Economies in the Financial Spotlight in 2021

IMF Blog, May 6, 2021

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The Financial Sector Assessment Program (FSAP) assesses financial vulnerabilities and strengthens financial systems; assessments for advanced economies are done by the IMF alone, while those for other economies are typically carried out jointly with the World Bank.
The IMF considers country-specific features and tailors analysis to each member participating in the program.
The IMF’s Executive Board will soon conduct a periodic review of the FSAP.
In 2021, the IMF plans to assess the stability of six financial systems.
- Two assessments cover economies with large financial systems: United Kingdom, Hong Kong SAR.
- The remaining four focus on emerging market and frontier economies: Chile, Philippines, South Africa, Georgia.
For economies with large, systemically important financial systems it is mandatory to undergo financial stability assessments every five years; for others, assessments are carried out at the request of their governments.

Chile features very large and deep local markets compared to other economies of similar size and level of development.
The assessment will focus on the resiliency of the financial system, which exhibits a high level of interconnectedness between banks, mutual funds, pension funds, and insurance companies.
Emphasis areas:
- Resiliency in light of shocks experienced in the fourth quarter of 2019 and during the pandemic.
- Effectiveness of banking, insurance, and financial market supervision following the reorganization and consolidation of the regulatory structure.
- Macroprudential policy coordination and the closing of regulatory gaps.
- COVID-related forbearance measures.

Hong Kong SAR is a small, open economy and a major international financial center with extensive linkages to mainland China.
Key vulnerabilities and themes:
- Cross-sectoral and cross-border linkages.
- Stretched real estate valuations.
- Exposure to shifts in global market and domestic risk sentiment.
Assessment scope:
- Review of 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.

Georgia is a small, open economy with a moderately-sized financial sector comprised almost entirely of banks.
Features and risks:
- Banking system is relatively concentrated and highly dollarized in both deposits and lending.
- High credit risks from unhedged borrowers of banks’ loans in foreign currency in case of currency depreciation.
Assessment focus:
- Banks’ solvency and liquidity risks.
- Banking supervisory oversight.
- Macroprudential policy, especially regarding risks from financial dollarization.
- Financial safety nets, including bank resolution and deposit insurance.
World Bank role:
- Examine financial sector competition.
- Assess oversight of markets and payments systems.
- Provide guidance for development of capital markets and access to finance for small and medium enterprises.

The Philippines' assessment was just concluded in March 2021.
Context and features:
- The country is now recovering from the impact of COVID-19.
- Banks dominate the financial system and entered the pandemic with solid capital and liquidity buffers.
- Banks are closely interconnected with nonfinancial corporations where market analysts forecast significant earning shocks, especially in retail, tourism, transportation, and construction industries.
- The economy is vulnerable to physical risks from climate change owing to its geographical position.
Risk assessment examined:
- Bank resilience against COVID-19 shocks and physical risks (typhoon).
- Interconnectedness with nonfinancial corporations.
- Bank oversight, macroprudential policy, and safety-net arrangements.
World Bank role:
- Investigated oversight and developmental issues of insurers, payment systems, capital markets, and credit reporting.
- Examined climate change and environment risks supervision and deepening markets for green growth.

South Africa is home to Africa’s largest financial sector, with large cross-border banking groups and a well-developed investment fund and insurance sector.
Assessment context:
- Difficult environment of subdued growth and large fiscal deficits.
- Fiscal pressures exacerbated by a weak financial position of state-owned enterprises and the ongoing health and economic impact of COVID.
Assessment focus:
- Importance of capital flows to the financial sector will underpin the “capital-flows-at-risk” analysis.
- Assessment of systemic liquidity management and macroprudential policy.
- Examination of banking, insurance, and securities markets.
- Pension and cyber risk supervision; crisis management and resolution; fintech; financial inclusion; climate risk; and capital markets development.

The United Kingdom is one of the world’s most complex and open financial systems, hosting several globally systemic entities and a large domestic financial sector.
Assessment context and risks:
- The 2021 FSAP will take place during a challenging macrofinancial period.
- UK institutions have proven resilient to the pandemic’s sharp economic contraction, but there could be scars that challenge profitability prospects of the financial system.
- The United Kingdom’s exit from the European Union will lead to structural changes.
- New developments deserve attention: growing share of market-based finance, adoption of new technologies, and the increasing importance of climate change and cyber risks.
Assessment scope:
- Examine risks in these areas and assess the adequacy of the oversight framework to safeguard financial stability.

Source: IMF blog post “Economies in the Financial Spotlight in 2021,” May 6, 2021.