## Financial Sector Surveillance (FSS) ## Source details **Canonical URL:** [Financial Sector Surveillance (FSS)](https://www.imf.org/-/media/files/icd/fss1.pdf) ## Other formats - [Markdown version](/-/media/files/icd/fss1.pdf.md) - [Structured JSON version](/-/media/files/icd/fss1.pdf.json) --- ### Course overview and objectives - Two-week course aimed at providing a foundation to assess financial sector risks. - Target audience: government officials charged with financial sector surveillance (junior to mid-level). - Participants are required to complete the online FMAx course prior to enrolling. - After completion, participants will be expected to: - Compute and interpret key financial ratios derived from accounting data. Use financial ratio analysis to detect potential vulnerabilities and sources of strength in bank balance sheets. Describe the limitations of financial ratio analysis. - Become familiar with the IMF's Financial Soundness Indicators and their use in financial sector surveillance. - Understand and assess banks’ main risks (e.g., credit, market, liquidity). Identify key aspects of stress test design and implementation, and interpret stress test results. - Recognize the importance of non-bank financial intermediaries and their links to banks. - Assess macro-financial linkages (e.g., the impact of business cycles on banks’ soundness). - Have the foundations to track the buildup of vulnerabilities due to ‘excessive’ credit, real estate prices, leverage and balance sheet mismatches. - Have the foundations to assess how shocks can propagate and amplify through the financial system and appreciate shifts in financial regulation since the Global Financial Crisis. ### Course structure and logistics - Course Area: Financial Sector Policies. - Course length: two-week course. - All lectures and workshops are 1.5 hours long. - Evaluation: Two short pre- and post-course quizzes will be administered to assess background knowledge and learning gains. Quiz results will be confidential. - Related/complementary courses: Financial Sector Policies, Risk-Based Banking Supervision, Systemic Macro Financial Risk Analysis and Macro Stress Testing. ### Topics covered (high-level) - 1. Motivating financial sector surveillance: macro-financial linkages and crises - 2. Business model of banks and non-bank financial intermediaries - 3. Credit risk - 4. Market risk - 5. Funding and liquidity risk - 6. The IMF’s Financial Soundness Indicators - 7. The time dimension of systemic risk - 8. The cross-sectional dimension of systemic risk - 9. Macro stress testing: Solvency - 10. Systemic liquidity risk - 11. Sovereign risk - 12. Case studies ### Detailed syllabus and learning modules - UNIT 0: MOTIVATING FINANCIAL SECTOR SURVEILLANCE: MACRO-FINANCIAL LINKAGES AND CRISES (L-0) - Lecture topics: - Financial Crises and vulnerabilities - The Importance of Macro-Financial Linkages - Course objectives and roadmap - UNIT 1: BUSINESS MODEL OF BANKS AND NON-BANK FINANCIAL INTERMEDIARIES (L-1 / W-1) - Lecture topics: - Banks’ and non-bank financial intermediaries’ business models - A review of bank profitability, provisioning and capital - Bank and shadow bank linkages and measurement issues - Workshop (Fundamentals of Financial Ratio Analysis, including CAMELS): - Purpose: computation of key financial ratios from banks' balance sheet to extract information on their soundness. - UNIT 2: MARKET AND INTEREST RATE RISK (L-2 / W-2) - Lecture topics: - Source of sensitivities to market risk - Interest rate risk: repricing gaps and duration - FX rate risk and equity price risk - Workshop: - Objective: compute interest rate risk using the repricing gap and the duration models. - UNIT 3: VALUE AT RISK (L-3 / W-3) - Lecture topics: - Market risk models (VaR, earnings-at-risk) - Alternatives to compute VaR - Market risk mitigation - Workshop: - Objective: compute Value at Risk (VaR) and Expected Shortfall using the historic and delta-normal methods. - UNIT 4: INTRODUCTION TO CREDIT RISK (L-4 / W-4) - Lecture topics: - The concept of default - Key credit risk indicators - Loan loss provisioning and capital - Workshop: - Objective: Calculate various credit risk indicators, including the NPL ratio, default rate, and indicators based on loan loss provisions data such as the NPL coverage ratio or risk costs. Emphasis on data understanding, limitations, and evolution over time. - UNIT 5: CREDIT RISK MODELLING (L-5 / W-5) - Lecture topics: - Building blocks of credit risk modeling - Portfolio models of credit risk - Illustration: The CreditRisk+ approach - Workshop: - Focus: estimation of the loss distribution of hypothetical credit portfolios, estimation of expected and unexpected loses, and associated loan loss provisions and capital charges. - UNIT 6: EXTRACTING INFORMATION FROM BOND SPREADS (L-6 / W-6) - Lecture topics: - Default probabilities and recovery rates - Credit ratings and transition matrices - Calculating PDs from bond spreads - Workshop: - Objective: extract probabilities of default using market data on bond spreads. - UNIT 7: FUNDING AND LIQUIDITY RISK (L-7 / W-7) - Lecture topics: - Sources and measures of liquidity and funding risk - Scenario analysis for liquidity risk and stress testing - Systemic liquidity risk - Workshop: - Objective: introduce the cash-flow based approach to liquidity stress testing. - UNIT 8: THE IMF’S FINANCIAL SOUNDNESS INDICATORS (L-8 / W-8) - Lecture topics: - Overview of the IMF’s Financial Soundness Indicators (FSIs) - Limits to FSIs - IMF’s work in financial sector surveillance (FSAPs) - Workshop: - Purpose: review uses and limitations of the FSIs as a forward-looking tool to assess banking sector soundness. - UNIT 9: MACRO STRESS TESTING OF SOLVENCY (L-9 / W-9) - Lecture topics: - Key steps in stress test design and implementation - Types and uses of stress tests - Sensitivity analysis and scenario analysis - Workshop (Bankistan case study): - Purpose: conduct stress tests on credit, market, and liquidity risk on a solo and combined basis using fictitious data. - UNIT 10: SOVEREIGN RISK (L-10 / W-10) - Lecture topics: - Indicators of sovereign risk - Regulatory treatment of sovereign exposures - Positive and negative aspects of linkages between the banking sector and sovereign entities - Workshop: - Objective: Illustrate feedback loops between sovereign and banking sector risks using data from selected European countries; discuss interlinkages and financial stability implications for participants' countries. - UNIT 11: NON-FINANCIAL CORPORATE SECTOR RISKS (L-11 / W-11) - Lecture topics: - Cross sector linkages - Key financial indicators - Methods to assess bankruptcy risk: z-scores and KMV - Workshop: - Purpose: compute distance to default applying the KMV model to corporate sector data. - UNIT 12: TIME DIMENSION OF SYSTEMIC RISK (L-12 / W-12) - Lecture topics: - Procyclicality (including leverage through the business cycle) - Key variables for surveillance of systemic risk - Early warning systems based on housing market prices and credit growth - Workshop: - Objective: Construct early warning models based on credit and house prices and assess their performance using the signaling approach. - UNIT 13: CROSS-SECTIONAL DIMENSION OF SYSTEMIC RISK (L-13 / W-13) - Lecture topics: - Interconnectedness - Indicators based on balance sheet data - Network Analysis - Workshop: - Objective: Analyze "domino-type" contagion among banks, including systematically important ("too-interconnected") banks, using the Bank Network Excel Add-In. - UNIT 14: ADVANCES IN SYSTEMIC RISK MONITORING (L-14) - Lecture topics: - CoVaR - CoRisk - JPoD, Distress Dependence Matrix - UNIT 15: CASE STUDIES - Participants analyze the structure, coverage, and analysis of the Financial Stability Reports of selected countries and prepare a presentation discussing strengths and aspects for improvement (e.g., data gaps, shortcomings in the analysis, proper identification of vulnerabilities and risk factors, disclosure, policy recommendations). --- _Source: https://www.imf.org/-/media/files/icd/fss1.pdf_