Press Release No. 14/447

Press Release: IMF Executive Board Concludes Review of the Financial Sector Assessment Program

September 29, 2014

The Executive Board of the International Monetary Fund (IMF) completed a periodic review of the Financial Sector Assessment Program (FSAP) on September 15.

This review focused on the Fund’s role and responsibilities in the FSAP, namely the financial stability assessment, the contributions of FSAPs to surveillance, and the program’s broader traction and impact. It assessed the impact of the 2009 review and subsequent changes to the program, drawing lessons from the experience of the last five years in order to strengthen the program further. The review was based on background staff analyses, surveys of country authorities and Executive Directors, and a special study by independent external consultants on the question of evenhandedness of FSAPs.

The Financial Sector Assessment Program (FSAP), established in 1999, is an in-depth assessment of a country’s financial sector and provides an important input into the Fund’s surveillance. In developing and emerging market countries, FSAP assessments are usually conducted jointly with the World Bank and include two components: a financial stability assessment (the main responsibility of the Fund) and a financial development assessment (the main responsibility of the World Bank). These two components may also be provided by the two institutions in separate modules. Each FSAP concludes with the preparation of a Financial System Stability Assessment (FSSA), which focuses on issues of relevance to IMF surveillance and is discussed by the IMF Executive Board normally together with the country’s Article IV staff report.

The last review of the FSAP in 2009, in the aftermath of the global financial crisis, introduced a number of far-reaching reforms that have strengthened the analytical focus and coverage of FSAPs; clarified the responsibilities of the Fund and the Bank in developing and emerging market countries; and introduced the option of modular assessments that has afforded the Fund, the Bank, and national authorities greater flexibility on the scope and timing of assessments. In 2010, the financial stability assessment under the FSAP became a mandatory part of Article IV surveillance, expected to take place every five years in 25 jurisdictions with financial sectors deemed by the Fund to be systemically important. The list was expanded to 29 jurisdictions in 2013. For all other jurisdictions, FSAP participation continues to be voluntary.

Executive Board Assessment

Directors welcomed the opportunity to review the Financial Sector Assessment Program (FSAP), which has become a key pillar of the Fund’s financial sector surveillance since its inception in 1999, and to assess the impact of the significant reforms introduced at the last program review in 2009, in the wake of the global financial crisis. Directors agreed that these reforms have considerably improved the FSAP, and there is no need for major changes to the current framework. They also noted that the recent experience has highlighted useful lessons that should be used to further strengthen the program and improve its input to Article IV surveillance.

Directors agreed that the reforms introduced in 2009 have strengthened the focus, effectiveness, and traction of FSAPs. A clearer definition of the content has proved effective in disciplining and focusing assessments, and the delineation of responsibilities of the Fund and the Bank in developing and emerging market countries has strengthened institutional accountability. The analysis of vulnerabilities has benefitted from the introduction of the Risk Assessment Matrix (RAM); the expansion of stress tests to cover a broader set of risks; the ongoing progress in the analysis of spillovers; and the coverage of macroprudential frameworks and financial safety nets.

Directors welcomed the results of the survey of national authorities, which shows a high degree of satisfaction with the FSAP; the high rate of implementation of FSAP recommendations; and the increasing rate of publication of the Financial System Stability Assessment (FSSA). Directors agreed that these gains can be consolidated and extended by further strengthening the focus on systemic risk; continuing to refine the analysis of vulnerabilities while being transparent about its limits; and enhancing quality and clarity of the FSSA.

Directors considered that FSAPs provide an in-depth assessment of stability risks and systemic resilience. They encouraged further improvements in the risk assessment, including by expanding the coverage of stress tests to the non-bank sector; enhancing the quality of RAMs and their integration with the assessments; and strengthening the analysis of interconnectedness, cross-border exposures, and spillovers. They supported more systematic evaluations of institutional arrangements for micro- and macroprudential supervision and financial safety nets, although a few Directors noted the lack of an established international best practice for macroprudential policies.

Directors concurred that the 2010 decision to make financial stability assessments under the FSAP mandatory for jurisdictions with systemically important financial sectors was an appropriate response to the global financial crisis. However, they recognized that this decision has limited the availability of FSAPs to non-systemic countries in a resource-constrained environment. Directors agreed that other forms of engagement with members with non-systemic financial sectors should be used to help address their needs, first and foremost improved coverage of financial sector issues in Article IV consultations, but also more targeted technical assistance and dissemination of best practices. Many Directors, however, cautioned that technical assistance is not a substitute for FSAPs and called for using savings in other areas or additional resources to increase the frequency of FSAPs for non-systemic countries, including low-income countries.

Directors noted that the success of the FSAP depends on the cooperation of all counterparts, notably policy-makers and supervisors, as well as on the availability of high-quality data. A number of Directors underscored that a more systematic provision on a voluntary basis of data that go beyond the requirements of regular surveillance is an important determinant of the success of the FSAP and, more broadly, macrofinancial surveillance. Directors agreed that the FSSA should be clear and transparent on the availability and quality of data underlying the risk assessment while recognizing the legal constraints that some authorities may face.

Directors agreed that key standards and codes are a valuable tool for an exhaustive and comprehensive assessment of financial supervision. Many saw scope for streamlining and targeting these assessments in a manner consistent with the FSAP’s focus on systemic risk and, more broadly, the Fund’s macrofinancial surveillance mandate. Directors encouraged staff to explore ways to focus these assessments on key areas from the perspective of financial stability, along the lines outlined in the proposed macrofinancial approach to supervisory standards assessments. A number of Directors expressed concern about the risk that partial assessments might create gaps in the evaluation of financial sector supervision. Directors looked forward to an early briefing on staff consultations with standards setters and stakeholders, and to considering specific proposals, which balance the need to streamline with that of maintaining a proper coverage of standards, in the context of the next review of the Standards and Codes initiative.

Most Directors supported aligning the next FSAP reviews with the regular reviews of surveillance. A few Directors suggested going beyond and fully integrating the FSAP review into the surveillance review.