IMF Executive Board Discusses Integrating Stability Assessments into Article IV SurveillancePublic Information Notice (PIN) No. 10/135
September 27, 2010
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On September 21, 2010, the Executive Board of the International Monetary Fund (IMF) decided to integrate financial stability assessments under the Financial Sector Assessment Program (FSAP) into Article IV Surveillance on a mandatory basis for member countries with systemically important financial sectors.
Financial sector issues and policies are at the core of the IMF’s surveillance mandate. Financial stability is a key component of members’ domestic and external stability, and is important for the promotion of the “stable system of exchange rates” envisaged under Article IV of the IMF’s Articles of Agreement. Against the background of the recent global crisis, the Surveillance Priorities for 2008–11 gave prominence to financial sector issues.
In practice, however, the integration of financial sector issues into surveillance has been a challenge. This is in large part because the Financial Sector Assessment Program (FSAP)—the premier tool for assessing members’ financial vulnerabilities and financial sector policies—has limitations as a surveillance tool: it is legally a technical assistance instrument with voluntary country participation, and assessments take place separately from Article IV consultations, relatively infrequently, and their scope often goes well beyond macro-relevant financial stability issues, especially in developing and emerging market countries. Although the 2009 Board review of the FSAP introduced changes to the program that go some way toward addressing these limitations, notably clarifying the institutional responsibilities of the IMF and the World Bank and permitting them to undertake separate stability and developmental assessments, respectively, the experience of the recent crisis underscored the urgency of more decisive steps to strengthen the Fund’s financial sector surveillance.
Against this background, in the context of the broader debate on modernizing the Fund’s surveillance mandate and modalities, in April 2010, the Executive Board agreed in principle to consider making stability assessments under the FSAP a mandatory part of bilateral surveillance for members with systemically important financial sectors. Following up on this discussion, on September 21 the Executive Board discussed a staff proposal with specific modalities to implement this important change.
Executive Board Assessment
Executive Directors welcomed the opportunity to discuss the proposal to make stability assessments under the Financial Sector Assessment Program a regular and mandatory part of Article IV surveillance for members with systemically important financial sectors. Most Directors saw this as an important step toward strengthening the Fund’s financial sector surveillance, consistent with the Fund’s existing bilateral surveillance mandate, and as a key component of the overall strategy to modernize the Fund’s surveillance mandate and modalities. At the same time, Directors called for further steps to integrate financial sector issues more fully into bilateral surveillance for all members. Some Directors stressed the need for a broader discussion of the Fund’s mandate for surveillance, in particular in the financial stability area, at an early opportunity.
Directors agreed that the proposed scope of mandatory financial stability assessments, modeled on the current FSAP stability modules, covers the macro-relevant financial sector issues that are critical for the Fund’s surveillance. They underscored that assessments of compliance with financial sector standards and codes would continue to be made available to members on a voluntary basis, as at present.
Directors recognized that regular financial stability assessments hold the promise of enhancing the effectiveness of Fund surveillance and its coverage of financial sector issues. They stressed that delivering on this promise would require follow up on the results of these assessments by Article IV teams. Many Directors considered that combining financial stability assessment and Article IV missions and further strengthening the coverage of financial sector issues in annual consultation missions, based on close interdepartmental cooperation, would help in this regard, while also possibly contributing to ease the burden on country authorities.
Directors endorsed the move toward a more risk-based approach to financial sector surveillance by focusing mandatory financial stability assessments on members with systemically important financial sectors. They took note of the list of members whose financial sectors the Managing Director had determined to be systemically important. Most Directors considered that the criteria described in the staff paper are relevant, clear, and transparent but would need to be periodically reviewed as members’ financial sectors and markets evolve and as refinements to the methodology can be made. A few Directors noted that the methodology would benefit from including risk and vulnerabilities in addition to size.
Directors noted that a higher frequency of mandatory financial stability assessments compared to the current average gap between FSAP updates of six to seven years is necessary to ensure effective surveillance of the members with systemically important financial sectors and closer integration with the Article IV process. Most Directors agreed that this increase in the frequency of financial stability assessment should be implemented with flexibility. They supported or were willing to go along with the Managing Director’s proposal to set the frequency, at which financial stability assessments under Article IV will be expected to be conducted, at no more than five years. Many Directors noted that this would also be consistent with the commitment made by FSB members, most of which are on the list of jurisdictions with systemically important financial sectors. A number of Directors would nevertheless have preferred a three-year cycle. At the same time, Directors acknowledged that, depending on the circumstances, it may be appropriate for the Managing Director in some cases to encourage members with systemically important financial sectors to undergo financial stability assessments more frequently, in particular within a three-to-five-year timeframe. Proceeding ahead of the deadline in this manner would be voluntary for members. Before calling upon a member to do so, the Managing Director would take into account (i) the date of the last financial stability assessment or FSAP for the member, (ii) legislative or other developments in the member country that may affect the member’s financial sector, and (iii) the need to ensure an efficient use of staff resources.
Directors noted that making financial stability assessments under the FSAP mandatory for members with systemically important financial sectors should not lead to a diminished availability of FSAPs for members without systemically important financial sectors. They emphasized that developmental assessments conducted by the World Bank in developing and emerging market countries should continue to be provided on a voluntary basis, as at present. Given the interlinkages between financial stability and financial development in these countries, Directors considered these developmental assessments to be an important complement to the Fund’s stability analysis. They encouraged authorities to continue volunteering for these assessments, and called for continued close cooperation between the Fund and the Bank in this area.
Directors generally agreed that the mandatory financial stability assessments in jurisdictions with systemically important financial sectors will require appropriate additional resources. They also noted that this is important to ensure that implementing this proposal does not come at the expense of conducting FSAPs on a voluntary basis in the rest of the membership. They emphasized the need, in particular, to ensure that developing and emerging market countries would continue to benefit from joint Bank-Fund assessments. Directors took note of the preliminary staff estimates of the proposal’s resource implications and agreed to consider these in the context of the Fund’s medium-term budget discussion. A few Directors expressed the expectation that the additional costs be financed through a Fund-wide reallocation of resources, including a review of the workload.