Financial Sector Regulation: Issues and Gaps
August 4, 2004

Financial Sector Regulation: Issues and Gaps Background Paper
August 17, 2004

Financial Sector Assessment Program (FSAP)

World Bank FSAP




Financial Sector Regulation: Issues and Gaps—
An Update

Prepared by Staff of the Monetary and Financial Systems Department

Approved by Stefan Ingves

October 25, 2004

The paper on Financial Sector Regulation--Issues and Gaps (SM/04/268, 8/5/04) and the Background Paper (SM/04/290, 8/18/04) were discussed by the Financial Stability Forum at its twelfth meeting held on September 8-9, 2004, in Washington D.C. The Forum considered ways to improve the implementation of regulatory standards in the banking, securities and insurance sectors, based on the experience of the Financial Sector Assessment Program. It discussed the treatment of preconditions for sound supervision and regulation, the consistency of implementation methodology, cross-sector and cross-border regulation, regulatory and corporate governance, and public disclosure. The FSF concluded that these matters merit further attention by international standard setters working with the international financial institutions. A summary of the FSF discussion on the paper is attached.

Staff also understands that the Joint Forum, set up under the aegis of the Basel Committee on Banking Supervision (Basel Committee), the International Organization of Securities Commissions (IOSCO), and the International Association of Insurance Supervisors (IAIS), will also be discussing the paper at its meeting on November 11-12, 2004. The Joint Forum deals with supervisory issues common to the banking, securities, and insurance sectors, including the regulation of financial conglomerates.



Twelfth Meeting of the Financial Stability Forum

8–9 September 2004, Washington, D.C.

Summary Extract1

Financial Sector Regulation: Issues and Gaps

The IMF reported on the main findings of a study examining the extent of implementation of standards in the banking, securities, and insurance sectors in a panel of industrial, emerging, and developing countries. The study, drawing on the joint IMF/World Bank Financial Sector Assessment Program (FSAP), described gaps in implementation and raised a number of issues relating to the standards themselves, including the treatment of preconditions, consistency in implementation methodology, cross-border regulation, regulatory and corporate governance, especially for state-owned enterprises (SOEs), public disclosure, and practices resulting in regulatory forbearance. Particular attention needs to be paid to shortage of internationally agreed concrete capital and risk management standards in the insurance sector.

Members welcomed the IMF study, which they found to be comprehensive and to offer useful insights. Representatives from the standard setting bodies, notably the BCBS, IAIS, and IOSCO, indicated that they would make good use of the study's insights for the revision of their standards, as appropriate. The standard setting bodies agreed that consistency across sectors deserved attention and that further work on their part on these matters was advisable, including by exploring possible synergies on specific issues from ongoing work by the Joint Forum. The following points were also made in the discussion:

  • All members agreed that FSAPs should encompass an assessment of the enabling preconditions to the effective implementation of standards. Several members stressed that these preconditions should not be incorporated into the standards themselves: the preconditions were not in general the standard setting bodies' responsibility, and prudential authorities needed to take compensatory measures where preconditions were weak. Some other members noted the need to distinguish the more general preconditions (e.g., macroeconomic stability) from the more specific ones (e.g., the accounting and auditing framework), and indicated that the latter could usefully be reflected in the standards. One member noted that the protection of property rights should be one key precondition. Several members suggested that the development of additional guidance for more effective and uniform assessments of preconditions was desirable, but that this should be done outside the standard setting process.

  • Several members stressed that the primary focus now should be on implementing standards, not revising them, and that the standard setting process should be the responsibility of the standard setting bodies.

  • One member noted that research has pointed to the importance of market discipline: enhanced supervision by itself will not ensure soundness. He also pointed out that there are objectives in addition to financial stability--including investor protection and the development of the financial sector--and that in the short run there could be trade-offs among them.

  • The OECD representative informed the Forum that the OECD Steering Group on Corporate Governance is developing an assessment methodology for the OECD's revised Corporate Governance Principles that were approved by OECD Ministers in May this year. The assessment methodology is to include a peer review element, and is to be further discussed at several upcoming regional roundtables jointly organized with the World Bank. He also noted that the OECD is developing governance guidelines for state owned enterprises in consultation with non-OECD countries.

  • Some members underscored the further development of stress testing as an important assessment tool, but noted that this should be done outside the standard setting process.

  • Some members welcomed the attention paid to the issues of the diversity of financial systems and dollarization, and supported the IMF's work agenda on these matters.

  • One member noted that the needs of less advanced countries should be better considered in the standard setting process. Other members expressed concerns that this could result in a weakening of the standards, and noted that the needs of less developed economies were better addressed through the essential and additional requirements of implementation guidance.

  • One member noted the importance of remittance payments, and suggested that the CPSS and BCBS look into whether a standard might be needed to better assess this increasingly important phenomenon.

  • In summing up the discussion, the FSF Chair noted that the FSAP has proved to be a very valuable and helpful process. He welcomed the IMF report and encouraged the IMF to continue its work in this field. The Chair also encouraged the standard setting bodies to consider the cross-sectoral issues underscored in the study with a view to addressing inconsistencies and unnecessary incompatibilities among the standards in areas where they overlap, in consultation with the Joint Forum and the international financial institutions.


1This is an extract from the Summary of the Twelfth Meeting of the Financial Stability Forum issued on September 28, 2004.