Press Release: IMF Expanding Surveillance to Require Mandatory Financial Stability Assessments of Countries with Systemically Important Financial Sectors

IMF News, September 27, 2010

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Canonical URL: Press Release: IMF Expanding Surveillance to Require Mandatory Financial Stability Assessments of Countries with Systemically Important Financial Sectors

Executive Board approved making financial stability assessments under the Financial Sector Assessment Program (FSAP) a regular and mandatory part of the Fund’s surveillance for members with systemically important financial sectors.
Decision date: September 21, 2010; press release date: September 27, 2010.
Participation in FSAP was previously voluntary for all Fund members; the decision makes financial stability assessments mandatory for members with systemically important financial sectors under Article IV of the Fund’s Articles of Agreement.
FSAP established in 1999.

Rationale: recognition of the central role of financial systems in domestic economies and in the overall stability of the global economy; response to lessons from the recent crisis that originated in financial imbalances in large and globally interconnected countries.
Objective: enhance the Fund’s economic surveillance by integrating systematic, regular financial stability assessments for the most systemically important financial sectors.

FSAP assessments:
- Conducted by joint IMF-World Bank teams in developing and emerging market countries.
- Conducted by the Fund alone in advanced economies.
FSAP components:
- A financial stability assessment — responsibility of the IMF.
- In developing and emerging market countries, a financial development assessment — responsibility of the World Bank.
The IMF and the World Bank are committed to ensuring the new mandate does not crowd out FSAP assessments in other countries.

Mandatory financial stability assessments will comprise three elements:

1) An evaluation of the source, probability, and potential impact of the main risks to macro-financial stability in the near term, based on an analysis of the structure and soundness of the financial system and its interlinkages with the rest of the economy.
2) An assessment of each countries’ financial stability policy framework, involving an evaluation of the effectiveness of financial sector supervision against international standards.
3) An assessment of the authorities’ capacity to manage and resolve a financial crisis should the risks materialize, looking at the country’s liquidity management framework, financial safety nets, crisis preparedness and crisis resolution frameworks.

A total of 25 jurisdictions were identified as having systemically important financial sectors, based on a methodology that combines the size and interconnectedness of each country’s financial sector.
The 25 jurisdictions (alphabetical order): Australia, Austria, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, Italy, Japan, India, Ireland, Luxembourg, Mexico, the Netherlands, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.
Coverage statistics:
- This group of countries covers almost 90 percent of the global financial system and 80 percent of global economic activity.
- It includes 15 of the Group of 20 member countries.
- It includes a majority of members of the Financial Stability Board.

Each country on this list will have a mandatory financial stability assessment every five years.
Countries may undergo more frequent assessments, if appropriate, on a voluntary basis.
The methodology and list of jurisdictions will be reviewed periodically to ensure continued coverage of countries with the most systemically important financial sectors.

John Lipsky, First Deputy Managing Director of the IMF: “The FSAP program has been a key tool for analyzing the strengths and weaknesses of the financial systems of IMF member countries. This is why more than three-quarters of the Fund’s members have volunteered for these assessments, some more than once. However, the recent crisis has made clear the need for mandatory and regular assessments of financial stability for countries with large and interconnected financial systems. The Board’s decision represents an important part of the international community’s response to the recent crisis and will buttress our ability to exercise surveillance over a key aspect of the global economic machinery – the financial system.”
Mr. Lipsky on public understanding and policy balance: “Going forward, regular stability assessments of systemically important financial sectors should contribute to a deeper the public understanding of the risks to economic stability arising from the financial sector. Financial instability can have a major impact on economic activity and job creation.”

Press Release No. 10/357 — September 27, 2010; International Monetary Fund