IMF Executive Board Concludes Periodic Review of the Financial Sector Assessment Program

May 27, 2021

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed a periodic review of the Financial Sector Assessment Program (FSAP) on May 12.

This review examined the Fund’s role and responsibilities in the Financial Sector Assessment Program (FSAP) as the global financial stability landscape has continued to evolve. The pandemic has highlighted the importance of assessing financial stability risks from vulnerabilities in the nonfinancial sectors, possibly long-lasting scarring effects, and digitalization. Climate change also has important implications for the financial sector. The review assessed how the FSAP has adapted to the transformation of financial systems and emerging new risks and provided proposals on enhancing the value of the FSAP for national authorities and further strengthening its contribution to Fund financial surveillance. The review was based on background staff analyses and surveys of country authorities and Executive Directors.

The FSAP provides in-depth assessments of financial sectors and provides important input to Fund surveillance. Assessments of financial sectors are usually conducted jointly with the World Bank in emerging market and developing economies and by the Fund alone in advanced economies. These assessments provide valuable analysis and policy recommendations for surveillance and capacity development. A landmark change in the FSAP took place in 2010 when the IMF’s Executive Board mandated that jurisdictions with Systemically Important Financial Sectors (SIFS) participate in financial stability assessments as a part of Fund surveillance. Since 2013, the list of such jurisdictions has been set at 29—so-called S29. Since the program’s inception in 1999, 157 Fund members have undergone individual or regional FSAPs. In recent years, the Fund has been conducting 12–14 FSAPs per year. More than half has been voluntary assessments and for emerging market and developing economies.

This review builds on past assessments of the program. The 2014 review emphasized systemic risk and deeper analysis of nonbank financial institutions and interconnectedness. It called for more work on macroprudential policies, more flexible use of international standards, and greater integration with bilateral surveillance. The 2019 evaluation of IMF financial surveillance by the Independent Evaluation Office called for further integration of FSAP and Article IV consultations and making the frequency of FSAP assessments more risk-based.

Executive Board Assessment [1]

Executive Directors welcomed the Financial Sector Assessment Program (FSAP) Review and its background papers. They noted that the FSAP has made an important contribution to Fund surveillance and capacity development. They also noted the potential strains facing financial systems across the Fund membership in the wake of the COVID-19 pandemic which have highlighted the significance of risks from the nonfinancial sector and vulnerabilities in nonbank financial institutions (NBFIs) and financial market infrastructures. In addition, the membership is facing important new opportunities and challenges, including from climate change and digitalization.

Directors emphasized that the three-pillar approach to conducting FSAPs—focusing on risk analysis, oversight, and safety nets—has worked well. The risk-focused approach to scoping Financial Stability Assessments (FSA) has provided flexibility to address relevant risks while helping to prioritize and contain the program’s resource footprint in the face of increasingly complex financial stability challenges since the previous review. Going forward, greater use could be made of the flexibility within the framework when scoping issues for FSAPs, balancing current coverage with emerging risks and issues, with continued tailoring of FSAPs to country specifics, effective prioritization, and in close consultation with the country authorities. The risk-based approach would help decide whether to conduct a full standard assessment versus a focused review and leverage the findings of recent standards assessment to tailor the scope of FSAs. Directors endorsed the Key Attributes of Effective Resolution Regimes as the assessment benchmark for insurance resolution frameworks in FSAPs and stand-alone assessments.

Directors welcomed ongoing efforts to further enrich the FSAP’s risk analysis toolkit. They stressed the importance of strengthening the development of tools to assess interactions between solvency, liquidity, and contagion risks, vulnerabilities among NBFIs, risks in nonfinancial sectors, interconnectedness, macrofinancial interactions, the macroprudential policy stance and new risks. Directors emphasized the importance of continued efforts to increase the efficiency, dissemination, and ease of use of the FSAP toolkit and to ease data constraints. They also stressed the need for continued efforts to strengthen the toolkit to enhance the assessment of financial vulnerabilities in low and lower-middle income countries.

Directors welcomed the proposals to improve the traction of FSAPs. While most FSAP recommendations were implemented, challenges arose when members faced political economy constraints or where there may have been differences in technical views. In this context, Directors welcomed the introduction of the authorities' views in FSSAs. Directors also welcomed efforts to leverage the FSAP to develop risk analysis tools for use in bilateral surveillance and looked forward to further progress in this direction. They emphasized the importance of closer integration of the Article IV consultation process with the FSAP.

Directors welcomed the update and expansion of the list of jurisdictions with Systemically Important Financial Sectors (SIFS) that are subject to periodic mandatory FSAs, and a few Directors recalled that Fund policy requires the periodic review of the list and assessment frequency. They recognized that the cost of the FSAP had been broadly stable over time. Going forward, the slight cost increase from expanding the list of mandatory FSAs while maintaining space for voluntary FSAs could be accommodated within the current resource envelope.

Directors clarified the framework for expected periodic FSAs with supra-national authorities. A periodic FSA with a supra-national authority would be conducted if at least one member with a SIFS has delegated financial sector policies to the supra-national authority. The individual member country FSAs would be scoped to leverage the planned work on the supra-national FSA to avoid duplication.

[1] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:

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