Financial System Soundness

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A country's financial system includes banks and nonbank lenders, insurers, securities markets, and investment funds; clearing counterparties, payment providers, central banks, and financial regulators and supervisors.
These institutions provide a framework to conduct economic transactions and monetary policy and to channel savings into investment, thus supporting economic growth.
Financial crises can:
- deepen economic downturns;
- trigger capital flight and lower exchange rates;
- disrupt financial intermediation and undermine monetary policy;
- generate large fiscal costs from rescuing troubled financial institutions.
Because financial institutions and countries are increasingly connected, financial shocks in one area can quickly spill across financial sectors and national borders.
IMF staff analyses point to crucial links between financial stability, financial depth, and financial inclusion.

The IMF promotes financial system soundness through bilateral and multilateral surveillance, lending programs, and capacity development.

Bilateral surveillance

The IMF provides regular policy advice to all its members through Article IV consultations covering countries’ macroeconomic and financial developments and policies.
Article IV consultations have increased emphasis on systemic financial-sector risks and macro-financial issues—spillovers to and from the financial sector and other sectors of the economy.

Multilateral surveillance

The IMF’s multilateral surveillance seeks to identify risks and promote policies that support orderly global financial conditions.
Key multilateral tools and activities include:
- Global Financial Stability Report, which assesses key financial market developments and systemic vulnerabilities;
- Spillover Notes, which present IMF work on spillover effects and are featured in the World Economic Outlook;
- the semiannual Early Warning Exercise, jointly carried out by the IMF and the Financial Stability Board (FSB);
- regional financial sector surveillance projects covering Central America, the West African Economic and Monetary Union, the Central African Economic and Monetary Community, the Eastern Caribbean Currency Union, and the European Union;
- Regional Economic Outlook reports, which often analyze financial sector–related issues.

Financial surveillance

Effective financial surveillance at the bilateral and multilateral levels is a key strategic priority for the IMF.
Following the 2014 Triennial Surveillance Review, IMF staff integrated and deepened risk and spillover analysis and enhanced coverage and integration of macro-financial issues in Article IV consultations by mainstreaming macro-financial surveillance.

Financial soundness indicators and financial access

The IMF has identified core financial soundness indicators to assess financial systems’ strengths and vulnerabilities and supports countries’ efforts to compile and disseminate such indicators.
The IMF’s Financial Access Survey contributes to broader efforts to compile data on financial inclusion.

Financial Sector Assessment Program (FSAP)

The FSAP provides member countries with an in-depth, comprehensive evaluation of their financial systems.
Introduced on a voluntary basis, the FSAP is now a mandatory part of Article IV consultations with countries that have systemically important financial sectors.

IMF-supported lending programs

IMF-supported lending programs often include measures to strengthen member countries' financial systems.
The IMF can help members with:
- institutional settings to monitor and address systemic risk;
- identifying and diagnosing financial system problems;
- designing strategies for systemic reforms and bank restructuring;
- ensuring strategies are consistent with and supported by appropriate macroeconomic and other structural policies.

Capacity development

Capacity development helps member countries to develop and strengthen their financial systems.
IMF assistance may include training and advice on:
- monetary and macro-prudential policy frameworks;
- debt management;
- development of foreign exchange and capital markets;
- design of payment systems and deposit insurance arrangements;
- regulation and supervision of financial institutions;
- crisis preparedness, crisis management, bank resolutions;
- central bank governance and transparency.