## USE OF SUPERVISORY STANDARDS IN THE FINANCIAL SECTOR ASSESSMENT PROGRAM (FSAP): UNDERSTANDINGS WITH STANDARD SETTING BODIES ## Source details **Canonical URL:** [USE OF SUPERVISORY STANDARDS IN THE FINANCIAL SECTOR ASSESSMENT PROGRAM (FSAP): UNDERSTANDINGS WITH STANDARD SETTING BODIES](https://www.imf.org/-/media/files/publications/pp/2017/pp060817useofsupervisorystandarsfsap.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2017/pp060817useofsupervisorystandarsfsap.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2017/pp060817useofsupervisorystandarsfsap.pdf.json) --- ### Executive summary and purpose - Paper prepared by Udaibir S. Das, Nigel Jenkinson, Jennifer Elliott, and Jana Gieck Bricco; approved by Tobias Adrian. - Staff report completed on June 9, 2017 and issued to the Executive Board for information. - Purpose: inform the Executive Board of staff-level understandings reached with global Standard Setting Bodies (SSBs) on the use in FSAPs of: - the Basel Committee’s Core Principles for Effective Banking Supervision (BCP), set by the Basel Committee on Banking Supervision (BCBS), - the Insurance Core Principles (ICP), set by the International Association of Insurance Supervisors (IAIS), and - the Objectives and Principles of Securities Regulation (Principles), set by the International Organization of Securities Commissions (IOSCO). ### Key background and rationale - Financial sector supervisory standards have been used in FSAPs since 2000 and are relied on by the Fund and World Bank as evaluative tools and benchmarks. - Graded assessments of compliance (Detailed Assessment Reports, DARs) are voluntary for Fund member countries, including in jurisdictions where FSAP stability assessments are mandatory. - The 2014 FSAP Review proposed a “macrofinancial approach” to identify macrofinancially-relevant subsets of principles for targeted assessment work in FSAPs. - Directors encouraged exploring ways to focus assessments consistent with FSAP’s systemic-risk focus, while balancing streamlining with maintaining proper coverage of standards. ### Consultations with SSBs and their views - Fund staff consulted with BCBS, IAIS, and IOSCO; discussions were open and constructive. Staff also consulted World Bank staff and periodically briefed the FSB’s Standing Committee on Standards Implementation (SCSI). - SSBs advised against assessing only a subset of principles when a graded assessment is undertaken, arguing: - Standards are a coherent and holistic package; principles are interrelated and should be considered as a cohesive whole. - A subset may serve as a starting point for analysis, but flexibility is needed to add other principles in agreement with authorities. - Benefits of full assessments should be weighed against costs; full assessments provide strong incentives to improve supervisory systems. - Full assessments are important cross-border supervisory tools that support a risk-focused approach. - Frequency of full assessments needs careful consideration so that long intervals do not miss emerging issues. - Member countries are willing to undertake self-monitoring of progress vis-à-vis the standards on a regular basis. ### Staff–SSB understandings and operational approach - Refinement of the existing flexible approach agreed: supervisory standards will continue to be used in one of two ways: - Graded assessment: - The standard will be assessed in full when assessed with grades, based on the SSB’s assessment methodology. - Output: Detailed Assessment Report (DAR). - Focused review: - A standard can be used as a benchmark to analyze specific prudential or supervisory gaps that could exacerbate or fail to contain systemic risk. - Focused reviews will not involve graded assessments and can be based on a subset of principles. - Refinement: sets of “base principles” (Annex) agreed by staff and SSBs will serve as the starting point for discussions with authorities about the scope of focused reviews. - Output: FSAP Technical Note or input to the Financial System Stability Assessment (FSSA). - Decision to conduct graded assessment or focused review remains by agreement between staff and authorities, based on: - relative importance of the specific sector, - degree of vulnerabilities, - overall priorities of the FSAP, - extent of changes in the sector or oversight framework, - extent of changes in the standard or assessment methodology since the last graded assessment. - Staff will draw upon desk analysis of macrofinancial risks, structural and conjunctural factors, recent institutional and supervisory developments, and an up-to-date self-assessment provided by the authorities. - No specific frequency for graded assessments is prescribed in the understandings, consistent with the voluntary nature of standard assessments. - Staff will continue to monitor use of supervisory standards in FSAPs, periodically consult with SSBs, and report to the Executive Board. The next FSAP Review (planned for 2019) will evaluate the use of supervisory standards in FSAPs. ### Appendix — Base Principles (agreed starting points for focused reviews) - BCP Elements (Base Principles Boldfaced) - Responsibilities, objectives and powers (CP1) - Independence, accountability and legal protection (CP2) - Cooperation and collaboration (CP3) - Permissible activities (CP4) - Licensing criteria (CP5) - Transfer of significant ownership (CP6) - Major acquisitions (CP7) - Supervisory approach (CP8) - Supervisory techniques and tools (CP9) - Supervisory reporting (CP10) - Corrective and sanctioning powers (CP11) - Consolidated supervision (CP12) - Home host relationship (CP13) - Corporate governance (CP14) - Risk management process (CP15) - Capital adequacy (CP16) - Credit risk (CP17) - Problem assets, provisions and reserves (CP18) - Concentration risk and large exposure limits (CP19) - Transactions with related parties (CP20) - Country and transfer risks (CP21) - Market risk (CP22) - Interest rate risk in the banking book (CP23) - Liquidity risk (CP24) - Operational risk (CP25) - Internal control and audit (CP26) - Financial reporting and external audit (CP27) - Disclosure and transparency (CP28) - Abuse of financial services (CP29) - Note: It is understood that the IMF remains flexible on the selection of these Principles. - ICP Elements (Base Principles Boldfaced) - Objectives, Powers and Responsibilities (ICP 1) - Supervisor (ICP 2) - Information Exchange and Confidentiality (ICP 3) - Licensing (ICP 4) - Suitability of Persons (ICP 5) - Changes in Control and Portfolio Transfers (ICP 6) - Corporate Governance (ICP 7) - Risk Management and Internal Controls (ICP 8) - Supervisory Review and Reporting (ICP 9) - Preventative and Corrective Measures (ICP 10) - Enforcement (ICP 11) - Winding-up and Exit from the Market (ICP 12) - Reinsurance and other forms of Risk Transfer (ICP 13) - Valuation (ICP 14) - Investment (ICP 15) - Enterprise Risk Management for Solvency Purposes (ICP 16) - Capital Adequacy (ICP 17) - Intermediaries (ICP 18) - Conduct of Business (ICP 19) - Public Disclosure (ICP 20) - Countering Fraud in Insurance (ICP 21) - AML/CFT (ICP 22) - Group-wide Supervision (ICP 23) - Macroprudential Surveillance and Supervision (ICP 24) - Supervisory Cooperation and Coordination (ICP 25) - Cross-border Cooperation and Coordination on Crisis Management (ICP26) - Notes: - It is understood that the IMF remains flexible on the selection of these Principles. - Items marked as “Added by SSB through consultation process” appear in the list as provided. - IOSCO Elements (Base Principles Boldfaced) - Responsibilities of the regulator (P1) - Operational independence and accountability (P2) - Adequate powers, proper resources, and capacity (P3) - Clear and consistent regulatory process (P4) - Staff professional standards and confidentiality (P5) - Monitor, mitigate and manage systemic risk (P6) - Review the perimeter of regulation regularly (P7) - Ensure that conflicts of interest and misalignment of incentives are avoided (P8) - SROs should be subject to oversight and confidentiality standards (P9) - Comprehensive inspection, investigation and surveillance powers (P10) - Comprehensive enforcement powers (P11) - Effective and credible use of powers and implementation (P12) - Authority for information sharing (P13) - Information sharing mechanisms (P14) - Assistance to foreign regulators (P15) - Full, accurate and timely disclosure of financial results by issuers (P16) - Holders of securities should be treated in a fair and equitable manner (P17) - International accounting standards (P18) - Auditors should be subject to oversight (P19) - Auditors should be independent (P20) - Audit standards should be of high and internationally acceptable quality (P21) - Credit rating agencies should be subject to oversight (P22) - Other entities offering evaluative services should be subject to oversight (P23) - Regulatory standards for collective investment schemes (CIS) (P24) - Rules governing CIS and the segregation and protection of client assets (P25) - Disclosure to evaluate the suitability of CIS for investors (P26) - Proper and disclosed basis for CIS asset valuation, pricing and redemption (P27) - Hedge funds should be subject to oversight (P28) - Minimum entry standards for market intermediaries (P29) - Prudential requirements for market intermediaries (P30) - Market intermediaries’ standards for business conduct and risk management (P31) - Procedures for dealing with the failure of a market intermediary (P32) - Trading systems should be subject to authorization and oversight (P33) - Ongoing regulatory supervision of exchanges and trading systems (P34) - Promote transparency of trading (P35) - Detect and deter manipulation and unfair trading practices (P36) - Proper management of large exposures, default risk and market disruption (P37) - Settlement systems and CCPs subject to adequate regulation and supervisor (P38) - Notes: - It is understood that the IMF remains flexible on the selection of these Principles. - Items marked as “Added by SSB through consultation process” appear in the list as provided. *Prepared by IMF staff; staff report completed on June 9, 2017; paper released July 2017.* --- _Source: https://www.imf.org/-/media/files/publications/pp/2017/pp060817useofsupervisorystandarsfsap.pdf_