## _wp08190

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---

### Scope and data sources
- Uses data from IMF-World Bank assessments of countries’ compliance with international standards and codes, derived from the Financial Sector Assessment Program (FSAP).
- The FSAP has so far covered about two-thirds of the IMF’s 185 member countries.
- The dataset covers practical implementation of regulation and supervision across the three key segments: banking, insurance, and securities regulation.

### Measurement approach and limitations
- Standards used: Basel Core Principles for Effective Banking Supervision (BCP, 25 Core Principles), Insurance Core Principles (ICP), and IOSCO’s Objectives and Principles of Securities Regulation.
- Grading scales and aggregation:
  - Principle gradings transformed from a four-point scale to a numeric 0–100 scale (0 percent = nonobserved; 100 percent = fully observed).
  - 67 percent corresponds to “largely compliant”; 33 percent corresponds to “materially noncompliant.”
  - Summary grading: unweighted average of principle-by-principle gradings (0–100 scale).
  - Component gradings: principles grouped into four components — (i) regulatory governance; (ii) prudential framework; (iii) regulatory practices; (iv) financial integrity and safety nets — each component’s index is an unweighted average of included principles.
- Data provenance and limitations:
  - Assessments largely prepared as part of FSAPs; many gradings confidential; published assessments available for countries that agreed to publication.
  - Assessments are country-by-country snapshots taken at various points during 2000–07; statistical tests did not find a significant relationship between assessment year and overall grading (controlling for income per capita).
  - Assessments contain subjective elements (assessors’ judgment); standardized methodologies, diversified assessor teams, multiweek country visits, and IMF–World Bank headquarters review enhance comparability.
- Caveats noted by authors:
  - Compliance scores do not necessarily give the full picture of supervisory quality.
  - Full theoretical discussion of optimal supervisory frameworks is beyond the paper’s scope.
  - Rigorous theoretical work is limited, especially for non-bank financial institutions.
  - Ultimate tests of regulation—efficient resource allocation and reducing systemic event costs—are difficult to measure directly.

### Key findings (aggregate and comparative)
- On average, countries’ regulatory frameworks score one notch below full compliance with the standards (on a 4-notch scale).
- Overall compliance across sectors:
  - Banking = 67 percent (standard deviation 19 percent).
  - Insurance = 67 percent (standard deviation 19 percent).
  - Securities = marginally higher (same standard deviation).
  - Interpretation: on average, regulatory systems are “largely compliant.”
- Per capita income is significantly linked to cross-country differences in regulatory quality.
- Higher regulatory quality in banking is correlated with better banking sector performance.
- There are substantial differences in regulatory quality across regions, some but not all of which can be explained by differences in economic development.
- High-income countries are characterized by better supervisory structures; however, these higher grades may still be insufficient given the complexity of their financial systems, as suggested by developments in the global financial system in 2007–08.

### Differences by income level and geographic region
- Income-level differences:
  - Compliance positively correlated with economic development (GDP per capita).
  - World Bank income cutoffs used:
    - high-income (GDP per capita above USD 11,115),
    - low-income (below USD 906),
    - medium-income (between those values).
  - Wealthy economies have higher compliance than poorer ones; gap larger between high-income and medium-income than between medium-income and low-income.
- Regional differences and examples:
  - Europe shows higher average observance than other regions.
  - Average (unweighted) GDP per capita in European sample = $19,566; non-European sample = $5,800.
  - EU vs non-EU: observance about 8 percentage points higher on average in EU countries than non-EU.
  - EU compliance ranged (sample averages) from 79 percent in insurance to 85 percent in securities.
  - Regional low points (examples):
    - African banking supervision — 42 percent in financial integrity and safety nets.
    - Middle East and Central Asian insurance supervision — 40 percent in financial integrity and safety nets.
    - African securities regulation — 45 percent in financial integrity and safety nets.
  - Regional high points (examples):
    - Europe — regulatory governance in banking = 82 percent.
    - Securities regulatory practices in Europe = 83 percent.
- Cross-country variability:
  - Variability within EU generally lower than in non-EU; variability higher within regulatory governance (banking and insurance).

### Main strengths and areas for improvement (sector-specific)
- Banking:
  - Strength: licensing — definition of permissible activities for licensed institutions.
  - Areas needing improvement: supervision of other risks; connected lending; money laundering issues; supervisory objectives, autonomy, powers, and resources; remedial measures; consolidated supervision.
  - Example metric: Basel Core Principle 1 (objectives, autonomy, powers, and resources): average degree of compliance = 73 percent; 61 percent of countries were less-than-fully-compliant for this principle.
- Insurance:
  - Strengths: confidentiality and winding-up.
  - Areas needing improvement: market conduct and internal controls; derivatives and off-balance-sheet items; organization of the supervisor; corporate governance; assets; onsite inspection; licensing.
- Securities:
  - Strengths: clarity and consistency of regulatory process; professional standards; appropriate use of self-regulatory organizations; rules on transparency of trading.
  - Areas needing improvement: enforcement powers and compliance programs; capital and other prudential requirements; powers, resources, and capacity; operational independence and accountability.

### Regression analysis — explaining cross-country differences in regulatory quality
- Correlations across datasets:
  - Correlations between supervisory-quality dataset and Barth, Caprio, and Levine (BCL) regulatory database: all below 50 percent, many in the 20–30 percent range.
  - Correlations between supervisory-quality indicators and World Bank governance database (KKM) as of 2002 and 2006: many between 50 and 60 percent, a few over 60 percent, about half below 50 percent.
  - Correlations between KKM governance data of 2002 and 2006: about half below 90 percent, many between 70 and 80 percent; slightly below half of changes between 2002 and 2006 were improvements.
- Best single macroeconomic explanatory variable:
  - GDP per capita outperformed alternatives (domestic credit and claims to private sector, proxies for size of financial sector).
- Primary regression framework:
  - OLS regression: SC_ij = α + β⋅KKM_i_j + γ⋅GDP_j + ε_ij
    - SC_ij = standards and codes variable i for country j (regulatory governance, prudential framework, regulatory practice, financial integrity) for BCP, IAIS, IOSCO.
    - KKM variables = Voice and Accountability; Political Stability; Government Effectiveness; Regulatory Quality; Rule of Law; Control of Corruption.
    - GDP_j = GDP per capita (same year as KKM: 2002 or 2006).
- Key regression findings:
  - BCP (banking):
    - GDP per capita coefficients positive and often significant at the 5 percent uncertainty level in 80 percent of cases (both 2002 and 2006 data).
    - KKM governance variables also frequently significant.
    - KKM “regulatory quality” variable significance for BCP regressions: significant at 5 percent in about 50 percent of cases for 2006 data and about 75 percent of cases for 2002 data; GDP per capita almost always significant.
    - Interpretation: BCP captures information beyond KKM governance indicators; BCP reflects level of development not fully captured by KKM.
  - IAIS (insurance) and IOSCO (securities):
    - Results weaker: around half of regressions featured GDP per capita with expected sign and significance at 5 percent (notably IAIS Regulatory Practice, IOSCO Prudential Framework and Financial Integrity).
    - KKM governance variables mostly not significant.
    - Interpretation: insurance and securities regulations feature less prominently in KKM survey responses.
- Subsample regressions:
  - Regional and income-level regressions show less significance (smaller samples).
  - For BCP regressions, GDP per capita significant at 5 percent in a number of subsamples, specifically for low-income and high-income (and OECD) countries — BCP results driven by low- and high-income groups.
- Additional regressions with BCL database:
  - GDP per capita significant in almost all cases.
  - Selected patterns:
    - Higher government ownership of banks associated with lower BCP ranking (significant in 2 out of 4 regressions).
    - Supervisor’s authority to ask a bank to change its structure associated with higher BCP scores (significant).
    - Higher ratio of nonperforming loans to total assets associated with lower BCP scores (significant in 1 out of 4 regressions).
- Interpretation summary:
  - Quality of regulation and supervision positively correlated with GDP per capita.
  - Standards-and-codes assessments (implementation-focused) capture different information than regulation-on-the-books databases.
  - Governance indicators (KKM) are correlated with supervisory-quality indicators, especially where implementation aspects overlap (e.g., BCP), but do not fully subsume standards-and-codes information.

### Analysis of other FSAP recommendations and qualitative survey findings
- Overall FSSA messages:
  - Majority described countries’ financial systems as well supervised; issues and gaps identified in virtually all cases; a minority identified “substantial weaknesses” or “important shortcomings.”
  - In securities regulation, more than half of countries had overall gradings in 80–100 percent range; about 5 percent of countries had overall gradings lower than 40 percent.
- Recurrent domestic prudential themes:
  - Improve monitoring of systemwide risks: enhance macroprudential surveillance, stress testing, and collection/dissemination of timely indicators.
  - Strengthen regulation in specific segments: insurance reforms recommended frequently (about half of surveyed FSSAs); attention to risks from large/growing residential mortgage loan portfolios in some cases.
  - Strengthen regulatory governance: majority of FSSAs raised need to reduce potential for political interference, strengthen legal protection of supervisors, and improve budgetary independence.
  - Improve corporate governance and disclosures: about one-third of FSSAs highlighted this need.
- Other prominent nonstandard issues:
  - Public ownership in financial sector (example: Germany).
  - Relationship between concentration, competition, and stability (examples: France and Italy).
  - Prudential regulation plays a secondary role in addressing such issues.

### Cross-border issues in FSAPs for European Union countries (Box 1 summary)
- Survey findings on cross-border coverage:
  - Mission leaders reported cross-border issues received some attention, but limited resources prevented in-depth coverage.
  - Attention typically driven by presence of systemically important foreign banks; substantial foreign exposure of domestic banks; and foreign ownership in new member states.
  - Coverage limited by resource constraints and access to data; missions frequently chose not to meet foreign supervisors or private sector representatives.
- Country-level examples:
  - United Kingdom (2003): focus on London as an international financial center; mission met with US and German supervisors; limited emphasis on cross-border crisis management.
  - Lithuania (2002): cross-border issues central due to foreign ownership and EU accession; mission did not meet foreign supervisors.
  - Netherlands (2004) and Belgium (2006): cross-border supervisory issues important; some recommendations on international coordination; missions did not meet foreign supervisors or private sector representatives.
  - Nordic countries (Norway 2005, Sweden 2002, Finland 2001): spillovers among Nordic countries highlighted; missions constrained by limited capacity to analyze regional exposures; no meetings with foreign supervisors took place in cited instances.
  - Greece (2006): lack of cross-border crisis management framework and weak cooperation with supervisors of southeastern European countries; mission decided not to meet foreign supervisors.
  - Poland (2006 update): "about three quarters" of the banking system is foreign-owned; cross-border issues addressed in stress tests and follow-up but analysis limited by domestic priorities and resource constraints; mission did not meet foreign supervisors.
- Common constraints and drivers:
  - Constraints: limited mission resources (time and staff); limited access to cross-border data and detailed exposure information; trade-offs on meeting foreign supervisors or private stakeholders.
  - Drivers elevating cross-border attention: foreign ownership of domestic banking systems; large foreign operations of domestic banks; systemic importance of foreign banks operating domestically; regional banking linkages (Nordic region, Central and Eastern Europe, southeastern Europe).
- Policy-relevant observations:
  - Cross-border supervisory coordination is important where large foreign banks or substantial foreign exposures exist.
  - Resource and data constraints frequently prevent in-depth cross-border analysis; addressing these constraints would improve FSAP coverage of cross-border risks.
  - Absence or weakness of cross-border crisis-management frameworks and unclear lender-of-last-resort arrangements pose vulnerabilities for branches operating abroad.
  - Differences in regulatory frameworks across regions raise concerns about regulatory arbitrage.
  - For countries with significant foreign ownership (e.g., Poland: "about three quarters"), stress testing and standards follow-up should explicitly incorporate cross-border risk channels, but domestic priorities and resource limits may overshadow such analysis.

*Source: _wp08190 — IMF staff analysis and synthesis of FSAP assessments, standards-and-codes gradings, BCL database comparisons, and KKM governance indicators as presented in the supplied text.*

### References..............................................................................................................

### _wp08190 - References

### Scope and data sources
- Uses data from IMF-World Bank assessments of countries’ compliance with international standards and codes, derived from the Financial Sector Assessment Program (FSAP).
- The FSAP has so far covered about two-thirds of the IMF’s 185 member countries.
- The dataset covers practical implementation of regulation and supervision across the three key segments: banking, insurance, and securities regulation.

### Key findings (as stated in the paper)
- On average, countries’ regulatory frameworks score one notch below full compliance with the standards (on a 4-notch scale).
- Per capita income is significantly linked to cross-country differences in regulatory quality.
- Higher regulatory quality in banking is correlated with better banking sector performance.
- There are substantial differences in regulatory quality across regions, some but not all of which can be explained by differences in economic development.
- High-income countries are characterized by better supervisory structures; however, these higher grades may still be insufficient given the complexity of their financial systems, as suggested by developments in the global financial system in 2007–08.

### Measurement approach and limitations
- The study analyzes FSAP assessments of compliance with international standards and codes aimed at identifying good supervisory practices.
- The approach allows assessment of practical implementation (beyond "on the books" regulation).
- The authors acknowledge that compliance scores do not necessarily give the full picture of supervisory quality, noting:
  - A full theoretical discussion of optimal supervisory frameworks is beyond the paper’s scope.
  - Rigorous theoretical work is limited, especially for non-bank financial institutions.
  - The ultimate tests of regulation—efficient resource allocation and reducing systemic event costs—are difficult to measure directly.
- Nonetheless, the standards assessments are results of detailed consultations among top international experts and have been useful in previous cross-country research.

### Contribution relative to existing literature
- Provides an analysis that covers practical implementation, not just laws "on the books."
- Covers banking, insurance, and securities regulation jointly, extending beyond prior work that focused mainly on banks or only one segment.
- Points to complementarities with other databases (e.g., World Bank governance database, and prior studies such as Barth, Caprio, and Levine, 2006; Carvajal and Elliot, 2007).

### Structure of the paper (as outlined)
- Section II explains the data and methodology.
- Section III provides a basic overview of the data on compliance with the various core principles.

*Source: _wp08190 - References (IMF Working Paper content excerpt).*

### Section IV presents the results of the regression analysis that tries to explain the factors behind

### _wp08190 - Section IV presents the results of the regression analysis that tries to explain the factors behind

### Data and Methodology
- Standards used: Basel Core Principles for Effective Banking Supervision (BCP, 25 Core Principles), Insurance Core Principles (ICP), and IOSCO’s Objectives and Principles of Securities Regulation.
- Grading scales and aggregation:
  - Principle gradings transformed from a four-point scale to a numeric 0–100 scale (0 percent = nonobserved; 100 percent = fully observed).
  - 67 percent corresponds to “largely compliant” (BCP terminology); 33 percent corresponds to “materially noncompliant.”
  - Summary grading: unweighted average of principle-by-principle gradings (0–100 scale).
  - Component gradings: principles grouped into four components — (i) regulatory governance; (ii) prudential framework; (iii) regulatory practices; (iv) financial integrity and safety nets — each component’s index is an unweighted average of included principles.
- Data provenance and limitations:
  - Assessments largely prepared as part of FSAPs; many gradings confidential; published assessments available for countries that agreed to publication.
  - Assessments are country-by-country snapshots taken at various points during 2000–07; statistical tests did not find a significant relationship between assessment year and overall grading (controlling for income per capita).
  - Assessments contain subjective elements (assessors’ judgment), but standardized methodologies, diversified assessor teams, multiweek country visits, and IMF–World Bank headquarters review enhance comparability.

### Introductory Analysis of the Quality of Supervision — Overall Findings and Patterns
- Overall compliance across sectors:
  - Average overall compliance: Banking = 67 percent (standard deviation 19 percent); Insurance = 67 percent (standard deviation 19 percent); Securities = marginally higher (same standard deviation).
  - Interpretation: on average, regulatory systems are “largely compliant.”
- Differences across regulatory components:
  - Insurance regulation lags in regulatory governance (many supervisory agencies lack clear autonomy).
  - Banking scores somewhat higher on prudential framework than insurance and securities (difference small relative to cross-country variation).
  - Securities regulation scores higher in regulatory practices and financial integrity and safety nets.
- Cross-country variability is large (high standard deviations); regional and income-group breakdowns follow.

### Differences by Income Level and Geographic Region
- Income-level differences:
  - Compliance positively correlated with economic development (GDP per capita).
  - Wealthy economies have higher compliance than poorer ones; gap larger between high-income and medium-income than between medium-income and low-income.
  - World Bank income cutoffs used: high-income (GDP per capita above USD 11,115), low-income (below USD 906), medium-income (between those values).
- Regional differences:
  - Europe shows higher average observance than other regions.
  - Average (unweighted) GDP per capita in European sample = $19,566; non-European sample = $5,800.
  - EU vs non-EU: observance about 8 percentage points higher on average in EU countries than non-EU (per Čihák and Tieman, 2007).
  - EU compliance ranged (sample averages) from 79 percent in insurance to 85 percent in securities.
  - Regional low points (examples):
    - African banking supervision — 42 percent in financial integrity and safety nets.
    - Middle East and Central Asian insurance supervision — 40 percent in financial integrity and safety nets.
    - African securities regulation — 45 percent in financial integrity and safety nets.
  - Regional high points (examples):
    - Europe — regulatory governance in banking = 82 percent.
    - Securities regulatory practices in Europe = 83 percent.
- Cross-country variability within EU generally lower than in non-EU; variability higher within regulatory governance (banking and insurance).

### Main Strengths and Areas for Improvement (sector-specific)
- Banking:
  - Strength: licensing — definition of permissible activities for licensed institutions.
  - Areas needing improvement: supervision of other risks; connected lending; money laundering issues; supervisory objectives, autonomy, powers, and resources; remedial measures; consolidated supervision.
- Insurance:
  - Strengths: confidentiality and winding-up.
  - Areas needing improvement: market conduct and internal controls; derivatives and off-balance-sheet items; organization of the supervisor; corporate governance; assets; onsite inspection; licensing.
- Securities:
  - Strengths: clarity and consistency of regulatory process; professional standards; appropriate use of self-regulatory organizations; rules on transparency of trading.
  - Areas needing improvement: enforcement powers and compliance programs; capital and other prudential requirements; powers, resources, and capacity; operational independence and accountability.
- Example metric from principle analysis:
  - Basel Core Principle 1 (objectives, autonomy, powers, and resources): average degree of compliance = 73 percent; 61 percent of countries were less-than-fully-compliant for this principle (exact numbers available upon request).

### Regression Analysis — Explaining Cross-Country Differences in Regulatory Quality
- Correlations across datasets:
  - Correlations between supervisory-quality dataset (standards & codes including implementation) and Barth, Caprio, and Levine (BCL) regulatory database (regulations on the books) are low: all below 50 percent, many in the 20–30 percent range (Table 7).
  - Correlations between supervisory-quality indicators and World Bank governance database (Kaufman, Kraay, and Mastruzzi, KKM) as of 2002 and 2006: many correlations between 50 and 60 percent, a few over 60 percent, about half below 50 percent (Tables 8 and 9).
  - Correlations between KKM governance data of 2002 and 2006: about half below 90 percent, many between 70 and 80 percent; slightly below half of changes in these variables between 2002 and 2006 were improvements.
- Best single macroeconomic explanatory variable:
  - GDP per capita outperformed alternatives (domestic credit and claims to private sector, proxies for size of financial sector).
- Primary regression framework:
  - OLS regression: SC_ij = α + β⋅KKM_i_j + γ⋅GDP_j + ε_ij
    - SC_ij = standards and codes variable i for country j (regulatory governance, prudential framework, regulatory practice, financial integrity) for BCP, IAIS, IOSCO.
    - KKM variables = Voice and Accountability; Political Stability; Government Effectiveness; Regulatory Quality; Rule of Law; Control of Corruption.
    - GDP_j = GDP per capita (same year as KKM: 2002 or 2006).
- Key regression findings:
  - BCP (banking):
    - GDP per capita coefficients positive and often significant at the 5 percent uncertainty level in 80 percent of cases (both 2002 and 2006 data).
    - KKM governance variables also frequently significant.
    - KKM “regulatory quality” variable significance for BCP regressions: significant at 5 percent in about 50 percent of cases for 2006 data and about 75 percent of cases for 2002 data; GDP per capita almost always significant.
    - Interpretation: BCP captures information beyond KKM governance indicators; BCP reflects level of development not fully captured by KKM.
  - IAIS (insurance) and IOSCO (securities):
    - Results weaker: around half of regressions featured GDP per capita with expected sign and significance at 5 percent (notably IAIS Regulatory Practice, IOSCO Prudential Framework and Financial Integrity).
    - KKM governance variables mostly not significant.
    - Interpretation: insurance and securities regulations feature less prominently in KKM survey responses.
- Subsample regressions:
  - Regional and income-level regressions show less significance (smaller samples).
  - For BCP regressions, GDP per capita significant at 5 percent in a number of subsamples, specifically for low-income and high-income (and OECD) countries — BCP results driven by low- and high-income groups.
- Additional regressions with BCL database:
  - GDP per capita significant in almost all cases.
  - Selected patterns identified:
    - Higher government ownership of banks associated with lower BCP ranking (significant in 2 out of 4 regressions).
    - Supervisor’s authority to ask a bank to change its structure associated with higher BCP scores (significant).
    - Higher ratio of nonperforming loans to total assets associated with lower BCP scores (significant in 1 out of 4 regressions).
- Interpretation summary:
  - Quality of regulation and supervision positively correlated with GDP per capita.
  - Standards-and-codes assessments (implementation-focused) capture different information than regulation-on-the-books databases.
  - Governance indicators (KKM) are correlated with supervisory-quality indicators, especially where implementation aspects overlap (e.g., BCP), but do not fully subsume standards-and-codes information.

### Analysis of Other FSAP Recommendations (qualitative survey of FSSA reports and FSAP mission leaders)
- Overall FSSA messages:
  - Majority described countries’ financial systems as well supervised; issues and gaps identified in virtually all cases; a minority identified “substantial weaknesses” or “important shortcomings.”
  - Quantitative complement: in securities regulation, more than half of countries had overall gradings in 80–100 percent range; about 5 percent of countries had overall gradings lower than 40 percent.
- Cross-sector and cross-border integration challenges:
  - Many FSSAs highlighted need to adjust supervisory frameworks to cross-sector and cross-border financial integration, consolidation, and effective cooperation within and across jurisdictions.
  - Examples of FSAP recommendations:
    - Belgium (2006 FSAP): position supervisory agency to meet challenges from conglomerates’ dominant and international roles; Basel II and Solvency II demands; Financial Services Action Plan implementation and European market integration; changes in cross-border market infrastructures (Euronext, Euroclear).
    - Netherlands (2004 FSAP): recommendations on cross-border securities settlement; cross-border crisis management; deposit guarantee system considering broader European context.
  - FSAP limitations: limited interaction with relevant foreign parties constrains analysis of cross-border issues; resource constraints and limited access abroad cited in survey of FSAP mission leaders.
  - Country-based FSAP format limits assessment of supranational issues (e.g., euro area elements) and cross-border conglomerate risk where significant risk management occurs abroad.
- Recurrent domestic prudential themes from FSSAs:
  - Improve monitoring of systemwide risks: enhance macroprudential surveillance, stress testing, and collection/dissemination of timely indicators.
  - Strengthen regulation in specific segments: insurance reforms recommended frequently (about half of surveyed FSSAs); focus on risks from large/growing residential mortgage loan portfolios in some cases.
  - Strengthen regulatory governance: majority of FSSAs raised need to reduce potential for political interference, strengthen legal protection of supervisors, and improve budgetary independence.
  - Improve corporate governance and disclosures: about one-third of FSSAs highlighted this need.
- Other prominent nonstandard issues in FSAPs:
  - Public ownership in financial sector (example: Germany).
  - Relationship between concentration, competition, and stability (examples: France and Italy).
  - Prudential regulation plays a secondary role in addressing such issues.

*Source: IMF staff analysis and synthesis of FSAP assessments, standards-and-codes gradings, BCL database comparisons, and KKM governance indicators as presented in the supplied text.*

### Box 1. Cross-Border Issues in FSAPs for European Union Countries: A Survey

### Box 1. Cross-Border Issues in FSAPs for European Union Countries: A Survey

### Survey findings on cross-border issues in FSAPs
- FSAP mission leaders for EU countries reported that cross-border issues received some attention in FSAPs, but missions generally had limited resources, preventing in-depth coverage.
- Attention to cross-border issues was typically driven by:
  - presence of systemically important foreign banks;
  - substantial foreign exposure of domestic banks;
  - in some new member states, foreign ownership of the banking system.
- Coverage in most FSAPs was limited by resource constraints and access to data.
- Missions frequently chose not to meet foreign supervisors or private sector representatives, after weighing costs and benefits.

### Country-level examples and salient cross-border themes
- United Kingdom FSAP (2003)
  - Focus: role of London as an international financial center.
  - Cross-border supervisory coordination was an important issue.
  - Mission met with US and German supervisors for perspectives on coordination with U.K. supervisors.
  - There was no substantial emphasis on cross-border crisis management.
- Lithuania FSAP mission (2002)
  - Cross-border issues seen as central due to considerable foreign ownership of financial sector assets and run-up to EU accession.
  - Mission did not meet foreign supervisors or private sector representatives.
- Netherlands (2004) and Belgium (2006)
  - Cross-border supervisory issues important in standards assessments.
  - Netherlands: vulnerability analysis focused on substantial foreign operations of Dutch banks; some FSAP recommendations related to international coordination.
  - Belgium: discussed foreign operations of large Belgian banks and foreign ownership of some large Belgian banks; foreign operations mainly in Central and Eastern Europe so systemic importance for Belgian system judged limited; no in-depth analysis performed; mission looked into cooperation with the Dutch supervisor but did not meet foreign supervisors or private sector representatives.
- Norway (2005), Sweden (2002), Finland (2001)
  - Scope for spillovers among Nordic countries highlighted in standard assessments.
  - Swedish stress tests and scenario analyses were based on the Nordic area due to prominence of Swedish banks throughout the region.
  - Missions constrained by limited capacity to analyze exposures in the Nordic region in detail.
  - Finland and Norway: foreign ownership of a systemically important bank was a key issue.
  - Norway: additional issue was cross-border implications of the relatively generous deposit insurance system.
  - No meetings with foreign supervisors took place.
- Greece FSAP (2006)
  - Mentioned lack of a cross-border crisis management framework and weak cooperation between Greek supervisors and supervisors of other southeastern European countries.
  - Associated lack of clarity on lender of last resort issues for Greek branches operating in southeastern European countries.
  - Differences in regulatory frameworks across the region raised concerns about regulatory arbitrage.
  - After considering costs and benefits, mission decided not to meet with foreign supervisors or private sector representatives.
- Poland FSAP Update (2006)
  - Cross-border issues important given "about three quarters" of the banking system is foreign-owned.
  - Cross-border issues addressed in stress tests, follow-up on standards assessments, and discussions on role of foreign-owned banks.
  - Analysis was overshadowed by domestic issues and limited by time and resource constraints.
  - Mission did not meet with foreign supervisors and representatives of foreign owners of local banks.

### Cross-border coverage constraints and patterns
- Common constraints across FSAPs:
  - limited mission resources (time and staff);
  - limited access to cross-border data and detailed exposure information;
  - trade-off decisions by missions on whether to meet foreign supervisors or private sector stakeholders.
- Typical drivers that elevated cross-border attention:
  - foreign ownership of domestic banking systems;
  - large foreign operations of domestic banks;
  - systemic importance of foreign banks operating domestically;
  - regional banking linkages (e.g., Nordic region, Central and Eastern Europe, southeastern Europe).

### Related broader conclusions in the source (implications for supervisory frameworks)
- Regulatory frameworks on average score one notch below full compliance with international supervisory standards (on a 4-notch scale); substantial cross-country differentiation exists.
- Level of economic development (GDP per capita) and governance variables help explain banking supervision quality; similar but weaker patterns hold for insurance supervision and securities regulation.
- Financial supervisory systems in high-income economies generally score higher than in medium- or low-income economies, but high-income systems face bigger challenges because of more complex financial systems.
- Financial integration, conglomerates with international character, and emergence of cross-border financial market infrastructures create new supervisory challenges and increase the importance of supervisory cooperation and cross-border crisis-management arrangements.

### Key policy-relevant observations (from FSAPs and assessments)
- Cross-border supervisory coordination is important where large foreign banks or substantial foreign exposures exist; missions often sought perspectives from foreign supervisors when feasible (e.g., U.K. mission met US and German supervisors).
- Resource and data constraints frequently prevent in-depth cross-border analysis; addressing these constraints would improve FSAP coverage of cross-border risks.
- Absence or weakness of cross-border crisis-management frameworks and unclear lender-of-last-resort arrangements (noted for Greece and other cases) pose vulnerabilities for branches operating abroad.
- Differences in regulatory frameworks across regions raise concerns about regulatory arbitrage.
- For countries with significant foreign ownership of banking systems (e.g., Poland: "about three quarters"), stress testing and standards follow-up should explicitly incorporate cross-border risk channels, but domestic priorities and resource limits may overshadow such analysis.

*Italic: Source — Box 1. Cross-Border Issues in FSAPs for European Union Countries: A Survey (extracted from the supplied PDF content).*

### REFERENCES

### REFERENCES

### Books and Monographs
- Barth, James R., Gerard Caprio, and Ross Levine, 2006, Rethinking Bank Regulation: Till Angels Govern (Cambridge, MA: Cambridge University Press).
- Dewatripont, M. and Jean Tirole, 1994, The Prudential Regulation of Banks  (Cambridge: MIT Press).
- Herring, Richard, and Anthony Santomero, 2000, “What is Optimal Regulation?” (Pennsylvania: Financial Institution Center, University of Pennsylvania).

### IMF and World Bank Reports
- International Monetary Fund, 2002, Implementation of the Basel Core Principles for Effective Banking Supervision, Experiences, Influences, and Perspectives   (Washington, D.C.: International Monetary Fund). Available at http://www.imf.org/external/np/mae/bcore/2002/092302.pdf.
- International Monetary Fund, 2004, Financial Sector Regulation: Issues and Gaps.   (Washington, D.C.: International Monetary Fund) Available at http://www.imf.org/external/np/mfd/2004/eng/080404.pdf.
- Carmichael, Jeffrey, Alexander Fleming, and David T. Llewellyn, 2004, Aligning Financial Supervisory Structures with Country Needs (Washington, DC: World Bank).
- Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi, 2003, “Governance Matters III: Governance Indicators for 1996–2002” (Washington, D.C.: World Bank). Available at www.worldbank.org.
- Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi, 2007, “Governance Matters IV: Governance Indicators for 1996–2006” (Washington, D.C.: World Bank). Available at www.worldbank.org.

### IMF Working Papers, Chapters, and Journal Articles
- Carvajal, Ana, and Jennifer Elliott, 2007, “Strengths and Weaknesses in Securities Market Regulation: A Global Analysis,” IMF Working Paper No. 07/259 (Washington: International Monetary Fund).
- Čihák, Martin, and Alexander Tieman, 2007, “Assessing Current Prudential Arrangements,” In Jörg Decressin, Hamid Faruqee, and Wim Fonteyne (eds.), Integrating Europe’s Financial Markets (Washington: International Monetary Fund).
- Čihák, Martin, and Richard Podpiera, 2006, “Is One Watchdog Better Than Three? International Experience with Integrated Financial Sector Supervision,” IMF Working Paper No. 06/57 (Washington: International Monetary Fund).
- Čihák, Martin, and Richard Podpiera, 2008, “Integrated Financial Supervision: Which Model?,” North American Journal of Economics and Finance, doi:10.1016/j.najef.2008.03.003.
- Das, Udaibir S., Marc Quintyn, and Kina Chenard, 2004, “Does Regulatory Governance Matter for Financial System Stability? An Empirical Analysis.” IMF Working Paper 04/89 (Washington, DC: International Monetary Fund).
- Podpiera, Richard, 2004, “Does Compliance with Basel Core Principles Bring Any Measurable Benefits?” IMF Working Paper No. 04/204.   (Washington, D.C.: International Monetary Fund).

### Regional and Thematic Studies
- Wajid, S. Kal, Alexander Tieman, May Khamis, Francois Haas, Dirk Schoenmaker, Plamen Iossifov, and Kalin Tintchev, 2007, Financial Integration in the Nordic-Baltic Region (Washington, D.C.: International Monetary Fund).

*Source: _wp08190 - REFERENCES*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08190.pdf_