Financial Sector Assessment Program: Frequently Asked Questions

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Financial Sector Assessment Program: Frequently Asked Questions

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Bibliographic details

• Authors: IMF Board

Overview

• The Financial Sector Assessment Program (FSAP) provides in-depth examinations of countries’ financial sectors.
• FSAPs are done jointly by World Bank and IMF staff in developing and emerging market countries and by the IMF alone in advanced economies.
• FSAPs have two main components: the financial stability assessment and—in developing and emerging market countries—the financial development assessment. These may be assessed together during a joint IMF-World Bank mission or at different times in separate stability and development “modules.”

Stability assessment (stability module)

• Responsibility: the Fund (IMF) is the main responsible institution for the stability assessment.
• Core coverage:
  • (1) The source, probability, and potential impact of the main risks to macro-financial stability in the near-term.
  • (2) The country’s financial stability policy framework.
  • (3) The authorities’ capacity to manage and resolve a financial crisis should the risks materialize.
• Output: key findings are summarized in the Financial System Stability Assessment (FSSA), prepared by the Fund team for the IMF Executive Board. The FSSA is a key input to IMF surveillance.

Development assessment (development module)

• Responsibility: the World Bank leads the development assessment in developing and emerging market countries.
• Focus: medium- to long-term needs for deepening and strengthening the financial sector, addressing weaknesses affecting efficiency, soundness, and contribution to long-term growth and social development.
• Typical topics:
  • (1) Financial sector infrastructure development needs.
  • (2) Financial sector oversight.
  • (3) Public policies affecting financial sector activity.
  • (4) The impact of an underdeveloped financial sector on financial stability.
  • (5) Long-term financial sector reforms.
• Relevance: particularly important in low-income countries.

Assessments of compliance with international standards (ROSCs) and AML-CFT

• ROSCs (Reports on Observance of Standards and Codes) are voluntary for the country even when an FSAP stability assessment is mandatory for surveillance purposes.
• The standards most frequently assessed in FSAPs: banking (BCP), capital market (IOSCO), and insurance supervision (IAIS).
• AML-CFT assessments:
  • By IMF Board decision, all FSAPs are required to be associated with an AML-CFT assessment conducted either by the IMF’s Legal Department or by FATF or a FATF-style regional body.
  • Timing: the AML-CFT assessment does not need to occur at the same time as the FSAP but may take place separately within a three-year window around the FSAP mission.
  • Satisfying the requirement: either an AML-CFT assessment must have taken place within 18 months prior to the FSAP mission (in which case a summary of its findings is reported in the FSSA), or the authorities must have firm plans to undertake one within 18 months after the FSAP mission.

Country participation, prioritization, and conditions

• Since launch in 1999, 157 member jurisdictions have completed the program (many more than once).
• G-20 commitment: G-20 countries committed to undergo an assessment under the program every five years.
• Any country can request an FSAP assessment, regardless of borrowing status.
• Systemically Important Financial Sectors (SIFS):
  • September 2010 IMF Board decision: 25 jurisdictions with the greatest impact on global financial stability should undergo in-depth reviews every five years as part of Fund surveillance.
  • December 2013: list expanded from 25 to 29 jurisdictions.
  • 2021 Board reconfirmation with minor adjustments: list further expanded to 47 and made more risk-based: 33 jurisdictions with relatively more systemically important financial sectors would participate in FSAP every once in five years, while the other 15 would participate every once in ten years.
  • The methodology emphasizes interconnectedness, potential for price contagion, and principles of relevance, transparency, and even-handedness; the list and methodology will be reviewed periodically.
• IMF Executive Board prioritization criteria for requests:
  • (i) The systemic importance of the country.
  • (ii) Macroeconomic or financial vulnerabilities.
  • (iii) Major reform programs that might benefit from a comprehensive financial sector assessment.
  • (iv) Features of the exchange rate and monetary policy regime that make the financial system more vulnerable.
• Balance considerations: maintaining a balance across regions and different levels of financial sector development is important.

Modular and additional elements

• Countries requesting FSAP updates may suggest additional topics; inclusion depends on resource availability.
• Possible additional elements:
  • Updates of previously assessed standards and codes and reassessment of compliance “grade.”
  • Detailed assessments of standards not previously assessed or issues that have gained relevance to financial stability or development.

Changes and adaptations since the Global Financial Crisis

• Program revamp since September 2009 with four important changes:
  • First: improved quality of assessments, incorporation of crisis lessons, and alignment with the post-crisis global regulatory reform agenda. FSAPs structured by three core pillars—risk and vulnerability analysis, oversight, and financial safety nets—with emphasis on issues posing systemic risks.
  • Second: scope adapted to evolving risks, including nonbank financial institutions, (digital) market infrastructures, fintech, cyber risks, and climate change.
  • Third: better integration with Fund surveillance; as of September 2010, countries with systemically important financial sectors are required to undergo financial stability assessments every five years as part of bilateral surveillance.
  • Fourth: clearer delineation of institutional responsibilities for stability (Fund) and development (World Bank), with greater institutional accountability. All FSAPs to advanced economies are stability modules conducted only by the Fund.

Mission preparation, team composition, and timing

• Typical missions:
  • First-time FSAPs typically require two missions; subsequent updates are usually one mission.
  • Each mission lasts about two weeks.
  • Short preparatory visits of 3-4 days may occur a few months before the FSAP in some cases.
• Typical IMF core team size: one mission chief and at least 4-5 other team members. The World Bank team, if involved, should be roughly equal in size. Teams may be larger for complex issues. One or two assessors per ROSC are common.
• Best practices for coordination:
  • Authorities are recommended to establish an FSAP Secretariat comprising representatives of relevant agencies.
  • Each participating agency should have an “FSAP coordinator,” typically its representative to the Secretariat.
  • Communications between the FSAP team and authorities should be channeled through the Secretariat.
• Background materials and timing:
  • Authorities should prepare self-assessments of any standards and codes to be formally assessed and ideally transmit these 1-2 months prior to the mission.
  • Questionnaires (standards, general financial stability issues, and data including institution-specific data for stress tests) are provided at least two months before the mission; responses should be transmitted at least a month before the mission.
  • FSAP teams are expected to avoid requesting information already publicly available.

Meetings, visits, and confidentiality

• Meetings: FSAP teams typically meet central bank, government, supervisory agencies, financial institutions, market participants, and trade associations. Resident Representatives play an important organizing role where present.
• Visits to institutions: teams usually visit a range of financial institutions and market participants to understand market developments and risk management practices; teams do not request proprietary or business-sensitive information.
• Confidentiality:
  • The Fund treats data confidentiality extremely seriously and has an excellent record of maintaining confidentiality.
  • Common confidential data provided: bank-by-bank balance sheet, liquidity, and supervisory data for stress tests; sometimes data on official reserves; samples of individual bank examination reports.
  • Confidential data are kept within the team and not circulated to the rest of the IMF (or World Bank) or shared with the Fund’s Executive Board.
  • Stress test results are presented preserving anonymity of individual institutions (e.g., “Bank A”, “Bank B”) or on aggregate bases.
  • The FSAP team can provide a formal letter of undertaking or sign a confidentiality protocol if requested.
  • Authorities in countries where the World Bank participates should consult with World Bank staff regarding the World Bank’s disclosure policy.

Outputs and publication

• Typical outputs:
  • Aide-Mémoire summarizing main findings and recommendations; remains confidential and cannot be published or shared with third parties by either the authorities or the Fund.
  • Technical notes on selected topics and Detailed Assessment Reports (DARS) of compliance with international standards and codes, as appropriate; publication of these is voluntary.
  • Financial System Stability Assessment (FSSA) report prepared for discussion at the IMF Executive Board; publication of FSSAs is voluntary but presumed.
  • In cases with World Bank involvement, the World Bank prepares a Financial Sector Assessment (FSA) for its Executive Board.

Authority engagement, review, and compliance

• Authorities’ review rights:
  • Authorities can review and provide comments on the Aide-Mémoire, Technical Notes, and Detailed Assessment Reports on any financial sector standards assessed during the mission to correct factual errors and ensure relevant factors are considered.
  • The FSSA is not provided to authorities for comment before circulation to the IMF Executive Board, though purely factual corrections are possible after circulation.
• Compliance and risks:
  • FSAP recommendations are advisory in nature; how countries choose to address them is up to the authorities.
  • Subsequent Article IV surveillance teams and future FSAPs are required to assess implementation of FSAP recommendations and report to the IMF Executive Board.
  • Other international or regional bodies may introduce monitoring processes to follow up on implementation of FSAP recommendations or actions to address shortcomings (examples cited include the FSB’s peer review and Non-Cooperating Jurisdictions processes), but such processes are not part of the Fund’s policy framework or governance structure.

Key statistics and timing references

• FSAP launched: 1999.
• Number of member jurisdictions that have completed the program: 157.
• Last Updated: November 17, 2021.
• IMF Board decisions and timelines:
  • September 2010: 25 jurisdictions required to undergo reviews every five years.
  • December 2013: list expanded from 25 to 29 jurisdictions.
  • 2021: list expanded to 47; 33 jurisdictions to participate every once in five years; 15 jurisdictions to participate every once in ten years.
• AML-CFT association timing: within a three-year window around the FSAP mission; either within 18 months prior or firm plans within 18 months after the FSAP mission.
• Preparation timelines for authorities:
  • Self-assessments ideally transmitted 1-2 months prior to the mission.
  • Questionnaires provided at least two months before the mission; responses at least one month before the mission.
• Typical mission durations and team sizes:
  • First-time FSAPs: typically two missions; subsequent updates: one mission.
  • Mission length: about two weeks.
  • Short preparatory visits: 3-4 days.
  • IMF core team: one mission chief and at least 4-5 other team members.