Financial Stability Board (FSB)

The Financial Stability Board (FSB) is an international body responsible for monitoring and making recommendations to promote global financial stability. Established in the aftermath of the 2008 global financial crisis, the FSB plays a crucial role in strengthening regulation, supervision, and resilience of the global financial system. Its work has significant implications for banking and finance worldwide, including for the Indian economy, given India’s integration with global financial markets and institutions.

Background and Establishment

The Financial Stability Board was established in 2009 as the successor to the Financial Stability Forum, following a decision by the G20 leaders. The global financial crisis exposed severe weaknesses in financial regulation, risk management, and cross-border supervisory coordination. The FSB was created to address these gaps and ensure that vulnerabilities in one part of the global financial system do not escalate into systemic crises.
The FSB operates as a coordinating body rather than a supranational regulator, relying on cooperation among national authorities and international standard-setting institutions.

Objectives and Mandate

The primary objective of the FSB is to promote international financial stability by identifying systemic risks and coordinating policy responses. Its mandate includes:

• Assessing vulnerabilities affecting the global financial system.
• Developing and promoting regulatory, supervisory, and policy reforms.
• Coordinating implementation of international financial standards.
• Enhancing cross-border supervisory cooperation.
• Monitoring the implementation of agreed reforms by member jurisdictions.

Through these functions, the FSB acts as a central pillar of global financial governance.

Membership and Institutional Structure

The FSB’s membership includes central banks, finance ministries, and financial regulatory authorities from major economies, as well as international organisations and standard-setting bodies. India is represented through its financial authorities, reflecting its status as a major emerging market economy.
The FSB works closely with institutions such as the International Monetary Fund and global standard setters for banking, securities, and insurance, ensuring coherence in international financial regulation.

Key Areas of Work

The FSB focuses on several critical areas of financial stability. One major area is the regulation of systemically important financial institutions, whose failure could pose risks to the global system. The FSB develops frameworks for identifying such institutions and strengthening their loss-absorbing capacity.
Another important area is shadow banking, referring to non-bank financial intermediation that can generate systemic risk. The FSB monitors and proposes measures to address vulnerabilities in this sector.
The FSB also addresses risks related to derivatives markets, financial market infrastructure, cyber resilience, and climate-related financial risks.

Role in Banking and Global Finance

For the banking sector, the FSB’s recommendations influence capital adequacy, liquidity standards, resolution planning, and supervisory practices. Although the FSB does not enforce rules directly, its standards are implemented through national regulators, shaping the global operating environment for banks and financial institutions.
Harmonised global standards reduce regulatory arbitrage, enhance transparency, and strengthen confidence in cross-border banking and financial markets.

Relevance to the Indian Banking System

India’s banking and financial system is influenced by global standards promoted by the FSB. The Reserve Bank of India aligns domestic regulations with international best practices to ensure resilience and credibility.
Participation in the FSB enables Indian authorities to contribute to global policy discussions and to anticipate regulatory trends that may affect domestic banks, non-banking financial companies, and financial markets.

Impact on the Indian Economy

At the macroeconomic level, FSB-led reforms support financial stability, which is essential for sustained economic growth. A stable global financial environment reduces the likelihood of sudden capital flow reversals and external shocks that can disrupt emerging economies like India.
By strengthening global financial architecture, the FSB indirectly supports investor confidence in India and facilitates smoother integration with international capital markets.

Coordination with International Institutions

The FSB works in close coordination with the International Monetary Fund, particularly in surveillance and early warning exercises. This collaboration enhances the ability to identify emerging global risks and supports timely policy responses.
Such coordination is vital for countries like India that are affected by global monetary conditions, capital flows, and financial market sentiment.

Challenges and Criticism

Despite its importance, the FSB faces challenges related to implementation and enforcement. As its recommendations rely on voluntary adoption by member countries, differences in domestic priorities and capacities can affect consistency.
There are also concerns about balancing global standards with national development objectives, especially for emerging economies with distinct financial structures.