The Role of Bank Diagnostics in IMF-Supported Programs
Technical Notes and Manuals, December 13, 2019
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Bibliographic details
- Authors: Joaquin Gutierrez Garcia, Dermot Monaghan, Alvaro Piris Chavarri
- Published: December 13, 2019
- Series: Technical Notes and Manuals
- DOI: https://doi.org/10.5089/9781513520704.005
Overview
- Diagnostic studies are essential to IMF programs in situations of significant bank weakness and when regular disclosures are not reliable.
- Restoring bank solvency is key to maintaining financial stability and, therefore, the ultimate policy objectives of a Fund-supported program.
- Bank diagnostics aim to ensure that existing potential losses and capital needs are identified in a timely manner and, in case public support is needed, the relevant cost is prudently incorporated in the program financing envelope.
- Diagnostics provide assurances that financial stability risks are reasonably quantified and underpin program decisions.
Core objectives of diagnostics
- Provide information essential to:
- (i) understanding the scale and scope of banking sector problems;
- (ii) executing strategies for bank resolution and restructuring, including quantifying recapitalization needs; and
- (iii) estimating any financing needs with reasonable certainty.
Components and approach
- There is no single template for diagnostic studies that fits all cases.
- An asset quality review (AQR) will always be a central component.
- Other aspects whose relevance depends on country circumstances include:
- stress tests;
- reviews of bank viability; and
- reviews of funding structures.
- The note advocates a building block approach to assessing banking businesses to form a view on long-term viability as a basis for action with respect to each institution reviewed.
- A diagnostic exercise provides a point-in-time snapshot but can be part of a process of discovery and remediation of root causes of banks’ problems.
Implementation, governance, and participation
- Diagnostics are undertaken by local authorities based on a robust governance structure that provides credibility and quality assurance through independent, external participation.
- Where resources are available and qualified, diagnostics should be performed with local participation to enhance ownership and political acceptance.
- Diagnostics should consider local conditions.
Communication
- Communication is a key consideration.
- The level of information released publicly is often dictated by circumstances.
Practical guidance and observed practice
- The note provides practical guidance drawing on experience rather than treating diagnostics as a narrow capital compliance event.
- Features of observed international practice are summarized, drawing on recent diagnostic studies in Europe and on extensive earlier experiences in a range of emerging and developing country contexts.
Publication information (from the content)
- By Joaquin Gutierrez Garcia, Dermot Monaghan, Alvaro Piris Chavarri
- December 13, 2019
- Technical Notes and Manuals No. 2019/004
- DOI: https://doi.org/10.5089/9781513520704.005
The Role of Bank Diagnostics in IMF-Supported Programs, Technical Notes and Manuals No. 2019/004; DOI: https://doi.org/10.5089/9781513520704.005
Content in this bundle
- The Role of Bank Diagnostics in IMFSupported Programs; Technical Notes and Manuals;