Financial Sector Assessment Program (FSAP)
Progress Reports on the Bank-Fund Financial Sector Liaison Committee (FSLC)
Offshore Financial Centers (OFCs): IMF Staff Assessments
Reports on Observance of Standards and Codes (ROSCs)
Guide to Progress in Strengthening the Architecture of the International Financial System
September 2001 Progress Report on
The FSLC initially focused on facilitating coordination in three areas: (1) work programs in countries facing important financial sector issues; (2) the development of guidelines and procedures for sharing documents and confidential information; and (3) Bank-Fund work on standards and sound practices regarding financial sector issues. The Financial Sector Assessment Program (FSAP) was initiated in April 1999 as a principal instrument for Bank-Fund collaboration in their financial sector work. Contributing to the development of the FSAP has been the a major focus of the FSLC's attention since then. However, the role of the FSLC has continued to evolve over the intervening period. In particular, the international community has continued to urge the Fund and the Bank to take on additional tasks--e.g., paying more attention to assessing and encouraging greater observance of a broadening range of international standards and codes, assessing supervisory cooperation and information exchange between supervisors in offshore financial centers and their counterparts in major countries, and helping to reduce the scope for money laundering. The FSLC has thus become a forum not only for enhancing coordination of the financial sector work programs of the Bank and the Fund, but also and more broadly for helping to integrate the various tasks assigned to the two institutions into a coherent joint work program, and facilitating coordination with the work programs of other institutions.
In the period since the last FSLC progress report issued in April 2000, the Committee has continued to spend significant time on supporting and coordinating the further development of the FSAP, reflecting both the still evolving nature of the program and the substantial resource commitment that it represents for both the Fund and the Bank.4 At the same time, the Committee has continued investigating ways to broaden the policy discussions between the Bank and the Fund on financial sector issues, facilitating coordination of the two institutions' financial sector work, and ensuring that the Bank and the Fund contribute to the various international efforts pertaining to reform of the financial sector in a coordinated way. Particular issues with which the Committee has been involved since the last report include enhancing coordination on the ongoing work on offshore financial centers (OFCs), anti-money laundering, and the new Basel Capital Accord. The Committee has also enhanced the coordination among the Fund, the Bank and others with respect to technical assistance related to the financial sector.
The implementation of the FSAP calls for a high degree of coordination owing to its linkages with: the Article IV process in the Fund; design of Fund-supported programs; a range of lending and non-lending activities in the Bank; technical assistance related to the financial sector by both institutions; the activities of major financial standard setting bodies; and a large number of cooperating official institutions that provide experts for the assessments. While the Committee is not involved in the preparation of individual country assessments conducted under the FSAP, it has continued to be the body responsible for facilitating the program's coordination and implementation. Specific issues addressed by the FSLC in the period since the last FSLC progress report have included:
The Committee has overseen the work being undertaken by the Bank and the Fund with international standard setting bodies to develop and refine financial sector standards and their assessment methodologies (see Box 1).5 This work is aimed at helping to strengthen the quality and consistency of assessments and, together with the work being undertaken by the Bank and the Fund to disseminate and support the implementation of financial sector standards and codes, it is making a major contribution to the development of financial infrastructure by member countries.
The FSLC has facilitated coordination of anti-money laundering work in the two institutions, including in particular the development of a methodology for assessing anti-money laundering supervisory principles.6 Early in 2001, the Boards of the Bank and the Fund undertook a review of ways for the two institutions to contribute to anti-money laundering efforts, based on a policy paper and a background paper jointly produced by the two staffs.7 It was agreed that the two institutions have a role to play in protecting the integrity of the international financial system, including through efforts to combat money laundering, but that their involvement should focus on their core areas of competence, such as the assessment of observance of supervisory principles in existing financial sector standards that are relevant to combating money laundering. The work of the Fund and the Bank will, in the near term, involve: an intensified focus on anti-money laundering elements when assessing financial regulation and supervision; increasing the provision of technical assistance to strengthen financial regulation and supervision; the inclusion of anti-money laundering issues, when relevant, in surveillance and development work; and working more closely with major international anti-money laundering groups, in particular with the Financial Action Task Force (FATF).
The Committee has also been involved in facilitating coordination regarding the initiative to undertake assessments of OFCs.8 While this work is primarily the responsibility of the Fund, it is being undertaken jointly with the Bank in those cases where the assessments are carried out in the context of a country's participation in the FSAP.
In a similar manner, the Committee has provided a forum to discuss the development of acceptable practices on insolvency and creditor rights systems. This work is being undertaken by the Bank (Draft Principles and Guidelines for Effective Insolvency and Creditor Rights Systems). However, given the importance of well developed laws and practices in this area to an efficient financial system, the Fund has a strong interest in it and has contributed to it.
The FSLC has also provided a forum for discussion regarding the recent preparation of joint Bank-Fund comments on the new Capital Adequacy Framework by the Basel Committee on Banking Supervision. The two institutions are supportive of the objectives of the new proposals, and in particular the goal of achieving a more comprehensive risk-based approach to the regulation of capital that would eliminate some arbitrariness in the classification of risks and reduce incentives for capital arbitrage. At the same time, both institutions expressed concerns about how the proposed framework could be implemented in many developing countries and suggested that additional guidance might be useful in that regard.
The FSLC has been closely involved in the ongoing discussions between the Fund and the Bank on how to better coordinate financial sector technical assistance. This issue has been a matter of discussion by the Committee since its beginnings. However, it has recently become more important in light of the increasing requests for technical assistance resulting from the recommendations given to countries under the FSAP, raising questions of how best to support these joint recommendations. Mechanisms by which the broad range of financial sector technical assistance can be coordinated in a more systematic way, not only between the Bank and the Fund, but also with a range of donors and technical assistance providers, are also under review.
The Committee will continue to oversee the further development of the FSAP. In particular, areas that would require attention include the appropriate scope and coverage of the program in countries with specific characteristics, such as those that share supervisory authorities with other countries, those that have especially large and complex financial systems, those that include major offshore centers, and those that follow Islamic banking principles.
The Committee will also focus on the critical issue of FSAP follow-up. Due to resource constraints FSAP assessments can only be undertaken periodically. Therefore, mechanisms need to be designed to update FSAPs in the periods between full assessments. This involves the updating of both the specific findings as well as the full assessments. FSAP findings also need to feed appropriately into the financial sector technical assistance and lending activities of the Bank and the Fund. The Committee plans to consider such follow-up issues in the coming period.
In further support of the FSAP, the Committee will also investigate whether relevant procedures are followed appropriately. The Committee will be undertaking a survey of how well the procedures laid out in the FSAP Confidentiality Protocol are being followed, on the basis of a questionnaire prepared by the Legal Departments of the Bank and the Fund. The Protocol was created to guide staff and to give comfort to national authorities, some of whom had expressed concerns about passing strictly confidential information on individual financial institutions to FSAP mission members. The Committee expects that such a review will add to the effectiveness of the Protocol and the FSAP process generally. The results of this FSAP-related work will be reported in the next review of experience with the FSAP, which is due to be considered by both Boards in mid-2002.
The Committee will continue to coordinate reviews of experience with assessing observance of individual financial sector standards, both in the context of the FSAP and on a stand-alone basis. The Committee will also strive for a systematic and on-going exchange of information among staff in the Bank and the Fund on work programs in the financial sector, document publication schedules, data and analysis available from external sources and contact lists of staff.
Finally, the Committee will seek to facilitate collaboration among all regional, area department and financial sector staff. The recent creation of the International Capital Markets Department (ICM) in the Fund is one development that is likely to result in increased collaboration with the Bank on financial sector issues and the Committee will stand ready to foster this collaboration as needed. The Committee will also continue to distribute the minutes of its meetings and canvas staff on topics for seminars and other meetings intended for all staff working on financial sector issues.
Given their mutual objectives and their individual resource constraints, there are clear benefits from improving the existing coordination and cooperation in the financial sector work of the Bank and the Fund. The FSLC considers that efforts over the last year have been constructive and successful. The Committee intends to continue to promote closer coordination of financial sector work in the coming period. The next report on the Committee's activities will be provided in one year.
1See Progress Report on the Bank-Fund Financial Sector Liaison Committee (FSLC), SM/99/89 and SecM1999-248, SM/99/226 and SecM1999-639, and SM/00/70 and SecM2000-170.
2The FSLC has six members, three senior staff from the Bank and three from the Fund. Each member also has an alternate. The Committee is co-chaired by V. Sundararajan from the Fund's Monetary and Exchange Affairs Department (MAE) and Larry Promisel of the Bank's Financial Sector Strategy and Policy Group. The other members include representatives of the Fund's MAE and Policy Development and Review (PDR) Departments, and the Bank's Poverty Reduction and Economic Management Department (PREM) and the Financial Sector Vice-Presidency (FSEVP).
3See, for example, Strengthening the International Financial System and the Multilateral Development Banks-Report of G-7 Finance Ministers and Central Bank Governors, July 7, 2001, Rome, Italy, paragraphs 6, 17, 27 and 42.
4See Financial Sector Assessment Program-A Review-Lessons from the Pilot and Issues Going Forward (SM/00/263 in the Fund and R2000-216 in the Bank). A general description of the FSAP was provided to the Boards of the Bank and the Fund in May 1999 (SecM1999-371 and SM/99/116, respectively); a report on early progress with the Program was discussed by the two Boards in September/October 1999 (SecM1999-639 in the Bank, and SM/99/226 and SM/99/226 Supplement 1, in the Fund); and a report on further progress with the FSAP, Financial Sector Assessment Program (FSAP)-Lessons From the Pilot Exercise and Next Steps (SecM2000-130 and SM/00/54, respectively) was discussed by the two Boards in the Spring of 2000.
5The financial sector standards that are the focus of this work are a subset of the eleven international standards that the Executive Boards of the Bank and the Fund have recognized as relevant to the operational work of the two institutions and for which, as a result, Reports on Standards and Codes (ROSC) modules are prepared.
6The methodology is described in the Fund's paper Anti-Money Laundering-Enhanced Contribution in the Fund (SM/01/258).
7Enhancing Contributions to Combating Money Laundering-Policy Paper (SM/01/103 and SecM2001-228) and Financial System Abuse, Financial Crime and Money Laundering- Background Paper (SM/01/46).
8See Offshore Financial Centers (OFCs): Note for the Executive Board (SM/01/205).
9When all FSAP visits have taken place and a final FSAP report has been transmitted to the authorities.