Law in the Global Order: The IMF and Financial Regulation

Over the last two decades, the framework for international financial regulation has emerged as a primary example of how contemporary international law works in the absence of familiar trappings of law. As the literature on the topic emphasizes, traditional definitions of international law assume formal obligations and international institutions created by state-level agreements. According to this literature, one thing is certain: there is no traditional, state-level, treaty-based component of international financial regulation.

This conventional account misapprehends the scope of international monetary law and the role of the International Monetary Fund, a treaty-based international institution. It miscasts the Fund as only a monitor of its members’ compliance with agreements forged elsewhere. In fact, although the Fund is largely known for its conditional lending function, it is a regulatory institution charged with enforcing formal obligations of its nearly universal membership, including the members’ obligations with regard to their financial policies. The Fund’s primary regulatory role is to conduct bilateral surveillance of its members’ performance of these obligations and multilateral surveillance to ‘oversee the international monetary system in order to ensure its effective operation’ (Art IV Section 3a of the IMF Articles of Agreement). –Surveillance is thus a mode of enforcement, albeit one that relies primarily on persuasion and not on coercive sanctions. And, since the 1990’s, members’ financial policies have become an increasingly important component of the Fund’s bilateral and multilateral surveillance.

A recent article of mine describes three important post-Crisis developments in the Fund’s financial surveillance: the evolution of the Financial Sector Assessment program, a project the Fund conducts with the World Bank, and its incorporation into Fund surveillance of members with systemically important financial systems; the Fund’s new view on managing capital flows and its expanded efforts to help manage flows on a global level; and the Fund’s efforts to promote financial regulatory reforms in the Eurozone.

By misapprehending its regulatory function, scholars and commentators have underestimated the Fund’s potential impact on its members’ domestic and international financial policies and what that impact may tell us about global governance. Assuming that the Fund has some meaningful impact on its members’ financial policies, this requires a remapping of the Fund’s place within the framework of international financial regulation, and it seriously complicates the account of financial regulation as exclusively the province of regulatory networks and informal coordination and cooperation. An accurate account must at least accommodate a formal international institution performing the distinctly traditional regulatory roles of enforcement and supervision. In the taxonomy of network theory, international financial regulation is a vertical governance network with the Fund, a genuinely supranational institution, performing an enforcement function.

Furthermore, if Fund surveillance has more than trivial impact on international financial regulation, this raises an interesting possibility: that states’ formal commitments and the Fund’s formal responsibilities under its Articles contribute to the design and operation of both domestic and international financial regulation. These formal, treaty-based obligations and responsibilities likely do make such a contribution. Perhaps most significantly, they appear to influence the Fund’s staff and its officials in their performance of ongoing supervisory and regulatory activities. Internal governance at the Fund puts meaningful weight on the formal authority for the Fund’s mandate and its activities, and such attention to formal authority likely gives Fund staff and officials some measure of confidence in their conduct of surveillance with members. It is also possible that states’ formal obligations pursuant to the Fund’s Articles affect their engagement with Fund staff and officials in the course of surveillance.

The conventional account of international financial regulation as a paradigmatic example of the regulatory work done by soft law and informal arrangements in global governance may be largely accurate.  However, this account ignores the role of the Fund in helping design and regulate the financial regulatory framework and the formal legal basis for that role. In ignoring this component of international financial regulation, scholars may be missing an important example of the utility of formal international legal arrangements.

Adam Feibelman is an Associate Dean for Faculty Research and Sumter Davis Marks Professor of Law at Tulane Law School.