Public Information Notice: IMF Reviews Experience with the Financial Sector Assessment Program and Reaches Conclusions on Issues Going Forward

April 4, 2003

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On March 14 and 18, 2003 the Executive Board of the International Monetary Fund (IMF) reviewed the experience to date with the Financial Sector Assessment Program (FSAP). The Board noted that the FSAP has greatly increased the depth and breadth of coverage of financial sector issues by both the IMF and the World Bank. The Board observed that the FSAP exercise is a good example of effective IMF-World Bank collaboration, and provided guidance on the program going forward.


The FSAP was introduced in May 1999 by the IMF and the World Bank to strengthen the monitoring of financial systems in the context of the IMF's bilateral surveillance and the World Bank's financial sector development work. The FSAP, which was developed in the wake of the financial crises of the late 1990s, is designed to help countries enhance their resilience to crises and cross-border contagion, and to foster growth by promoting financial system soundness and financial sector diversity. The value added from the program derives importantly from its collaborative nature. The joint nature of the program, the expert support it receives from various cooperating institutions, and substantial ongoing research and work on the use and implementation of a range of analytical and assessment tools and methodologies help ensure consistency of policy advice by the IMF and the World Bank, economizes on scarce expert resources, and enhances the legitimacy of the program.

Focus of FSAP

Assessments of financial systems undertaken under the FSAP identify the strengths, risks and vulnerabilities in the financial system, and the two-way linkages between financial sector performance and the macroeconomy; ascertain the financial sector's development needs; and help national authorities to design appropriate policy responses. The comprehensive nature of these assessments requires a wide range of analytical tools and techniques, including macroprudential analysis, stress testing and scenario analysis, and assessments of observance and implementation of relevant international financial sector standards, codes and good practices. In implementing the FSAP, IMF and World Bank staff have been drawing on feedback received from previous reviews of the program by the Executive Boards of the IMF and the World Bank, from countries that have already participated in the program, and from various international groups.

External Experts

In addition to their own staff, the IMF and the World Bank draw on the knowledge of experts from a range of cooperating central banks, supervisory agencies, standard setting bodies and other international institutions in carrying out the assessments. As well as augmenting the pool of expertise already available in the World Bank and the IMF, outside experts provide a valuable element of peer review to the analysis undertaken in the FSAP, particularly as regards the assessments of observance of financial sector standards and codes which are an integral part of the program.

FSAP Outputs and Follow-up

FSAP teams provide country authorities with an FSAP report which presents their analysis and findings. Based on this common analytical platform, the IMF and the World Bank staff then each prepare separate summary reports for their Executive Boards—a Financial System Stability Assessment (FSSA) and a Financial Sector Assessment (FSA), respectively—which focus on the issues arising from the FSAP exercise that are of relevance to each institution's specific mandate and responsibilities. Summary assessments of financial sector standards prepared in the FSAP are also included in the FSSA and are issued as Reports on Observance of Standards and Codes (ROSCs). This diagnostic work is followed up by technical assistance and other forms of support to countries where vulnerabilities and development needs are identified.

Country Participation

About 95 countries have already participated or agreed to participate in the near future in an FSAP assessment, including a significant number of systemically or regionally important countries and economies.

Executive Board Assessment

At their March 2003 meetings, IMF Executive Directors welcomed the opportunity to undertake a further review of the FSAP in light of the experience that has been gained with the program since their last review in December 2000. They also focused on how, going forward, the scope and pace of FSAP assessments and financial sector standards can be tailored so as to complement IMF surveillance most efficiently.

Directors observed that the FSAP has been generally successful in providing a comprehensive and strategic framework to: identify countries' financial sector vulnerabilities and strengths; strengthen the analysis of financial stability issues and development needs and priorities; and provide country authorities with appropriate policy recommendations. FSAP participation has generally led to: greater data availability; improved assessments of financial system strengths and fragilities, including by markets; and sounder analyses of the potential impact of financial crises on macroeconomic conditions.

Directors also noted the many benefits of the FSAP that have been affirmed by participating countries. Its usefulness has been evidenced by the fact that over half of the membership of the IMF has voluntarily participated or agreed to participate in the future, with growing demand for follow-up assessments. In line with the guidance provided by the Executive Boards of the IMF and the World Bank, a substantial number of systemically important countries, but also a broad range of other industrial and developing countries, are participating in the program.

Streamlining and Prioritization

Notwithstanding these many achievements, however, Directors acknowledged that the recent experience also highlights that the Program has become increasingly costly, and has overstretched staff resources. They noted that the increasing cost of the FSAP to the IMF and the World Bank is due in part to the recent bunching of assessments of a number of systemically important countries (industrial countries and emerging market countries), and the increase in the average number of international standards and codes that are assessed in detail. Directors therefore supported the ongoing efforts by the staffs of the IMF and the World Bank to make the program more efficient and effective through streamlining and prioritization. In this regard, while some Directors thought that consideration could be given to providing additional budgetary resources for the FSAP, most considered that streamlining efforts would allow funds to be rechanneled to priority areas, thereby containing costs within the existing resource envelope.

With a view to achieving the desired streamlining, Directors generally agreed that FSAP assessments and reassessments should be more sharply focused. They called for greater selectivity in the scope and pace of assessments and for continued priority to be accorded to industrial countries and emerging-market economies of systemic importance while maintaining a balanced coverage of countries. Directors also emphasized the importance of better tailoring the assessments to individual country circumstances. It was recognized that the FSAP also remains resource intensive for national authorities, and that there are areas in which the quality and depth of technical analysis can be improved so as to enable a faster and more focused assessment process. Directors noted that assessments provide a baseline that helps set the priorities for subsequent work. In this regard, it was noted that the staff should suggest an appropriate sequencing and timeframe for the implementation of FSAP recommendations, taking into account relative costs and benefits as well as the authorities' priorities and capacity constraints. Directors stressed the importance of technical assistance to support the needed reforms identified by FSAP teams and of identifying potential sources of such assistance.

Directors also recognized the heightened challenges in managing the many diverse aspects of the program. Going forward, therefore, strong management of the process will be required to achieve the desired greater selectivity and flexibility in the scope and pace of the program, while ensuring evenness of quality and proper oversight.

Additional Tools

Directors agreed that the FSAP remains the key tool for strengthening the monitoring of financial systems. However, given resource constraints, the scope for frequent comprehensive assessments and reassessments is limited. Additional tools are therefore required for following up on priority issues identified in the FSAP, and to maintain the desired depth and quality of financial sector surveillance in between comprehensive assessments.

Directors agreed that the range of additional instruments outlined in the paper—including reassessments, focused updates, work undertaken during Article IV consultation missions, and ongoing monitoring of financial sector developments and policy issues from headquarters—should provide a framework that can supplement the FSAP effectively, and thus enable more continuous and effective financial sector surveillance. Directors were also generally supportive of the proposed reforms with regard to the pace and scope of comprehensive assessments.

Pace of FSAP Assessments

Directors expressed a range of views on how the desired resource savings would be achieved. Most Directors agreed that some reduction from the number of comprehensive assessments undertaken previously was warranted, while ensuring that assessments for countries with systemic implications should continue to be given priority. Some other Directors underscored that focus should be on the quality and effectiveness of the assessments, rather than on quantitative targets. A few Directors considered that, given the resource constraints, initial assessments should generally be given priority over reassessments. On balance, Directors agreed that a reduction in the number of comprehensive assessments and reassessments initiated in each year to some 17-19 would be acceptable as a broad guideline, while underscoring the need for flexibility.

Scope of FSAP Assessments

Directors also discussed specific actions to allow greater selectivity in the scope of assessments. They agreed that FSAP assessments should continue to be comprehensive in terms of the areas covered, as a proper understanding of financial system stability issues and development needs and priorities requires coverage of all key areas. However, the depth and intensity of the assessment of individual financial sector standards should be tailored to country circumstances and take into account the authorities' priorities. In this regard, many Directors considered that, in countries with complex financial systems (for example, industrial and emerging market countries), where the potential scope of the program is particularly wide, it might be appropriate to follow a two-stage approach. The first stage could cover a prioritized range of topics and standards assessments, while the remaining standards could be assessed in the context of subsequent FSAP reassessments and updates. Many others, however, were of the view that for such countries it would be more cost efficient if the initial comprehensive assessment covers as much ground as possible.

On balance, Directors agreed that in pursuing greater selectivity and streamlining, the staff should adopt a case-by-case approach, work closely with the authorities, the IMF's area departments, and the World Bank, and make decisions in a transparent manner. Several Directors suggested that an initial risk assessment, possibly undertaken prior to the FSAP mission, would help focus the work on the key areas of vulnerability and offer some resource savings. Directors also recognized the important role external experts play in assisting the IMF and the World Bank with the FSAP, and considered that careful selection of experts was necessary to ensure that they have an appropriate understanding of the legal and regulatory traditions of the country being assessed.

Anti-Money Laundering and Combating the Financing of Terrorism

Most Directors agreed that, given the synergies with assessments of prudential supervisory standards, the FSAP provided a suitable context to undertake these assessments, and that anti-money laundering and combating the financing of terrorism (AML/CFT) issues will be addressed in all countries participating in the FSAP, in line with the currently applicable Board guidance on this issue. A few Directors were concerned with the cost implications of this approach. Directors noted, however, that in the context of the 12-month AML/CFT pilot assessment program, AML/CFT assessments conducted by the Financial Action Task Force (FATF) and FATF-Style Regional Bodies (FSRBs) would be used in preparing Financial System Stability Assessments, if they follow the agreed methodology and if they are undertaken on a timely basis, thus saving resources and avoiding duplication. These estimated cost-savings have been factored into the supplementary budget estimates for conducting AML/CFT assessments. Directors agreed that further discussion of the relationship between AML/CFT assessments and FSAPs and technical assistance, as well as the role of the FATF/FSRBs, will need to await the 12-month review of the AML/CFT pilot program.

Greater Role of the World Bank

Directors also welcomed the proposed greater focus on medium-term and structural issues in low-income countries with small financial systems. They saw a greater role for World Bank staff and experts in these countries. However, Directors underscored the importance of continued IMF involvement in all FSAP cases, as this is critical for IMF surveillance and the coverage of key stability issues. It was noted, however, that for least developed countries with nascent diversified financial systems, the more immediate need might be technical assistance to develop the financial sector, rather than a resource-intensive detailed FSAP.

Enhanced Surveillance

Directors noted that there is also a need to strengthen the coverage of financial sector issues in countries that have not yet had the opportunity to participate in the FSAP. This is particularly important for systemically important countries, countries with potential vulnerabilities, or those facing significant structural changes. Directors agreed that for such countries, FSAP participation remains the preferred option and strongly encouraged them to participate in the FSAP at an early stage, while reiterating that FSAP assessments should remain voluntary. Nevertheless, owing to resource constraints or for other reasons, there could be delays in scheduling a country's participation in the program. For countries that have not participated in the FSAP, most Directors agreed that strengthened monitoring of financial sector issues could be implemented by targeted assessments of key issues in the Article IV process, through the analysis of financial soundness indicators (FSIs); and, in some cases, a selected focus on observance of standards and institutional developments. Directors also agreed that, in cases where the Article IV consultation is delayed or the country is on the 24-month cycle, FSAPs/FSSAs can be carried out as part of a program review.

Streamlining Documentation

Directors supported efforts to streamline documents and review procedures, so as to help reduce the cost of the FSAP, minimize duplication, and bring assessments to a more rapid conclusion. They agreed with the new documentation arrangements, whereby the Main FSAP Report will be replaced by an aide-mémoire produced in the field and reviewed expeditiously at headquarters. Directors agreed that the revised aide-mémoire, as a confidential working document of missions, should not be authorized for publication.


As regards publication of other FSAP documentation, Directors supported the continuation of the current policy whereby the two managements authorize publication by country authorities on a voluntary basis of the Detailed Assessments of Observance of Financial Sector Standards and Codes that are included as a separate volume of FSAP reports and are circulated to the Board for information. Most Directors also agreed that management can authorize the publication by national authorities of the Selected Issues notes and background analysis, with the exception of stress test results and information on individual institutions, and with appropriate deletions for highly market-sensitive information. A few Directors, however, raised the issue that the Selected Issues notes should be circulated to the Board prior to publication so as to better inform Directors. It was agreed to return to this issue at the time of the Board's next review of the IMF's transparency policy scheduled for later this year. A few Directors suggested establishing a policy of presumed publication of FSSAs.

It was stressed that confidential supervisory information used by the staff to arrive at policy conclusions in the FSAP process should, to the extent possible, be made available to the Board in aggregate form that preserves confidentiality in order to facilitate Article IV consultations and to increase transparency.

Next Review

Directors agreed that the next review of the FSAP should take place in two years.


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