Designing the Financial Stability Board. A Theoretical Investigation of Mandate, Discretion, and Membership

This paper investigates the factors that help explain certain aspects of the new institutional design of the Financial Stability Board (FSB), namely its mandate, discretion, and membership. In doing so, the paper tests the hypotheses suggested by principal-agent (PA) theory, according to which institutional characteristics are consciously intended by state-principals with the aim to overcome cooperation problems. Empirical evidence lends support to PA hypotheses according to which the functions assigned to the FSB help minimize the transaction costs related to the specific area of financial cooperation. Nevertheless, PA hypotheses have difficulty explaining the degree of discretion and the size of the FSB membership, thereby calling for exploring alternative theoretical explanations.