On its 25th anniversary, the Institute of International Finance is well placed to facilitate a new world order involving the sharing of responsibility for global financial stability between multinational financial services firms and governmental institutions, say Dr Josef Ackermann (left) and Charles H Dallara (right).
Twenty five years ago, Mexico suspended payments on its foreign debt, ushering in almost a decade of crisis. Hundreds of banks had loans outstanding to Latin American sovereign debtors – loans that threatened their very solvency – and they scrambled to arrange negotiating syndicates, gather information and forge key relationships with the International Monetary Fund and the World Bank. This was the setting for the establishment of the Institute of International Finance (IIF), which is now celebrating its 25th anniversary.
For a quarter of a century, the IIF has grown and changed enormously – in line with the dynamic developments seen in the world of international finance, which have led to today’s complex, highly integrated markets in which financial services firms operate on an unprecedented scale.
IIF relevancy
These firms, just like the group of commercial banks that founded the IIF, continue to need high quality and timely country economic analysis, insights into critical cross-border capital flows as well as excellent relationships with leading regulators, government finance officials and international financial organisations. The IIF continues to provide these services, and with more than 365 member institutions from across the world, it has truly become the global association of financial services firms.
A central challenge for the IIF is to maintain its position as an expert in economic and financial analysis in today’s rapidly changing environment while remaining an influential representative of its members vis-à-vis a wide array of important national and international public sector counterparts.
What was only partially evident back in 1982, when Jacques de Larosière, the IMF’s managing director at the time, supported the idea of creating the IIF at a conference of bankers at Ditchley Park, near London, is now very clear: to ensure an efficient functioning of the global financial system, private financial institutions have a key role to play in promoting the soundness, safety, stability and vitality of the system, which in turn is a core requirement for secure and substantial economic growth.
Expanded dialogue
In the 1980s, the focus of the IIF and its members, which were only commercial banks for most of that decade, was concentrated predominantly on the debt crisis. However, as the Basel I capital accord was being contemplated, banking supervisors were already making overtures to the IIF’s leadership for the Institute to forge an expanded dialogue, and Peter Cooke, then a senior official of the Bank of England and chairman of the Basel Committee on Banking Supervision, was among the first to promote this.
In 1989, the ‘Brady Plan’ paved the way for an end to the debt crisis and the start of what was to become a profound review of the IIF’s mission and strategy. The core elements and basic services were in place, but even in the early 1990s it had been obvious that four crucial developments were unfolding:
- Merchant banks, investment banks, insurance firms with banking affiliates and a range of other financial services firms were becoming as involved in global finance as commercial banks.
- The commercial banks of the 1980s were being transformed into global financial conglomerates with investment banking, asset management and in some cases insurance product franchises.
- The lending and investing opportunities in emerging market economies were growing and becoming increasingly attractive
- The national and international regulation of banks was becoming more complex, requiring regulators to have a far greater, in-depth understanding of the institutions’ cross-border activities.
Institutional response
The IIF responded to these developments by broadening its membership, expanding its emerging market economic analysis and its dialogue with leaders of sovereign borrowing countries and international organisations. It did this by contributing directly to the resilience of the global financial architecture through key initiatives, such as the Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets, and by expanding its range of taskforces, working groups and steering committees that interact with supervisory authorities.
The IIF’s experience, for example, from the crises that gripped Mexico, parts of Asia, Brazil, Russia and Argentina and other regions at various times, or from contributing to the work on Basel II and other regulatory initiatives, has had a profound impact on the ways it operates. Another significant factor was the rapid rise in membership from banks in emerging market economies, ranging from China and the Asia-Pacific region, across central and eastern Europe, to the Middle East and north Africa and Latin America.
Pulling together
The IIF’s work has also been influenced by the leaders of major financial firms, who have devoted their energies to the organisation’s board of directors and its many working groups, and by public sector leaders, who have recognised that the fundamental soundness of the global financial system is enhanced by having the leading providers of international finance involved in their work via the IIF.
This highlights the challenge that lies ahead – to take the relationships between the private and public financial sectors to an even higher level. The IIF’s history shows we are well equipped to meet this challenge.
When it comes to banking supervision, one of the most fundamental challenges – now and in the immediate years ahead – relates to building a far more efficient, effective and globally consistent regulatory architecture. This will involve major efforts by the public sector to reconcile a myriad of tensions between national authorities as well as hard work on the part of firms to institute sound risk management practices and to forge a relationship of trust with the regulators, so that reforms in even the most complex financial areas can move ahead, in step with the rapid pace of market developments.
Emerging stability
In securing the stability of emerging market finance at a time when the dominant source of funds to governments is the private financial sector, we need to continue to be inspired by innovative perspectives, such as those of European Central Bank president Jean-Claude Trichet. Some years ago, he recognised that informal dialogue between leaders of private finance, officials from emerging market countries and top international financial officials could result in a voluntary code of conduct that was capable of providing framework approaches to crisis prevention and crisis management that are both market-based and adaptable to the ever-changing world.
This concept was translated into the Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets, which are now well into their second year of implementation. In light of the progress made here, we are all the more convinced that the next 25 years in global finance will see the IIF strengthening its basic economic research and analysis, on behalf of all of its increasingly diverse members, while participating with public sector leaders in the evolution of the global financial system.
What lies ahead could well be a fundamental change to the Bretton Woods System established after the Second World War, with multinational financial services firms sharing responsibility with officials and institutions for guiding the global system and preserving its stability.
Dr Josef Ackermann has served as chairman of the board of directors of the Institute of International Finance (IIF) since 2003. He is chairman of the group executive committee of Deutsche Bank.
Charles H Dallara was appointed IIF managing director in 1993. He had previously served as a managing director at JP Morgan after two decades in public service in the US government, including positions as US executive director to the IMF and assistant secretary for international affairs at the US Treasury.
