## _081814

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### Transformation since the last review
- In the five years since the last FSAP review the program has been transformed, largely in response to the global financial crisis.
- The 2009 review introduced fundamental changes to:
  - incorporate the emerging lessons from the crisis,
  - increase the flexibility and effectiveness of the FSAP, and
  - delineate the main responsibilities of the Fund and the World Bank in developing and emerging market countries to strengthen institutional accountability.
- The 2010 Fund decision made financial stability assessments under the FSAP mandatory as part of Article IV surveillance for jurisdictions with systemically important financial sectors, which:
  - integrated the FSAP with Fund surveillance for the most systemic jurisdictions, and
  - ensured a risk-based allocation of FSAP resources globally, while affecting availability of FSAPs to non-systemic countries.

### Improvements in focus, tools, and traction
- Major improvements introduced and expanded since 2009:
  - Introduction of the Risk Assessment Matrix (RAM).
  - Expansion of stress tests to cover a broader set of risks.
  - Increasing—albeit still fledgling—analysis of spillovers.
  - Systematic coverage of macroprudential frameworks and financial safety nets.
- Evidence of effectiveness:
  - Survey evidence: "over 90 percent of respondents agreed that FSSAs were adequately structured" around the three core areas (identification of key vulnerabilities and resilience; assessment of policy framework; evaluation of financial safety nets).
  - "Over 80 percent of survey respondents agreed that the coverage and depth of analysis were adequate."
  - FSSAs are published at an increasingly high rate and reaching broader audiences.

### Key constraints and lessons from experience
- Success depends on:
  - cooperation of all counterparts in the country, notably policy-makers and supervisors, and
  - availability of high-quality data that go beyond the requirements of regular surveillance.
- Limits and challenges:
  - FSAP teams are not normally in a position to assess the accuracy or quality of underlying assets even when supervisory data are made available.
  - Analysis of financial interconnectedness and spillovers remains a challenge, partly dependent on data availability.
  - Balancing comparable, evenhanded risk analysis and tailoring tools and scenarios to country-specific circumstances is necessary.
  - Tension exists between comprehensive compliance assessments and FSAP’s focus on systemic risk.

### 2014 FSAP review: agenda going forward
- Continue to shift the focus of all components of the financial stability assessment towards systemic risk.
- Upgrade analytical underpinnings, transparency, and evenhandedness by:
  - Expansion of stress testing to non-banking financial sectors.
  - Detailed guidance on scenario design and dissemination of standardized quantitative tools.
  - Deeper treatment of interconnectedness and better integration with stress tests.
  - More systematic analysis of cross-border exposure and spillovers, based on data availability.
  - Transparent and detailed disclosure of limitations of risk assessments.
- Explore a macrofinancial approach to supervisory standards assessments to focus on the most relevant principles for financial stability and integrate findings into FSAP risk assessment.
- Ensure greater focus on macroprudential policy issues in all FSAPs.
- Improve traction and input to Article IV consultations by using macrofinancial relevance to prioritize FSAP findings and structuring FSSAs to feed into subsequent surveillance priorities.
- Step up targeted Technical Assistance (TA) on financial stability issues and, where appropriate, use the World Bank’s development modules to mitigate the global systemic focus impact on LICs.

### Focus and analytical depth — assessment and tools
- Three core FSAP components since 2009: (i) key vulnerabilities and resilience; (ii) financial stability policy framework (micro- and macroprudential); (iii) financial safety nets.
- RAM:
  - Encouraged candid, prioritized risk assessments and focused stress tests.
  - High satisfaction with RAMs’ focus but lower satisfaction on tracing propagation channels and incorporating mitigating policies.
  - RAMs are not consistently used to guide supervisory framework or safety-net evaluations.
- Stress testing:
  - Coverage broadened: always cover banking and increasingly insurance; risk coverage expanded beyond solvency to include liquidity, contagion, and, to a lesser extent, spillover analysis.
  - Remaining gaps: limited incorporation of second-round effects and nonlinearities; model risk persists.
- Data limitations:
  - Many required datasets (granular bank-by-bank supervisory information, inter-institutional exposures) are not publicly available.
  - Authorities often provide such data voluntarily under confidentiality protocols; absence of data reduces analytical depth.
- Staff developments:
  - MCM disseminated new stress testing tools; in 2012 staff set out general principles for stress tests; MCM provides TA and internal staff training through Toolkit Seminar Series and ICD courses.
- Cross-country comparability tradeoffs:
  - Prior rule of thumb for "extreme but plausible" shocks (two-standard deviation shock from long-term growth trend) not always appropriate.
  - Stress Testing Matrix (STeM) included in all FSSAs since 2011 to enhance transparency.

### Interconnectedness and spillovers
- FSAPs increasingly analyze interconnectedness (domestic interbank; sometimes cross-border) but findings often remain narrative and not formally integrated into stress tests.
- Spillover analysis improved; approaches include narrative transmission, quantification of cross-border exposures, and contagion assessments.
- Virtually all FSAPs include narratives; many quantify direct inward cross-border exposures; few include quantitative outward spillovers.
- Recent quantitative outward spillover examples: 2011 Luxembourg; 2013 Austria and Italy; 2014 Switzerland.

### Limits of vulnerability assessment (Box 1)
- Standard FSSA disclaimer: FSAPs assess system-wide stability not individual institutions and do not cover fraud, legal, and operational risk.
- Additional limitations:
  - Data gaps: international interbank market not fully mapped; lack of international intra-group data for global financial institutions; country-level data gaps may severely impair assessments and are not always flagged.
  - Access to supervisory data: voluntary sharing uneven; when non-public data are withheld analyses rely on public data or authorities’ stress tests.
  - Asset quality: FSAP teams usually cannot verify loan classifications or capital component reporting even with supervisory data.
  - Model risk: stress tests and tail-risk forecasting subject to model risk due to nonlinearities, spillovers, feedback effects.

### Macroprudential Policy (MaPP) coverage (Box 2)
- Since 2010 FSAPs regularly assess MaPP frameworks; depth differs across countries and evolved over time.
- Findings:
  - Systemic risk monitoring became standard; scope reflects data availability.
  - Institutional setup: almost all recent FSAPs cover MaPP institutional setup; central bank role and clear mandates emphasized.
  - MaPP tools discussion extensive but uneven; focus more on cyclical tools (LTV, DTI, countercyclical capital buffers) than structural issues (interconnectedness).
  - Multilateral/cross-border aspects discussed less frequently; few FSAPs discussed cross-border spillovers from uncoordinated actions.
- Areas for strengthening MaPP treatment:
  - Disseminate best practices and the Key Aspects framework.
  - Integrate MaPP analysis into stability analysis and FSAP recommendations.
  - Promote greater international consistency and coordination over time.

### Role and functioning of the Financial Sector Liaison Committee (FSLC)
- FSLC coordinates Fund and Bank FSAP modalities for emerging countries and LICs and reviews joint aspects (scheduling, procedures).
- Composition (as of July 1, 2014): co-chaired by senior Fund and Bank staff; includes MCM and SPR (Fund) and Finance & Markets Global Practice, Macroeconomics & Fiscal Management Global Practice, Development Research Group (Bank).
- Ongoing friction points:
  - Differences in Bank and Fund priorities (Fund timing with Article IV vs. Bank follow-up implementation).
  - Concerns over Fund’s systemic focus for non-systemic countries, especially LICs.
- FSLC roles to continue/expand:
  - Ensure modules do not substitute for full updates when appropriate.
  - Maintain knowledge sharing and coordinate TA and policy development.

### Traction, implementation, and public/market impact
- FSAP usefulness:
  - Large majority of respondents found FSAPs useful for raising awareness and improving policy dialogue.
  - Positive responses increased compared to 2009.
  - FSAPs less effective in promoting discussion with legislatures/public, though progress since 2009.
- Implementation rates:
  - From FSSAs during 2010-14: at almost 80 percent the share of fully or partially implemented recommendations is very high.
  - Survey respondents indicated about one-third of FSAP recommendations were fully implemented, with almost all remaining two-thirds partially implemented.
  - Reasons for incomplete implementation: disagreement over relevance; lesser factors include disagreement on priority or insufficient political support. Limited technical capacity seen as less significant and declining since 2009.
  - Perceptions: over 90 percent agreed recommendations were clear; over 75 percent agreed they were candid; satisfaction with prioritization/sequencing about 60 percent; about 60 percent agreed recommendations were feasible with reasonable effort.
- Composition statistics (from source figure slices):
  - Examples of numeric slices shown in source charts: 15.9%, 46.6%, 17.5%, 6.2%, 13.8%, 11.4%, 55.8%, 6.3%, 6.4%, 20.4%.
- Publication and downloads:
  - Since FY2009, all FSSAs in advanced countries have been published; publication rates lower for emerging market countries and LICs.
  - Publication rates rose to 90 percent in FY2013, then dipped in FY2014 reflecting shift toward emerging markets and LICs.
  - Downloads peaked in year of publication and fall markedly thereafter.
- Market impact (event study):
  - Sample: 38 FSAP-related outreach events covering 2009–13.
  - Findings: 21 events (for 12 FSAPs) contained useful information with statistically significant bank stock market reactions.
  - Statistically significant CAR examples from source:
    - US 2010 press release: CAR -0.006, t-stat -2.621
    - US 2010 publication: CAR 0.019, t-stat 5.122
    - Germany 2011 publication: CAR -0.016, t-stat -4.087
    - Russia 2011 publication: CAR 0.022, t-stat 3.694
    - Turkey 2012 publication: CAR 0.028, t-stat 5.236
    - Czech Republic 2012 publication: CAR -0.017, t-stat -4.094
    - EU 2013 publication: CAR -0.026
    - Poland 2013 publication: CAR 0.023
    - Belgium 2013 publication: CAR 0.011

### FSAP relationship to Fund surveillance (Article IV)
- Division of responsibilities:
  - Article IV: principal responsibility for continuous macrofinancial surveillance and broader issues.
  - FSAP: in-depth assessment of financial stability risks, regulatory framework, supervision effectiveness, safety nets, and infrastructure.
- Complementarity:
  - FSAPs bring breadth and depth beyond typical Article IV teams but cannot substitute for continuous Article IV engagement due to low FSAP frequency.
- Recommended Article IV coverage (per 2014 TSR):
  - Basic macrofinancial relationships; level of systemic risk; policy dialogue on appropriate settings including macroprudential policies; longer-term issues (efficiency of intermediation; role in monetary transmission; state-owned banks); integrate these continuously.

### Integration with Article IV and multilateral perspectives
- FSAP assessments and Article IV missions are coordinated and teams overlap; FSSAs are joint MCM/Area Department documents.
- Progress has been made to ensure Article IV teams follow up on FSAP recommendations.
- FSAPs provide input to multilateral surveillance products (WEO, GFSR, Spillover Reports).
- Opportunities to time national FSAPs for interconnected jurisdictions to maximize analytical depth and impact.

### Impact of mandatory FSSAs and resource pressures
- 2010 decision made FSSAs mandatory for jurisdictions with systemically important financial sectors.
- Between 2010 and 2014: 24 of the 25 mandatory financial stability assessments were conducted, plus a special EU assessment in 2013.
- Consequences:
  - FSAPs for advanced countries are, on average, nearly twice as expensive as those for emerging countries or LICs.
  - Cost for countries with globally systemically important financial sectors is more than double that of similar countries with smaller, less complex systems.
  - Average number of FSAPs per year dropped from about 18–20 prior to 2009 to 14–15 in recent years, primarily affecting LICs and other non-systemic countries.
  - Regional distribution shifted toward Europe, Asia and Pacific, and Western Hemisphere at expense of Sub-Saharan Africa and the Middle East.

### Strengthening systemic risk focus and supervisory standards assessments
- Need to make systemic risk the organizing principle of stability assessment.
- Gap identified: oversight and safety-net evaluations less risk-focused; many recommendations driven by compliance gaps rather than systemic impact.
- Macrofinancial approach to standards assessments proposed:
  - Map financial sector risks to the most relevant BCP, ICP and IOSCO principles using econometric analysis and expert judgment.
  - Four-stage process (identify risks; reduce dimensionality; parametric and non-parametric econometrics; apply expert judgment).
  - Outcome: focus assessors on macrofinancially-relevant principles and integrate results into the RAM.
- Full assessments remain optional upon authorities' request; approach intended to guide, not replace, full assessments universally.
- Approach to be considered in the next Standards & Codes review in 2016.

### Upgraded tools, stress testing priorities, and interconnectedness
- Stress testing priorities:
  - Expand stress tests to non-bank sectors.
  - Model second-round effects and capture nonlinearities and risk co-dependence in tail scenarios.
- MCM plans:
  - Develop guidance notes on stress test design for FSAPs.
  - Cooperate with TGS to create simple, portable stress testing tools with user manuals.
  - Maintain detailed disclosure of all assumptions in FSSAs.
- Interconnectedness:
  - Strengthen use of network analysis; data availability dictates coverage.
  - Implementation of G-20 data gaps initiative recommendations would help.
  - Network analysis to be better integrated with solvency analysis and used to identify SIFIs.
- Cross-border spillovers:
  - Adequate coverage depends on national authorities providing data on cross-border bilateral exposures and engagement with BIS data hub for G-SIFIs.
  - Market price–based models (CCA) useful when granular data lacking but have limitations.
  - Outward spillovers are harder to analyze but critical for systemic countries; efforts should be made to assess outward spillovers at least in each of the S29 countries.

### Data, confidentiality, and communication
- Authorities' voluntary confidential data sharing crucial to depth of FSAP analysis; national legal limits sometimes constrain sharing.
- Fund confidentiality protocol provides safeguards for confidential treatment by FSAP teams.
- FSAPs should be explicit about limitations arising from data gaps and model risk; FSSAs should transparently expand disclaimers where material.
- Proposed FSSA structure changes:
  - Use systemic risk as organizing principle for prioritizing findings and recommendations.
  - Explicitly prioritize summary FSAP recommendations based on relevance for mitigating systemic risk.
  - Present key macrofinancial linkages in baseline outlook developed with Article IV team and link RAM to assessments across three pillars.
  - Clearly identify data gaps and access limitations material to risk assessment.

### Addressing needs of Low-Income Countries (LICs) and TA
- Shift toward systemic jurisdictions reduced FSAP access for LICs.
- Development modules address capacity and developmental needs but often leave gaps in financial stability analysis (system-wide vulnerabilities, supervisory robustness, safety nets).
- Staff responses:
  - Stepped up TA on stress testing, systemic risk analysis, macroprudential policies, institutional frameworks, crisis management, contingency planning, financial safety nets, and bank asset quality reviews.
  - Pilot exercises pairing financial TA missions with Article IV missions to improve macro-relevance.
  - Holistic diagnostic TA assessments and the recently-introduced Capacity Assessment program to assess institutional capacity.

### TA versus FSAP assessments; resource and frequency issues
- TA is diagnostic and capacity-focused but does not provide the same rigorous scrutiny of vulnerabilities as an FSAP; TA is not a full alternative to FSAP.
- Leveraging partnerships (notably the World Bank) and strengthening FSLC coordination for TA is emphasized.
- Resource implications:
  - Implementation of proposed measures largely achievable within existing budgets by re-directing resources (focus on systemic risk; prioritize recommendations).
  - Additional manageable costs: expanding analytical toolkit; creating portable quantitative tools; establishing stress testing guidelines.
  - Drivers of rising FSAP costs: shift toward systemic complex cases; surge in demand for formal compliance assessments; expansion of thematic coverage; strengthened internal review and quality control.
  - Easing demand for formal compliance assessments and streamlining around systemic risk should help contain costs.
- Illustrative staffing/financial estimate:
  - Raising average annual number of FSAPs to about 20 per year (all additional FSAPs in non-systemic countries) would:
    - Cost an additional US$2.75 million per annum.
    - Reduce average gap between FSAPs for non-systemic jurisdictions from current 14–15 years to 9-10 years.

### Issues for discussion (summary questions posed)
- Do Directors agree with the main findings that the 2009 FSAP review was broadly successful in:
  - Improving analytical focus of FSAPs;
  - Providing greater flexibility to country authorities and the Fund;
  - Establishing institutional accountability?
- Do Directors agree key priorities are to:
  - Strengthen systemic risk focus of FSAP assessments;
  - Continue improving analytics while being explicit about risk-assessment limitations;
  - Restructure the FSSA to bring out these elements more clearly;
  - Recognize importance of more systematic provision of non-public data on a voluntary basis for effectiveness of FSAPs and macrofinancial surveillance?
- Do Directors view a macrofinancial approach to supervisory standards assessments as promising to:
  - Enhance effectiveness and focus of compliance assessments in FSAPs;
  - Facilitate integration of such assessments into overall risk assessment; and
  - Explore further in the next Standards & Codes Review?
- Do Directors endorse more targeted TA to enhance financial sector coverage in LICs, given the shift toward systemically important jurisdictions?
- Do Directors agree to consider aligning and coordinating future FSAP reviews with periodic surveillance reviews?

*Source: EXECUTIVE SUMMARY and selected sections from "FSAP REVIEW—FURTHER ADAPTATION TO THE POST-CRISIS ERA," International Monetary Fund.*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### Transformation since the last review
- In the five years since the last FSAP review the program has been transformed, largely in response to the global financial crisis.
- The 2009 review introduced the most fundamental changes to the program since its inception, aimed at:
  - incorporating the emerging lessons from the crisis,
  - increasing the flexibility and effectiveness of the FSAP, and
  - delineating the main responsibilities of the Fund and the World Bank in developing and emerging market countries to strengthen institutional accountability.
- The 2010 decision by the Fund made financial stability assessments under the FSAP a mandatory part of Article IV surveillance for jurisdictions with systemically important financial sectors, which:
  - integrated the FSAP with Fund surveillance for the most systemic jurisdictions, and
  - ensured a risk-based allocation of FSAP resources globally, while having implications for the availability of FSAPs to non-systemic countries.

### Improvements in focus, tools, and traction
- The 2009 review provided a framework for the Fund’s financial stability assessment in the context of the FSAP that has proved effective in disciplining and focusing assessments.
- Major improvements introduced and expanded since 2009 include:
  - Introduction of the Risk Assessment Matrix (RAM).
  - Expansion of stress tests to cover a broader set of risks.
  - Increasing—albeit still fledgling—analysis of spillovers.
  - Systematic coverage of macroprudential frameworks and financial safety nets.
- Evidence of effectiveness:
  - Surveys of country authorities indicate a high degree of satisfaction with the focus and relevance of assessments, the clarity and candor of recommendations, and the overall usefulness and impact of the exercise.
  - FSAPs are seen as making a useful contribution to the policy debate, and there is evidence that they have a market impact.
  - FSAP recommendations have a high rate of implementation.
  - FSSA reports are published at an increasingly high rate and are reaching broader audiences.

### Key constraints and lessons from experience
- Success of the FSAP depends on:
  - cooperation of all counterparts in the country, notably policy-makers and supervisors, and
  - availability of high-quality data that go beyond the requirements of regular surveillance.
- Limits and challenges identified:
  - FSAP teams are not normally in a position to assess the accuracy or quality of underlying assets even when high-quality data are made available; the limits to risk assessment in FSAPs need to be clearly understood and communicated.
  - Analysis of financial interconnectedness and spillovers remains a challenge, partly dependent on data availability.
  - Balancing comparable, evenhanded risk analysis and tailoring tools and scenarios to country-specific circumstances is necessary.
  - Tension exists between the comprehensive nature of formal assessments of compliance with international standards and the FSAP’s focus on systemic risk; options to resolve this tension should be explored.

### 2014 FSAP review: the agenda going forward (Box)
- Continue to shift the focus of all components of the financial stability assessment towards systemic risk.
- Upgrade the analytical underpinnings, transparency, and evenhandedness of the assessment of vulnerabilities and resilience through:
  - Expansion of the coverage of stress testing tools to non-banking financial sectors.
  - Detailed guidance on scenario design and dissemination of standardized quantitative tools.
  - Deeper analytical treatment of interconnectedness and better integration with stress tests.
  - More systematic analysis of cross-border exposure and spillovers, based on data availability.
  - Transparent and detailed disclosure of the limitations of risk assessments.
- Explore a macrofinancial approach to supervisory standards assessments to enable the assessment effort to focus on the most relevant principles for financial stability and integrate the findings into the FSAP’s overall risk assessment.
- Ensure greater focus on and more systematic treatment of macroprudential policy issues in all FSAPs.
- Improve traction and maximize input to Article IV consultations by:
  - using macrofinancial relevance as the organizing principle for streamlining and prioritizing FSAP findings and recommendations, and
  - structuring FSSAs so as to feed more directly into the surveillance priorities in subsequent years.
- Step up targeted Technical Assistance on financial stability issues and, where appropriate, use the World Bank’s development modules to mitigate the impact of the global systemic focus of the FSAP on LICs.

### Scope and coordination
- This paper focuses mainly on the Fund’s role and responsibilities in the FSAP, consistent with the Fund’s mandate for macrofinancial surveillance and the framework introduced by the 2009 review.
- A separate World Bank paper focuses on developmental issues in FSAPs in developing and emerging market countries; Fund and Bank staff worked closely to ensure consistency, and joint aspects—such as the coordinating role of the Financial Sector Liaison Committee (FSLC)—are covered equally.

*Source: EXECUTIVE SUMMARY, FSAP REVIEW—FURTHER ADAPTATION TO THE POST-CRISIS ERA (International Monetary Fund).*

### 9.      So how did we do? The remainder of this section provides a critical evaluation of progress

### _081814 - 9.      So how did we do? The remainder of this section provides a critical evaluation of progress

### Focus and Analytical Depth — overall assessment
- The 2009 review defined three components of stability assessments under the FSAP: (i) identification of key vulnerabilities and assessment of the resilience of the financial sector; (ii) assessment of the financial stability policy framework, including micro- and macroprudential regulatory framework and supervision in practice; and (iii) evaluation of financial safety nets (system’s capacity to manage and resolve a financial crisis).  
- Since 2009, FSAPs systematically covered these three core areas. Survey evidence: "over 90 percent of respondents agreed that FSSAs were adequately structured around these three core areas and covered most relevant financial sector issues."  
- Survey evidence on depth and coverage: "over 80 percent of survey respondents agreed that the coverage and depth of analysis were adequate," noted as a higher level of satisfaction than in the 2009 survey.

### Assessment of vulnerabilities and financial system resilience — key findings
- Risk Assessment Matrix (RAM)
  - The introduction of the RAM after 2009 was a major improvement: encouraged candid, prioritized risk assessments and focused stress tests on the most significant macrofinancial risks rather than a scattergun approach.
  - Country-specific RAMs, informed by the Global RAM, facilitated cooperation between FSAP and Article IV teams and engagement with authorities.
  - Survey results: high satisfaction with RAMs’ focus on the most relevant risks but lower satisfaction regarding their ability to (a) trace relevant propagation channels and (b) incorporate mitigating policies in impact estimation.
  - RAMs are not consistently used to guide evaluations of supervisory frameworks or financial safety nets, which often remain exhaustive rather than targeted to macrofinancial risks.
- Stress testing
  - Coverage has broadened: stress tests always cover banking and increasingly cover other sectors, notably insurance.
  - Scenario design: stress test scenarios almost always cover key macrofinancial risks identified in RAMs, with additional scenarios or single-factor shocks as necessary.
  - Risk coverage expanded beyond solvency to almost always include liquidity, contagion risk and, to a lesser extent, spillover analysis (including financial cross-border exposures).
  - Remaining gaps: incorporation of second-round effects and nonlinearities remains limited; model risk persists.
- Data limitations
  - Reliability of stress test results depends on data quality and provision by authorities; many required datasets (granular bank-by-bank supervisory information, inter-institutional exposures) are not publicly available.
  - In most cases authorities provide such data voluntarily under confidentiality protocols; when not available, analyses must rely on less granular public data and analytical depth is reduced.
- FSAP staff developments and capacity building
  - Fund staff developed and disseminated new stress testing tools in-house and engaged with the global stress testing community (Expert Forum on Advanced Stress Testing Techniques).
  - In 2012 staff put forward general principles for the design and implementation of stress tests based on FSAP experience and survey of central bank/supervisory practices.
  - MCM staff deliver Technical Assistance on stress testing and internal staff training through the MCM Toolkit Seminar Series and ICD courses and seminars.
- Cross-country comparability tradeoffs
  - Tension between ensuring comparability and adapting to country circumstances (data availability, idiosyncratic shocks, authorities’ capacity).
  - Examples:
    - Advanced economies: shocks in RAM incorporated into fully-fledged macrofinancial scenarios and often implemented in cooperation with national supervisors.
    - Less developed countries: lack of reliable data often limits stress tests to single-factor shocks.
    - Defining “extreme but plausible” shocks: prior rule of thumb (two-standard deviation shock from long-term growth trend) was not always appropriate (e.g., in crisis-hit European countries), limiting scenario comparability.
  - Response: transparency emphasized via the Stress Testing Matrix (STeM), included in all FSSAs since 2011.
- Interconnectedness and spillovers
  - FSAPs increasingly analyze interconnectedness among financial institutions (typically domestic interbank markets, sometimes cross-border exposures) but findings are often narrative rather than formally integrated into stress tests or used to assign systemic importance and policy recommendations.
  - Spillover analysis improved but analytical depth and data availability vary; coverage approaches include: (i) narrative on transmission channels; (ii) quantification of cross-border exposures; (iii) elaborate contagion assessments. Virtually all FSAPs include narratives; many quantify direct inward cross-border exposures; few include quantitative outward spillovers.
  - Recent examples of quantitative outward spillover treatment: 2011 Luxembourg, 2013 Austria and Italy, and 2014 Switzerland FSAPs.
- Limitations to vulnerability assessment
  - Key limitations stem from: (i) varying access to supervisory bank-by-bank data; (ii) inability to assess underlying quality of bank assets and reported capital components even when supervisory data are available; and (iii) model risk (including failure to capture nonlinearities and “unthinkable” shocks).
  - FSAPs do not cover all risk types (e.g., operational risk, risk of fraud); Box 1 elaborates additional limitations (data gaps, access to supervisory data, asset quality, model risk).

### Financial stability policy framework — key findings and practices
- Coverage and evolution
  - FSAP coverage of financial sector oversight is extensive and has increased attention to systemic oversight and macroprudential policies since 2009.
  - FSSAs almost always now discuss mechanisms for monitoring systemic risk, ensuring interagency cooperation, and, for countries with significant cross-border banking, cooperation among supervisors across jurisdictions—though scope for improvement remains.
- Evaluation tools and approaches
  - One evaluation approach: formal assessments of compliance with international standards summarized in a Detailed Assessment Report (DAR) and a shorter Report on Observance of Standards and Codes (ROSC), issued to the Board alongside the FSSA.
  - Formal compliance assessments are thorough and time/resource-intensive and are voluntary for countries (even when FSAP financial stability assessment is mandatory).
- Integration of macroprudential policy analysis
  - Since 2009, coverage of regulatory and supervisory issues relevant to systemic risk and macroprudential policies has improved significantly; analysis still follows a sector-by-sector approach (banking, insurance, securities) but with increased systemic focus.

### Box 1 — The limits of risk assessments in FSAPs (summary of main points)
- Standard FSSA disclaimer states FSAPs assess system-wide stability not individual institutions and do not cover fraud, legal, and operational risk.
- Additional important limitations not covered by the standard disclaimer:
  - Data gaps: international interbank market not fully mapped; lack of international intra-group data for global financial institutions; country-level data gaps may severely impair assessments and are not always flagged in FSSAs.
  - Access to supervisory data: voluntary sharing under strict confidentiality is uneven; when institution-specific non-public data are withheld (often in advanced economies for legal reasons) analyses rely on public data or authorities’ stress tests, limiting independent staff assessments; differences in data-sharing are not always flagged in FSSAs.
  - Asset quality: even with supervisory data, FSAP teams usually cannot verify accuracy of loan classifications or capital component reporting; asset quality reviews (e.g., ECB/national EU supervisors) reveal potential deviations from best practice that are rarely discussed in FSSAs.
  - Model risk: stress tests and tail-risk forecasting are subject to considerable model risk due to non-linearities, spillovers, feedback effects; results are conditional on simulated shocks and cannot rule out realization of the “unthinkable.”

*Source: IMF FSAP review section titled "So how did we do?"*

### Box 2. Coverage of Macroprudential Policy (MaPP) Issues in FSAPs

### Box 2. Coverage of Macroprudential Policy (MaPP) Issues in FSAPs

### Evolution and scope of MaPP coverage in FSAPs
- The 2009 review identified four MaPP areas of particular interest for FSAPs: systemic risk monitoring tools; the role of systemically important financial institutions; gaps in systemic risk monitoring; and institutional responsibilities of central banks and other supervisory agencies.
- The 2009 FSAP review did not provide a blueprint; the Fund’s position in these areas emerged only gradually in subsequent years (IMF 2011, 2013a, 2013b).
- FSAPs have assessed MaPP frameworks regularly since 2010, but depth and breadth of coverage differed across countries and evolved over time.
- Overall, FSSAs for advanced economies and more advanced emerging market economies had more comprehensive coverage.
- More recent FSAPs had more systematic treatment that was better integrated into the overall stability analysis.
- The scope of coverage and integration into financial stability analysis evolved along with development of policy guidelines on MaPP within and outside the institution.

### Findings from FSAP assessments on MaPP themes
- Systemic risk monitoring
  - Assessments of systemic risk became a standard feature of FSAPs, a marked departure from earlier sectoral risk focus.
  - The scope of analysis largely reflects data availability; many FSAPs highlight data deficiencies as a key obstacle.
  - Some FSAPs recommend collection of more granular data on bank exposures.
  - Others emphasize development of forward–looking frameworks for assessing systemic risk via enhanced group-wide monitoring of financial conglomerates and closer monitoring of exposures to parents or subsidiaries of domestic banks.
- Institutional setup for MaPP
  - Almost all recent FSAPs cover the institutional setup for MaPP, noting in many countries it was in the process of being set up or absent.
  - FSAP recommendations varied reflecting different institutional histories and traditions.
  - All FSAPs typically stressed the need for an active central bank role in systemic risk monitoring and the importance of establishing clear goals, mandates, accountability mechanisms, and powers necessary to implement MaPP effectively.
- MaPP tools
  - Discussion of tools was extensive but uneven; most FSAPs focused more frequently on cyclical developments (rapid credit growth) than on structural issues (interconnectedness and complexity).
  - Some FSAPs recommended introducing or tightening of LTV or DTI limits or setting up countercyclical capital buffers.
  - Other FSAPs highlighted risks associated with growing connectivity and complexity of financial institutions and called for more intensive supervision.
- Multilateral and cross-border aspects
  - Discussion of multilateral aspects of MaPP was less frequent.
  - Home-host supervisory coordination, including treatment of systemic subsidiaries and branches in the host country, was discussed in some advanced and emerging market countries.
  - Only a few FSAPs discussed cross-border spillovers associated with uncoordinated actions abroad and/or inaction domestically.

### Areas for strengthening MaPP treatment in FSAPs (policy recommendations and integration)
- As knowledge and understanding of MaPP frameworks deepen, MaPP coverage should become more comprehensive and systematic.
- Dissemination of best practices from country experiences, together with the framework developed in the Key Aspects paper, should provide a more systematic treatment.
- Integration of MaPP analysis into the stability analysis requires greater efforts to reflect key messages in FSAP recommendations and cross-reference the analysis throughout the FSSA.
- Adequately "connecting the dots" will ensure FSAPs provide an integrated assessment of the key risks faced by the financial sector.
- Systematic treatment of MaPP issues in FSAPs can help promote greater international consistency and coordination over time.
- FSAPs provide a vehicle for discussion of MaPP frameworks with individual country authorities and as input into a multilateral context, leveraging the Fund’s unique perspective and institutional position, which may help engender a more consistent global approach to macroprudential policies.

*Prepared by Inci Otker-Robe and Ben Huston.*

### 34.      The 2009 review called for strengthened mechanisms for quality control and inter-

### 34.      The 2009 review called for strengthened mechanisms for quality control and inter-

### Role and functioning of the Financial Sector Liaison Committee (FSLC)
- FSLC was envisaged to have a stronger role in deciding FSAP modalities for emerging countries and LICs (joint missions or separate modules), taking into account authorities’ preferences, country circumstances, and the need to ensure both stability and developmental aspects are appropriately covered and synergies between the Bank and Fund work are maximized.
- Since 2010, FSLC has provided an effective coordination mechanism where country and institutional constraints have been taken into consideration when planning FSAPs, either joint or in modules.
- FSLC composition (as of July 1, 2014): co-chaired by senior Fund and Bank staff; includes MCM and SPR on the Fund side; includes Finance & Markets Global Practice, Macroeconomics & Fiscal Management Global Practice, and the Development Research Group on the Bank side.
- FSLC principal focus in practice: coordination of joint aspects of FSAP (scheduling, procedures), while also acting as a forum for issues raised by international standard-setters regarding standards and codes and approaches to quality assurance for DARs/ROSCs.
- Ongoing/friction points to be managed by FSLC:
  - Differences in Bank and Fund institutional priorities (e.g., Fund timing with Article IV consultations vs. Bank priority on using FSAP as a platform for follow-up implementation through finance instruments and/or technical assistance).
  - Concerns about the Fund’s focus on systemic jurisdiction for non-systemic countries, especially LICs.
- Areas where FSLC could continue or expand its role:
  - FSAP modules: ensure modules do not substitute for “full” updates when more appropriate; review terms of reference before missions to ensure consistent policy positions; facilitate cross-support where expertise of the other institution is helpful.
  - Knowledge sharing: maintain a strong platform for knowledge management and sharing given clearer delineation of institutional responsibilities.
  - Technical assistance: potential to revive FSLC’s role (coordination already occurs via FIRST Initiative and Bank-Fund Debt Management Facility).
  - Policy development: act as a clearing house for Bank-Fund coordination on standards, codes, and other financial policy areas when coordination is needed or helpful.

### FSAP modular approach and coverage (FY2010–FY2014)
- The document lists FSAP modules and country/module assignments for FY2010–FY2014 (table present in source). Modules aim to provide clarity on institutional responsibilities and flexibility in assessments.
- Guidance: modules should not replace full updates when country needs warrant full assessments; FSLC should review mission terms of reference and facilitate cross-institutional support.

### Traction and broader impact of FSAPs
- Objectives of 2009 reforms: increase usefulness and impact of FSAPs for recipient countries and global stability, measured by:
  - Traction with country authorities (usefulness, effect on domestic policy agenda).
  - Broader impact on domestic and international audiences and markets.
- Survey results and perceptions:
  - Large majority of respondents (country authorities and Executive Directors) thought FSAPs had been useful, particularly for raising awareness of financial stability issues, encouraging discussion among government agencies and between government agencies and financial sector stakeholders, and improving policy dialogue with the Fund.
  - In every listed area, the share of positive responses increased compared to the 2009 survey.
  - FSAPs appear less effective in promoting discussion with legislatures or the broader public on financial sector reforms, though there has been substantial progress since 2009.
- Specific survey/approval metrics presented in figures (text summaries preserved):
  - FSAP Usefulness and Satisfaction reported: examples include 88%, 63%, 75%, 25%, 80%, 66%, 68%, 48%, 35%, 78%, 56%, 54%, 37%, 34% (as shown in the source figures for various questions and respondent groups).
  - FSAPs' Contribution to Policy Debate satisfaction metrics presented: examples include 88%, 75%, 38%, 13%, 66%, 43%, 42%, 9%, 8%, 44%, 37%, 31%, 7%, 24% (as shown in the source figures).

### Evolution, clarity, and implementation of FSAP recommendations
- Evolution of focus:
  - FSAP recommendations grouped into five broad areas: Financial Stability Analysis; Financial Sector Oversight; Safety Nets and Crisis Management; Financial Market Infrastructure; Developmental.
  - Bulk of recommendations historically in financial oversight; since the 2009 review, shares related to analysis of vulnerabilities and resilience and especially financial safety nets have increased significantly.
- Implementation rates:
  - Reported implementation of FSAP recommendations (from FSSAs during 2010-14): at almost 80 percent, the share of fully or partially implemented recommendations is very high.
  - Variation across topics: recommendations addressing systemic concerns have a very high probability of being implemented, though their absolute number was limited.
  - Survey respondents indicated about one-third of FSAP recommendations were fully implemented, with almost all of the remaining two-thirds partially implemented.
  - Main reasons for non- or incomplete implementation reported by country authority respondents: disagreement over relevance; to a lesser extent disagreement about degree of priority or insufficient political support. Limited technical capacity was seen as a less significant constraint and has declined since the 2009 survey.
- Perceptions of recommendations:
  - Over 90 percent of survey respondents agreed recommendations were clear.
  - Over 75 percent agreed recommendations were candid.
  - Satisfaction with prioritization and sequencing drops to 60 percent.
  - About 60 percent agreed recommendations were feasible with a reasonable effort from authorities.
- Composition statistics shown (exact figures from Figure 5 and composition chart):
  - Composition of FSAP recommendations (Since FY2010 vs Pre FY2010) breakdowns shown in source charts with numeric slices including: 15.9%, 46.6%, 17.5%, 6.2%, 13.8%, 11.4%, 55.8%, 6.3%, 6.4%, 20.4% (as presented in the source figure).

### Publication, public interest, and market impact
- Publication rates of FSSA:
  - Following 2009 review, Fund’s publication policy for the FSSA aligned with Article IV staff report (publication presumed).
  - FSB encourages members to publish FSSAs.
  - Since FY2009, all FSSAs in advanced countries have been published.
  - Publication rates are lower for emerging market countries and LICs.
  - Publication rates rose steadily, reaching 90 percent in FY2013, then dipped in FY2014 reflecting shift toward emerging markets and LICs in country composition.
- Public interest and downloads:
  - Upward trend in public interest as measured by downloads of FSSAs from the Fund’s website, with year-to-year variation.
  - Shelf life is relatively short: downloads peak during year of publication and fall markedly in subsequent years.
  - Source figures show trends by country group for FY2009–FY2014 and download trajectories (with 2014 data annualized in source).
- Market impact (event study summary):
  - Sample: 38 FSAP-related outreach “events” (press releases, press conferences, or publication of FSSAs) covering 2009–13.
  - Methodology: two-stage CAPM-based approach to compute cumulative abnormal returns (CARs) for banks; statistical significance tested using Kolari and Pynnönen (2010) test statistic.
  - Findings: 21 events (for 12 FSAPs) found to contain useful information (positive or negative) with statistically significant market reactions.
  - Statistically significant CAR examples from the source table include:
    - US 2010 press release: CAR -0.006, t-stat -2.621
    - US 2010 publication: CAR 0.019, t-stat 5.122
    - Germany 2011 publication: CAR -0.016, t-stat -4.087
    - Russia 2011 publication: CAR 0.022, t-stat 3.694
    - Turkey 2012 publication: CAR 0.028, t-stat 5.236
    - Czech Republic 2012 publication: CAR -0.017, t-stat -4.094
    - EU 2013 publication: CAR -0.026
    - Poland 2013 publication: CAR 0.023
    - Belgium 2013 publication: CAR 0.011
  - Interpretation: FSAP-related news can have a statistically significant positive or negative impact on banks’ stock prices in the relevant country, suggesting releases conveyed useful information prompting market reassessment.

### FSAP relationship to Fund surveillance (Article IV)
- Division of responsibilities:
  - Article IV consultations: principal responsibility for macrofinancial surveillance with individual jurisdictions; covers broader range of issues beyond FSAP scope and is continuous.
  - FSAP: narrower focus on financial stability issues and tail risks; provides in-depth and sophisticated assessment of stability risks and systemic resilience, regulatory framework, supervision effectiveness, financial safety nets, and infrastructure benchmarked against international experience.
- Complementarity and comparative advantages:
  - FSAPs bring breadth and depth of expertise beyond typical Article IV teams and can be a valuable complement to Article IV surveillance both in the year of assessment and subsequently.
  - Article IV cannot be supplanted by FSAPs for continuous assessment of vulnerabilities and ongoing dialogue due to FSAPs’ low frequency.
- Recommended coverage for Article IV (as per 2014 TSR referenced in source):
  - Cover basic macrofinancial relationships, key drivers behind current trends and their interactions, assess level of systemic risk, engage in policy dialogue on appropriate policy settings including macroprudential policies, examine longer-term issues (efficiency of financial intermediation; role of financial system in monetary policy transmission; interrelationship between evolving market practice and credit cycles; role of state-owned banks), and integrate these with macroeconomic analysis on a continuous basis.

*Source: Excerpt from the IMF document “FSAP REVIEW—FURTHER ADAPTATION TO THE POST-CRISIS ERA” (sections and figures summarized as provided in the source content).*

### 43.      The FSAP and Article IV consultation processes are closely integrated. FSAP assessments

### _081814 - 43.      The FSAP and Article IV consultation processes are closely integrated. FSAP assessments

### Integration with Article IV consultations
- FSAP assessments and Article IV missions are coordinated and teams always overlap.
- FSSAs are joint MCM/Area Department documents and provide background information to the Article IV consultation, helping ensure consistency of policy advice.
- The 2014 TSR documents progress in ensuring that Article IV teams follow up on implementation of FSAP recommendations.
- Staff has the option to submit to the Board an FSSA for consideration on a stand-alone basis; this option has been exercised sparingly to avoid long gaps between FSAP discussions with authorities and Board consideration.

### FSAP contributions to mainstreaming macrofinancial issues in surveillance
- An enhanced systemic risk focus of FSAP components can streamline FSAPs and maximize input to surveillance.
- Prioritizing FSAP findings and recommendations based on macrofinancial relevance improves integration into and follow up by Article IV missions.
- Disseminating standardized tools for risk analysis to Area Department teams would help transfer knowledge and expertise, subject to data availability and quality.
- Aligning periodic FSAP reviews with broader surveillance reviews (e.g., moving surveillance review to a quinquennial basis as proposed in the TSR) would facilitate assessment of integration between the two products.

### Regional and multilateral perspectives
- FSAP is principally a bilateral instrument but regional assessments have been undertaken in three currency unions (West African CFA franc zone, Central African CFA franc zone, East Caribbean Currency Union) and an EU assessment in response to banking union developments.
- Opportunities exist to time national FSAPs for highly interconnected jurisdictions to maximize analytical depth and impact.
- FSAP assessments in systemic jurisdictions provide important input into multilateral surveillance products such as the WEO, GFSR, and Spillover Reports.
- Systematic discussion of financial sector policies in bilateral FSAPs, including analysis of policy spillovers, can promote greater consistency in regulatory reform and macroprudential policy use.

### Impact of mandatory FSSAs and program resource pressures
- The 2010 decision made financial stability assessments under the FSAP mandatory for jurisdictions with systemically important financial sectors.
- Between 2010 and 2014, 24 of the 25 mandatory financial stability assessments were conducted, plus a special assessment for the EU in 2013.
- The shift toward systemic jurisdictions increased FSAP complexity and cost due to:
  - greater coverage of macroprudential and financial safety net issues;
  - spike in demand for formal standards assessments; and
  - larger number of FSAPs in large, complex, and systemic jurisdictions.
- Consequences:
  - FSAPs for advanced countries are, on average, nearly twice as expensive as those for emerging countries or LICs.
  - The cost of FSAPs for countries with globally systemically important financial sectors is more than double that of similar countries with smaller and less complex financial systems.
  - The average number of FSAPs per year dropped from about 18–20 prior to 2009 to 14–15 in the last few years, with the reduction primarily affecting LICs and other non-systemic countries.
- Regional distribution shifted: coverage in Europe, Asia and Pacific, and Western Hemisphere increased, mainly at the expense of Sub-Saharan Africa and the Middle East; development modules improve the picture but insufficient coverage of financial stability issues in LICs remains.

### Lessons learned and incremental reforms
- Reforms from the 2009 FSAP review and subsequent changes have strengthened the FSAP and been well received by users compared to 2009.
- Main challenge: consolidate gains, further strengthen analytics and macrofinancial focus, adapt to evolving global financial landscape, and absorb emerging policy lessons while respecting FSAP limitations and comparative advantages relative to Article IV consultations.
- Priority incremental steps:
  - Focus all components of the financial stability assessment more clearly around systemic risk.
  - Continue to upgrade analytical underpinnings of vulnerabilities and resilience analysis while documenting limitations (e.g., data quality/availability) and providing greater standardization and guidance in tool and macroeconomic scenario selection.
  - Improve quality and clarity of the FSSA to ensure traction with country authorities and provide better input to Article IV surveillance.
- These improvements can be accommodated within the existing program framework.

### Stronger focus on systemic risk and supervisory standards assessments
- FSAPs, though infrequent, can complement Article IV surveillance by using more sophisticated tools, analyzing emerging tail risks, and engaging authorities in in-depth dialogue on financial risk mitigation.
- Systemic risk should become the main organizing principle of all aspects of the financial stability assessment.
- Current gap: assessment of systemic vulnerabilities and resilience is risk-focused, but evaluation of financial sector oversight and financial safety nets is less risk-focused, and many FSAP recommendations are driven by compliance gaps rather than systemic risk impact.
- Need for a macrofinancial approach to supervisory standards assessments to:
  - Guide assessment effort based on most relevant country-specific risks.
  - Integrate findings of oversight evaluation into overall FSAP risk assessment (RAM).
- Proposed approach (described in accompanying background paper) combines quantitative and qualitative criteria to identify a macrofinancially-relevant subset of principles in the three supervisory standards (BCP, ICP, IOSCO).
- Full assessments remain an option upon authorities’ request; the approach is meant to guide FSAPs, not replace full assessments universally.
- The approach should be considered in the context of the next Standards & Codes review in 2016.

### Box 6 — A Macrofinancial Approach to Standards Assessments (summary)
- Purpose: streamline supervisory standards assessments and integrate findings into the FSAP’s overall risk assessment by mapping financial sector risks to the most relevant BCP, ICP and IOSCO principles using econometric analysis and expert judgment.
- Four-stage process:
  1. Identify key macrofinancial risks relevant for the banking, insurance, and securities sectors.
  2. Address high correlation of “grades” across principles using dimensionality-reduction techniques (e.g., principal component and explanatory factor analysis).
  3. Use parametric and non-parametric econometric approaches to identify correlations between each principle—or each explanatory factor—and each measure of risk:
     - Parametric: multi-regression search identifies principles most relevant for financial stability based on sign, significance, robustness of interaction terms between macrofinancial variables and principles’ “grades”, and ability to minimize forecasting errors.
     - Non-parametric: binary tree analysis identifies non-linear relationships and selects principles whose compliance (high “grades”) correlates with low measures of risk under prevailing macrofinancial conditions.
  4. Apply expert judgment to select macrofinancially relevant principles by combining econometric results with a system-wide macro perspective, including principles omitted from econometric analysis due to lack of data or needing joint assessment with other principles.
- Outcome:
  - Final set of macrofinancially-relevant principles is the intersection and complement of econometric findings and expert judgment.
  - Assessors focus on these principles in FSAPs, and assessment results are integrated into the RAM to indicate whether supervision/regulation mitigates or aggravates probability/impact of specific risks.
- Prepared by Laura Valderrama.

*FSAP REVIEW—FURTHER ADAPTATION TO THE POST-CRISIS ERA, INTERNATIONAL MONETARY FUND*

### 61.      A stronger systemic risk perspective could also be brought to bear on the analysis of

### _081814 - 61.      A stronger systemic risk perspective could also be brought to bear on the analysis of

### A stronger systemic risk perspective on financial safety nets
- Application of international standards to safety nets is still in its nascent stage.
- FSAP teams should exercise greater selectivity in coverage of safety-net components: emphasis should be commensurate to their relevance for systemic risk.
- Scope for better integration of analyses of safety nets, financial stability, and the oversight policy framework guided in part by the RAM.

### Upgraded tools and improved analytical frameworks
- The evolving global financial landscape raises the bar for vulnerability analysis, requiring improvements in stress testing, interconnectedness, and spillover analysis.
- Continuing challenge: ensure adequate integration of these strands into a coherent narrative.

### Stress testing: priorities and design
- Priority areas for stress testing improvements:
  - expanding stress tests to non-bank sectors;
  - modeling of second-round effects;
  - capturing non-linearities and risk co-dependence in tail risk scenarios.
- Systems dominated by financial conglomerates present particular challenges:
  - limited data availability (e.g., on intra-group transactions);
  - current stress testing tools not easily applicable to non-bank financial intermediaries in groups (including shadow banking entities).
- New approaches will be required on a case-by-case basis.
- MCM plans to develop:
  - (i) a set of guidance notes of general applicability on a range of aspects of stress test design in FSAPs;
  - (ii) in cooperation with TGS, a set of simple, portable stress testing tools, with user’s manuals.
- Existing requirements for detailed disclosure in the FSSA of all assumptions used in FSAP stress tests will be maintained.
- Benefits expected:
  - improved comparability and transparency;
  - room to tailor stress tests to country circumstances;
  - help with knowledge management and continuity given staff turnover.

### Data, authorities’ cooperation, and confidentiality
- Authorities’ cooperation, including confidential data sharing on a voluntary basis, is crucial; more and better data are needed.
- Access to institution-specific and non-public information improves depth and relevance of vulnerability assessment in the FSAP.
- Constraints noted:
  - such data go beyond requirements of regular surveillance;
  - limitations in national legislation in some cases.
- Providing these data on a voluntary basis would, other things being equal, improve macrofinancial analysis and strengthen the Fund’s macrofinancial surveillance.
- The Fund’s existing confidentiality protocol provides safeguards for confidential treatment of such information by the FSAP team.

### Interconnectedness analysis
- There is scope for strengthening FSAP work on interconnectedness between financial institutions and across sectors through more systematic use of network analysis.
- Data availability dictates coverage; efforts should address data gaps and further disseminate analytical tools.
- Implementation of the G-20 data gaps initiative recommendations would help close the data gap.
- Network analysis could be better integrated with solvency analysis and used more frequently to help identify SIFIs (see Box 7).

### Cross-border spillovers: challenges and approaches
- Coverage of cross-border spillovers is essential but analytically challenging and hampered by data gaps.
- Adequate coverage depends critically on cooperation of national authorities in providing data on cross-border bilateral exposures.
- FSAP teams should seek to engage national supervisors and the BIS to access the data hub created at the BIS on bilateral credit exposures on an institution-by-institution basis for G-SIFIs.
- Market price–based models (such as the CCA) can help when granular exposure data are lacking, but limitations include:
  - unreliable market data for all institutions in all countries;
  - volatility of estimated correlations during stress periods limiting usefulness.
- Analysis of outward spillovers is more challenging than inward spillovers but critical for systemic countries; efforts should be made to assess outward spillovers at least in each of the S29 countries.
- Different cross-border exposures require different approaches:
  - consolidated stress tests assume resources can be redeployed within a group—this may not hold when intra-group transaction concerns exist;
  - monitor intra-group transactions, raise liquidity ratios on a solo basis, or reduce dependence on parent credit lines when appropriate.
- Identifying causes of contagion is often difficult; distinguishing among explanations (similar business models, concentrated investor bases, correlated trading strategies, changes in competition, structural funding/liquidity changes) may require judgment but is essential for shaping policy recommendations.

### Acknowledging limitations of risk assessment
- FSAPs should be upfront in acknowledging limitations of risk assessment, arising from:
  - inherent limits in current understanding of macrofinancial linkages;
  - inadequate data availability or data quality concerns.
- Explicitly stating these limitations in the FSSA is essential for transparency and for limiting reputational risk for the Fund.

### Improving clarity and communication
- Stronger systemic risk focus and improved analytics will pay off only with clear and effective communication.
- Communication challenges stem from technical, market-sensitive, and legal/institutional complexities, complicating prioritization and clear messaging to authorities and stakeholders.
- The FSSA is the key FSAP document and an important input to surveillance; changes to its structure are proposed to improve clarity.
- Proposed changes include:
  - using systemic risk as the organizing principle for prioritizing FSAP findings and recommendations across the three pillars of the stability assessment;
  - explicitly prioritizing summary FSAP recommendations in the FSSA based on relevance for mitigating systemic risk;
  - ensuring adequate presentation of key macrofinancial linkages in the baseline outlook, developed with the Article IV team, and linking the RAM to assessments across the three pillars;
  - clearer identification of data gaps and access limitations material to the risk assessment, expanding the standard disclaimer on risks not covered by the assessment.
- The new FSSA structure aims to focus and prioritize FSAP work while allowing flexibility for country-specific features.

### Addressing needs of Low-Income Countries (LICs)
- Resource constraints and emphasis on systemic jurisdictions have substantially impacted access to FSAPs for LICs.
- Development modules address developmental and capacity needs but leave gaps in financial stability analysis.
- Development modules often focus on sector-specific issues and do not assess system-wide vulnerabilities, supervisory robustness, or strength of safety nets and crisis management frameworks.
- Staff responses to fill gaps include:
  - stepped up technical assistance (TA) on financial stability issues; MCM’s “Technical Assistance Strategy Update, 2014–2017” notes greater emphasis on TA in systemic issues and crisis management from a relatively low base;
  - new TA focus areas include stress testing, systemic risk analysis, macroprudential policies, institutional frameworks, crisis management and contingency planning, financial safety net arrangements, and bank asset quality reviews;
  - closer integration of financial TA with surveillance via pilot exercises pairing financial TA missions with Article IV missions to improve macro-relevance of TA;
  - more holistic diagnostic TA assessments focusing on strategies for financial system stability, identifying capacity challenges in regulatory, supervisory, crisis management, cooperation, stress testing, and data coverage;
  - the recently-introduced Capacity Assessment program provides scope to assess institutional capacity in supervision and central banking.

*Italic: Source — FSAP REVIEW—FURTHER ADAPTATION TO THE POST-CRISIS ERA, INTERNATIONAL MONETARY FUND*

### 73.      At the same time, TA cannot fully substitute for an FSAP assessment. While all TA has a

### _081814 - 73.      At the same time, TA cannot fully substitute for an FSAP assessment. While all TA has a

### TA versus FSAP assessments
- TA contains a diagnostic element and "holistic" diagnostic assessments are even more diagnostic-oriented, but:
  - TA is guided by the demands of country authorities.
  - TA is focused mainly on capacity needs.
  - TA does not provide as rigorous a scrutiny of financial vulnerabilities as FSAPs.
- While TA may be appropriate and in some circumstances better suited to country needs than an FSAP, it should not be seen as a fully-fledged alternative to an FSAP.

### Leveraging instruments and partnerships
- Continue to leverage existing instruments and the work of other institutions.
- Key partnership:
  - The World Bank will continue to be a key partner.
- Institutional coordination:
  - There is scope to further strengthen the role of the FSLC as a vehicle for coordinating the provision of TA.
- Donor engagement:
  - MCM has worked and will continue to work closely with donors to highlight where TA needs are high and solicit their support where appropriate.

### Resource issues and cost containment
- Implementation of proposed measures can largely be accommodated within existing budgets.
- Steps achievable by re-directing existing resources include:
  - Using systemic risk as a basis for focusing FSAPs.
  - Prioritizing recommendations based on their macrofinancial relevance.
- Steps that would have additional but manageable costs (since work is already underway):
  - Expanding the analytical toolkit.
  - Creating portable quantitative tools.
  - Establishing guidelines for stress testing in FSAPs.
- Introducing a macrofinancial approach to standards assessments—if endorsed in the next review of the Standards and Codes initiative—could yield some savings over the medium term.
- Containing the cost of individual assessments should remain a priority.
  - The average cost of an FSAP assessment has been increasing.
  - Drivers of rising costs:
    - Change in country composition toward more systemic, complex cases.
    - Surge in demand for formal compliance assessments with standards.
    - Expansion of thematic coverage of the FSAP in areas underscored by the crisis, notably macroprudential frameworks.
    - Decisions from the 2009 review to strengthen internal review and quality control.
  - Easing of demand for formal compliance assessments should help arrest the trend toward ever-higher costs.
  - Streamlining assessment components around systemic risk and moving toward macrofinancially-relevant standards assessments (if approved) would help contain costs.
  - Continued effort and cooperation of country authorities will be needed to contain scope and cost.

### Frequency of FSAPs and resource constraints
- Low frequency of FSAPs in non-systemic jurisdictions is chiefly the result of resource constraints.
- Global FSAP resources have been focused on systemic jurisdictions, creating difficult tradeoffs.
- Options to mitigate impact on LICs have been outlined but are unlikely to offset constrained resources combined with the program's focus on jurisdictions with systemically important financial sectors since 2010 (an issue flagged in the 2012 Financial Surveillance Strategy).
- Illustrative estimate provided by staff:
  - Even raising the average annual number of FSAPs to the level of the previous decade (about 20 FSAPs per year, with all the additional FSAPs taking place in non-systemic countries) would:
    - Cost an additional US$2.75 million per annum.
    - Reduce the average gap between FSAPs for non-systemic jurisdictions from the current 14–15 years to 9-10 years.

### Issues for discussion (summary of questions posed)
- Do Directors agree with the main findings of this review of the FSAP, including that the 2009 FSAP review was broadly successful in:
  - Improving the analytical focus of FSAPs.
  - Providing greater flexibility to country authorities and the Fund.
  - Establishing institutional accountability?
- Do Directors agree that key priorities from lessons learned are to:
  - Strengthen the systemic risk focus of the financial stability assessment under the FSAP.
  - Continue improving the analytics while being explicit about the limitations of the risk assessment.
  - Restructure the FSSA to bring out these elements more clearly?
  - Recognize that more systematic provision of non publicly-available data on a voluntary basis is important for the effectiveness of financial stability assessments and macrofinancial surveillance?
- Do Directors believe that a macrofinancial approach to supervisory standards assessments is a promising avenue to:
  - Enhance effectiveness and focus of compliance assessments in FSAPs.
  - Facilitate integration of such assessments in the overall risk assessment?
  - Explore further such an approach in the context of the next Standards & Codes Review?
- Do Directors endorse the use of more targeted Technical Assistance to enhance coverage of financial sector issues in LICs, given the shift of the FSAP program toward jurisdictions with systemically important financial sectors?
- Do Directors agree to consider aligning and coordinating future reviews of the FSAP with periodic reviews of surveillance?

*Source: Excerpt from FSAP REVIEW—FURTHER ADAPTATION TO THE POST-CRISIS ERA, IMF.*

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