Countries in the IMF Financial Spotlight in 2020
IMF Blog, January 30, 2020
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- Authors: The Editors
- Published: January 30, 2020
Program overview
- The IMF plans to assess the stability of twelve financial systems in 2020.
- Seven assessments are of jurisdictions with systemically important financial sectors (Austria, Denmark, Hong Kong SAR, Italy, Korea, Norway, and the United States), for which it is mandatory to undergo financial stability assessments every five years.
- Five assessments are at the request of the countries themselves: Algeria, Latvia, Philippines, South Africa, and Trinidad and Tobago.
- Assessments for advanced economies are done by the IMF alone, while those for other countries are typically carried out jointly with the World Bank.
- The Financial Sector Assessment Program (FSAP) has just entered its 20th year.
- In 2020, the IMF’s Executive Board will review the FSAP, covering topics such as analytical foundations, coverage of emerging risks, integration of the FSAP with other IMF surveillance, and country participation in the program.
Country-specific assessments — key findings and focus areas
- Denmark
- Financial system is relatively large with a high degree of interconnectedness between financial institutions, households, and corporates.
- Key vulnerabilities: high household debt amid elevated housing valuations, particularly in urban areas.
- Assessment will analyze: resilience of banks and insurers to adverse macrofinancial shocks; strength of oversight of banks and insurance companies; macroprudential and crisis management frameworks; effectiveness of the anti-money laundering and counter-financing of terrorism regime, particularly in mitigating related cross-border risks.
- Hong Kong SAR
- Characterized as a small and open economy and a major international financial center.
- Vulnerabilities: extensive linkages to mainland China, stretched real estate valuations, exposure to shifts in global market and domestic risk sentiment.
- Assessment focus: cross-sectoral and cross-border linkages; regulatory and supervisory frameworks for fintech developments; regular risk and regulatory assessments of banking, securities and insurance markets; review of crisis management arrangements and macroprudential frameworks; detailed assessment of payments and financial market infrastructures.
- Korea
- Financial system operates within a trade dependent, open economy and has grown into one of the largest and most developed in Asia.
- Vulnerabilities: rapid financial digitalization, international expansion, adverse demographic shifts, risks from highly indebted households and cross-border activities.
- Assessment will evaluate: soundness and resilience of the financial system; adequacy of oversight across banking, insurance, and investment fund sectors, and financial conglomerates; macroprudential policy framework; crisis-management, safety-net, and resolution arrangements.
- Latvia
- Small open economy exposed to external shocks; financial sector undergoing major transformation due to a crackdown on money laundering.
- Noted that the financial sector is shrinking and has decreased as a percentage of total economic output since 2006.
- Immediate risk: being grey-listed by the Financial Action Task Force due to deficiencies in the anti-money laundering and counter-financing of terrorism framework.
- Challenges: refocusing banking sector business model and customer base; improving efficiency; potential domestic vulnerabilities related to bank asset valuation and insufficient provisions for collateral recovery.
- Over 60 percent of its banking system is connected to Nordic institutions, implying exposure to regional real estate corrections.
- Assessment will examine adequacy of the supervisory framework, with focus on recent progress on anti-money laundering and counter-financing of terrorism measures.
- Norway
- Sizable banking system appears to be well-capitalized, liquid, and profitable; country has large fiscal buffers.
- Vulnerabilities: protracted real estate boom, related buildup of household debt, banks’ reliance on wholesale funding markets.
- Assessment focus: macroprudential policy framework; effectiveness of banking and insurance oversight; systemic liquidity management; financial safety nets; stress tests of the banking sector, including an exploratory climate-change component.
- Philippines
- Banks dominate the financial system and have solid capital and liquidity buffers.
- Interconnectedness: banks closely interconnected with corporates with significant business and property loan exposures and mixed-conglomerate structure.
- Vulnerabilities: economy prone to external shocks and natural disasters from climate change.
- Assessment will examine: bank resilience against macrofinancial shocks and natural disasters and their interconnectedness with companies; bank oversight; macroprudential policy; safety-net arrangements.
- The World Bank will investigate oversight and developmental issues of insurers, payment systems, and capital markets, as well as the link between climate change and the financial sector.
- South Africa
- Home to Africa’s largest financial sector, with large cross-border banking groups and a well-developed investment fund and insurance sector.
- Assessment—carried out jointly with the World Bank—will examine the strength of the financial sector in a difficult environment characterized by stagnant growth and deteriorating fiscal health (exacerbated by the government assistance to the failing state-owned energy utility).
- Analysis will include: “capital-flows-at-risk” analysis given the importance of capital flows to the financial sector; systemic liquidity management; macroprudential policy; banking, insurance, securities markets; pension supervision; fintech; financial inclusion; climate risk; and capital markets development.
- Trinidad and Tobago
- Financial system remained stable through the recent economic downturn, but household debt and sovereign exposures increased.
- Assessment will look at: effectiveness of supervision of banks and non-banks, including financial conglomerates; developing a macroprudential policy framework; strengthening financial crisis management and resolution framework.
- Key focus: whether the regulatory framework is up to date with best international practice given the growing complexity and regional importance of the financial system.
- United States
- U.S. financial sector is of global relevance due to its size, role as an international funding source, and the position of the U.S. dollar as a global reserve currency.
- Context: amidst the longest economic expansion in recorded history and spurred by easy financial conditions, corporate leverage has reached historic highs while the buildup of vulnerabilities continues in nonbank financial companies that dominate credit intermediation.
- Assessment will examine: resilience of highly-indebted companies and the solvency of banks and insurers; how shocks could transmit through the complex interconnected financial sector; financial oversight for banks, securities markets, and insurers; risk management practices of the systemically important central counterparties; effectiveness of the crisis-management framework.
- Will also examine systemic risk oversight and inter-agency coordination, as well as the intensity of supervision and implications of the ongoing regulatory tailoring.
Key statistics and program timing
- Number of financial systems to be assessed in 2020: twelve.
- Number of mandatory assessments for jurisdictions with systemically important financial sectors: seven.
- FSAP has entered its 20th year.
- Frequency of mandatory financial stability assessments for systemically important jurisdictions: every five years.
Source: Countries in the IMF Financial Spotlight in 2020 (IMF blog, January 30, 2020).