1998 International Monetary Fund

January 1998

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World Economic
and Financial Surveys

    WORLD ECONOMIC AND FINANCIAL SURVEYS
  Toward a Framework for
  Financial Stability

Prepared by a Staff Team led by David Folkerts-Landau and Carl-Johan Lindgren


Preface

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I.   Introduction

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II.   Role of the IMF in Promoting Financial Stability
Role in Promoting Macroeconomic Stability
Role in Disseminating and Adapting Best Practices
Synergy Between the Two Roles

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III.   Key Aspects of a Framework for a Sound Financial System
Raising the Competence and Integrity of Management
Increasing the Transparency of Banking
    Realistic Valuation of Bank Assets
    Public Disclosure
    Prudential Reporting
Limiting Public Sector Distortions
    Lender-of-Last-Resort Facilities
    Deposit Insurance
    Exit Policy
Controlling Risk Through Regulatory and Supervisory
        Oversight
    Prudential Regulation
    Prudential Supervision
Strengthening the Broader Structural Framework
Fostering National and International Supervisory
        Coordination

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IV.   Quality of Information, Supervisory Reporting, and Public Disclosure
Quality of Banking Data
    Accounting and Valuation Rules
    Problems with Bank Asset Valuation and Income
        Recognition
Information for Supervisors
    Information to Evaluate Decision-Making Structures
        and Management
    Information to Evaluate Risks
    Information to Evaluate Profitability
    Information to Assess Capital and Capital Adequacy
Information for Public Disclosure
    Information on the Condition of the Bank
    Information on Earnings

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V.   Public Sector Guarantees
Components of Financial Safety Nets
    Lender of Last Resort
    Deposit Insurance
Exit Policy
    Conservatorship

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VI.   Prudential Regulation of Banking
Bank Licensing
    Management, Nonexecutive Board Members, and
        Shareholders
    Business Plan
Governance of Banks
    Money Laundering
    Internal Controls and Internal Audit
    External Audits and Banking Supervision
Quantitative Supervisory Tools
    Capital Adequacy
    Liquidity
    Credit Diversification
    Connected Lending
    Foreign Exchange Exposure
    Limits on Nonbank Activity

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VII.   Supervisory Oversight
Autonomy of Banking Supervision
    Political Autonomy
    Staffing and Resources
    Immunities
Powers of the Supervisory Authority
Interaction with Other Financial Sector Supervisors and
    Law Enforcement Bodies
Location of the Banking Supervision Function
Off-Site Analysis and On-Site Inspections
Remedial and Punitive Measures

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VIII.   Cross-Border Supervision of Banks
Evolution of Best Practices
Current Status of Best Practices
    Location of the Licensing and Lead Supervisory
        Authority
    Licensing of Internationally Active Banks
    International Implementation of Prudential Standards
    Cross-Border Supervisory Information
    Cross-Border Inspections
    Supervisory Action Against Establishments Abroad
    Information on Supervisory Systems and Structures
    "Shell Banks" and Parallel-Owned Banks
    International Financial Conglomerates
    International Bank Liquidation

175k
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Annexes
  I.   Core Principles for Effective Banking Supervision
  II.   IOSCO Principles and Recommendations for the Regulation and Supervision of Securities Markets
References