INTERNATIONAL MONETARY FUND
THE WORLD BANK
The Financial Sector Assessment Program After Ten Years:
Experience and Reforms for the Next Decade
Approved by José Viñals and Penelope J. Brook
August 28, 2009
Contents Page
Glossary .....................................................................................................................................3
Executive Summary...................................................................................................................4
I. Introduction ............................................................................................................................7
II. The First Ten Years...............................................................................................................9
A. Structure, Organization, Scale, and Cost ..................................................................9
Structure and organization of the program ........................................................9
Country participation .......................................................................................12
Cost of the program .........................................................................................14
B. Scope, Impact, and Dissemination ..........................................................................15
FSAP recommendations and implementation..................................................15
The FSAP and the recent crisis........................................................................17
Publication and dissemination .........................................................................18
C. Standards Assessments and the FSAP ....................................................................19
D. The Views of Country Authorities..........................................................................20
E. The FSAP and Fund Surveillance ...........................................................................22
F. The FSAP and Bank Support to Financial Sector Development.............................23
III. The Next Ten Years...........................................................................................................24
A. Old Challenges, New Demands ..............................................................................24
B. An FSAP for the Next Decade ................................................................................27
Sharper focus, clear delineation of institutional contributions ........................28
Flexibility, responsiveness, systemic focus, and continuity ............................31
Stronger analytical content, candor, transparency, and
regional/thematic perspectives.........................................................................34
Effective Bank-Fund coordination and management of
the joint program..............................................................................................38
C. Integration of the FSAP with Other Bank Financial Sector Work and Fund
Surveillance..................................................................................................................39
D. Resource Implications and Tradeoffs .....................................................................42
2
IV. Issues for Discussion .........................................................................................................45
Tables
1. G20 Participation in the FSAP.............................................................................................13
2. FSAP Costs..........................................................................................................................15
3. Profile of Assessment Missions (Bank and Fund)...............................................................15
4. FSAP Recommendations by Topic......................................................................................16
5. FSAP Recommendations by Sector.....................................................................................16
6. Implementation of FSAP Recommendations by Topic .......................................................17
7. Publication Trends ...............................................................................................................19
8. Financial Standards Completed and Underway...................................................................21
9. Average Number of Standards Assessments Conducted During FSAP Missions...............21
10. Bank Budget Support to Post-FSAP Follow-Up Work, FY04–08 ....................................24
Figures
1. Initial Assessments (by Income and Region).......................................................................13
2. Updates (By Income and Region)........................................................................................14
Boxes
1. Summary of Key Findings of Past Board FSAP Review ......................................................8
2. Role of the Financial Sector Liaison Committee (FSLC)....................................................11
3. The Core Elements of the Stability Assessment..................................................................30
4. Elements of the Development Assessment..........................................................................31
5. The Option for FSAP Modules............................................................................................33
6. Resource Tradeoffs ..............................................................................................................44
Appendixes
I: Country Participation in the FSAP.......................................................................................46
II. The Grid for Classifying FSAP Recommendations ............................................................47
III. Financial Stability Forum Standards..................................................................................49
IV. Financial Risk Assessment Matrix: An Illustration...........................................................50
V. FSLC Principles and Procedures.........................................................................................51
Appendix Tables
11. Basic Classification of Recommendations.........................................................................48
3
GLOSSARY
ABS Asset-Backed Securities
AM Aide-Mémoire
AML/CFT Anti-Money Laundering and Combating the Financing of Terrorism
BCP Basel Core Principles for Effective Banking Supervision
BIS Bank of International Settlements
CAS Country Assistance Strategy
CCA Contingent Claims-Based Approach
CDS Credit Default Swaps
CMU Country Management Unit
CPSS Committee on Payment and Settlement Systems
EU European Union
EWE Early Warning Exercise
FATF Financial Action Task Force
FPD Financial and Private Sector Development Vice Presidency
FSA Financial Sector Assessment
FSB Financial Stability Board
FSAP Financial Sector Assessment Program
FSIs Financial Soundness Indicators
FSLC Financial Sector Liaison Committee
FSSA Financial System Stability Assessment
GFSR Global Financial Stability Report
IAIS International Association of Insurance Supervisors
IASB International Accounting Standards Board
IEG Independent Evaluation Group (World Bank)
IEO Independent Evaluation Office (IMF)
IMFC International Monetary and Financial Committee
IOSCO International Organization of Securities Commissions
JMAP Joint Management Action Plan
LICs Low-Income Countries
MBS Mortgage-Backed Securities
MCM Monetary and Capital Markets Department
OFC Offshore Financial Center
OECD Organization for Economic Cooperation and Development
RAM Risk Assessment Matrix
ROSC Report on the Observance of Standards & Codes
SMEs Small and Medium-Size Enterprises
TA Technical Assistance
WEO World Economic Outlook
4
EXECUTIVE SUMMARY
1. Ten years after its inception, the FSAP has established itself as an important
instrument for assessing financial systems around the world. More than three-quarters of
the membership have volunteered for FSAP assessments or agreed to do so in the near future,
including almost all the G20 countries. Previous reviews have confirmed that the FSAP has
helped deepen the understanding of countries’ financial sectors and linkages with the rest of
the economy, enriched the policy dialogue, and ensured consistency of Bank and the Fund
advice, the last being a feature highly valued by participating countries. As also noted in the
Malan Report, the collaborative nature of the FSAP adds value by effectively addressing areas
of financial sector policy where developmental and stability concerns are interlinked and
overlap and by facilitating knowledge spillovers between the two institutions. These past
reviews have noted, however, the need to make the FSAP more flexible, responsive, and
continuous, to deepen and strengthen the analytical toolkit, and to integrate the FSAP more
closely with the Bank’s and the Fund’s other financial sector work.
2. In the coming decade, FSAP assessments will be conducted in a very different
environment from the one in which the program was framed. Financial systems have
become increasingly sophisticated and integrated across borders, while policymakers’
concerns have changed, including those of multilateral fora such as the G20 and the Financial
Stability Board (FSB). The recent crisis has also underscored the need to ensure that the FSAP
better informs and guides Fund surveillance. While the crisis has illustrated that the FSAP can
play only a limited role as an early warning instrument, it has also shown the advantage of
systemic and holistic reviews of countries’ financial sectors while, at the same time, extending
the coverage to crisis management and macroprudential frameworks. At the same time, the
new demands placed on the program will need to take careful account of the abiding financial
sector needs of all member countries, particularly in the developing world.
3. The proposed changes for reshaping the FSAP aim to preserve and capitalize on
the successes and wide acceptance of the program among the membership. As such, two
key aspects of the program would remain the same: the FSAP would remain a joint Bank-
Fund program in developing and emerging market countries (FSAPs in advanced economies
would continue to be the sole responsibility of the Fund); and country participation would
continue to be voluntary.
4. Within the joint framework of the program, the option of modular assessments
would introduce greater flexibility and help align the FSAP better with country needs.
Joint Bank-Fund assessment missions would remain the norm and would be conducted at a
frequency determined by country circumstances and the strategic prioritization of each
institution’s resources. As is now the case, initial assessments would be expected to be wide-
ranging and comprehensive, while the scope of updates would be more narrowly defined,
based on country needs. A key proposed innovation in this regard is the option for FSAP
modules focused on stability or developmental aspects when country circumstances warrant
5
and under the Financial Sector Liaison Committee (FSLC) guidance. This approach would
facilitate a higher frequency of assessments and a more continuous dialogue. Combined with
better off-site monitoring of financial sectors, this would help fill the gaps between
assessments and ensure that the FSAP findings inform (and are incorporated in a more
effective manner into) other Bank and Fund activities in financial sectors in member countries.
5. In addition, a number of important changes, informed by the experience of the
last decade and the recent crisis, are designed to strengthen the analytical basis for FSAP
assessments and enhance their effectiveness in promoting appropriate policy responses.
The Fund will continue to refine stress testing methodologies and improve the analysis
of macrofinancial linkages. This will involve placing greater emphasis on ensuring
data quality, assessing off-balance sheet exposures, calibrating the shocks, and
exploring more fully liquidity and cross-border risks.
The Bank will enhance analytical tools to benchmark financial sector development and
improve the analysis of areas that are becoming increasingly important, such as
competition issues, incentives, and governance, and will incorporate lessons from the
crisis for financial sector strengthening, such as the appropriateness of government
policies for supervision and regulation.
Stability assessments will become more rigorous, standardized, and comparable across
countries through the introduction of a Risk Assessment Matrix.
Recommendations in the area of financial sector supervision will draw on the emerging
lessons from the crisis, including with regard to the perimeter of regulation, the
procyclicality of prudential norms, the supervision of cross-border entities, and the
capacity of national authorities to coordinate domestically and with foreign peers.
Assessments will place even greater emphasis on crisis preparedness, such as central
bank liquidity frameworks, lender-of-last resort facilities, bank resolution frameworks
and tools, and inter-agency cooperation mechanisms, as well as exit strategies from the
unprecedented policy interventions undertaken during the recent crisis.
New methodologies for assessing macroprudential risks will be developed in parallel
with national and international authorities and gradually become part of the FSAP.
Although the FSAP is inherently a bilateral instrument, assessments will focus more
squarely on cross-border linkages and incorporate the findings of multilateral analyses,
such as the WEO, GFSR, the vulnerability exercise, and the Early Warning Exercise.
6. Strengthened mechanisms for quality control and inter-institutional coordination
through FSLC would ensure the continued integrity of the FSAP product. These include a
more systematic prioritization exercise and an upgraded role of the FSLC. FSLC will review
and approve the proposed modality of FSAP updates (i.e., whether to mount “full” missions or
more focused modules); provide guidance on the analytical and policy framework for the
program; play a key role in forming the strategy and overseeing the implementation of the off-
site framework; and serve as a vehicle for systematic information sharing of results from
6
assessments and modules. New principles and procedures have been established to enable
FSLC to play this role.
7. The extent and effectiveness of the proposed changes would depend on available
resources. The current crisis has necessitated a reprioritization of FSAP missions, but the
long-term effect on the demand for FSAP updates among the membership, especially the G20,
will only become clear over time. Nonetheless, increasing the frequency of assessments
through full FSAP updates or modules; providing more in-depth assessments to facilitate
better follow-up; expanding the program’s analytical content in areas such as macroprudential
risks; and enhancing off-site monitoring would, other things being equal, require additional
resources. Keeping the current resource envelope broadly unchanged would require a strict
prioritization of FSAP updates and modules that will tend to cover systemically important and
vulnerable countries, at the expense of many developing and small industrial countries. These
aspects of the program and, more broadly, the experience with the innovations proposed in this
paper, will be the subject of an early review by staff and Management of the two institutions.
7
I. INTRODUCTION
8. The Financial Sector Assessment Program (FSAP) is today at a crossroads. Born
in the aftermath of the financial crises of the 1990s, the FSAP has established itself as an
important tool for comprehensive assessments of both financial stability and developmental
needs. It is conducted at the request of the member country
1
by the Fund alone in advanced
economies and jointly by the Bank and the Fund in developing countries. Over two-thirds of
the members have now completed first-round assessments, and many have already undergone
FSAP updates. The program also provides a valuable framework for Bank-Fund collaboration,
helping to ensure consistent advice in developing countries, while allowing the two
institutions to leverage their resources. But a new financial crisis is again changing profoundly
the environment in which both the Bank and the Fund operate. Although lessons from the
crisis are still evolving, it has already engendered a major refocusing and re-prioritization of
both institutions’—but especially the Fund’s—financial sector work, and requires major
adaptations in their toolkit, including the FSAP.
9. Recent reviews of the FSAP reaffirmed its contribution to the institutions’
financial sector work but also pointed to weaknesses (Box 1).
2
They noted that the FSAP
has helped deepen the understanding of countries’ financial sectors, articulate policy
recommendations, and improve analytical discussions with authorities. It has encouraged
policy and institutional changes and led to a better understanding of the key linkages between
financial sector vulnerabilities and macroeconomic stability. At the same time, the reviews
noted that the voluntary nature of the FSAP was a constraint on effective country coverage
and the allocation of scarce resources. They pointed out that FSAP assessments needed to be
better integrated into each institution’s work, in particular the Bank’s other financial sector
work and IMF surveillance. And they called for efforts to streamline the program and improve
its cost effectiveness, while enhancing its analytical foundations.
10. More recently, a technical briefing to the Bank Board on the future of the FSAP
(March 2009) reinforced some of the recommendations of past reviews. It was largely
based on an internal Bank stocktaking exercise that identified three major areas for
improvement: (i) greater flexibility and the ability to address evolving country needs and adapt
the assessments to meet the Bank’s and Fund’s financial sector priorities, including leveraging
their resources effectively; (ii) enhanced analytical content, quality, and comparability of
assessments; and, (iii) strengthened “off-site” work as a way to enhance the continuity of
assessments and the effectiveness of “on-site” reviews.
1
For the Fund, FSAPs are legally a form of technical assistance.
2
Independent Evaluation Group (IEG (2006)), Financial Sector Assessment Program, Review, IEG Review of
the Joint World Bank and IMF Initiative; and Independent Evaluation Office (IEO (2006)), Report on the
Evaluation of the Financial Sector Assessment Program.
8
Box 1. Summary of Key Findings of Past Board FSAP Reviews
Previous reviews of the FSAP concurred that the program is a good diagnostic instrument, a cornerstone of
Bank/Fund financial sector work in member countries, and an example of effective Bank/Fund collaboration. It
has helped deepen the understanding of countries’ financial sectors and linkages with the rest of the economy,
enrich the dialogue with authorities, and encourage policy and institutional changes. Finally, it has facilitated the
pooling of resources of the two institutions and led to greater consistency in policy advice.
However, the reviews noted that the voluntary nature of the program was a constraint on resource allocation and
prioritization of assessments, and stressed the need for improvements in several areas:
Strengthened incentives for participation in the FSAP would ensure greater coverage of systemically important
or vulnerable countries. At the same time, staff should signal to the Board when countries are viewed as high
priority for FSAPs regardless of whether the countries had volunteered or not.
Within the joint and collaborative framework of the program and the Financial Sector Liaison Committee
(FSLC), greater flexibility in the scope of assessments, particularly updates, would allow staff to tailor them
better to country circumstances. FSAP assessments should be more candid and the dissemination of outputs
more timely.
Further research was needed to underpin policy advice and improve the impact of the FSAP, including the
development of assessment tools for regions with substantial cross-border links and improved approaches to
missing market and access issues.
There should be closer integration between the FSAP and Fund surveillance, as well as with Bank programs.
Within the IMF, in particular, scarce financial sector expertise should be deployed more strategically across
FSAPs and other financial sector work in order to enhance surveillance.
Technical assistance follow-up to FSAP findings should be more systematic, including through the
establishment of a clearer framework for coordination with the authorities and other donors.
Greater effort should be made to streamline FSAP assessments further against the backdrop of constrained
resources and emerging demands.
11. In addition to these focused reviews of the program, the FSAP has also been
covered by broader assessments of the two institutions’ financial sector work, with
broadly similar findings.
The 2007 Malan report underscored Bank-Fund collaboration on financial sector issues
through the FSAP and the FSLC. Following the 2007 Malan report, the two institutions
elaborated the Joint Management Action Plan, which included specific measures to
improve coordination.
The Fund’s 2007 Financial Sector Task Force report and 2008 Triennial Surveillance
Review provided a framework to improve the analysis of financial sector issues in Article
IV consultations, and called for moving beyond the “coverage” of financial sector issues
toward the “integration” of financial sector issues and, in particular, FSAP assessments,
into Article IV surveillance. In February 2009, an informal Fund Board seminar discussed
progress on this front and some preliminary proposals on how to reshape the FSAP.
9
The Bank’s Financial Sector Strategy Review in 2007 and subsequent briefings to its Board
have identified a strategy for strengthening the Bank’s financial sector development work,
ensuring a closer link of the FSAP to the other operations of the Bank, and leveraging of
comparative advantage across instruments. They also called for stronger financial sector
development benchmarks and indicators for monitoring and evaluating progress, and a
results-focused approach.
12. The recent financial crisis has created major new challenges for both institutions
and underscored the need to adapt the FSAP to new realities. In some areas, the crisis has
amplified the urgency to address weaknesses already identified by previous reviews: for
instance, to make the FSAP more nimble, focused, and flexible, and integrate it better with the
Fund’s surveillance. But it has also created some entirely new demands on the program. In
October 2008, the International Monetary and Financial Committee (IMFC) called for work
toward a reshaped FSAP that is better integrated with the Fund’s surveillance mandate and
embraces regional perspectives. And at their 2009 summit, the G20 leaders called for renewed
efforts on crisis prevention, underlining the role of the international financial institutions in
crisis response and the reform of the international financial architecture.
13. This review looks at the FSAP experience over the past ten years and discusses
options for the future. It is the culmination of several threads of preparatory work, including
the Bank stocktaking exercise mentioned above, as well as three special studies: a joint
Bank/Fund survey of participating countries’ views, an independent review of the performance
of the FSAP in the context of the current financial sector crisis, and a Fund paper on the
methodological development of the stress testing toolkit in view of the crisis. These studies are
summarized here and presented in full in a separate background document. The next Chapter
reviews the experience of the first ten years, covering the structure, organization, and coverage
of the program; the scope and impact of the FSAP; and the relationship between the FSAP and
IMF surveillance and Bank support to financial sector development. Chapter III outlines a
vision for a new FSAP, including the focus and content of the program; flexibility, rigor,
candor, transparency, and stronger regional/thematic coverage; improved Bank-Fund
coordination; and concludes with a discussion of resource implications and tradeoffs.
II. THE FIRST TEN YEARS
A. Structure, Organization, Scale, and Cost
Structure and organization of the program
14. The FSAP was established as a voluntary joint Bank-Fund program to assess
countries’ financial sector vulnerabilities and developmental needs. It was one of several
initiatives to strengthen the international financial architecture following the crises of the
1990s. The key elements of the program were the following:
10
FSAP assessments are undertaken at the request of country authorities. The voluntary
nature of the program was seen as instrumental for ensuring the country authorities’
ownership of the process and findings.
The focus of the assessment is broad and comprehensive—although FSAP updates are
supposed to be more focused—and may include detailed Reports on the Observance of
Standards & Codes (ROSCs).
Assessments are supposed to identify stability weaknesses and developmental needs
and propose remedial actions to enrich the policy dialogue between countries and the
two institutions, as well as between policy-makers and other stakeholders. They are
separate from the rest of the two institutions’ financial sector work but, in the countries
that choose to participate, the assessments inform and guide surveillance (Fund),
financial sector lending operations (Bank), and technical assistance (Fund and Bank).
15. Most assessments are conducted jointly by the Bank and the Fund, but the two
institutions maintain a different focus and follow separate internal reporting modalities.
In advanced economies, FSAPs are the responsibility of the Fund. In all other countries, they
are conducted by joint Bank/Fund teams composed of staff and expert consultants. The
analysis of stability issues is the main focus of the Fund, while the Bank covers financial
sector development issues; but there is, of course, considerable overlap between the areas.
Once the assessment is completed, a joint Aide-Mémoire is delivered to the authorities. The
two institutions then follow different internal reporting processes, focused on their respective
mandates and priorities: the Fund generates a Financial System Stability Assessment (FSSA),
focused on financial sector vulnerabilities, which is discussed by its Executive Board
alongside the regular Article IV consultation report; the Bank produces a Financial Sector
Assessment (FSA), focused on the main financial sector development needs, which is
distributed to the Bank’s Executive Board for information.
16. Assessments of compliance with various financial sector standards and the
associated Reports on the Observance of Standards and Codes (ROSCs) are closely
related to the FSAP. The Boards of the Bank and the Fund have endorsed 11 Standards and
Codes of the 12 designated by the Financial Stability Board (FSB) as key for sound financial
systems (Appendix III). These standards are broadly accepted as representing minimum “good
practices.” Six of the twelve standards are assessed as part of the FSAP. Five of them—
Banking Supervision, Securities, Insurance, Payments and Securities Settlement Systems, and
Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT)—are
assessed jointly. In addition, the Fund assesses Monetary and Financial Policy Transparency.
Corporate Governance, Accounting, Auditing, and Insolvency and Creditor Rights are
assessed either independently or as part of the FSAP by the Bank, depending on country
circumstances (however, the standard in the area of Insolvency and Creditor Rights has not yet
11
been endorsed by both Boards). Finally, two additional standards are not assessed in the
context of the FSAP but reviewed independently by the Fund.
3
17. The Bank and the Fund have developed mechanisms for coordination (Box 2) and
for integrating the FSAP into their other country work.
Box 2. Role of the Financial Sector Liaison Committee (FSLC)
Efforts to strengthen collaboration between the Fund and the Bank have always been viewed as a high
priority for the two institutions, essential for each to fulfill its mandate and best serve the interests of its
members. However, the financial crises of the late 1990s highlighted the need for substantial improvement in
inter-institutional coordination in the financial sector as a means for ensuring greater consistency in the advice
provided to countries and improving the utilization of scarce resources. This was one of the motivations for the
creation of the Financial Sector Liaison Committee (FSLC) in September 1998.
The main objective of the FSLC is to foster better collaboration between the Bank and the Fund on
financial sector work, which is distributed widely within the two institutions. In that context, the
Committee assumes responsibility for operational inter-institutional coordination and management for the joint
aspects of the FSAP. Other priorities for FSLC in recent years have been the coordination of technical
assistance provided through the FIRST program and the identification of regional and global lessons for
financial sector reform.
It is constituted as a joint committee of senior staff from the Fund and the Bank. Facilitating early and
continuous dialogue on the allocation of work between the two institutions helps ensure that the two institutions
deliver sound and timely advice and support to member countries, and that the limited expert resources
available are engaged in the most effective way.
The Malan Committee report and the follow-up Bank-Fund Joint Management Action Plan (JMAP),
echoing many of the recommendations of past FSAP reviews, highlighted FSLC as a good example of
Bank/Fund collaboration. They recommended that the mandate of the Committee be widened to the
promotion of collaboration on all financial sector issues, including being specifically empowered to better
coordinate technical assistance to member countries. The Malan Report encouraged FSLC to promote a robust
dialogue, the exchange of information, and joint work planning.
The Bank works through a central management unit within Financial and Private
Sector Development Vice Presidency (FPD)’s Financial Systems Department, which
maintains close collaboration with its six Regions, Country Management Units (CMU),
the FIRST Initiative, and the Fund. Country Assistance Strategy (CAS) documents are
the key vehicle for incorporating FSAP findings into the Bank’s country work. The
CMU is also critical in driving FSAP follow-up, ranging from assistance in the
3
The Code of Good Practices on Fiscal Transparency and Special Data Dissemination Standard-General Data
Dissemination Standard.
12
identification of more specific sector reform priorities to fitting detailed FSAP
recommendations into existing Bank programs in the country.
In the Fund, FSAP-related work is the responsibility of the Monetary and Capital
Markets Department (MCM), which collaborates closely with area departments. The
key vehicle for integrating FSAP findings into bilateral surveillance is the FSSA,
which is produced in cooperation with the relevant area department Article IV team,
approved by both the Director of MCM and the Area Department Director, and
discussed by the Board alongside the Article IV staff report. Follow-up capacity-
building work is also the responsibility of MCM, the technical assistance provider on
financial sector issues in the Fund.
Country participation
18. Participation in the program is voluntary, but country requests are prioritized
based on criteria established by the two Boards. The prioritization criteria include: (i) the
systemic importance of the country; (ii) external sector weaknesses or financial vulnerabilities;
(iii) major reform programs that might benefit from a comprehensive financial sector
assessment; and (iv) features of the exchange rate and monetary policy regime that make the
financial system more vulnerable, such as inconsistency with other macroeconomic policies.
Maintaining a balance across regions and different levels of financial sector development is
also important, as is the time elapsed since the initial FSAP or previous FSAP update. Based
on these criteria, the staff prepares priority lists twice a year—before the Spring and Annual
Meetings—that guide the planning of assessments and are communicated to the Managements
of the two institutions.
19. About 80 percent of the member countries have participated in the program—or
agreed to do so in the near future (Appendix I). Preparations are underway for FSAPs in
China, Indonesia, and the United States. Once these assessments have been completed, the
majority of systemically or regionally important financial systems, including almost all the
G20 (Table 1) will have participated in the program.
20. Coverage across geographic regions has been strong everywhere except Asia, with
the highest participation rate in Europe (Figures 1 and 2). Most of the European countries
have been assessed at least once, and several have had updates. Participation in the Middle
East and North Africa has also been strong, as it has been in North, Central and South
America and the Caribbean. In Sub-Saharan Africa, most countries have been covered,
including in the context of regional FSAPs for the monetary unions of Central and West
Africa. Despite the lower participation rate in East Asia, most countries with large financial
sectors have completed or are planning assessments.
13
Table 1. G20 Participation in the FSAP
Initial
Assessment Update Planned
Argentina (1)
FY01
Australia
FY06
Brazil
FY03
Canada
FY01 FY08
China
FY10
France
FY04
Germany
FY04 FY10
India
FY01
Indonesia
FY10
Italy
FY05
Japan
FY04
Mexico
FY02 FY07
Russia
FY04 FY08
Saudi Arabia
FY06
South Africa
FY00 FY08
South Korea
FY04
Turkey
FY07
United Kingdom
FY03
United States
FY10
Source: World Bank FSAP Management Unit.
1/ The Argentina FSAP was not completed due to the emergence of the crisis.
Figure 1. Initial Assessments (by Income and Region)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
HIC MIC LIC
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Eur ope Mi ddle East Amer i cas Af r i ca Asi a
Source: World Bank and IMF FSAP Databases.
14
Figure 2. Updates (By Income and Region)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
HIC MIC LIC
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Eur ope Mi ddle East Amer icas Af r i ca Asia
Source: World Bank and IMF FSAP Databases.
21. The interval between assessments tends to be long. The 2003 FSAP review noted
that demand for updates was stronger than had been anticipated at the start of the program, and
recommended focusing the scope of updates and tailoring them more closely to country
circumstances in line with budget constraints. The 2005 FSAP review additionally called for
more selective thematic coverage and a target interval of about five years between updates. In
the event, the average period between updates has been six years and the average size of
Bank-Fund teams has varied relatively little.
Cost of the program
22. The total cost of the program has been contained, in part owing to the shift over
time toward updates. The total cost of the FSAP to the Fund in recent years (including staff,
consultants, and travel costs but excluding overtime and general overhead and support
activities) has been in the order of US$7½-11 million annually (Table 2). About 90 percent of
this has been borne by MCM, where FSAP-related work represents over 10 percent of the
department’s total budget. The Bank’s cost of the FSAP has been in the order of
US$4-5 million per annum (including staff, consultants, travel costs, and program
coordination). Table 3 includes information on the size and duration of FSAP updates.
23. The IMF downsizing exercise in 2008 did not have a major impact on the resource
envelope for the program, but nonetheless necessitated some adjustments. Under MCM’s
FY09–11 business plan, the targeted number of FSAPs has remained at 7–8 initial assessments
and 10–12 updates. However, the number of headquarters-based financial sector experts
available to staff missions declined, requiring greater use of externally sourced experts. To
increase efficiency, the Offshore Financial Center (OFC) Assessment Program was absorbed
into the FSAP (
http://www.imf.org/external/np/pp/eng/2008/050808.pdf).
24. The Bank has kept its financial contribution to the program stable over the years,
but the number of its financial sector experts has gradually diminished. In recent years, as
priorities shifted to other sectors, the pool of experienced financial sector experts available to
perform assessments has shrunk. The adopted Bank financial sector strategy already plans for
15
resource replenishment, and a structured approach to train and mentor new FSAP leaders is
being developed. However, the capacity to replenish skilled human resources will depend on
the continuity of available financial resources over the years.
Table 2. FSAP Costs
FY2005 FY2006 FY2007 FY2008 FY2009
(Thousands of U.S. dollars)
Fund Total Annual Costs 7,431 7,504 8,679 11,007 7,458
Personnel Costs
1,2
5,023 4,765 6,933 7,979 5,425
Travel Costs 2,408 2,739 1,746 3,028 2,033
Bank Total Annual Costs 4,787 4,889 4,813 5,319
3,791
3
Personnel Costs 3,708 3,657 3,654 3,975 2,934
Travel Costs 1,079 1,232 1,159 1,344 857
Total Annual Costs 12,218 12,392 13,492 16,326 11,250
Source: Staff estimates.
1
Does not include overtime, which added 11–13 percent to Fund cost for 2007–2009.
2
2003–2006 figures estimated from partial data.
3
FSAP demand in FY09 was lower owing to the effect of the crisis.
Table 3. Profile of Assessment Missions (Bank and Fund)
(FY06–09 averages)
Total
Initial
Assessments
Updates
Average number of missions per assessment 1.7 1.8 1.5
Average length of missions (days) 18.9 20.1 14.6
Average size of missions (staff and consultants)
2
13.2 16.2 9.5
Source: Staff estimates.
1
1999–2009; figures include preliminary scoping missions.
2
Staff members and consultants participating in more than one mission per assessment are counted once.
B. Scope, Impact, and Dissemination
FSAP recommendations and implementation
25. The Bank stocktaking exercise (2008) compiled a database categorizing FSAP
report recommendations into three areas (infrastructure, oversight, and public policy)
and tracking their implementation (Appendix II). Prudential oversight accounted for over
half of all recommendations. In addition, the developmental focus of the FSAP (infrastructure,
market competition, and financial promotion policy recommendations) has risen over time.
This mainly reflects increases in the information aspects of infrastructure (e.g., accounting and
16
auditing, rating, registries) and a growing focus on the state’s financial sector promotion
policies, including direct intervention in financial intermediation, or indirectly through
subsidies, guarantees, or regulations (Table 4). In terms of sectoral coverage, the vast majority
of FSAP recommendations relate to the banking sector, reflecting the bank-centric nature of
many middle- and low-income financial systems (Table 5).
Table 4. FSAP Recommendations by Topic
(percent share of the total)
2002–2004
2005–2007
A. Infrastructure 20.6 20.8
a. Contractual
5.8 4.7
b. Informational
7.3 8.6
c. Transactional
5.9 6.3
d. Corporate Governance
1.5 1.3
B. Oversight 55.4 57.3
a. Prudential
50.3 52.2
b. Market performance and
Integrity
5.1 5.1
C. Public Policy 24 21.9
a. General Enabling Policies
14.8 11.4
b. Financial Promotion Policies
9.2 10.5
Source: “The Process of Financial Development: A Statistical View from the FSAP Program” (Ize, Pardo, and
Zekri), 2008.
Table 5. FSAP Recommendations by Sector
(Percentage of overall sector coverage)
2002–2004 2005–2007
Banking 42.8 42.6
Insurance 19.2 16.5
Pensions 7.2 9.5
Microfinance 4.8 5.5
Other NBFIs 4.9 4.7
Capital Markets 10.7 9.0
Global Oversight 10.5 12.1
Source: “The Process of Financial Development: A Statistical View from the FSAP Program” (Ize, Pardo, and
Zekri), 2008.
17
26. The rate at which countries implemented the recommendations in infrastructure,
oversight, and public policy has remained relatively constant around 60 percent (Table 6)
. In
the banking sector, implementation has mainly consisted of increasing bank minimum capital
requirements, issuing and implementing loan classification systems, strengthening valuation
methodologies for loans and collateral, and introducing regulation on internal controls. The
greatest progress was achieved in modernizing legal frameworks for banking, helped in large
part by the push in European Union (EU) candidate countries to adopt EU standards. In the
payments area, central banks have also implemented the majority of the measures
recommended by assessors. Less progress is evident in the supervision and regulation of other
sectors of the financial system and on tax, bankruptcy, collateral, and judiciary issues.
The FSAP and the recent crisis
27. The recent financial crisis was a major test for the FSAP (see separate background
paper). Encouragingly, many of the most vulnerable countries participated, and the program
was successful in identifying measures that helped mitigate some of the consequences of the
global crisis, especially in emerging economies. In most cases, FSAPs identified correctly the
main sources of risk. As the crisis unfolded, FSAP teams were also able to adapt the scope of
their assessments to increase the focus on critical issues such as crisis management, liquidity
risks, cross-border issues, and cross-sectoral issues.
Table 6. Implementation of FSAP Recommendations by Topic
Recommendations Classified by Topic
Number of
Recommendations
in the
Aide-Mémoire
Percentage of
Recommendations
Reported as PI
or FI 1/
(percent)
A. Infrastructure 66 59
a. Contractual (insolvency, creditor rights, judiciary) 24 33
b. Informational (accounting, auditing, rating, registries) 12 71
c. Transactional (trading, payment) 27 74
d. Corporate Governance 3 83
B. Oversight 212 60
a. Prudential 194 61
b. Market performance and integrity (incl. AML/CFT) 18 56
C. Public Policy 80 59
a. General Enabling Policies (monetary, public debt, tax) 54 57
b. Financial Promotion Policies (public banks, SMEs,
housing, etc.)
26
63
Source: World Bank FSAP Management Unit’s Database and staff estimates.
1/ PI = Partially implemented; FI = Fully implemented. Percent scores are the average of all FI and half of the PI
ratings divided by the total number of ratings in that category.
18
28. The study also highlighted the limitations of the FSAP in reducing the likelihood
of crises and mitigating their consequences. In particular:
The voluntary nature of the FSAP limited the scope for covering countries that might
have benefited from an assessment but had not expressed interest. As a result, some
systemically important countries had had initial assessments but no update for some
time, and a few had not been assessed at all. Resource constraints at both the Fund and
the Bank restricted the number of assessments that could be undertaken and limited the
frequency of assessments for any given country, even where specific risks had been
previously identified.
The stress tests undertaken were not always able to capture the right risks and
exposures. In some cases, the estimated shocks and impact were not sufficiently
severe. Sometimes, this reflected the sensitivity of the issues to national authorities; in
other cases, it was attributable to shortcomings in the stress tests themselves, for
instance when they failed to provide a strong enough test of resilience, to recognize
cross-border implications, or to reflect the risk of contagion from abroad.
One of the FSAP’s primary objectives is the assessment of the stability of the financial
system as a whole. Therefore, FSAPs have often not focused on individual institutions’
vulnerabilities, which can pose risks to the entire system. In some of the pre-crisis
countries, greater attention to individual institutions might have uncovered some of
vulnerabilities that led to, or facilitated the transmission of the current crisis.
The assessments centered mostly on home-grown vulnerabilities, even when external
factors were considered in stress-testing scenarios. They rarely assessed vulnerabilities
originating in other countries or the possible implications of a global crisis.
The FSAP’s focus on identifying underlying vulnerabilities could not, by itself,
address them. Identification of vulnerabilities could only lead to a solution if the
country authorities decided to implement the recommendations of the FSAP. The study
identified a number of cases where the FSAP correctly identified vulnerabilities but no
action was taken to forestall the crisis.
Publication and dissemination
29. FSAPs produce different documents for different audiences, whose dissemination
is governed by well-established rules of each institution. The Aide-Mémoire, produced by
the team in the field and revised at headquarters based on the authorities’ and peer reviews, is
intended for the country authorities, and is not published. Technical Notes, which contain
background information or the analysis underlying the Aide-Mémoire, may be published with
the authorities’ consent. Publication of the two Board documents (the FSA and the FSSA) is
governed by each institution’s publication policy. Under the Bank’s disclosure policy, the FSA
19
is a country document that requires the authorities’ prior agreement before distribution to the
Board and publication via the Bank’s eBoard. For the Fund, publication of the FSSA and the
ROSCs is voluntary. In contrast to Article IV consultation reports, however, there is no
presumption of publication. ROSCs may be published even if the FSSA is not published, but
not vice versa.
30. Publication rates are high, with the proportion of FSSAs published generally
higher than that for FSAs (Table 7). This is attributable to the fact that FSSAs include a
higher proportion of advanced economies (whose FSAPs are conducted by the Fund alone),
which on average tend to publish more of their country documents than emerging and low-
income countries.
4
The percentage of Technical Notes published has risen, but this reflects
partly the fact that fewer Notes are being prepared with each FSAP update as part of the
streamlining and cost reduction effort. The website statistics show that visits to the Fund’s
external FSAP website have increased by 34 percent since the onset of the crisis (October
2007), with peaks around the Spring and Annual meetings.
5
Table 7. Publication Trends
(Published documents as a percentage of issued documents)
2001 2002 2003 2004 2005 2006 2007 2008
FSSAs 65 63 68 74 71 81 61 59
FSAs 50 42 67 64 55 43 33 62
ROSCs 0 0 5 17 50 65 35 74
Source: World Bank and IMF FSAP Databases.
C. Standards Assessments and the FSAP
31. Detailed assessments of compliance with Standards and Codes have been closely
associated with the FSAP (Table 8). The assessments are essentially an evaluation of a
country’s regulatory and financial policies and provide ratings against international Standards
and Codes developed by the relevant standard-setting bodies. Though not a necessary
component of the FSAP, in practice most financial sector standards assessments take place in
4
The IMF paper “Key Trends in the Implementation of the Fund’s Transparency Policy”
(http://www.imf.org/external/np/pp/eng/2008/013108.pdf
) reports that, while advanced economies publish nearly
all their country reports, developing countries publish around 87 percent and while emerging markets around 82
percent.
5
Data refer to external visits only, excluding visits by Fund staff.
20
the context of FSAP missions. To complete the assessments, the Bank and the Fund rely on
both staff and external experts, particularly from cooperating agencies.
6
32. Standards assessments have become more costly, and the average number of
ROSCs associated with FSAPs has declined over time. Standard-setters have been
continually updating assessment methodologies, and this process has intensified since the
onset of the financial crisis.
7
This has increased the resource cost of full standards assessments
and, combined with the resource constraints of the Bank and the Fund, has led to a decline in
the number of full standards assessments in FSAPs: the average number of ROSCs has
decreased from about five at the height of the first round of FSAPs to around one in FY09 for
initial FSAP assessments and less than one for updates (Table 9). Standards-related work
continues to be important, but has been increasingly focused in certain areas only—typically
those where compliance in the original assessment had been found lacking—and is now often
summarized in Technical Notes rather than ROSCs.
33. Resource constraints also affect the quality of the standards assessments. An
internal Bank-Fund review of the quality and consistency of standards assessments conducted
in 2006 identified several weaknesses, including insufficient attention to the actual
implementation of the principles by regulatory regimes. The study covered the BCP, IAIS,
IOSCO, and FATF’s AML/CFT standards and found that, because of time constraints,
assessors devoted more time to ensuring formal compliance with the various standards (with a
focus on adoption of the required laws, regulations, supervisory policies, and systems) and less
to reviewing actual implementation. This trend is likely to be exacerbated by the increasing
complexity in financial standards and assessment methodologies.
D. The Views of Country Authorities
34. In preparation for this review, the Bank and the Fund conducted a survey of
country authorities that have participated in the FSAP during the last 10 years (see
separate background document). About 60 countries responded. Their responses complement
the evidence presented in the previous sections and the staffs’ own views, thus providing a
useful perspective to the findings of this review.
6
Typically, two banking supervisors (“four eyes” principle) perform the Basel Core Principles assessment. For
the securities and other assessments, the FSAP relies on the relevant standard-setter when Fund and Bank staff
are not available. Approximately 140 official agencies have provided experts to the FSAP.
7
For instance, in 2008, the Basel Committee on Banking Supervision announced a comprehensive strategy aimed
at reflecting the lessons from the crisis for the regulation, supervision, and risk management of internationally
active banks. The changes aim to promote more rigorous supervision and risk management and to focus more
squarely on issues such as excessive risk concentration, reputation, funding liquidity risks, and the valuation of
financial instruments.
21
Table 8. Financial Standards Assessments Completed and Underway
(as of end-December 2008)
Standards Assessed
Completed Underway
Monetary and Fiscal Policy Transparency
98 1
Banking Supervision
152 9
Securities Regulation
71 2
Insurance Supervision
63 3
Payment Systems
88 2
AML/CTF
72 45
Accounting and Auditing
85 15
Corporate Governance
64 7
Insolvency and Creditor Rights
37 11
Total
730 95
Source: World Bank and IMF ROSC and FSAP Databases.
Table 9. Average Number of Standards Assessments Conducted
During FSAP Missions
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08
Initial assessments 4.1 4.4 4.9 3.9 2.9 2.6 3.0 2.7 1.0
Updates … … … 1.0 0.8 0.3 1.0 1.0 1.0
Source: World Bank and IMF ROSC and FSAP Databases.
Note: Excludes ROSCs undertaken outside FSAP missions.
The survey indicated that countries value the FSAP as an independent assessment of
their country’s financial sector vulnerabilities and needs. They found that FSAPs
have deepened the discussion of financial sector issues in Article IV consultations and
helped formulate a better development agenda. The most appreciated elements of the
program were the assessments of financial sector regulatory frameworks and
supervisory practices and of financial system stability. The integrated analysis of the
financial sector also was highly valued. Regarding analytical components, the
assessment of compliance with Standards and Codes, along with stress testing and
system level risk modeling were viewed positively by most respondents.
Respondents thought that the FSAP recommendations had been sufficiently clear
and candid. Of the total number of respondents, almost 90 percent viewed the
recommendations as clear and over 80 percent saw them as candid. Where
recommendations were not implemented, the most commonly-cited reason was
disagreement with specific recommendations. Other reasons included insufficient
political support or resources to implement the recommendations.
22
Around 70 percent considered that the FSAP should continue to be voluntary. At the
same time, they emphasized that the frequency of assessments should be primarily
based on the systemic importance of the country. They stressed the need to ensure
coverage of the remaining systemically important member countries.
Respondents suggested several areas that require more attention. Crisis prevention,
crisis resolution, and cross-border and regional issues seem to be important
preoccupations, as is the integration of the FSAP with other Bank and Fund financial
sector work. Respondents stressed the need for future FSAPs to be better adapted to
country circumstances, both in terms of the scope of each assessment, and with respect
to the team members’ knowledge of the country. Several respondents called for greater
TA support to ensure that country authorities can assess more independently their own
financial sectors, and greater assistance with follow-up actions.
E. The FSAP and Fund Surveillance
35. Although the FSAP has the potential to provide useful input into Article IV
surveillance, it has limitations. The FSAP was never conceived as a surveillance instrument,
and some of its key characteristics limit its versatility in this regard. Its voluntary nature and
its status as a joint program with the Bank, notwithstanding their considerable benefits,
constrain the scope for prioritization and mean that the assessments are not legally part of the
Article IV process. Also, the current requirement that assessments be relatively
comprehensive, combined with resource constraints at the Fund, means that FSAP updates
take long to prepare and are infrequent. The long time gap between FSAP updates is a major
handicap for the analysis of financial sector vulnerabilities and macro-financial linkages,
which are the key concerns of the Fund’s macrofinancial surveillance.
36. In addition, the relationship between the FSAP and the Fund’s Article IV
consultation process implies difficult resource tradeoffs.
The Article IV consultation is the main vehicle for all bilateral surveillance, but it
receives critical support from the FSAP, which provides a more in-depth, but much
less frequent, assessment of financial stability. There is, however, a tradeoff between
the deployment of financial sector expertise in the Fund for Article IV support, FSAP
assessments, as well as support of Fund programs, capacity-building, multilateral
surveillance, and methodological development.
The 2008 Triennial Surveillance Review stressed the need to “deploy financial sector
expertise strategically, using a risk-based approach, and prioritizing according to the
criteria of systemic or regional importance, importance of vulnerabilities, and
importance of financial development issues for present or prospective macroeconomic
or external stability.” However, unlike the Article IV consultation, participation in the
FSAP is voluntary. Therefore, the Fund is not always able to direct FSAP resources
23
where the financial sector stability needs are most urgent, and pressure from the Bank
to meet FSAP requests from countries where financial development needs are
paramount may occasionally require difficult compromises.
F. The FSAP and Bank Support to Financial Sector Development
37. The FSAP is recognized as a useful instrument for identifying financial sector
needs to develop diverse and competitive financial sectors. The two major reviews
undertaken by the independent evaluation offices of the Bank and the Fund and the FSAP
stocktaking project (2008) concluded that, in general, the program serves to inform national
authorities of emerging problems in their financial systems. It also helps to expand technical
capabilities in participating countries and to enhance the understanding of issues, along with
the awareness of financial sector vulnerabilities. It provides a valuable independent external
assessment of countries’ financial systems, encouraging governments to embark on financial
sector reforms, and has also provided support to the authorities’ policy discussions, including
with the legislature and the private sector.
38. However, follow up on the implementation of FSAP recommendations is uneven
across countries. While the FSAP/ROSC diagnostic tools are used widely in client countries,
the coverage of financial sector issues in CASs has been uneven and mostly shallow.
8
A
monitoring and evaluation study on the financial sector
9
confirmed that the FSAP and ROSC
recommendations remain underutilized in CASs. The absence of financial sector coverage in
CASs does not necessarily limit the Bank’s capacity to provide assistance in that sector, but
this appears to have been the case. Table 10 shows, for projects labeled as “FSAP follow-up,”
a decrease in the ratio of Bank budget-funded projects to the number of FSAPs since 2004,
and diminishing budgetary allocations for FSAP follow-up projects. Beyond financing
support, the availability of funding from CMUs plays a crucial role in deepening the dialogue
between the Bank and the authorities. It also helps leverage other funds, such as the FIRST
Initiative or funds from other donors.
8
A review of 38 CASs in FY07-FY08 found that fewer than half contained a comprehensive discussion on the
financial sector; the discussion of key financial sector issues is frequently relegated to annexes and not
highlighted in the main text.
9
In 2008, the Bank undertook a study on how to build a results management or monitoring and evaluation
framework for the financial sector. Drawing on CASs, the study examined diagnostic and analytical work, as well
as lending during FY 2004-08, and proposed a set of comprehensive actions, including the need to (i) enhance the
role of the financial sector in CASs (including better use of diagnostic work and financial indicators); and
(ii) track more effectively the implementation of FSAP and ROSC recommendations.
24
Table 10. Bank Budget Support to Post-FSAP Follow-Up Work, FY04–08
FY
Number of
Countries for which
Bank budget was
Made Available
Number of FSAP
Assessments
Ratio of Follow-Up
Bank budget
funded projects to
FSAPs
(in percent)
Average Value of
Initial Bank budget
allocation
(in $1000)
2004 16 18 89 67,400
2005 7 15 47 48,600
2006 6 15 40 52,900
2007 4 19 21 40,500
2008 6 21 29 41,700
Source: Bank staff estimates.
39. Successful follow-up depends on the motivation for reform and the country’s
capability to deliver it. The FSAP and the ROSC programs have elements of both assessment
and advisory work. Successful implementation depends critically on the motivation and
capacity of country counterparts and on the political economy context. Motivation factors vary
widely, including (e.g., in EU accession countries) peer pressure. And reforms can meet the
resistance of vested interests intent on maintaining the status quo.
III. THE NEXT TEN YEARS
A. Old Challenges, New Demands
40. This FSAP review will need to take into account a range of trends that have been
shaping the financial sector environment for some time.
National financial systems are increasingly important for economic growth and
macroeconomic stability. Financial sectors represent much larger shares of domestic
activity. As the recent crisis has illustrated, macro-financial linkages are dense and
complex; household and corporate indebtedness may seriously affect financial sector risks,
in addition to government indebtedness; and issues of access to financial services and
consumer protection have become central to the policy agenda in developing countries.
Financial systems are increasingly sophisticated and integrated across borders. This
change is especially apparent in emerging markets, but cross-border issues, including the
possibility of contagion and supervisory cooperation, have become more important in all
countries.
41. At the same time, several of the recommendations of the last FSAP review and
subsequent program evaluations remain unfinished business. As the previous Chapter
showed (see Box 1 above), open issues include:
25
within the joint and collaborative framework of the program and FSLC, the need for
greater flexibility in the scope of assessments, particularly updates;
the call to deepen and strengthen the analytical toolkit;
the need to streamline further and contain the costs of the program, especially FSAP
updates; and
the need to integrate the findings of FSAPs more closely with Fund surveillance, a need
that has been emphatically underscored by the G20 and the IMFC following the recent
financial crisis, as well as with the Bank’s financial sector work.
42. Last but not least, the recent financial crisis is changing profoundly the
environment in which the Bank and the Fund operate and places new demands on the
FSAP. First, FSAP assessments will have to incorporate the lessons from the crisis. In some
cases, this is just a matter of placing greater emphasis on certain topics that are already
covered under the FSAP, such as crisis management; but in others, it requires expanding the
scope and changing the modalities of the program. Second, in the wake of the crisis,
institutions such as the FSB, the G20, and the financial standard-setters are becoming
increasingly important, setting the policy agenda at the global level and engaging bilaterally
with member countries’ financial authorities.
43. Although the lessons from the crisis are still crystallizing, it is already clear that
they will affect the FSAP program in at least four areas. Some of these lessons have
already been incorporated in FSAP assessments that have taken place since the onset of the
crisis; for others, further work is needed—in cooperation with other stakeholders—to
formulate an adequate response.
Greater emphasis on crisis preparedness and crisis management frameworks and exit
strategies. Although crisis preparedness has always been assessed as part of an FSAP, the
crisis has highlighted the need to sharpen the focus and deepen the dialogue with the
authorities on this issue in almost all countries. Future FSAPs assessment—like the ones
that have taken place in the last year or two—will pay greater attention to central bank
liquidity management frameworks, lender-of-last-resort arrangements, stress testing and
scenario analysis capabilities of the supervisors, cross-agency coordination arrangements,
bank resolution frameworks and tools, and frameworks for debt enforcement and
restructuring and corporate insolvency. They would also have to focus on the need for an
orderly and coordinated approach to unwinding the unprecedented policy interventions
undertaken by countries during the crisis, such as blanket deposit guarantees and other
forms of assistance to troubled financial institutions.
Exploring cross-border linkages. The FSAP is and will remain essentially an assessment
tool for individual country financial sectors and a vehicle for policy dialogue with national
26
authorities, just like the Fund’s Article IV consultation. Within this bilateral context,
however, the recent crisis has underscored the need to examine more closely cross-border
aspects of financial sectors, in particular (i) financial linkages, such as ownership patterns,
financing flows, or market links that propagate and amplify the transmission of financial
shocks; and (ii) supervisory cooperation arrangements that mitigate these risks. While the
latter has for some time been part of the traditional FSAP coverage, more effort needs to be
made on both issues.
Developing assessment methodologies for macroprudential risks. The financial crisis has
illustrated how macro-prudential and micro-prudential factors can interact to contribute to
market excesses and financial instability. It has also illustrated that risks to financial
stability stem not just from illiquidity or insolvency of large financial institutions, but also
from the interdependence and interconnectedness between financial institutions and
markets. This has brought home the need to expand the FSAP to cover not just micro-
prudential supervision and issues, but also to develop new tools and methodologies to
enable assessments of macroprudential vulnerabilities and to correspondingly enrich the
policy dialogue with authorities on these issues.
Incorporating the lessons being distilled in the area of supervision and regulation of
financial institutions. The crisis has exposed the pitfalls of regulating tightly only deposit-
taking institutions, relying excessively on market discipline for prudential purposes, and
using procyclical regulatory practices. As a result, standard-setters and national authorities
are now re-examining the appropriate perimeter of regulation; the scope for differentiated
layers of oversight; requirements for governance, risk management, and disclosure that
would directly affect incentives within financial institutions; rules to reduce conflict of
interest at rating agencies; and introducing countercyclical capital buffers. As these changes
crystallize into formal standards or best practices, they will have to be incorporated into
FSAP assessments.
44. These new demands on the FSAP have to be balanced against abiding needs of
member countries… While the current financial crisis and its implications are attracting most
of the attention, the FSAP should not lose sight of enduring financial sector needs of member
countries, particularly in the developing world. Many of these developmental financial sector
challenges were present before the crisis and will continue long after its impact has passed. In
re-setting priorities for the program, the Bank and the Fund should continue to pay due regard
to these issues.
45. … and, at the same time, contend with the reality of available resources. While
expectations are multiplying, resources in both institutions, unless increased, are unlikely to
keep pace with new demands for financial sector work. Systemic importance already is one of
the criteria used by the Bank and the Fund to prioritize assessments, once these are requested
by the member countries. This criterion will henceforth become much more prominent,
especially for the Fund. It will inform not only the response to individual requests (whether
27
and when to conduct an assessment) but also the amount of resources that each institution
would dedicate to the assessment. Given the current resource envelope, this implies that, at the
Fund, FSAP assessments in non-systemically important countries—including low-income
countries—would be given lower priority and fewer resources than those in systemically
important countries.
B. An FSAP for the Next Decade
46. Against this background, the proposed changes to the FSAP have three
overarching goals.
Make the program more flexible and better aligned with country needs, as well as the
Bank’s and the Fund’s financial sector priorities and core responsibilities. This requires
inter alia, improving the targeting and timeliness of the outputs; clarifying the relationship
of FSAP to other financial sector work in the Bank and the Fund; and simplifying and
accelerating internal processes. These efforts would be underpinned by strengthened
analytics and continued close coordination of Bank and Fund staff. This is critical for
allocating scarce resources in line with a sharper systemic focus —especially at the Fund—
and for balancing the new demands on the program with the mandate to serve the entire
membership.
Enhance the quality, candor, and comparability of assessments. This entails developing
further tools and methodologies for assessing both the stability and the developmental
aspects of financial sectors and their linkages to the rest of the economy; and tackling the
new analytical challenges posed by the crisis in the areas of stability analysis,
macroprudential risk assessment, and cross-border linkages.
Integrate the FSAP analysis and results into the institutions’ evolving mandates. The key
objective for the Fund is to integrate FSAP assessments more closely with surveillance.
This would require changes both to the FSAP program and to the conduct of Article IV
consultations. For the Bank, the priority is to integrate effectively financial sector analysis
and recommendations for reform stemming from the FSAP in the CASs and other financial
sector work.
47. The point of departure in reshaping the FSAP is to preserve and capitalize on the
successes and wide acceptance of the program among the membership. To achieve this,
two key aspects of the program are proposed to remain the same.
First, the FSAP would remain a joint Bank-Fund program in developing and emerging
market countries (FSAPs in advanced economies would continue to be the sole
responsibility of the Fund). The joint nature confers important benefits in terms of
combining complementary resources, skills, and viewpoints, albeit at some cost in terms of
coordinating the internal processes of the Bank and the Fund. At the same time, it
complicates the integration of FSAP assessments into Fund surveillance. The increased
28
flexibility within the joint framework described below would provide greater clarity on
each institution’s distinct contribution while reinforcing the benefits of the joint program.
Second, participation in the FSAP would continue to be voluntary for members. Since
initial assessments have been conducted for most of the membership and—on the basis of
the G20 commitment—will soon have been completed for all systemically important
countries, the voluntary nature of the program does not leave major gaps in global
coverage. Still, it complicates the prioritization of assessments and does not allow the Bank
and the Fund to allocate resources where vulnerabilities are most urgent unless the
authorities request it. It is also a major obstacle for the integration of the FSAP assessments
into the Fund’s surveillance.
10
That said, voluntary participation increases ownership by the
authorities, as also indicated by the results of the survey of participating countries’ views
(see Section II.D above and background document). On the assumption that, following the
initial assessment, countries undergo FSAP updates regularly, this benefit arguably offsets
the costs of voluntary participation. Prioritization of country requests will continue to be
based on the criteria established by past Board reviews of the program (see Section II.A).
48. Beyond these key aspects of the program, staff are proposing a set of
complementary changes concentrated in three areas: (i) sharpening the focus of individual
assessments and clarifying the institutional responsibilities of the Fund and the Bank;
(ii) making the FSAP more flexible, responsive, and continuous; and (iii) strengthening the
analytical content and making assessments more rigorous, candid, and transparent, with a
pronounced thematic/regional perspective.
49. To support these changes, adjustments are also needed in two other areas:
(i) making standards assessments more flexible and targeted; and (ii) improving the
management of the joint program, notably through strengthening FSLC and streamlining
internal processes.
50. The experience with the proposed innovations will be subject to an early review
by staff and Management. Given the extent of some of the proposed changes, the operation
of the program will be monitored closely and the experience reviewed by staff and
Management of the two institutions within two years.
Sharper focus, clear delineation of institutional contributions
51. FSAPs have always encompassed assessments of both financial sector stability
and developmental needs. As discussed in Chapter II, this has indeed been one of the
10
As noted above, for the Fund FSAPs are legally a form of technical assistance that is performed at the request
of the member. It would be possible for the Fund to make the FSAP exercise a mandatory part of the surveillance
process under Article IV, but this would require a number of changes to the Fund’s policy framework for
surveillance and to Bank policies that would need to be adopted by Executive Board decisions.
29
strengths of the program: a “holistic” view of the financial sector, benefiting from the
comparative advantage and expertise of both institutions, as well as the presence of external
assessors, who are often included in the FSAP teams.
52. Stability and developmental assessments provide distinct and complementary
perspectives on the financial sector. To be sure, the distinction between financial sector
“stability” and “development” issues is not clear-cut and differs from country to country; and
their sectoral coverage (banking, insurance, pensions, payments systems, etc.) often overlap.
Nevertheless, these two distinct perspectives are not always equally important or topical in
every country undergoing an assessment. Also—and crucially—the time horizon over which
each of these perspectives applies is different: the stability assessment focuses on the near-
term horizon, while the developmental assessment is anchored around medium-term issues.
Notwithstanding the inevitable areas of overlap, clarifying each institution’s principal
contribution to the joint program will help make the FSAP more flexible, ensure institutional
accountability, and strengthen systemic focus in the allocation of the Bank’s and the Fund’s
resources. It is also a prerequisite for closer integration of the FSAP with IMF surveillance and
the Bank’s other financial sector work.
53. Financial stability assessment in the context of an FSAP—the primary
responsibility of the Fund—will comprise three elements: an evaluation of the main risks to
macro-financial stability and their potential impact; an assessment of the country’s financial
stability policy framework; and an assessment of the authorities’ capacity to manage and
resolve a financial crisis. These assessments would be focused on the near term (1–3 years).
These elements would be the core of the Fund’s contribution to the joint program, and would
in all cases be summarized in an FSSA, which would remain the key FSAP input into IMF
surveillance. If needed, they could be accompanied by ROSCs. Box 3 outlines in more detail
the content of each of these three elements.
54. The sectoral coverage of stability assessments would vary according to country
circumstances. It is expected that in all cases the assessment would cover the banking sector,
but other sectors (securities, pensions, insurance) or aspects of the financial system (legal
framework, payments system) could be covered if (i) they are sources of risks to financial
stability, or (ii) their structure or operation impinges on the authorities’ crisis management and
resolution capabilities.
55. The financial development assessment in the context of the FSAP—the primary
responsibility of the Bank—will cut across different sectors and topics, according to
country circumstances (Box 4). The key output of a “developmental assessment” would be
the Aide-Mémoire (AM) delivered to the authorities at the end of the field work and the FSA
delivered for information to the Board. The AM will be complemented by technical notes and
ROSCs as necessary.
30
56. As with the stability assessments, the sectoral coverage of developmental
assessments would also vary. They would cover all sectors that are currently or potentially
important for growth and development (e.g., banking, securities, pensions and insurance), with
a particular emphasis on the structural or policy-related impediments that hold back the
contribution of the financial system to economic growth and development. In developing
countries, in particular, these aspects also have important implications for financial sector
soundness.
57. Developmental assessments play a particularly critical role in low-income
countries (LICs). For many LICs, shallow financial markets and limited access to financial
services constrain growth and can exacerbate poverty. These impediments also make these
markets less resilient to shocks and constrain the ability of authorities to undertake
countercyclical policies. Thinness of markets limits financial institutions’ ability to manage
Box 3. The Core Elements of the Stability Assessment
At a minimum, a stability assessment would include three components.
An evaluation of the source, probability, and potential impact of the main risks to macro-financial stability in
the near-term. This involves analyzing the structure and soundness of the financial system; salient trends in both
the financial and non-financial sectors; risk transmission channels (macro-financial linkages, cross-border
effects, and feedback loops); and features of the overall policy framework that may attenuate or amplify
financial stability risks (e.g., exchange rate regime). Both quantitative analysis (Financial Soundness Indicators
(FSIs), stress tests) and qualitative assessments would be used to estimate the severity of risks and rank them
according to the likelihood of occurrence and the potential impact on financial stability.
An assessment of the country’s financial stability policy framework. This involves an evaluation of the
effectiveness of financial sector supervision; the quality of financial stability analysis and reports; the role of and
coordination between the various institutions involved in financial stability policy (with special emphasis on the
central bank); and the effectiveness of monetary policy.
An assessment of the authorities’ capacity to manage and resolve a financial crisis should the risks
materialize. This involves an overview of the country’s liquidity management framework (instruments,
collateral policies); financial safety nets (deposit insurance, lender-of-last-resort arrangements); crisis
preparedness and crisis resolution frameworks (bank resolution); and the possible spillovers from the financial
sector onto the sovereign balance sheet.
To preserve the integrity of the program, these three elements would be the minimum required for a stability
assessment in the context of the FSAP. All three elements are required for a well-rounded assessment of near-term
financial vulnerabilities, and would be expected to be covered in all FSSAs. To be sure, focused missions by
specialist staff—either as part of Article IV surveillance or technical assistance—could cover some of these
elements (e.g., stress testing, institutional structure of financial supervision, central bank liquidity management,
etc.), as at present. But unless all three elements are covered, these focused missions will not be done under the
FSAP (though their findings could, of course, be an input to future stability assessments) and will not generate an
FSSA. Of course, stability assessments in individual cases could cover additional areas, if needed, and could also be
accompanied by detailed assessments of compliance with Standards and Codes.
31
portfolios, leaving them vulnerable to shocks. More generally, the lack of reliable and
comprehensive data coverage in most LICs hinders analysis and benchmarking.
Flexibility, responsiveness, systemic focus, and continuity
58. The limited progress toward streamlining and focusing FSAP updates since the
last review has resulted in long lags between updates. One difficulty has been the
expectation that FSAP updates would be comprehensive in all cases, regardless of country
circumstances. This has resulted in updates that often were less focused and more cumbersome
than they could be. Large teams and long lead-times, combined with the tightening resource
constraints—especially at the Fund—have kept the average time lag between updates to about
six years. Although this was consistent with the directions given by the last Board review,
11
11
The Board had concluded at the time of the last review that “an average frequency of FSAP updates of about
five years seems reasonable” (http://www.imf.org/external/np/sec/pn/2005/pn0547.htm
).
Box 4. Elements of the Development Assessment
Developmental assessments would tend to focus on the medium- to long-term needs for the deepening and
strengthening of the financial sector, addressing major weaknesses affecting the sector’s efficiency, soundness, and
contribution to long-term growth and social development. They will encompass a combination, based on the
relevance of each topic for the country assessed, of some of the following elements:
An assessment and identification of development needs for the financial sector infrastructure, that includes:
(i) a set of rules regarding property rights, including those governing proprietary security; (ii) general rules on
corporate governance; (iii) a basic framework to collect, organize, store and communicate information; and
(iv) an infrastructure to facilitate the trading and settlement of contracts.
An evaluation of financial sector oversight to ensure that: (i) financial systems remain sound; (ii) financial
intermediation becomes as competitive and efficient as possible; and (iii) consumers are adequately protected
and markets retain their integrity.
An assessment of public policy that can affect financial sector activity by: (i) managing general enabling
policies that have an important bearing on financial development; or (ii) by managing public financial
institutions or seeking to influence the activities of private financial intermediaries through targeted financial
promotion policies.
An assessment of the impact of an underdeveloped financial sector on financial stability in low-income
countries, and identification of the long-term financial sector reforms that would enhance the capacity of the
financial sector and the economy as a whole to absorb shocks and improve the effectiveness of economic
policies.
Development assessments could also be accompanied by detailed assessments of compliance with Standards and
Codes.
32
the experience of the recent financial crisis has shown that long lags between updates,
especially for the stability assessment component, weaken the effectiveness of the FSAP.
12
59. “Modular” FSAP updates would introduce a degree of flexibility and continuity
in the program. The modular approach would essentially introduce the option, under FSLC
guidance, to conduct an FSAP update through separate, smaller, more focused missions
concentrating on stability or developmental needs, with the Fund and Bank taking the lead
respectively. This option would eliminate the rigidity inherent in the current “one-size-update-
fits-all” approach and allow both institutions to respond more flexibly to country
circumstances—as well as their own priorities—without abandoning the joint nature of the
program. By allowing greater flexibility with respect to the scope and focus of updates, it
would facilitate a more strategic focus in allocating scarce resources among countries
requesting updates. Last but not least, the option for modules would facilitate an increase in
the frequency of stability assessments when necessary, as frequently as every 3-4 years for
systemically important and vulnerable countries, provided there is demand and subject to
resources. Box 5 illustrates how the modular approach would work.
60. Risk-focused ROSCs would also enhance the flexibility and transparency of the
program. At present, ROSCs—be they initial assessments or updates—must be based on a
comprehensive detailed assessment of all principles. As Chapter II documented, this has
resulted in the number of ROSCs declining from almost five per initial FSAP in the early
years to about one now. Instead, staff is producing more focused Technical Notes on selected
principles, which are arguably less effective (full ROSCs have been found to spur authorities
to take remedial action) and less transparent (Technical Notes are not, as a rule, issued to the
Board). The proposal thus is to modify the existing requirement so that, following the initial
comprehensive assessment, staff could have the option to undertake a risk-focused partial
ROSC update.
13
This proposal is developed in detail in a separate paper (Revised Approach to
Financial Sector Standards Assessments in FSAP Updates), which describes the basis on
which the principles that would be re-assessed in a partial ROSC would be determined.
12
The accompanying background paper shows that, in the recent crisis, the more dated the FSAP assessment, the
less accurate the diagnosis of financial vulnerabilities and the less apt the policy recommendations on how to
address them.
13
This option would not apply to AML/CFT standards, which would continue to be assessed in their entirety.
Moreover, initial FSAPs and full FSAP updates would continue to incorporate a full AML/CFT assessment,
consistent with existing IMF Board guidance (see http://www.imf.org/external/np/sec/pn/2006/pn0672.htm
which also provides for flexibility in the timing of the AML/CFT assessment). When FSAP modules are
conducted separately in-between “full” updates, on the other hand, it may or may not be appropriate or necessary
to incorporate a full AML/CFT assessment. The relationship of AML/CFT assessments to the FSAP program
more broadly will be addressed in a forthcoming Board paper on the AML/CFT program.
33
61. Enhanced off-site monitoring and analysis would improve the continuity of
monitoring and policy dialogue. Combined with the option for modular assessments, it
would help plug the gaps that the current model leaves in financial sector surveillance,
highlighted by the experience with the recent crisis (see background document). Two recently-
launched Bank and Fund initiatives are first steps in this direction.
FSI databases. During the recent crisis, the standard FSIs that were used in surveillance
did not provide sufficiently early warning of the turmoil. MCM is revising the list of core
and encouraged FSIs for commercial banks, expanding them to include systemically
important nonbank financial institutions, and broadening their coverage of sectoral risk
Box 5. The Option for FSAP Modules
The modular option introduces flexibility in the choice of vehicles for FSAP updates. The standard, joint Bank-
Fund assessment mission would remain the norm for initial assessments and for “full” updates in developing and
emerging market countries (and similarly, the standard Fund-only mission in advanced countries). This reflects the
overlap between stability and development issues and the recognition that the distinction between them is not always
clear-cut. But when, for example, a rapid update of the stability assessment is required for surveillance purposes or
requested by the authorities, the Fund would lead a stand-alone stability assessment, focused on the core topics
outlined in the previous section (Box 3). Similarly, when it is important for the reform process or requested by the
authorities, a Bank-led development module could conduct stand-alone, focused assessments of developmental
needs (Box 4). Although each institution would take the lead for its module, staff from both institutions would
normally participate in both.
The modular approach would allow scheduling and tailoring the modules more closely to the needs of the
country and to each institution’s priorities and resources. The output of a Fund-led stability module would in all
cases be an FSSA, just as with the joint “full” FSAP update missions. The output of a Bank-led development module
would be an Aide-Mémoire left with the authorities at the end of the mission, and technical notes, ROSCs, and an
FSA, as appropriate. The output of separate modules would be shared between (and reviewed by) the staff of the two
institutions.
Modules would complement but not replace the “full” FSAP updates. A “full” update would still require both
stability and development perspectives to provide a “holistic” view of the country financial sector, while tailored to
country circumstances; but modules would provide the flexibility to address specific country needs and
circumstances between full updates. To preserve the FSAP brand, the outputs of the stability and development
modules (Aide-Mémoire and FSSA/FSA), when conducted separately, would be clearly labeled as such. Joint “full”
FSAP update missions would still be undertaken periodically, as at present. Their frequency would depend on
country circumstances and the systemic prioritization of allocating Bank and Fund FSAP resources.
Strengthened mechanisms for quality control and inter-institutional coordination would be a crucial part of the
modules. A number of reforms, discussed in more detail in the following sections, would ensure the continued
integrity of the FSAP product. These include (i) a more systematic prioritization exercise; (ii) an upgraded role for
FSLC in deciding the modalities of FSAP updates (joint “full” update missions or modular assessments) taking into
account the authorities’ preferences, country circumstances, and the need to ensure that both stability and
developmental aspects of the financial sector are appropriately covered over time; and (iii) enhanced off-site
financial sector monitoring by both institutions.
34
exposures (e.g., to cover CDS spreads, distance to default, size of ABS markets and
performance of MBS/ABS securities). Work is also underway to develop FSIs for non-
financial corporations and households. In addition, the Bank is expanding the range of
development and business indicators for the financial sector.
FSAP recommendations database. The Bank has compiled a database of FSAP
recommendations since the start of the program as part of its stock-taking exercise.
Recommendations were classified based on the grid described in Appendix II. This effort
will now be continued, with the maintenance of a permanent database of FSAP
recommendations; and enhanced, with the introduction of a tool to measure the degree of
implementation. This would allow a more systematic follow-up of the implementation of
FSAP recommendations, provide greater continuity, and help anchor the FSAP more
effectively in the other financial sector work of the Bank and the Fund. It would also help
reduce somewhat resource demands on mission teams.
These initiatives notwithstanding, increased off-site monitoring and analysis are neither easy
nor costless. They have implications for staffing and may require a careful look at
organizational aspects in both institutions.
62. The incorporation of offshore financial center (OFC) assessments into the FSAP
has also helped streamline and facilitate the systemic focus of the program. The
integration of the program in the FSAP last year has enabled a more uniform and risk-based
approach to financial sector surveillance and improved the coordination of Fund analysis
across jurisdictions. It has also allowed a better allocation of Fund resources, focusing on
those OFCs that account for the largest share of offshore activity and could pose systemic
risks.
Stronger analytical content, candor, transparency, and regional/thematic perspectives
63. Improving the analytical tools used for stability assessments in the FSAPs is a
major priority. The Fund has already invested heavily in developing more advanced
quantitative models and market-based indicators for gauging financial vulnerability and its
potential impact on the real economy. Since these tools are not unique to the FSAP, a fuller
discussion may be found in the paper Financial Sector Work and Bilateral Surveillance—
Toward Further Integration. These efforts will concentrate in four areas:
Macro stress testing. This includes refinements to meet bilateral surveillance needs arising
from FSAP and Article IV work, including shedding greater light on macro-financial
linkages and their feedback effects to the real economy. Refinements will cover the
methodology itself, as well as quality control, training, and dissemination of tools within
and outside the Fund.
35
Risk modeling. The Fund is working to refine macro-financial models, including better
integration of credit, market, and liquidity risk, and the incorporation of second-round
effects in the models.
High frequency monitoring and risk assessment tools, including for early warning
purposes. A variety of system-wide risk indicators are being developed to meet the
expanding bilateral and multilateral financial surveillance requirements. These include
daily computations of CDS spreads for major banks and insurance companies, an emerging
market bond spread indicator, and an Excel-based risk management tool to assess sovereign
debt-related vulnerabilities and risks. These tools will continue to be expanded and
disseminated to both FSAP and Area Department teams.
Contingent Claims-based Approach (CCA). The Fund has developed a Contingent Claims
utility that facilitates calibrating risk-adjusted balance sheets for sovereign, financial, and
non-financial corporate sectors. Use of this facility will now be gradually extended to
advanced country and emerging market FSAPs, provided the required data are available.
64. Stress tests in FSAPs have become more sophisticated over time, but the recent
financial crisis has prompted a critical re-assessment of stress testing tools and
methodologies. Some of the stress tests performed in the run-up to the crisis missed important
sources of instability, such as exposures to liquidity risk, concentration of exposures in the real
estate market, and exposures to off-balance sheet vehicles. The crisis also illustrated rather
dramatically the strength of contagion, both domestically and across borders. An internal Fund
evaluation of how stress tests performed during the crisis, presented in a separate background
document, has proposed a number of improvements in the stress testing methodologies based
on this experience. Chief among them will be efforts to obtain adequate data for the tests,
covering both on- and off-balance sheet exposures—which requires the full cooperation of the
authorities—and, when there are gaps, communicating these, and associated simplifying
assumptions, clearly; paying greater attention to the possibility of cross-border contagion and
to liquidity risk; design scenarios that combine solvency risk with liquidity risk; and running
stress tests regularly, and harmonizing methodologies for peer groups of countries.
65. The crisis has also created demands for methodological development in new
areas, notably the assessment of macroprudential risks. Analytical work in this area, both
in the Fund and more broadly, has gained impetus since the crisis. The emerging lessons will
be distilled and used in stability assessments, in particular as regards (i) the identification and
monitoring of systemic risk by developing tools to monitor large exposures (e.g., to sub-prime
mortgages) across firms and markets, rather than only at the level of individual firms; focusing
on the role of systemically important financial institutions; and analyzing possible spillovers
between financial firms; (ii) risk management or regulatory gaps that could increase systemic
risk, such as deficiencies in risk-management practices, broad-based increases in financial
leverage, and deficiencies in regulations, e.g., procyclicality; and (iii) developing a system-
36
wide approach to regulation and clarifying institutional responsibilities of the central banks
and other supervisory agencies.
66. In addition to improving the analytical toolkit, the introduction of a Risk
Assessment Matrix will make stability assessments more candid and transparent. While
there is a limit to how far assessments can be standardized without losing depth and nuance,
the Fund, largely based on an approach pioneered by the Bank of England and others, last year
developed and piloted on an experimental basis a Risk Assessment Matrix (RAM) designed to
help organize the analysis and presentation of FSAP stability assessments and—as
important—to facilitate their integration in both bilateral and multilateral Fund surveillance.
RAMs combine the identified major sources of risks (e.g., over-indebted households,
undercapitalized banks), possible triggers (e.g., a severe macroeconomic downturn, a failure of
a systemically important institution), and transmission mechanisms, with the assessment of
regulatory, supervisory, and crisis management frameworks and the results of stress tests to
arrive at qualitative assessments of (i) the probability of risk triggers being activated (low,
medium, high); and (ii) the potential impact on financial stability and on the broader economy
were those events to materialize. Appendix IV presents a sample RAM. Based on a review of
the pilot uses, guidelines for the use of RAMs are being prepared with a view to mainstream
its use in all stability assessments in the context of FSAPs by year-end.
67. On the Bank side, analytical tools are also being enhanced to assess more
effectively the developmental aspects of a country’s financial system. The areas assessed
by the Bank are wide and varied, including analysis of sectors and markets (banking, pensions,
insurance, housing finance and capital markets), financial infrastructure issues (payment and
settlement systems, credit reporting systems), and topics that cut across sectors and markets
(access to finance, market competition, governance, transparency and disclosure, legal basis).
Several efforts are underway to enhance analytical tools used in these areas.
Benchmarking financial development. A Financial Indicator Benchmarking Project that is
currently underway aims to produce and annually update a core set of cross-country
financial sector indicators (both on intermediate outcomes and on the enabling
environment). The Bank also launched recently a Global Payments System Survey with
responses by 142 countries over a range of issues (legal and regulatory framework, large
value payments, retail payments, foreign exchange settlement, remittances and other cross-
border payments, securities settlement, oversight). These new tools can be used to
benchmark and assess financial development progress in the context of the FSAP.
Creation of new assessment tools. The Bank’s FSAP stock-taking exercise included the
production of guidance notes in several areas (including access to finance, credit reporting,
and pensions). In addition, new approaches and lessons learned are being applied to areas
that have been increasingly important in FSAP assessments (such as competition issues,
housing finance, etc.). The Bank has also produced a legal technical note providing a
37
comprehensive overview of the legal issues underpinning, affecting, and enabling financial
sector development.
Contribution to standard-setting efforts. In addition to the Bank’s and Fund’s close
collaboration with standard-setters (BIS, CPSS, FATF, IASB, IFAC, IOSCO, IAIS, and
OECD), the Bank is adapting tools and creating new standards. The Bank developed a
guidance note for the FSAP to help evaluate the legal framework that governs insolvency
and creditor rights. The Bank is also leading an international effort to define guidelines and
standards in the area of credit reporting. Also, the Bank has been advocating that the
Financial Action Task Force (FATF) devise a policy note on the specific challenges of
implementing AML/CFT standards in countries with low supervisory and enforcement
capacities. The Bank is participating in the Global Corporate Governance Forum to
incorporate lessons learned in this area and continue ongoing efforts for their
implementation. Finally, the Bank has developed a set of “Good Practices in Consumer
Protection and Financial Literacy” for financial sector areas including banking, securities,
insurance, private pensions, non-bank credit institutions, and credit reporting.
Incorporating lessons from the crisis for financial sector strengthening. The crisis has
also highlighted the importance of a sound financial infrastructure, and challenged
perceptions of “best practice” for creating sound financial systems. Where financial
markets are underdeveloped, shallow, and inefficient, financial institutions will be less
resilient to shocks and policy less effective at addressing market imbalances. Analytical
work on the lessons from the crisis is being incorporated into developmental assessments,
in particular as regards (i) tools to measure better the incentive structures and resulting risks
being taken by individual financial institutions; (ii) governance structures, and their ability
to measure and mitigate risk; and (iii) the appropriateness of government policies for
supervision and regulation, including the roles played by the central banks and other
supervisory agencies.
68. Within the limitations of the FSAP, assessments would be enriched by a stronger
regional/thematic perspective. The FSAP is a tool for assessing vulnerabilities and
development needs of national financial sectors and a vehicle for policy dialogue with
supervisors and policy-makers, whose authority is predominantly defined by national borders.
As such, it is essentially—and will remain—a bilateral instrument. It will nevertheless need to
adapt to the reality of an increasingly interconnected global financial market by enhancing
cross-border perspectives in its analysis. Specifically, FSAPs would focus more squarely on
cross-border financial linkages that propagate and amplify the transmission of financial shocks
(cross-border capital flows and ownership, global liquidity conditions, global investor bases
and risk management practices, spillover effects from global or regional systemically
important countries). And more will be done to incorporate into FSAP assessments the
findings and policy recommendations from regional and multilateral financial sector analyses,
such as the GFSR, the WEO, vulnerability exercise, and the early warning exercise (EWE).
38
69. Finally, the reach and impact of FSAP assessments can be enhanced by a more
open publication policy. At present, the Aide-Mémoires produced by FSAP teams are
confidential documents, while Technical Notes, FSSAs, and FSAs may be published with the
consent of the authorities. There is merit in the status of keeping Aide-Mémoires unchanged:
these documents often contain market-sensitive information, data on individual institutions, or
detailed assessments of compliance with international standards. They should thus continue to
be a vehicle for transmitting this valuable information to the authorities in a secure and
confidential manner. FSSAs, however, are the main input into the Fund’s surveillance, and
there is a strong argument to treat them in the same way as Article IV consultation reports, i.e.,
apply also to them the presumption of publication. This proposal will be considered in the
forthcoming review of the Fund’s transparency policy. On the Bank side, there is also a strong
case for publication of FSAs but as country documents, their publication will still require
approval by country authorities.
Effective Bank-Fund coordination and management of the joint program
70. The aforementioned changes would be underpinned by a strengthened FSLC.
Since its creation in 1999, the FSLC has had the mandate to coordinate the two institutions’
financial sector agendas, focusing on the FSAP and financial sector technical assistance.
However, its structure, activities, and mandate set out at its creation (see Guidelines for FSLC,
1999)
14
have become ill-suited to the rapidly changing global financial environment.
71. An enhanced FSLC will ensure that the FSAP is targeted and focused and that
the proposed changes improve the quality of the program. This would involve
setting country priorities, reflected in a memo sent to the top management of both
institutions prior to Spring and Annual Meetings;
providing guidance on the analytical and policy framework for the program;
reviewing FSAP requests from countries and, for updates, approve the proposed modality
(joint “full” missions or separate modular assessments);
providing guidance regarding the scope and composition of assessment teams;
serving as a vehicle for systematic information-sharing of results from stability and
development modules; and
playing a key role in forming the strategy and overseeing the implementation of the off-site
framework that will provide continuity to the program.
14
Guidelines for Bank-Fund Collaboration in the Financial Sector. Developed by the Financial Sector Liaison Committee of World Bank and
IMF, 1999. http://finsec.worldbank.org/assets/images/Guidelines_for_Collaboration.pdf
39
New FSLC terms of reference and procedures have been prepared to ensure an effective
implementation of its enhanced role. (See Appendix V).
72. The FSLC will continue to coordinate the financial sector activities undertaken by
both institutions outside the FSAP. In a more continuous and flexible framework, it will be
more important than ever to strengthen this function to ensure effective coordination of policy.
To this end, FSLC will facilitate regular meetings between Bank and Fund teams to discuss
TA follow-up for countries that have recently completed an FSAP and will oversee TA
coordination.
73. At the same time, the strengthening of FSLC aims to improve decision-making
without creating an additional layer of bureaucracy. The existing FSAP Secretariats in
each institution will take the general guidance of FSLC forward in developing plans for
assessments with staff and country authorities. Existing arrangements for scheduling, staffing
and budgeting by FSAP Secretariats in each institution will be maintained. Processes will be
reviewed to consider what is best decided at a FSLC level and what could be addressed in a
FSLC sub-committee or at the FSAP Secretariat level. FSLC would meet regularly, with many
decisions made on a lapse-of-time basis, and with disagreements promptly referred to
management. FSLC will continue to elevate some meetings per year to the level of the Fund
MCM director and Bank FPD vice president. Also FSLC may establish, as needed,
subcommittees to review financial sector policies and practices, similar to the subcommittee
created for the preparation of this review paper.
C. Integration of the FSAP with Other Bank Financial Sector Work and Fund
Surveillance
74. A critical priority in the proposed revisions of the FSAP is linking the assessments
more closely to follow-up technical assistance to support countries willing to implement
FSAP recommendations. The FSAP provides a valuable independent external assessment,
informs national authorities about vulnerabilities and challenges, and opens a window for
further engagement with the Bank and Fund. However, this window does not automatically
lead to engagement and technical assistance; and as demonstrated by the Bank’s declining
budget spent on follow-up to FSAPs in FY04–FY08, efforts to use the assessment as a
springboard for technical assistance have been shrinking year after year. Review of the history
of follow-up efforts in recent years suggests that client ownership of the process, engagement
with reform-minded counterparts in the countries, and continuity of communication with
clients are key for more substantive follow-up technical assistance.
75. The revised program will emphasize continuous engagement with countries. The
program will develop an off-site component that maintains communication with country
authorities about the status of financial sector development, tracking improvements, and
channeling the information to possible sources of technical assistance within the Bank and
Fund. FSAP assessments will place greater emphasis on communicating messages effectively,
40
raising countries’ awareness about potential opportunities for learning and technical
assistance. Greater flexibility would also help respond more rapidly to country needs for
assessment in particular sub-sectors in a less rigid format. Through these efforts, the program
aims to strengthen the ongoing relationship with countries, and link its assessments more
effectively with technical assistance, advisory work, and lending offered by the Bank and
Fund.
76. Financial sector standards assessments will continue to be closely linked with the
FSAP, but greater use outside the FSAP could be considered. These standards assessments
have typically been performed in the context of the FSAP to take advantage of the synergies
between a detailed consideration of the strengths of prudential and regulatory arrangements
and stability and developmental considerations. However, full standards assessments are
expensive, time-consuming for the authorities, and occasionally divert attention from a more
holistic discussion of the financial sector to a principle-by-principle box-checking exercise.
The proposed risk-focused ROSCs would introduce greater flexibility to tailor standards
assessments and help arrest the reduced emphasis that these have received as part of the FSAP.
Moreover, given the increasing emphasis on standards assessments by the FSB and others,
consideration may need to be given to expanding the use of stand-alone (full or risk-focused)
ROSCs separate from the FSAP, although the resource implications of this would need also to
be addressed.
77. Two of the proposed changes above are critical for improving the integration of
the FSAP with other Bank financial sector work:
The development of an off-site component. Building up the off-site work would be a
way to enhance the effectiveness of on-site reviews and leverage the Bank’s
contribution as regards its cross-country experience. The off-site work will be aimed at
maintaining a more regular contact with country authorities. Building on the summary
of findings and recommendations, an information system could be developed in which
all actors (including country authorities) could input and retrieve data on a continuous
and flexible basis. In addition to facilitating coordination, this system could also
become a key element of the Bank’s monitoring and evaluation (M&E) system for the
financial sector development.
Linking FSAPs assessments more efficiently to follow-up technical assistance. The
FSAP management unit will actively facilitate the ongoing dialogue about technical
assistance and follow-up work between regional and anchor staff, the FSLC, FIRST
Initiative and client counterparts. In this respect, the FSLC will play a larger role to
bring stakeholders together and make decisions. The FSAP management unit will liaise
with FPD sector managers and support them with background information and
recommendations to help in discussions of CAS. In addition, the unit will liaise closely
with FIRST Initiative to ramp up efforts to connect assessment recommendations with
efforts to provide follow-up technical assistance. The goal is to ensure a more
41
continuous approach to diagnosing vulnerabilities and weaknesses in countries’
financial sectors, and getting the right resources and tools lined up to help.
78. Last but not least, the proposed changes outlined in the foregoing sections will
allow the Fund to meet the challenge set out by the IMFC and the G20 to integrate the
program more closely with surveillance. The existence of the FSAP as a distinct instrument
from the Article IV consultation, which also—and increasingly—covers financial sector
issues, creates difficult tradeoffs for the Fund’s financial sector expert resources. Nevertheless,
the proposed changes will help shrink that gap.
79. Three of the proposed changes in this paper are critical for improving the
integration of the FSAP with Fund surveillance.
The definition of the core elements of the stability assessment, the Fund’s main
contribution to the FSAP (Box 3) would clarify expectations about what the FSAP can in
turn contribute to the Article IV process. An assessment that covers these elements,
whether conducted in a joint Bank-Fund mission or as a stand-alone stability module,
would always be summarized in an FSSA and be associated with an Article IV
consultation, as at present. More limited assessments of particular vulnerabilities or aspects
of a country’s financial stability policy framework could still be conducted in separate
missions or as part of the Article IV consultation.
The greater flexibility afforded by the option of modular assessments would allow the
Fund—resources permitting—to address a major shortcoming of the current FSAP: the
relatively low frequency between updates. Stability assessments would henceforth not need
to wait for a comprehensive FSAP update mission to take place but could be mounted
quickly and flexibly on a stand-alone basis.
Some of the new analytical tools for the FSAP being developed in response to the crisis
would enhance the quality of macrofinancial surveillance by allowing a better assessment
of financial vulnerabilities and more candid and comparable assessments across countries.
By providing input that could be readily used by the WEO and GFSR, these would also
help bridge the gap between bilateral and multilateral surveillance.
80. Better integration of the FSAP with surveillance would also require changes in
the Article IV process. This paper has described a set of proposed changes that would make
the output of the FSAP more easily incorporated into surveillance. But for these to yield
maximum benefit, the Article IV process also needs to adapt. The 2008 Triennial Surveillance
Review discussed a number of improvements, underway or planned, that would improve the
coverage and depth of analysis of financial sector issues in Article IV consultations. A
separate paper (Financial Sector Work and Bilateral Surveillance: Toward Further
Integration) follows up on that discussion and puts forward a number of proposals that
42
complement and dovetail with the proposed changes to the FSAP, with a view to making the
integration as seamless as possible, given the limitations.
D. Resource Implications and Tradeoffs
81. Meeting the new expectations and additional demands placed on the FSAP would
require additional resources. Other things being equal, additional resources will be needed
to (i) exploit the flexibility provided by the modular option to increase the frequency of
assessments—particularly stability assessments—and facilitate better follow-up through more
in-depth development assessments; (ii) expand the coverage and analytical content of the
program to new areas, such as macroprudential risks and policies; (iii) adapt the existing
toolkit and assessment methodologies to the lessons learned from the crisis; and (iv) enhance
the continuity of the program through off-site monitoring of financial sectors and policies.
Moreover, at least in the near term, additional resources would be needed to meet the recent
G20 commitment to FSAP assessments, as well as possible demands associated with FSB peer
reviews that may use the FSAP as a vehicle.
82. These implications will affect both institutions. The tradeoffs are stark for the Fund:
first, many of these demands fall in areas that are the Fund’s primary responsibility; second,
they affect largely—though by no means exclusively—advanced economies, for which FSAPs
are conducted by the Fund alone; and third, they come at the heels of the recent downsizing.
The Bank is also faced with additional demands, especially given the importance of meeting
the needs of countries facing persistent financial sector developmental challenges and the need
for more in-depth assessments to better facilitate follow-up. Given the different focus and
areas of expertise of the two institutions, the room for substitutability between Fund and Bank
resources within the program is limited.
83. The shift in focus towards systemically important or highly vulnerable countries
risks diverting resources from low-income countries that face profound developmental
challenges, as well as stability and soundness issues, and for which the FSAP remains an
important and valued program. Many of these demands fall in areas that are the Bank’s
primary responsibility, and the two institutions (through FSLC) need to reflect on the
appropriate scope for these FSAPs and the relative contributions of Bank and Fund staff.
84. Recent and proposed measures will yield some efficiency gains. In particular, the
option to conduct modular assessments; the recent integration of the OFC assessment program
into the FSAP; and the greater emphasis on systemic focus provide greater scope to prioritize
missions and allocate resources in a more effective manner. Moreover, efforts will continue to
be made in the areas of containing the size of missions; avoiding duplication in analytical
work and methodological development across the two institutions; and simplifying internal
processes (e.g., consolidating pre-mission Scoping Notes and Terms of Reference,
accelerating the post-mission review of the Aide-Mémoire, and eliminating unnecessary
revisions and meetings).
43
85. Nonetheless, these gains would be modest, and the tradeoffs can be illustrated
with two scenarios assuming an unchanged budget envelope. Given the uncertainty
regarding the long-term impact of the new demands on the FSAP and the asymmetric impact
these are likely to have on the two institutions, and since the Bank’s and the Fund’s budgetary
processes and timetables are different, a detailed budgetary proposal is beyond the scope of
this joint staff paper. It is nonetheless crucial to ground the proposals for the reshaped FSAP
on resource realities. To illustrate the tradeoffs, this paper uses the default assumption of an
unchanged resource envelope, i.e., that the current combined resources for the Bank and Fund
are maintained at roughly US$11–16 million annually.
If joint assessments continued to be the norm, the two institutions could continue to deliver
around 20 FSAP assessments per year—depending on the countries involved and the mix
between initial assessments and updates. As the number of countries that have undergone
initial FSAPs increases, however, the average time gap between full updates would
gradually rise.
Modules could increase the assessment frequency for some, but at the cost of longer gaps
between full updates, especially for non-systemically important countries. In particular,
although the stand-alone Fund-led stability modules are expected to be streamlined,
covering the three core elements would still require a minimum of 3-4 staff (more in
advanced economies). With an unchanged resource envelope, these modules, while in
principle available to all members, would have to be limited to systemically important and
vulnerable countries (assuming steady demand for FSAP updates and/or modules on behalf
of these countries). This would imply that Fund participation in FSAPs in small emerging
and developing countries would have to be scaled back. Although higher participation of
Bank staff could partly fill the gap, the coverage of financial stability issues in these
countries would decline, with the average time between assessments lengthening well
beyond the current six years. The impact on small industrial countries, where FSAPs are
conducted by the Fund alone, would be even starker (Box 6 provides an illustration). Also,
without an increased resource envelope there will be no room for more in-depth
development-oriented modules.
44
Box 6. Resource Tradeoffs
Although the precise resource impact of new demands on the FSAP is uncertain, it is possible to quantify
with reasonable precision the resource tradeoffs in one area: the frequency of stability assessments in
FSAP updates. This would help illustrate the implications of the assumption of a broadly unchanged resource
envelope on the FSAP program.
Under the staff proposals presented above, comprehensive stability assessments would henceforth be
conducted in the context of either (i) full FSAP updates (Fund-only for advanced countries or joint Bank-
Fund missions for the rest) or (ii) focused Fund-led stability modules. This would provide the flexibility to
increase the frequency of stability assessments, when appropriate. To be sure, selected aspects of financial sector
soundness could be assessed in the context of Bank-led development modules (if they have important
developmental implications) or indeed outside the FSAP program altogether, e.g., in Article IV consultations; but
these assessments would be partial (they would not cover all three core elements discussed in Box 3) and would
not generate an FSSA report to the Fund Board.
With unchanged resources, more frequent stability assessments would by necessity be limited to
systemically important and vulnerable countries, and come at the expense of less frequent assessments in
the rest of the membership. This is illustrated in the Table below.
The first column presents the average of initial assessments and FSAP updates in recent years, implying an
average gap between updates of about 6 years. Going forward with this model and unchanged resources
would have implied fewer initial assessments and more updates but, as the number of countries participating
in the FSAP also increases, the average gap between updates would tend to rise (second column).
The flexibility to conduct stability modules would allow higher frequency updates of stability assessments;
but under unchanged resources, these would need to be prioritized. Assuming that high-frequency stability
modules are targeted to about 30 systemically important and vulnerable countries would imply that the rest
of the membership would be limited to regular “full” FSAP updates. But the Fund’s resource constraint
would mean that the frequency of these updates—and associated coverage of stability issues in these
countries—would decline substantially from the present level (third column).
Resource Tradeoffs at the Fund: An Illustration
Actual average Steady state, Steady state with
FY07-09 full updates only stability modules
Initial FSAP assessments 7.0 4 4
Stability asses sment updates
In full FSAP updates (Fund-only or joint Bank-Fund missions) 12.3 16 10
In Fund-led high-frequency stability modules -- -- 8
Avg. time between stability assessment updates, in years 5-6 6-7
Systemically important countries
1
……3-4
Non-systemically important countries … … 8-9
Source: Fund staff estimates.
1
For the purposes of this calculation, it is assu med that (i) the systemically important group includes the G20 countries plus
8-10 non -G20 vulnerable or otherwise high p riority cases; and (ii) Fund-led high-frequency stability modules are focused
exclusively on these systemically important countries, while the rest continue to be serviced by regular FSAP updates.
45
86. These tensions remain unresolved and will need to be revisited in light of the
experience with the new features of the FSAP. The tradeoffs described above, while
illustrative, highlight tensions that cannot be resolved at this stage. Their severity will depend
crucially on the steady-state level of demand for updates by systemically important countries,
notably the G20, which will become manifest only over time. Also, as the Bank and the Fund
gain experience with the implementation of the proposed changes, their precise resource
impact will become clearer. Resource implications will therefore need to be re-assessed again
in this light.
IV. ISSUES FOR DISCUSSION
Do Directors agree with the characterization in Chapter II of the FSAP since its inception,
and the results of the survey of country authorities? What are Directors’ views about the
evolution of the program, including its integration with Bank and Fund operational work,
and the response to the recent global financial crisis?
What are Directors' views about the proposals that have been put forward in Chapter III for
improving the focus, flexibility, analytical content, and administration of the program? Do
Directors have other suggestions for improving the effectiveness of the program?
Do Directors agree with the assessment of the advantages and disadvantages of the
voluntary nature of the program? Do Directors agree that FSAP participation should remain
voluntary?
What are Directors' views about the resource issues flagged in Section III.D, in particular
the caution that absent additional resources allocated to the program, it would be difficult to
avoid stricter prioritization of assessments for non-systemically important countries, would
limit the depth of assessments and follow-up, and would constrain the scope for significant
increases in the analytical toolkit and off-site analysis?
46
APPENDIX I: COUNTRY PARTICIPATION IN THE FSAP
Underway Future Participation Confirmed
Albania Ireland 2/ Slovak Republic Burundi Angola
Algeria Israel Slovenia Cote d'Ivoire Benin
Armenia Italy South Africa 2/ Cyprus Cambodia
Australia Jamaica Spain Fiji 6/ Chad
Austria Japan Sri Lanka
Total: 4
China
Azerbaijan Jordan Sudan Equatorial Guinea
Bahrain Kazakhstan 2/ Sweden Guinea
Bangladesh Kenya Switzerland Indonesia
Barbados Korea Syrian Arab Republic Papua New Guinea
Belarus Kuwait Tajikistan Republic of Congo
Belgium Kyrgyz Republic Thailand San Marino
Bolivia Latvia Tanzania United States
Bosnia and Herzegovina Lebanon 2/ Trinidad and Tobago
Total: 12
Botswana Lithuania Tunisia
Brazil Luxembourg Turkey
Bulgaria Macedonia, FYR Uganda
Burkina Faso Madagascar Ukraine
Cameroon 2/ Malawi United Arab Emirates
Canada 2/ Mali United Kingdom
Cape Verde Malta Uruguay
CEMAC 3/ Mauritania
WAEMU 5/
Central African Republic Mauritius Yemen
Chile Mexico Zambia
Colombia 2/ Moldova
Total: 125
Costa Rica Mongolia
Croatia Montenegro
Czech Republic Morocco
Denmark Mozambique
Djibouti Namibia
Dominican Republic Netherlands
ECCU 4/ New Zealand
Ecuador Nicaragua
Egypt Niger
El Salvador 2/ Nigeria
Estonia 2/ Norway
Finland Oman
France Pakistan
Gabon Paraguay
Georgia Peru
Germany Philippines
Ghana Poland
Greece Portugal
Guatemala Qatar
Guyana Romania
Haiti Russia
Honduras Rwanda
Hong Kong SAR Saudi Arabia
Hungary 2/ Senegal
Iceland Serbia
India 2/ Sierre Leone
Iran 2/ Singapore
6/ Board discussion postponed due to delayed completion of Article IV.
Overview of Country Participation in the FSAP
(As of end-July, 2009)
Completed 1/
5/ The West African Economic and Monetary Union (WAEMU) comprises Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo.
1/ Defined as cases where the FSSA has been discussed by the Fund’s Executive Board.
2/ The initial assessment was a part of the pilot program.
3/ The Central African Economic and Monetary Community (CEMAC) comprises Cameroon, Central African Republic, Congo, Gabon, Equatorial Guinea and Chad.
4/ The ECCU FSAP covered the ECCU member countries: Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.
47
APPENDIX II: THE GRID FOR CLASSIFYING FSAP RECOMMENDATIONS
87. The FSAP recommendations are classified according to a logical grid that closely
adheres to the foundations of financial contracting and the different ways in which the state
can help support it:
To facilitate the leap of faith involved in inter-temporal contracting, financial contracts
must be supported by a proper underlying infrastructure that includes: (i) a set of rules
regarding property rights; (ii) general rules on corporate governance; (iii) a basic
framework to collect, organize, store, and communicate information; and (iv) an
infrastructure to facilitate the trading and settlement of contracts.
In addition to providing (and enforcing) basic rules of the game, states also need to
exert a proper oversight to ensure that: (i) financial systems remain sound and the
failures of financial intermediaries, when they occur, are dealt with swiftly and
efficiently; (ii) financial intermediation remains as competitive and efficient as
possible; and (iii) consumers are protected and markets retain their integrity.
Finally, states can also affect financial activity by directly influencing the way the
game is played or by being part of the game, namely by: (i) managing general enabling
policies that have an important bearing on financial development (monetary policy,
public debt policy, tax policy); or (ii) more directly, by managing public financial
institutions or seeking to influence the activities of private financial intermediaries
through targeted financial promotion policies.
88. The policy universe is thus first broken down into three main headings:
(i) infrastructure; (ii) oversight; and (iii) public policies. A second tier further deconstructs
these by broad areas:
infrastructure into: (a) contractual, (b) informational, (c) transactional, and
(d) corporate governance;
oversight into: (a) prudential and (b) market performance and integrity; and
public policy into (a) general enabling policies and (b) financial promotion policy.
89. A third tier is introduced by themes along logical lines. For example, the contractual
framework is divided between main rules (insolvency and creditor rights) and enforcement
(the judiciary). The informational framework is organized according to the way information is
presented (accounting), reviewed (auditing), disclosed (disclosure and reporting), assessed
(rating), or stored for consultation (registries). The transactional framework distinguishes
between trading and payment. Prudential oversight reflects the four logically different stages
of oversight: (i) the underlying legal and organizational framework, (ii) the regulatory
framework, (iii) the supervisory framework, and (iv) crisis management. Financial promotion
policy distinguishes between areas where the state: (i) is directly involved in intermediation,
(ii) seeks to influence the orientation of intermediation in favor of certain segments of society
through subsidies, guarantees, or regulations, or (iii) seeks to promote market development in
a neutral yet pro-active fashion.
48
90. The grid is completed with a fourth and fifth tier reflecting more specialized themes or
different sectors of intermediation. For example, the judiciary distinguishes between
procedures, transparency, enforcement, capacity building, specialized courts, and extra-
judicial arrangements. The recommendations that relate to the oversight of the financial
system as a whole (unified or coordinated oversight, consolidated supervision) or that cut
across national boundaries (cross-borders) are placed into a “global oversight” bucket.
Table 11. Basic Classification of Recommendations
A. Infrastructure
a. Contractual
i. Creditor Rights
ii. Insolvency
iii. Judiciary
b. Informational
i. Accounting
ii. Auditing
iii. Disclosure & Reporting
iv. Rating
v. Registries
c. Transactional
i. Trading
ii. Paying
d. Corporate Governance
B. Oversight
a. Prudential
i. Legal & organizational framework
ii. Regulation
iii. Supervision
iv. Crisis management
b. Market performance & integrity
i. Market competition
ii. Consumer protection
iii. Anti-Money Laundering
C. Public Policy
a. General enabling policies
i. Monetary & Foreign Exchange
Management
ii. Debt Management
iii. Tax Management
iv. Fiscal & public sector management
b. Financial promotion policy
i. Direct intervention
ii. Indirect intervention
iii. Pro-market Activism
49
APPENDIX III: FINANCIAL STABILITY FORUM STANDARDS
15
Area Standard Issuing Body
Macroeconomic Policy and Data Transparency
Monetary and financial
policy transparency
Code of Good Practices on Transparency
in Monetary and Financial Policies
IMF
Fiscal policy transparency Code of Good Practices on Fiscal
Transparency
IMF
Data dissemination Special Data Dissemination Standard
General Data Dissemination System
IMF
Institutional and Market Infrastructure
Insolvency Insolvency and Creditor Rights World Bank/
UNCITRAL
Corporate governance Principles of Governance OECD
Accounting International Accounting Standards (IAIS) IASB
Auditing International Standards on Auditing IFAC
Payment and settlement Core Principles for Systemically
Important Payment Systems
CPSS
CPSS/IOSCO
Market integrity The Forty Recommendations of the
Financial Action Task Force/9 Special
Recommendations Against Terrorist
Financing
FATF
Financial Regulation and Supervision
Banking supervision Core Principles for Effective Banking
Supervision
BCBS
Securities regulation Objectives and Principles of Securities
Regulation
IOSCO
Insurance supervision Insurance Core Principles IAIS
15
From the FSB website.
50
APPENDIX IV: FINANCIAL RISK ASSESSMENT MATRIX: AN ILLUSTRATION
Country X
Overall Level of Concern
16
Nature/Source of Main
Threats
Likelihood of severe realization of threat
sometime in the next 3 years
Expected impact on financial stability if
threat is realized
High credit growth in
recent years, in part
externally funded, may
have compromised loan
quality, thus increasing
credit risk vulnerabilities
Staff assessment: medium
Spreads on sovereign bonds and CDS
have started to widen in the last few
months, well above the movement seen
for countries in the peer group. Given
shallow domestic markets, the room for
countercyclical fiscal policies appears
increasingly constrained.
Enforcement of regulatory standards has
been uneven, which has left some banks
more room for aggressive risk taking,
particularly the funding of the real estate
sector and margin share purchases.
However, distance-to-default measures
for the domestic banks traded in the local
stock exchange remain close to historical
highs.
Staff assessment: high
A sharp retrenchment in bank credit via de-
leveraging—to restore compliance with
capital requirements—would have a sizable
impact on economic activity, particularly on
the construction sector.
Stress test results suggest that banks holding
around 40–50 percent of system’s assets
could see their capital fall below minimum
in the event of a severe downturn.
There is significant potential for cross-
border spillovers to country Y given the
significant presence of that country’s banks
in the local market.
The crisis management framework has some
important shortcomings, not least an
inadequate remedial actions regime.
In recent years, banks
have become
increasingly dependent
on foreign sources and
local institutional
investors to fund the
rapid expansion of their
balance sheets, thus
increasing funding risk
vulnerabilities
Staff assessment: low (but rising)
Deterioration in global liquidity
conditions would negatively impact the
terms and extent of access of country X
and its peers. This will impact the
funding of country Y banks operating in
X. Foreign funding to the private sector
in country X is mostly intermediated
through its banking system.
Liquidity ratios remain high (relative to
peers) but have been falling.
Although mostly carrying floating rates,
the average maturity of loans is rising,
with rising maturity mismatches at the
short-end of the spectrum.
Staff assessment: medium
Two small domestic banks have a limited
stock of CB-eligible collateral, thus leaving
them particularly vulnerable to liquidity
shocks. This assessment is confirmed in
liquidity stress simulating a run on deposits.
Confidence effects could spread the impact.
The interbank market is relatively
underdeveloped, thus providing limited
opportunities to buffer an idiosyncratic
shock (e.g., single/few rating downgrade).
By the same token bank interconnectedness
via interbank market is limited, thus limiting
the scope for direct contagion.
Central Bank LOLR facilities are adequate
and well structured.
16
Use dual metrics: likelihood of threat crystallizing, and potential impact of the threat if it does crystallize;
either one being high, medium or low.
51
APPENDIX V: FSLC PRINCIPLES AND PROCEDURES
91. The FSLC was created in 1998 with the purpose to coordinate Bank and Fund
financial sector activities; facilitate compilation of standards, guidelines, and good
practices; and resolve differences of view on recommendations or approaches in areas of
overlapping interest. This broad mandate has been confirmed on numerous occasions, most
importantly in the Malan Report in 2007 and the Joint Management Action Plan (JMAP)
launched as a result of that report. Yet the core of FSLC’s work has been, and will remain, the
facilitation and administration of the FSAP program.
92. The proposals outlined in this report require a strengthened FSLC, with
improved governance and transparency to ensure a strong and accountable decision-
making framework. The key elements of the strengthened FSLC, which would ensure that
the principles underpinning the FSAP and summarized in this report are effectively
implemented, will include:
A streamlined mandate, in which FSLC provides a platform for sharing information
and operational experience about financial sector issues of common concern; and
continues to administer the joint FSAP program in keeping with the Boards' call for it
to remain joint, voluntary, and focused on providing a comprehensive assessment of
the financial systems of member countries. Information-sharing about follow-up
technical assistance to the FSAP would remain an important role for FSLC, with the
Committee providing guidance but without a decision-making capacity.
Maintenance of the FSLC Secretariat with representative membership at the
appropriate level so as to be effective. This would include regular meetings of the full
Committee, with streamlined procedures for additional meetings when required by
pressing client demands. Accountability would be enhanced by strong regional
representation in the committee and on working groups, and elevation of certain
meetings to Fund MCM Director and Bank FPD Vice President level.
Establishment of working groups that would report to FSLC on critical issues. The
focus and composition of these groups would be determined by FSLC, with reference
to three issues in particular highlighted in this report: (i) FSAP coordination; (ii) TA
issues and coordination, particularly as it relates to FSAP follow-up; and (iii) the
special challenges faced by low income countries.
Regular reporting to senior management on prioritization, decisions and outcomes.
Prioritization and decision-making about undertaking FSAPs, as before. Proposals for
FSAPs, FSAP updates, and modules would be brought to FSLC for review. FSLC
approval would be by consensus and the outcome would guide mission chiefs in
52
carrying out the assessments. Issues that cannot be resolved in FSLC would be
promptly escalated, as has been the practice in the past, to senior management of both
institutions.
