Financial Sector Assessment Program (FSAP)

March 16, 2021

The global financial crisis showed that the health and functioning of a country’s financial sector has far-reaching implications for its own and other economies. The Financial Sector Assessment Program (FSAP) is a comprehensive and in-depth analysis of a country’s financial sector. It is a crucial part of the Fund’s financial surveillance and an input to the Article IV consultations. To date, more than three-quarters of the institutions’ member countries have undergone assessments.

Assess financial stability and development

The goal of FSAP assessments is twofold: to gauge the financial sector's stability and soundness and assess its potential contribution to growth and development.

  • To assess stability, FSAP teams examine the resilience of the banking and nonbank financial sectors; conduct stress tests and analyze systemic risks, including links among banks and nonbanks and domestic and cross-border spillovers; analyze emerging risks, such as climate and cyber risks; examine microprudential and macroprudential frameworks; review the quality of bank and nonbank supervision and financial market infrastructure oversight, including central clearing, payment systems, and fintech ecosystems; and evaluate the ability of central banks, regulators and supervisors, policymakers, backstops, and financial safety nets to respond effectively in case of systemic stress.
  • To assess development aspects, FSAPs examine institutions, markets, infrastructure, and their inclusiveness; the quality of the legal framework and of payments and settlements systems; obstacles to competitiveness and efficiency; progress in financial inclusion; and access to retail payment digital technology. They also examine the financial sector’s contribution to economic growth and development. Issues related to the deepening of domestic capital markets are particularly important in developing and low-income countries.

The FSAP following the global financial crisis

In 2009, the FSAP underwent the most significant changes since its inception a decade earlierlargely in response to the global financial crisis. These changes included a clear definition of the three pillars of stability assessments (vulnerabilities and resilience of the financial system, regulatory and supervisory framework, and financial safety nets), the introduction of Risk Assessment Matrices (RAMs), and the possibility of modular FSAPs conducted separately by the IMF or the World Bank, focusing on each institution’s chief responsibility.

The 2014 FSAP Review found that FSAPs conducted since 2009 improved in all dimensions. The introduction of RAMs has led to a more coherent discussion of risks and their likely impact. National authorities highly regard FSAPs and have implemented a large share of their recommendations. Many Financial System Stability Assessment reports (FSSAs) are made public. It emphasized systemic risk and deeper analysis of nonbank financial institutions and interconnectedness and called for more work on macroprudential policies, more flexible use of international standards, and greater integration with Article IV surveillance.

The 2021 FSAP Review found that stakeholders highly and increasingly valued the program. The Review proposed to build on past progress and leverage the FSAP’s flexibility to balance resources with priorities—including risks from climate and technological change—when deciding the scope of individual assessments. The Review emphasized the importance of deepening analytical approaches to assess and mitigate systemic risk, grappling with the after-effects of the pandemic, and further integrate FSAP with Article IV consultations together with concurrent Comprehensive Surveillance Review.

Integration of FSAP into IMF surveillance

FSAP findings provide valuable input into the IMF’s broader surveillance of countries’ economies, known as Article IV consultations. The global financial crisis and the ongoing COVIC-19 pandemic demonstrated the need for an even more seamless integration of these two strands of the IMF’s work.

In September 2010, the IMF made it mandatory for 25 jurisdictions with systemically important financial sectors to undergo assessments under the FSAP every five years. The list of jurisdictions for these mandatory assessments was based on the size and interconnectedness of their financial sectors. In December 2013, the IMF’s Executive Board revised the methodology for determining jurisdictions with systemically important financial sectors. The new methodology places greater emphasis on interconnectedness, and its application led to an increase in the number of systemically important jurisdictions to 29. In the context of the 2021 FSAP Review concluded in May 2021, the Executive Board endorsed the 2013 methodology with minor adjustments and decided to make mandatory financial stability assessment more risk-based. The list of jurisdictions with SIFS was expanded to 47. Thirty-three jurisdictions with relatively more systemically important financial sectors would participate in FSAP every once in five years, while the other 15—many of them are emerging market economies—would participate every once in ten years. In addition, the 2014 and 2021 FSAP Reviews discussed actions to be undertaken in FSAPs to facilitate further the integration of its findings and recommendations in Article IV surveillance. The 2014 Review encouraged using a macro-financial filter to choose key FSAP recommendations to be reported in FSSAs. The 2021 Review recommended further enhance financial surveillance in Article IV based on FSAP findings and analytical tools.

While the decision to require stability assessments under the FSAP aims to safeguard global financial stability, it also poses a challenge in terms of resource intensity and technical rigor. Also, a balance must be maintained with FSAPs for non-systemic countries—particularly low-income countries—in the context of broadly unchanged resources. Several steps are underway to strengthen the focus and coverage of the FSAPs, to make innovative use of financial stability technical assistance spanning the various areas related to financial stability, and to ensure that FSAPs provide accurate and timely support to financial sector surveillance in Article IV consultations.