Public Information Notice: IMF Executive Board Reviews Experience with the Financial Sector Assessment Program, Options for the Future, and Complementary Reforms in Surveillance and the Assessment of Standards and Codes

September 29, 2009

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Public Information Notice (PIN) No. 09/123
September 29, 2009

On September 21, 2009, the Executive Board of the International Monetary Fund (IMF) reviewed the experience with the Financial Sector Assessment Program (FSAP) over the past ten years, options for strengthening the program going forward, as well as complementary reforms in surveillance practices and the assessment of financial standards. During its review, the Board agreed that the FSAP has established itself as an important instrument for assessing financial systems around the world, has gained wide acceptance among the membership, and has enriched surveillance and the policy dialogue with member countries. As a joint Bank-Fund program, it has helped promote collaboration and consistent advice by the two institutions. The Board concluded by agreeing to steps to further strengthen the program and to enhance the integration of finance into surveillance, taking account of the lessons learnt over the past ten years, and during the recent financial crisis.1


The FSAP was established in 1999, in the aftermath of the Asian crisis, as an instrument for conducting in-depth examinations of countries’ financial sectors. It is jointly run by the World Bank and the IMF, with joint teams conducting assessments in low-income and emerging market countries, and the Fund solely responsible for assessments in advanced economies. The last Board review of the program took place in March 2005.

Focus of the FSAP

FSAP assessments focus on both gauging the stability of the financial sector and assessing its potential contribution to growth and development. In addition, FSAPs define a set of prioritized policy recommendations geared toward addressing any weaknesses identified. The stability and development assessments are the main responsibilities of the IMF and the World Bank, respectively, and the joint IMF-World Bank FSAP teams bring their complementary perspectives to bear on a holistic assessment of financial sector vulnerabilities and needs. To assess stability, FSAPs examine: the soundness of the banking and other financial sectors; the quality of bank, insurance, and financial market supervision against accepted international standards; and the ability of supervisors and financial safety nets to respond effectively in case of a crisis. To assess developmental needs, FSAPs examine the legal framework and of financial infrastructure—such as the payments and settlements system, identify obstacles to the sector’s competitiveness and efficiency, and evaluate the framework for oversight, market integrity, and consumer protection. They also look at how the sector contributes to economic growth and social development (in areas such as access to banking services for the poor, loans to small and medium-size enterprises, and domestic capital markets development).

FSAP Outputs and Follow-up

The IMF and the World Bank staff 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 are also included in the FSSA and 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

Although country participation in the FSAP is voluntary, most members of the IMF and the World Bank have volunteered: between 1999, when the program was established, and June 2009, well over three-quarters of the member countries had undergone assessments, many of them more than once. Most systemically important countries have been assessed.

Financial Sector Surveillance

The 2009 FSAP review is seen as a significant part of the Fund’s strategy to strengthen its macrofinancial surveillance. The Fund has made significant strides in enhancing financial sector focus and analytics in bilateral surveillance, an area that its Executive Board set as a priority for surveillance in October 2008 (Statement of Surveillance Priorities).The main initiatives include enhancing collaboration with other multilateral institutions, improving analytical tools and methodologies, and a major strengthening of the financial sector capabilities in area departments. But more needs to be done to keep up with the ever-changing financial landscape, bearing in mind that it is unlikely that any single measure or reform alone would address this challenge.

Executive Board Assessment

Executive Directors considered this review of the FSAP timely, and welcomed the opportunity to discuss options for strengthening it, along with complementary reforms to financial sector surveillance and standards assessments. While substantial progress has been made in integrating high-quality financial sector analysis into surveillance, Directors emphasized that further adaptations are necessary for the Fund to meet the challenges posed by the rapidly changing financial landscape. They considered the proposed reforms to be a pragmatic way forward and desired that progress be kept under close review.

Directors noted that the FSAP has gained wide acceptance among the membership, enriched surveillance and the policy dialogue with member countries, and, as a joint Bank-Fund program, promoted consistency in policy advice by the two institutions. The global financial crisis has revealed both the strengths and the shortcomings of the FSAP, necessitating a reshaping of the program. Directors agreed that its usefulness could be enhanced by expanding country coverage and improving the focus and frequency of assessments, particularly those of financial stability. Directors broadly endorsed the proposed reforms, which aim to enhance the flexibility, responsiveness, and analytical rigor of assessments.

Directors agreed that modular assessments, as well as enhanced off-site monitoring, would introduce much-needed flexibility into FSAPs and help better align assessments with country needs and priorities. FSAP modules—with the Fund focusing on financial stability and the Bank on developmental aspects—would help clarify the respective responsibilities of the two institutions in the joint program. The option of stability modules, in particular, would allow more frequent stability assessments when necessary, facilitating their integration into Fund surveillance. Preserving the joint Bank-Fund nature of the FSAP in developing and emerging market countries would help ensure that the relevant developmental aspects of the financial sector in these countries are covered.

Directors supported conducting partial risk-based ROSC updates, following an initial comprehensive assessment. Selected principles of financial sector regulation and supervision standards would be reassessed based on the risk profiles and needs of individual countries. A methodology for choosing the principles to be assessed will be developed, in cooperation with standard setters, to avoid “cherry picking” and ensure that important areas are adequately covered.

Directors observed the tension inherent in integrating financial sector assessments from the voluntary FSAP exercise into the mandatory bilateral surveillance process. Most Directors agreed that, given resource constraints and in the interest of preserving country ownership of the assessments, FSAP participation should remain voluntary. Some Directors, on the other hand, favored making FSAPs part of Fund surveillance. In any event, Directors stressed the importance of FSAP participation by all systemically important economies. As regards publication of FSSAs, various views were expressed and Directors welcomed the opportunity to have an in-depth and focused discussion on publication issues in the context of the forthcoming review of the Fund’s transparency policy.

Directors noted the progress made in strengthening the focus on financial sector issues in bilateral surveillance, enhanced multilateral analyses of macro-financial linkages particularly the joint IMF-Financial Stability Board early warning exercise, and improvements in data coverage and availability. They encouraged further efforts to swiftly address the major areas for improvement identified in the Triennial Surveillance Review, given the urgency brought on by the global financial crisis.

Directors endorsed staff proposals to build on the lessons from the financial crisis to strengthen the analytical toolkit and, more broadly, financial sector work in the Fund. Efforts would focus primarily on stress testing, macro-prudential frameworks, and crisis prevention and resolution. Directors supported introducing into FSAPs a standardized Risk Assessment Matrix, which would identify threats to financial sector stability and assess their likelihood and implications for macro-financial stability. They also emphasized the need to integrate consistently the findings from the Fund’s various surveillance vehicles, welcoming recent cross-country, thematic staff papers. An enhanced interdepartmental Financial Sector Group is expected to facilitate cooperation and information sharing among relevant Fund departments.

Directors emphasized the importance of broadening the coverage of cross-border issues. They supported further work to develop an integrated analytical framework for capturing macro-financial linkages and assessing risks, building on balance sheet analyses and stress tests, with a few Directors viewing regional FSAPs as a useful vehicle. With regard to financial sector coverage in low-income countries, closer attention should be paid to the impact of underdeveloped financial markets on the effectiveness of macroeconomic policies and the economy’s ability to absorb shocks. A new IMF-World Bank Low-Income Country Financial Group, under the auspices of the Financial Sector Liaison Committee, would help identify macro-financial stability issues and market development needs for Article IV discussions.

Turning to resource issues, Directors believed that it is difficult to be definitive at present about future demands related to the revised FSAP and ROSCs. Careful prioritization and a Fund-wide reallocation of resources, including through a more strategic deployment of financial sector expertise across departments, were seen as the proper way to tackle the difficult tradeoffs. A number of Directors acknowledged that implementing the proposed changes could well require additional resources, which should be considered along with the overall budget.

1See The FSAP After Ten Years: Experience and Reforms for the Next Decade (plus accompanying background document); Financial Sector and Bilateral Surveillance—Toward Further Integration; and Revised Approach to Financial Regulation and Supervision Standards Assessments in FSAP Updates.


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