refused to contribute, the combined IMF-EU bailout fund only set aside $200 billion.

With that said, the IMF issues its loans with a variety of conditions, which often impose fiscal austerity on crisis-battered societies. While many in the developing world have long regarded the IMF as a tool for developed nations to control developing nations, the fund’s eurozone bailouts have generated resentment in Europe, too. In fact, portions of European publics, in particular, demonize the IMF for its strict demands of austerity. Furthermore, IMF critics still question the discretionary nature of its interventions as the institution lacks clear standards for determining how much financing countries should receive. Some economists even argue that the existence of the IMF prompts governments and investors to pursue reckless policies because they know they can receive IMF loans if their investments fall through. Unlike domestic lenders of last resort, the IMF’s lending capacity is limited by donor contributions contingent upon internal voting processes and the feasibility of issuing new Special Drawing Rights (SDRs). As one expert notes, "Neither the IMF nor the Bank for International Settlements nor any other international organization has the authority to create and extinguish reserve money."

Past concerns with the IMF prompted a slew of new bilateral, regional, and multilateral institutions—including the Brady Bonds, the Chiang Mai Initiative, and the European Central Bank—all aiming to supply a troubled country with the foreign exchange currency it needs in a crisis. In the European case, a multinational currency—the euro—and its accompanying policy infrastructure enabled the EU to oversee regional crisis management with aid from the IMF. Thus far, the IMF has provided traditional conditional loans to Iceland (its first loan to a developed country since the 1970s), as well as to Hungary, Ukraine, Pakistan, Latvia, Romania, Ireland and Portugal.

To quell fears that the post-2008 wave of lending would exhaust the IMF’s resources, the G20 and a few emerging market economies agreed to expand the New Arrangements to Borrow, providing the IMF with up to $500 billion in supplementary financing in March 2011. The IMF’s members also authorized a Special Drawing Rights allocation, which expanded the IMF’s global pool of reserves by giving each member additional reserves in proportion to their contribution to the IMF. However, the IMF’s spending on eurozone bailouts and countries’ failure to match rhetorical commitments with cash, has caused the IMF to fall short of that target. At the 2012 spring meetings of the World Bank and International Monetary Fund (IMF), the world’s finance ministers agreed to increase the IMF’s lending power by $430 billion, but doubts remain whether it will be enough to contain the crisis.

Supporting Development

Supporting Development: Some progress, but still starving for aid and investment

A final shortcoming of the current global architecture is the disproportionate effect financial crises have on development assistance to developing countries. Poor countries are vulnerable to negative spillover effects that culminate in rampant poverty, mass unemployment, and food shortages. Over the years, multilateral development agencies and the International Monetary Fund (IMF) have refashioned their policies to support financial sector stability and growth, and to encourage financial activity through incentive programs. However, the demand for aid in developing countries remains tangible.

Multilateral efforts to address the needs of the developing world extend back to 1945, when the architects of the Bretton Woods system created the World Bank to support postwar reconstruction. Many capital controls were dismantled, and private capital markets emerged as an alternative source of long-term financing. But countries with rudimentary financial and banking infrastructure or unstable governments still struggled to attract private investment on any but the most onerous terms. Meanwhile, concerns that development failure might spillover into neighboring economies created a demand for multilateral development support. Subsequently, the World Bank increasingly focused on helping the world’s poorest economies, and in 1960, it set up its International Development Association, or so-called soft loan window to finance developing countries.

Today, the World Bank continues to make loans to middle-income countries with access to private markets. These loans are priced commercially so they provide the World Bank with a profit, part of which is used to subsidize concessional assistance to poorer countries. In addition to being a financial intermediary, the World Bank has become a center of knowledge: it disseminates lessons learned from its experience of maintaining programs in dozens of countries from a variety of programs including its Poverty Reduction Strategy Papers. Regional development banks have also undertaken similar objectives.

States, too, offer bilateral official development assistance (ODA) from donor countries and have helped support development goals in poor countries. However, too often bilateral ODA suffers [PDF] from a lack of harmonization and host country-ownership. Despite boosting funding levels in recent years, the increased number of actors involved—from donor states to nongovernmental organizations and philanthropic foundations—has increasingly fragmented the sources of financing for development projects. Additionally, weak capacity and corruption in recipient states often lead to ineffective implementation and squandered resources. These challenges make it difficult to account for success on the ground.

In recent years, the developing world gained another source of financing: government-backed firms from Europe, the Middle East and Asia. Such investment, together with renewed private investment in mines and oil fields driven by high commodity prices, pushed investments and loans to Africa from $9 billion in 2000 to $62 billion in 2008. These investors offered governments an opportunity to sidestep the transparency requirements, performance monitoring, and governance rules attached to loans from development banks or Western ministries.

The G20 also formally introduced development as a key issue to its agenda in November 2011 (which the Group of Eight had previously included on its agenda). The final communiqué agreed not to tax or restrict food destined for the United Nations World Food Program, established a task force to address youth unemployment, and enumerated steps to increase global agricultural output. However, in 2009, development assistance from industrialized countries dropped for the first time since 1997.

In sum, development efforts fall short of fulfilling commitments outlined at the 2005 World Summit. Domestic financial policies in low- and middle-income countries need to become more countercyclical and targeted [PDF] to address systemic vulnerabilities in their national financial markets. As noted above, development banks, the IMF, and new financial institutions will inevitably play a critical role to keep these economies from contracting as the global financial crisis runs its course.

Financial Policy Issues


The United States has been a champion of free markets, the architect of the Bretton Woods system, and home to one of the world’s leading financial capitals. Despite evolving from the world’s leading lender to the world’s largest borrower, the United States has been the major promoter of a liberalized global financial system. Many therefore saw the United States as the major culprit of the 2008 financial crisis (though others blamed the crisis on global sources).

Sweeping regulation

Does global finance need sweeping regulation?

Yes: Crises arise, in part, due to a lack of regulatory oversight in markets. To prevent their occurrence, the world needs to devise and implement a set of monitoring and enforcement guidelines. After the financial crisis hit in 2008, the Financial Stability Forum—now the Financial Stability Board (FSB)—produced a blueprint [PDF] for global reform. In June 2010, leaders from the Group of Twenty (G20) pledged to pursue a "better regulated" financial system based on four pillars: (1) a strong regulatory framework; (2) effective supervision; (3) addressing the systemic problems involving important ally institutions; and (4) transparent international assessment and peer review. The FSB is monitoring implementation of G20 recommendations for increasing financial stability and assesses [PDF] that efforts are progressing. In September 2010, financial authorities from twenty-seven countries also forged new rules known as Basel III to require larger holdings of low-risk capital reserves, thereby reducing systemic risk. However, individual nations are responsible for implementation, and spotty compliance points to the inadequacy of currency regulations. At the June 2012 Los Cabos G20 Summit, little progress was made to boost compliance with Basel III regulations. In December 2012, it became clear that compliance with the agreed-to Basel III would be further delayed in the United States and Europe amid fears that its implementation might hinder growth.

No: Few question the need for reform, but some caution against going too far. Excessive restrictions and government interference might slow economic recovery by suffocating creative market dynamism. If the government’s hand reaches too deep, politicians and policymakers may be tempted to use regulations to pursue their own agendas, creating dangerous distortions in resource allocation. In sum, these critics argue that the painful recession should not make us forget the remarkable results of the past twenty-five years. Stifling financial innovation would be even more costly than the financial crisis. Others argue that instead of regulating institutions that are "too-big-to-fail," the system needs to be made safe for failure—allowing markets rather than regulators to discipline financial institutions. Still others worry that reforms may concentrate too much power in the hands of a few regulators, such as the Federal Reserve, without eliminating the risk of regulatory capture. Moreover, adding new mandates to existing institutions could draw energy and attention away from traditional duties. These voices consequently favor limiting the Federal Reserve’s regulatory responsibilities.

New global architecture

Should regulation come through a new global architecture?

Yes: Despite calls from some analysts who argued as early as 1984 that global financial markets could not sustain itself in the long term, proponents have only now begun to rally support for a global financial governance regime. European leaders have been particularly vocal, with former European Central Bank president Jean-Claude Trichet urging increased vigilance and a three-pronged approach based on "macroeconomic discipline, monetary discipline, [and] market discipline." The deep impact of the 2008 financial crisis has persuaded some economists and policymakers to favor a comprehensive financial architecture that looks not only at banks and coordinating macroeconomic policies, but also at the shadow financial market, including enhanced regulation and transparency of investment banks and derivatives. Other analysts have added to the plea by pointing out that the current financial system is too big to be rescued by one national government, and needs a more robust governance body to offer viable rescue packages.

No: Critics of a new Bretton Woods approach believe that the ills of global finance can in large part be cured at home. National policies, they argue, will do more to address the key problem of excessive bank leverage than new global rules. "It’s worth remembering that after the last global crisis in 1997-98, there was lots of grand talk about a new international financial architecture," Sebastian Mallaby writes, but in the end, "the only important reforms were national ones." Looking at the aftermath of the Asian financial crisis, the Economist argues that huge foreign reserves, flexible exchange rates, and stronger banking systems proved more powerful than international initiatives in spurring economic recovery. Others, such as former U.S. treasury secretary Henry Paulson, believe that new, intrusive international rules will not only be useless, but also damaging, because they will inevitably rely on a one-size-fits-all approach. Moreover, a final group argues that, regardless of whether a theoretical global system would work, it will never see the light of day because countries will simply refuse to turn over real power to international regulators.

Global rebalancing

Should there be more support for global rebalancing?

Yes: Many analysts agree that a root cause of the latest financial crisis has been the global imbalances that have been accruing since the 1990s. As current account discrepancies between exporting and importing countries grow larger, the need for rebalancing solutions becomes more imperative. Supporters of global rebalancing efforts feel that larger structural changes need to occur to correct these imbalances. Surplus countries, particularly China and Germany, need to save less and stimulate domestic demand and the United States must save more and increase the role of exports in its economy.The trend of global trade balance corrections since 2008 relied on unsustainable large fiscal stimuli and has already reversed.

No: Critics contend that a global correction is already under way and that the market naturally tends toward equilibrium. The 2008 financial crisis has driven global demand lower, contributing to a decline in the U.S. trade deficit, a higher savings rate among U.S. households, and a correction in the U.S. exchange rate. Moreover, if countries were to pursue coordinated policies to tackle global imbalances, the question of who would be tasked with spearheading these efforts remains unanswered. The Group of Twenty (G20) has not adequately addressed concerns, and the recent summit in Los Cabos, Mexico represents a continued failure in these efforts. Some also believe that the informal institution may also be too big to prescribe consensus-based global rebalancing policies.

Recent Developments

Higher IMF growth forecast

January 2014

The IMF revised its 2014 global growth forecast upward in January by 0.1 percent to 3.7 percent. In a shift from recent years, stronger performances by advanced economies, rather than emerging markets, are fueling global growth.  The modest growth rates predicted for much of the developing world may slow even further in response to improvements in the U.S. economy as tighter U.S. monetary policy could redirect capital flows toward the U.S. market.

Doha round ends

January 2014

The moribund Doha Round trade round was finally brought to a close in Bali, Indonesia. The Bali deal focuses on “trade facilitation”, addressing inefficiencies in customs procedures. The agreement, however, fails to settle many other long-standing points of contention among WTO member states, nor is it likely to shift the international trade landscape decisively in favour of multilateral agreements, away from increasing popular bilateral and plurilateral agreements.

2013 G20 Summit

September 2013

The eighth G20 Summit was held in St. Petersburg, Russia, from September 5-6. Unfortunately, tensions over the international response to the conflict in Syria overshadowed meaningful progress on the economic agenda. The outcome document from the Summit did not outline concrete steps on more critical issues like remaining regulatory challenges, but did include an extended commitment to refrain from protectionist measures and points of agreement on addressing the challenge of tax havens.

Dow Jones at record high

May 2013

On May 7, the Dow Jones Industrial Average closed above 15,000 points for the first time. Quantitative easing from central banks, low interest rates, and recent positive figures related to unemployment and productivity has each contributed to this record high. It remains unclear whether this trend will continue or whether it characterizes the end of the global financial crisis. It does, however, represent a significant expansion of the index from 13,000 points immediately before the crisis began and a doubling of the index from its lowest point under 7,000 points in early 2009.

World Bank targets extreme poverty

April 2013

Global finance officials endorsed a World Bank target to end extreme poverty by 2030 at the Spring Meetings of the World Bank and International Monetary Fund. The goal is to have only 3 percent of the world’s populations classified as being in "extreme" poverty (with average consumption below $1.25 per day) and creates poverty reduction strategies to serve the bottom 40 percent of the population of each country in the developing world. This goal was created against the backdrop of new statistics that suggest extreme poverty has been reduced to 21 percent in 2010 compared to 43 percent in 1990 and the recent discussions reflected concerns that climate change and environmental protection were essential to achieving its goal of reaching 3 percent by 2030. This effort will likely coincide with the United Nations’ effort to create a post-2015 development framework to replace the Millennium Development Goals.

U.S. sequestration

March 2013

U.S. lawmakers failed to make a deal to prevent significant budget cuts to U.S. government discretionary spending. These cuts to defense programs, research, and education programs took place despite warnings that they would affect both domestic and international markets and slow growth in gross domestic product by half a percentage point. These cuts remain ongoing with their full force not expected to take hold until later in the year.

Currency wars

February 2013

A devaluation of the Japanese yen triggered fears of a currency war among developed and developing states in early February. Japan’s new fiscal and monetary policies apparently targeted a lower exchange rate to reinvigorate a stagnant economy. This development coincided with a rapidly strengthening euro that put a six-month long recovery in jeopardy. The prospect of a currency war between members of the G20 led to fears of increased protectionism that would unravel the international financial architecture built in the aftermath of the financial crisis. These fears overshadowed February’s G20 Finance Ministers and Central Bank Governors Meeting. At this meeting, however, the group made clear that they would not devalue their currency in search of improving their respective balances of trade.

Options for Strengthening the Regime


The 2007-2009 economic crisis, followed by the sovereign debt traumas in Europe, has triggered a variety of operational and normative challenges in both finance and economics. The United States and other major economies are being pressured to find effective strategies that remedy financial instability, through both measures at home and international cooperation. Strengthening multilateral mechanisms remains the foundation for responding to financial crises, but importance must also be placed on coordination of domestic policies, particularly among the top twenty industrialized nations. These recommendations reflect the views of Stewart M. Patrick, director of the International Institutions and Global Governance program.

In the near term, the United States and its partners should pursue the following initiatives to ensure the global recovery is a success:

Revitalize G20 action on balancing

Revitalize Group of Twenty (G20) action on global economic imbalances

During the April 14-15, 2011, Group of Twenty (G20) meeting of finance ministers and bank governors in Washington, DC, the group agreed on a two step process to reduce persistently large imbalances between countries with current-account surpluses (notably China) and those with deficits (notably the United States). The plan also charged the International Monetary Fund with identifying factors that drive countries to accumulate massive surpluses or deficits. However, building unanimous consensus on the outcome of these independent assessments is notoriously difficult. The risk is that national politicians will despair of a multilateral solution and will resort to unilateral sanctions, as suggested by a bill in the U.S. Congress that would punish China for alleged currency manipulation. Because unilateral measures could result in retaliation and escalation, the United States and its partners must display leadership by affirmatively supporting the G20 process. Both China and the United States recognize that it is in their own interest to address imbalances, so an international understanding about benchmarks of progress should not be impossible.

Unfortunately, G20 leaders made only limited progress on these issues due to heightened tension over the eurozone and their own economic concerns.

Bolster IMF crisis-response capacity

Bolster IMF in fighting liquidity crises

The United States should support France’s proposal [PDF] to bolster the IMF’s role in helping countries respond to liquidity crises. Stronger IMF responses to liquidity crises would decrease the motivation for vulnerable countries to stockpile excessive reserves as a precaution in case of a sudden capital outflow. An increasing number of emerging economies are practicing precautionary reserve accumulation—which contributes to macroeconomic imbalances and mispricing of financial risks. As the U.S. dollar is the currency of stockpiled reserves, widespread reserve accumulation drives up the value of the dollar, widening the U.S. current-account deficit. A larger IMF, and one that stood ready to lend rapidly and without excessive conditions, would reduce the incentive to unilaterally accumulate cash reserves. In effect, collective insurance would displace individual insurance.

IMF governance reform

Implement IMF governance reform

Leaders at the 2010 G20 Seoul summit agreed to increase the voting shares of emerging economies at the International Monetary Fund (IMF) by 6 percent, and give more seats to developing countries on the IMF Executive Board. However, these reforms missed the deadline for actual implementation, which was slated for October 2012. An additional challenge continues to be negotiations within Europe to decide which European nations will give up seats on the executive board to allow for emerging economies. The United States needs to continue to pressure its partners in the G20—especially those European countries hesitant to acquiesce—toward implementing these and future reforms. A timely increase in the voting shares of emerging economies will reinforce the sense of ownership that these countries feel toward the IMF. That, in turn, should encourage them to have faith in the IMF’s ability to provide liquidity in a crisis, and should dampen the temptation to unilateral reserve accumulation.

Aid European recovery

Provide assistance to support the European recovery

Despite positive developments toward the end of 2012 alongside the eurozone’s recently negotiated banking union, Europe’s economy remains deeply troubled. Those countries that embarked upon fiscal austerity face low growth rates and grim forecasts. Further, any movement toward fiscal union has been postponed until the summer of 2013 while the European Union has been dealt the blow of a potential British withdrawal amid its fraught budget negotiations. With France’s new Hollande government looking inwards (and asking for a loosening of the EU’s foundational Stability and Growth Pact) and Germany’s leadership no longer a driving force toward consensus due to upcoming elections, there is a tangible leadership vacuum. This was clear during the unfolding banking crisis in Cyprus that has huge ramifications for European investors but that has received a lackluster response from the EU and International Monetary Fund, who failed to craft a financial rescue package that would not affect depositors and launch damaging capital controls on Cypriot banks. While the worst may well have passed, the European economy remains an anchor in the international economy and remains in need of fiscal stimulus and a nudge toward pro-growth strategies.

Bolster regulations

Improve regulatory standards to mitigate financial risks

Experts and policymakers have placed much of the blame for the financial crisis on weak regulatory standards and inadequate supervision of sophisticated financial activities. Although progress has been made, particularly through the creation of the Financial Stability Oversight Council in the United States and the European Systemic Risk Board in Europe, the complexity and integrated nature of modern finance continues to pose unprecedented challenges. Responding to the crisis, the Financial Stability Board (FSB), formerly the Financial Stability Forum, has provided [PDF] a set of proposals to "restore confidence in the soundness of markets and institutions." Though the 2011 G20 Cannes Summit endowed the FSB with a "legal personality," its recommendations remain advisory, and have no legally binding enforcement mechanism.

Long-term proposals

 Beyond the aforementioned near-term steps, the United States should consider another set of important proposals. These recommendations reflect the views of Stewart M. Patrick, director of the program on international institutions and global governance.

Implement Basel III regulations

The recently released Basel III regulations require banks to hold higher levels of tier-one capital and develop countercyclical buffers to cushion against future financial turbulence. Implementation of the reforms requires national supervision and the willingness of individual financial institutions to adhere to the new standards. The established timeframe for banks to meet requirements, on some measures lasting until 2019, means that there will be plenty of opportunities for global progress on Basel III to slow or falter. The IMF has recently criticized the European Commission’s efforts to implement Basel III regulations as “too weak” and “a disappointment.” In addition, the approaches to national enforcement may be altered by local political and economic concerns, leading to an inconsistent application between countries over that period. To some extent, differences in implementation may be justified. But it is vital that legitimate differences in implementation of capital and regulatory standards do not open the way for a regulatory race to the bottom.

Finance the developing world

The economic recession that followed the global financial crisis had a serious effect on developing countries. Export demand collapsed, commodity prices fell, and the flow of both remittances and private capital shrank. The World Bank estimates that in the first year of the crisis alone, 130 to 155 million people fell into extreme poverty. The period 2009-2011 saw a sharp rebound for emerging economies, especially commodity exporters that took advantage of resurgent prices and red-hot demand in China. But the extremes of the recent cycle demonstrate the value of public-sector development banks that can lend in a countercyclical fashion. Thus, in addition to commitments to the IMF, the United States and its industrialized partners should continue its commitment to multilateral financing for development banks and encourage private sector investment flows.

Core Agreements and Arrangements



For more information, including membership; mandate; gaps and weaknesses; implementation, compliance and enforcement; and U.S. policy stance, download the full report. 

Bretton Woods Agreement (including IMF Articles of Agreement) (1944)

Promotes global economic growth and financial stability, initially through a global fixed but adjustable exchange rate system. Created IMF to monitor the exchange-rate regime and the World Bank to provide long-term development financing.

IMF - General Arrangements to Borrow (GAB) (1962)

A stand-by borrowing arrangement that provides back-up credit lines to help IMF respond to financial crises. The arrangement enables access to SDR 17 billion (about $26 billion). Superseded by the 2011 New Arrangements to Borrow, though GAB remains in force and can be employed in special circumstances.

OECD Guidelines for Multinational Enterprises (est. 1976) (rev. 2011)

Set standards for corporate governance. Part of OECD Declaration on International Investment and Multinational Enterprises.

Plaza Accord (1985)

Encouraged an orderly depreciation of U.S. dollar in relation to Japanese yen and German deutsche mark to reduce U.S. current account deficit. Signed on September 22, 1985, at the Plaza Hotel in New York City by five nations—France, West Germany, Japan, the United States, and the United Kingdom.

Louvre Accord (1987)

Signaled G6 belief the dollar depreciation had gone far enough, and sought to limit further depreciation by intervening in currency markets.

Basel Accord (Basel I) (1992)

Defined consistent safety and soundness standards for banks regulated by different countries, primarily through a common standard requiring that banks hold a minimum amount of capital.

Treaty of the European Union (Maastricht Treaty) (1993)

Called for a common European currency and a European central bank by January 1999. Specified a macroeconomic convergence criterion that countries must satisfy to access the euro area. New EU member must join the currency union.

OECD Multilateral Agreement on Investment (MAI) (Proposed 1995, never entered into force)

Promoted liberalization of investment regimes, with effective dispute settlement procedures.

Stability and Growth Pact (est. 1997) (rev. 2005)

Intended to ensure that member states maintain budgetary discipline after introduction of single currency.

IMF - New Arrangements to Borrow (NAB) (1998)

A stand-by borrowing arrangement that increases credit lines established under the GAB. In times of financial contraction when the IMF needs to supplement its resources to provide more capital to nations, NAB activation can dispense up to 370 billion in special drawing rights (about $565 billion). Expanded the 1962 General Arrangements to Borrow (GAB) by incorporating funds from emerging economies. Initiated by the April 25, 2009 communiqué.

Chiang Mai Initiative Multilateralisation (CMIM) (2010) (formerly the Chiang Mai Initiative (CMI) (2000))

Evolved from the Chiang Mai Initiative (CMI).Combined complex arrangement of bilateral swap arrangements into a "single, uniform facility" to address shortfalls in liquidity. Promotes regional cooperation in four principal areas: monitoring capital flows, regional surveillance, swap networks, and training personnel. Created an independent regional research office designed to monitor the regional economies.

Basel II Capital Accords (2008)

Created common capital standards for internationally active banks while avoiding some of the obvious distortions introduced by the initial framework. Has three pillars: minimum capital standards, supervisory review, and market discipline through public disclosure.

Basel III banking regulations (2010)

Increase the tier-one capital requirements to 7 percent from the previous 2 percent, and requires banks to hold a 2.5 percent "counter-cyclical" buffer during periods of economic prosperity to guard against sharp and unexpected downward trends.

European Financial Stability Facility (EFSF) (2010)

Preserved financial stability in Europe by providing financial aid to euro area member states by means of loans, bonds, and other forms of debt assistance. The EFSF is permitted to lend up to €440 billion.

Euro-Plus Pact (2011) (initially called the Competitiveness Pact and later called A Pact for Europe)

Supports the creation of policies aimed at increasing competitiveness, fostering employment, contributing further to the sustainability of public finances, reinforcing financial stability, and reforming tax code.

Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (2012)

The treaty, also known as the European Fiscal Compact, requires ratifying member states to enact laws requiring national budgets to be balanced, or has a deficit less than 0.5 percent of GDP and debt can not be more than 60 percent of GDP. A state in violation of the debt or deficit limits can be fined by up to 1 percent of GDP.

European Stability Mechanism (ESM) (2012)

Designed to be a permanent successor to the European Financial Stability Facility. Will be used to preserve financial stability in Europe and a guarantor of the euro by providing emergency aid to eurozone members who are in need. The ESM will have a lending capacity of €700 billion.

The G20 Mutual Assessment Process (MAP) (2009)

Ensures that collective policy efforts are made to benefit all members of the G20. Identifies objectives for the global economy, creates policies needed to reach these objectives, and assesses progress made towards these goals.

Core Agreements And Arrangements

For more information, including membership; mandate; gaps and weaknesses; implementation, compliance and enforcement; and U.S. policy stance, download the full report. 




For more information, including membership; mandate; gaps and weaknesses; implementation, compliance and enforcement; and U.S. policy stance, download the full report. 

Bank for International Settlements (BIS) (1930)

Venue for regular consultations among central banks. Researches and reports on economic and monetary policy, global banking, securities, foreign exchange, and derivatives markets; also collects data on cross-border banking. Houses the Basel Committee on Banking Supervision, but both are independent of one another.

World Bank (1944)

Promotes economic development in the world’s poorer countries through advice, long-term lending, and concessional grants. Three main branches: the International Bank for Reconstruction and Development (IBRD), the International Development Agency (IDA), and the International Finance Corporation (IFC).

International Monetary Fund (1944)

Increased lending capacity within New Arrangement to Borrow. Promotes international monetary cooperation, exchange rate stability, and temporary financial assistance facing balance-of-payments problems. Provides emergency loans—both conditional and unconditional—to governments facing financial crises. Monitors members’ macroeconomic and financial sector policies as well world economic and market developments.

United Nations Economic and Social Council (ECOSOC) (1945)

Forum for discussing international economic and social issues, and for providing policy recommendations.

Paris Club (1956)

Provides an informal forum at which creditor governments meet to reschedule payment schedules and in some cases reduce the debt of to debtor countries. An International Monetary Fund program is a prerequisite for rescheduling.

Inter-American Development Bank (IDB) (1959)

To foster development and economic growth in Latin America. The first regional development organization, founded in response to Latin American complaints that the World Bank was overlooking lending in the social and agricultural sectors.

Bank for International Settlements Committee on the Global Financial System (1960) (rev. 1971, 1999)

Monitors global financial conditions, analyzes functioning of financial markets over the longer term, makes policy recommendations to improve market functioning and stability.

Organization for Economic Cooperation and Development (OECD) (1961)

A forum for discussing economic policy and a think-tank that monitors, analyzes, and forecasts global economic trends. Publishes reports on the economic performance of individual countries. Promotes best practices for economic (and, increasingly, social and environmental) governance, including anti-money laundering, corporate governance, fiscal policy, and so on.

Group of Ten (G10) (1962)

Provides a forum for consultation and cooperation among members. The ministers of finance and central bank governors usually meet only briefly in connection with International Monetary Fund and World Bank annual meetings. The central bank governors often meet separately from the finance ministers.

African Development Bank (AfDB) (1964)

Reduce poverty by mobilizing resources for Africa’s economic and social development.

Asian Development Bank (ADB) (1964)

Reduce poverty and raise standards of living for developing-country members.

International Accounting Standards Board (IASB) (1973)

An independent standard-setting board that works to develop a single set of international financial reporting standards.

Basel Committee on Banking Supervision (1974)

Forum for regular information-sharing and cooperation on banking supervision. Since the 1980s, has set guidelines and regulatory standards for the banking sector. Outreach to regulators of non-bank financial institutions through the Joint Forum and the Coordination Group (Basel Committee, ISOCO, IAS, and Joint Forum officials), which meets on supervisory standards. Has produced the Basel Accords.

International Federation of Accountants (IFAC) (1977)

Through independent boards, works to create international standards on auditing practices, ethics, public sector accounting, and accounting education. Developed IFACnet, a one-stop multilingual tool wth information and resources for accountants.

International Organization of Securities Commissions (IOSCO) (1983)

Brings together regulators of world’s principal stock exchanges and promotes common accounting standards for securities.

Financial Action Task Force on Money Laundering (FATF) (1989)

Promotes legislative and regulatory reforms to counter money laundering and terrorism financing. Activities led to establishment in several countries of financial intelligence units (FIUs) to protect financial institutions from criminal abuse.

Bank for International Settlements Committee on Payments and Settlements Systems (CPSS) (1990)

Monitors and analyzes developments in domestic payment, settlement, and clearing systems as well as in cross-border and multicurrency systems. Has developed relationships with many non-CPSS central banks to help strengthen payment systems globally.

European Bank for Reconstruction and Development (EBRD) (1991)

Fosters development and economic growth in eastern Europe. Has been more involved in private-sector lending than other regional multilateral banks and has regularly sought partners in financial activity.

International Association of Insurance Supervisors (IAIS) (1994)

Encourages supervision and regulation of insurance companies, sets global insurance supervisory standards, helps improve cross-sector financial supervision, and assists in implementing and monitoring insurance supervisory standards. Also provides training and technical support for insurance supervision.

European Central Bank (ECB) (1998)

Defines euro area’s monetary policy, prints the euro, and conducts foreign exchange operations.

Group of Eight (G8) (1998)

Provides a forum for consultation and cooperation among the G8 countries. The heads of state or government meet annually.

Financial Stability Board (FSB) (rev. 2009)

Originally the Financial Stability Forum. Created to improve the flow of information among finance ministries, central banks, and supervisors from the Group of Seven (G7) countries and major financial centers in the emerging world. Membership recently expanded to all G20 members and five nonmembers. Expanded mandate to include collaborating with International Monetary Fund (IMF) for early-warning assessment and identifying action needed to address vulnerabilities.

Group of Twenty (G20)(1999)

Provides a forum for consultation and cooperation among of the large industrialized countries and major emerging economies. Since 1999, central bank governors and finance ministers have typically met once a year. In the fall of 2008 and again in the spring of 2009, leaders held a summit on the financial crisis.



IMF Voting Share: 5.81 percent

Gross Domestic Product: $3,366 Bn

Current Account Balance: $183 Bn

Germany joined the International Monetary Fund (IMF) in 1952 and has advocated for a reform of the IMF's institutional architecture to reflect increased representation of developing countries. It has also supported a French proposal to decrease representation by the European Union by organizing an EU constituency group that would more accurately reflect global economic weightings. Germany has been active within the Group of Eight (G8) in dealing with global economic policy matters, namely by initiating the Heiligendamm Process, which brought Brazil, China, India, Mexico, and South Africa together with the G8 countries to discuss global economic challenges. The country's gross domestic product is expected to grow by 0.6 percent in 2013.


IMF Voting Share: 0.87 percent

Gross Domestic Product: $474 Bn

Current Account Balance: $1.3 Bn

Argentina joined the International Monetary Fund (IMF) in 1956 and currently does not have any outstanding loans from it. Argentina's relationship with the IMF has been overshadowed by suspicion and distrust stemming from experiences during the 2001 Argentine financial crisis, when the country defaulted on its debt and was forced to abandon the currency board's peg to the U.S. dollar. Today, Argentina is one of three Latin American countries represented in the Group of Twenty (G20). Although its economy is one of the world's top thirty, Argentina has drawn criticism for its place in the G20 given its continued bouts of economic instability and unwillingness to adopt financial reforms. The country's gross domestic product is expected to grow by 3.1 percent in 2013.


IMF Voting Share: 1.31 percent

Gross Domestic Product: $1,542 Bn

Current Account Balance: -$62.7 Bn

Australia joined the International Monetary Fund (IMF) in 1947 and relied on the IMF for assistance several times in the 1960s and 1970s. Since the G20 was established in 1999, Australia has been optimistic about discussing and providing sustainable solutions to global economic challenges within the context of this new forum. A long-standing advocate for IMF quota and voice reform, Australia has called on the IMF to modernize its governance structure and increase the voting share of the most underrepresented market economies. Australia participated in the IMF's Financial Sector Assessment  [PDF] program and concluded its first assessment in 2006, which confirmed that its own financial sector was compliant with international banking and regulatory standards. The country's gross domestic product is expected to grow by 3 percent in 2013.


IMF Voting Share: 1.72 percent

Gross Domestic Product: $2,425 Bn

Current Account Balance: -$62 Bn

An emerging economic powerhouse, Brazil has increasingly elevated its role in international financial institutions. A member of the International Monetary Fund (IMF) since 1946, Brazil has shifted from being a major recipient of IMF loans to being a net contributor in just five years. In 2002, the IMF issued one of its largest bailout packages, some $30 billion, to mitigate Brazil's financial crisis and restore consumer confidence. By January 2010, Brazil signed an agreement to purchase up to $10 billion in notes to the IMF. President Luiz Inacia Lula da Silva has been a staunch advocate for the Group of Twenty (G20), expressing the need to integrate developing countries as part of the solution to the global financial crisis. The country's gross domestic product is expected to grow by 3.5 percent in 2013.


IMF Voting Share: 2.56 percent

Gross Domestic Product: $1,770 Bn

Current Account Balance: -$59.9 Bn

Canada is a founding member of the Bretton Woods institutions, and after briefly abandoning the policy of prevailing fixed-exchange-rates in the 1950s, it has since maintained a healthy relationship with both the International Monetary Fund (IMF) and the World Bank. Canada was the first country to participate in the joint IMF-World Bank Financial Sector Assessment Program (FSAP), with an update conducted in 2008. Canada has also been a strong supporter of the Group of Twenty (G20) forum and hosted both the Group of Eight (G8) and G20 Summits in June 2010. The country's gross domestic product is expected to grow by 1.8 percent in 2013.


IMF Voting Share: 3.81 percent

Gross Domestic Product: $8,250 Bn

Current Account Balance: $190.7 Bn

China—which joined the International Monetary Fund (IMF) in 1945—has no outstanding IMF loans or purchases, but its relationship with the IMF is undergoing a trying period. China, along with many experts, contended that the IMF's quota and voting shares needed to be recalibrated to account for China's share of the global economy. In 2008, China benefitted from an ad hoc quota increase, but experts still believe that the country is underweighted in real terms. Questions remain regarding China's relationship with the World Bank and the Asian Development Bank as well, although the country has recently benefitted from a share increase of 1.65 percent at the World Bank—making it the third largest shareholder behind only the United States and Japan. China has been a strong advocate for the Group of Twenty (G20), utilizing the forum to campaign for a new global reserve currency and reforms of international financial institutions. The country's gross domestic product is expected to grow by 8.2 percent in 2013.


IMF Voting Share: 4.29 percent

Gross Domestic Product: $2,580 Bn

Current Account Balance: -$44.5 Bn

France is a founding member of the Bretton Woods institutions and, in 1947 became the first to draw on the International Monetary Fund(IMF) for assistance. Today, France is the fourth largest contributor and a strong advocate for the institution, which is headed by a French national, Christine Lagarde, and formerly by  Dominique Strauss-Kahn. France has been a major architect of numerous international forums and arrangements, notably the Paris Club, chaired by the French treasury, which convenes major industrialized nations to determine financial solutions to the challenges faced by developing countries, including debt restructuring. France, along with Germany, has utilized the Group of Twenty (G20) to call for strengthening financial regulations and reforming the architecture of international financial institutions. The European nation has also indicated its interest in including the African Union more prominently at the G20 summits. The country's gross domestic product is expected to grow by 0.3 percent in 2013.


IMF Voting Share: 2.34 percent

Gross Domestic Product: $1,946 Bn

Current Account Balance: -$74.5 Bn

India joined the International Monetary Fund (IMF) as one of the founding members in 1945. IMF loans to India were critical in helping the country overcome balance-of-payment problems in the early 1980s and the early 1990s. Since 2003, India has made the transition from a debtor nation to a creditor nation based on its robust macroeconomic indicators. Today, India has no outstanding loans or purchases from the IMF. India has reiterated calls [PDF] for "re-fashioning the IMF so that it becomes more relevant, useful and effective in the future." It has also voiced strong support for the Group of Twenty (G20) and, like many other rising powers, is a member of the Financial Stability Board. The country's gross domestic product is expected to grow by 5.9 percent in 2013.


IMF Voting Share: 0.85 percent

Gross Domestic Product: $894 Bn

Current Account Balance: -$18.8 Bn

Indonesia joined the International Monetary Fund (IMF) in 1967 and currently has no outstanding loans. It had relied on IMF funds and IMF-recommended policies to address the consequences of the Asian Financial Crisis [PDF]. These policies were largely blamed for depreciating Indonesia's local currency and mounting inflationary pressures in the country, which contributed to the resignation of President General Suharto. Indonesia has recently become an advocate for emerging and Southeast Asian economies in international fora like the Group of Twenty (G20), pushing for developing countries to set up a donor fund on par with the IMF. The country's gross domestic product is expected to grow by 6.1 percent in 2013.


IMF Voting Share: 3.16 percent

Gross Domestic Product: $1,980 Bn

Current Account Balance: -$29.2 Bn

Italy joined the International Monetary Fund (IMF) in 1947. In 2006, it completed its first Financial Sector Assessment Program [PDF] in coordination with the World Bank and the IMF. Italy has been advocating for a new, modernized IMF governance structure that shares responsibilities with emerging powers. Italy's former central bank governor, Mario Draghi, was at the helm of the Financial Stability Board and has commended its relaunch with expanded membership and a "broadened mandate to promote financial stability." He is now Europe's central bank governor. The country's gross domestic product is expected to contract by 1 percent in 2013.


IMF Voting Share: 6.23 percent

Gross Domestic Product: $5,984 Bn

Current Account Balance: $95.4 Bn

A member of the Bretton Woods institutions since 1952, Japan is the second largest shareholder of the International Monetary Fund (IMF). Nonetheless, Japan remains one of the dozen countries grossly underrepresented in terms of quota shares at the IMF. Japan, alongside its regional partners, has been deeply engaged in forming Asia-specific solutions to financial crises with initiatives such as the Chiang Mai Bilateral Swap agreements and even proposing the creation of an Asian Monetary Fund. Japan has repeatedly committed to providing the IMF with an additional $100 billion to bolster the IMF's lendable resources during the global financial crisis. The country's gross domestic product is expected to grow by 1.2 percent in 2013.


IMF Voting Share: 1.47 percent

Gross Domestic Product: $1,162 Bn

Current Account Balance: -$11 Bn

Mexico, which joined the International Monetary Fund (IMF) in 1945, is one of the few countries to have benefitted from the ad hoc quota reforms in 2008. Mexico is one of three Latin American countries represented in the Group of Twenty (G20), boasting the world's twelfth largest economy. Mexico has no outstanding loans with the IMF, but did have access to a preapproved "precautionary" credit line of $47 billion, which expired in April 2010. Unlike previous IMF lendings, the new Flexible Credit Line does not come with conditions attached and was created to target countries such as Mexico that have been faring well economically, but may suffer from transient financing difficulties. The global economic crisis, combined with the swine flu outbreak, has caused a severe decline in Mexico's economic activity, causing a contraction of nearly 7 percent in 2009. The country's gross domestic product is expected to grow by 3.5 percent in 2013.


IMF Voting Share: 2.39 percent

Gross Domestic Product: $1,953 Bn

Current Account Balance: $102 Bn

Since becoming a member in 1992, Russia has relied on the International Monetary Fund (IMF) several times to counter balance-of-payment issues, at times making it the largest borrower on account. Despite being in the economic doldrums, Russia has not sought external assistance from the IMF. In fact, Russia has signaled an interest to purchase up to $10 million bonds from the IMF to help countries—namely the Commonwealth of Independent States (CIS)—counter the negative repercussions of the global financial crisis. While Russia's economy is largely dependent on its export of energy resources, it is seeking greater cooperation with Europe to foster stability. After contracting in 2009 and showing signs of modest revival in 2010, the country's gross domestic product is expected to continue to grow by 3.7 percent in 2013.

Saudi Arabia

IMF Voting Share: 2.80 percent

Gross Domestic Product: $657 Bn

Current Account Balance: $171 Bn

Saudi Arabia joined the International Monetary Fund (IMF) in 1957. It contributes to the IMF through the New Arrangement to Borrow and provides an additional 1.5 billion in Special Drawing Rights to the General Arrangement to Borrow under an associated agreement. Until the beginning of 2010, Saudi Arabia saw little growth during the economic crisis. However, the country's gross domestic product is expected to grow by 4 percent in 2013.

South Africa

IMF Voting Share: 0.77 percent

Gross Domestic Product: $391 Bn

Current Account Balance: -$21.4 Bn

South Africa joined the International Monetary Fund (IMF) in 1945, was expelled in 1983 for its apartheid policies, and reassumed full membership in 1996. It currently has no outstanding loans from the IMF. During the 1970s and the early 1980s, South Africa relied on the IMF several times to assist with balance-of-payment problems stemming from weak gold prices. A strong advocate for structural reforms, South Africa's finance minister, Trevor Manual, is the chair of the Committee on IMF Governance Reform, which has produced a report [PDF] calling for measures to accelerate quota and voice reforms to enhance the IMF's legitimacy and effectiveness. At the 2010 Toronto Group of Twenty (G20) summit, South African President Jacob Zuma called for accelerated efforts on voice and quota reforms. The country's gross domestic product is expected to grow by 2.8 percent in 2013.

South Korea

IMF Voting Share: 1.37 percent

Gross Domestic Product: $1,151 Bn

Current Account Balance: $22 Bn

South Korea joined the International Monetary Fund (IMF) in 1955 and has no outstanding IMF loans or purchases. South Korea benefited from the 2008 quota reforms, which increased voting shares by 5.4 percentage points to underrepresented countries. Considered one of the strongest of the emerging economies, South Korea will be the first country outside the Group of Eight (G8) to hold the presidency of the Group of Twenty (G20). The G20 summit, held in Seoul took place in November 2010 and added development concerns to the G20 portfolio. The country's gross domestic product is expected to grow by 2.9 percent in 2013.


IMF Voting Share: 0.61 percent

Gross Domestic Product: $783 Bn

Current Account Balance: -$59 Bn

Turkey joined the International Monetary Fund (IMF) in 1947 and currently has an outstanding loan for 4,462 million in Special Drawing Rights—nearly 375 percent of the country's quota subscription. An early member of the World Bank, Turkey has tapped into both institutions for help with reconstruction and stabilization numerous times, including during its economic crisis of 2000-2001. In 2008, the country completed its most recent "stand-by agreement" with the IMF, gaining relative financial autonomy from the institution. Turkey was one of the few countries to have benefitted from the ad hoc quota reforms in 2008, which increased voting shares by 5.4 percentage points to underrepresented countries. After contracting in 2009 and rising in 2010, the country's gross domestic product is expected to continue to grow by 3.9 percent in 2013.

United Kingdom

IMF Voting Share: 4.29 percent

Gross Domestic Product: $2,433 Bn

Current Account Balance: -$80.6 Bn

The United Kingdom (UK) is a founding member of the Bretton Woods institutions and currently the fourth largest shareholder in International Monetary Fund (IMF), with 4.3 percent of the votes. In an effort to stave off a looming financial crisis, the United Kingdom reluctantly accepted an IMF loan [PDF] in 1976 to address its current account deficit. The UK has supported reforms of the international financial institutions to reflect the changing economic balance and has advocated bolstering the IMF's early warning capabilities to diagnose financial vulnerabilities. The United Kingdom hosted the second G20 meeting, in 2009 in London. Held during the global financial crisis, the agenda was headlined by financial recovery and stability measures. The British economy contracted in 2009 and remained relatively stagnant in 2010. The country's gross domestic product is expected to grow by 1 percent in 2013.

United States

IMF Voting Share: 16.75 percent

Gross Domestic Product: $15,653 Bn

Current Account Balance: -$486.5 Bn

The United States is a founding member of the Bretton Woods institutions and the only member with veto power in the International Monetary Fund (IMF) because of the shares allocated to it—16.75 percent. The United States has supported structural reforms of quota and voice representation (possibly because the United States is currently underweighted by gross domestic product (GDP)). In November 2008, President George W. Bush hosted the first summit of the Group of Twenty (G20), which has since been elevated to the world's premier economic forum. After contracting during the global economic crisis, the U.S. gross domestic product is expected to increase by 2 percent in 2013.



Jagdish N. Bhagwati, Senior Fellow for International Economics

Timothy F. Geithner, Distinguished Fellow

Robert Kahn, Steven A. Tananbaum Senior Fellow for International Economics

Sebastian Mallaby, Director of the Maurice R. Greenberg Center for Geoeconomic Studies and Paul A. Volcker Senior Fellow for International Economics

Peter R. Orszag, Adjunct Senior Fellow

Matthew J. Slaughter, Adjunct Senior Fellow for Business and Globalization

A. Michael Spence, Distinguished Visiting Fellow

Benn Steil, Senior Fellow and Director of International Economics


Steil, Ben. The Battle for Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, Princeton University Press, 2013

Council on Foreign Relations: Francis E. Warnock, "Doubts About Capital Controls"

International Finance: Adam Posen, "The Soft Tyranny of Inflation Expectations"

New York Times Op-ed: Timothy Geithner, "Welcome to the Recovery"

Financial Times: Sebastian Mallaby, "Capitalism and its Divided Critics"

Financial Times: Chris Giles, "World Economy: Vulnerable to Vertigo"

Washington Post: Robert B. Zoellick, Justin Yifu Lin, "Recovery Rides on the ’G-2’"

June 2010-G20 Toronto Summit Declaration

World Economic Outlook 2011

Global Financial Stability Report 2011

Zedillo Commission Report: Repowering the World Bank for the 21st Century

Analysis Brief: "The Struggling Economic Recovery"

Council on Foreign Relations: Squam Lake Papers

Council Special Report: Lessons of the Financial Crisis

Council Special Report: Global Imbalances and the Financial Crisis


Sebastian Mallaby, More Money than God (Penguin Press, 2010).

Liaquat Ahamed, Lords of Finance: The Bankers Who Broke the World (Penguin Press, 2009).

Peter L Bernstein, Capital Ideas: The Improbable Origins of Modern Wall Street (Simon and Schuster, 1992).

Benjamin J. Cohen, The Geography of Money (Cornell University Press, 1998).

Barry Eichengreen, Globalizing Capital: A History of the International Monetary System (Princeton University Press, 1996).

Barry Eichengreen, Toward a New International Financial Architecture: A Practical Post-Asia Agenda (Institute for International Economics, 1999).

John Kenneth Galbraith, A Short History of Financial Euphoria (Penguin Group, 1993).

Charles P. Kindleberger and Robert Z. Aliber, Manias, Panics and Crashes: A History of Financial Crises (John Wiley & Sons, 1978).

Paul Krugman, The Return of Depression Economics (W.W. Norton , 1999).

Nouriel Roubini and Brad Setser, Bailouts or Bail-ins?: Responding to Financial Crises in Emerging Markets (Institute for International Economics, 2004).

Paul A. Volcker, Changing Fortunes (Random House Value Publishing, 1997).

Martin Wolf, Fixing Global Finance ( John Hopkins University Press, 2008).


Institute of International Finance

Peterson Institute for International Economics

The Brookings Institution

Organization for Economic Cooperation and Development

Center for Global Development

Carnegie Endowment for International Peace