Selected Decisions and Selected Documents of the IMF, Thirty- Eighth Issue -- Mandatory Financial Stability Assessments Under the Financial Sector Assessment Program—Update

Prepared by the Legal Department of the IMF
As updated as of February 29, 2016

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Decision No. 14736-(10/92), adopted September 21, 2010, is hereby amended to reflect the changes set forth in the Annex to this Decision. (SM/13/304, 11/18/13)

Decision No. 15495-(13/111),

December 6, 2013

Appendix II


This Decision sets out the scope and modalities of bilateral surveillance over the financial sector policies of members with systemically important financial sectors and of multilateral surveillance over the spillovers arising from such policies in accordance with Article IV, Sections 3(a) and (b) of the Fund’s Articles and the Fund’s Decision on Bilateral and Multilateral Surveillance - 2012 Integrated Surveillance Decision (Decision No. 15203-(12/72), adopted July 18, 2012 (the “ISD”).


  • 1. The obligations of the Fund and its members with regard to bilateral and multilateral surveillance are set forth in Article IV of the Fund’s Articles and further elaborated in the ISD.

    • a. With respect to bilateral surveillance, Article IV, Section 1 requires each member to “collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates” (“systemic stability”). Recognizing the important impact that a member’s domestic economic and financial policies can have on systemic stability, Article IV, Sections 1(i) and (ii) establish obligations for members respecting the conduct of these policies, including their financial sector policies. In accordance with the framework set out in Article IV, the ISD provides that systemic stability is most effectively achieved by each member adopting policies that promote its own balance of payments stability and domestic stability—that is, policies that are consistent with members’ obligations under Article IV, Section 1 and, in particular, the specific obligations set forth in Article IV, Section 1, (i) through (iv). “Balance of payments stability” refers to a balance of payments position that does not, and is not likely to, give rise to disruptive exchange rate movements. In the conduct of their domestic economic and financial policies, members are considered to be promoting balance of payments stability when they are promoting their own domestic stability that is, when they comply with the obligations of Article IV, Sections 1 (i) and (ii) of the Fund’s Articles. For this purpose, the ISD requires the Fund’s bilateral surveillance to assess, in particular, whether a member’s domestic policies are directed towards domestic stability. It provides that “financial sector policies (both their macroeconomic aspects and macroeconomically relevant structural aspects)” will always be the subject of the Fund’s bilateral surveillance with respect to each member.

    • b. With respect to multilateral surveillance, Article IV, Section 3 (a) requires the Fund to oversee the international monetary system in order to ensure its effective operation, and requires members to consult with the Fund on any issue that the Fund considers necessary for this purpose. The ISD recognizes that the international monetary system may only operate effectively in an environment of global economic and financial stability, and provides that the Fund in its multilateral surveillance will focus on issues that may affect global economic and financial stability, including the spillovers arising from policies of individual members that may significantly influence the effective operation of the international monetary system. The policies of members that may be relevant for this purpose include, among others, members’ financial sector policies.

  • 2. While an examination of members’ financial sector policies is important in all cases of bilateral surveillance, the Fund decides that, taking into account the framework described above and the overall purpose of surveillance, heightened scrutiny should be given in bilateral surveillance to the financial sector policies of those members whose financial sectors are systemically important, given the risk that domestic and balance of payments instability in such countries will lead to particularly disruptive exchange rate movements and undermine systemic stability. Heightened scrutiny should also be given in multilateral surveillance to the spillover effects of the financial sector policies of those members, given the risk that they may undermine global economic and financial stability. As financial stability assessments are a key tool for assessing members’ financial vulnerabilities and financial sector policies, it is appropriate that financial stability assessments be conducted with such members as provided for in this Decision.

  • 3. This Decision does not impose new obligations on members or, in particular, modify the scope of their obligations under Article IV. The Fund, in its bilateral surveillance, will continue to assess whether a member’s domestic economic and financial policies are directed toward the promotion of domestic stability. In its multilateral surveillance, the Fund may discuss the impact of members’ policies on the effective operation of the international monetary system and may suggest alternative policies that, while promoting the member’s own stability, better promote the effective operation of the international monetary system.

Scope and modalities of financial stability assessments

  • 4. Determination of systemic importance. The Managing Director, in consultation with the Executive Board, will identify those members that have systemically important financial sectors. This determination will be made in the context of each review that is conducted under paragraph 9 below, and will be based on an assessment taking into account the size and interconnectedness of members’ financial sectors as contemplated in paragraphs 23 to 27 in SM/13/304.1

  • 5. Financial stability assessments. Where the financial sector of a member is determined to be systemically important pursuant to paragraph 4 of this Decision, the member shall engage in a financial stability assessment in the context of bilateral and multilateral surveillance under Article IV of the Fund’s Articles in accordance with the terms of this Decision. For this purpose, the member shall consult with the Fund and the authorities of the member shall make themselves available for discussions with Fund staff of the issues that fall within paragraph 6 of this Decision.

  • 6. Scope of financial stability assessments. The financial stability assessments undertaken under this Decision will consist of the following elements:

    • a. An evaluation of the source, probability, and potential impact of the main risks to macro-financial stability in the near-term for the relevant financial sector. Such an evaluation will involve: an analysis of the structure and soundness of the financial system; trends in both the financial and nonfinancial sectors; risk transmission channels; and features of the overall policy framework that may attenuate or amplify financial stability risks (such as the exchange rate regime). Both quantitative analysis (such as balance sheet indicators and stress tests) and qualitative assessments will be used to evaluate the risks to macro-financial stability.

    • b. An assessment of the authorities’ financial stability policy framework. Such an assessment will involve: an evaluation of the effectiveness of financial sector supervision; the quality of financial stability analysis and reports; the role of and coordination between the various institutions involved in financial stability policy; and the effectiveness of monetary policy.

    • c. An assessment of the authorities’ capacity to manage and resolve a financial crisis should the risks materialize. Such an assessment will involve an overview of the country’s liquidity management framework; financial safety nets (such as deposit insurance and lender-of-last-resort arrangements); crisis preparedness and crisis resolution frameworks; and the possible spillovers from the financial sector onto the sovereign balance sheet.

    • d. Where relevant, the assessments will also cover the spillovers arising from a member’s financial sector policies that may significantly influence global economic and financial stability.

  • 7. Modalities of assessments. The key findings and recommendations of a financial stability assessment under this Decision will be summarized in a Financial System Stability Assessment Report (FSSA) that will normally be discussed by the Executive Board at the same time as the relevant Article IV consultation report.

  • 8. Frequency. Where the financial sector of a member is determined to be systemically important pursuant to this Decision, it will be expected that a financial stability assessment will be conducted and the FSSA resulting from such an assessment will be discussed by the Executive Board by no later than the first deadline for completion of an Article IV consultation with the member that follows the fifth anniversary of such determination or, in the case of the financial sector of a territory of a member, the first deadline for completion of an Article IV consultation discussion with respect to that territory by the Executive Board that follows the fifth anniversary of such determination. It is expected that subsequent FSSAs for a member with a systemically important financial sector will be discussed by the Executive Board by no later than the first deadline for completion of an Article IV consultation with that member that follows the fifth anniversary of the date of completion of the previous Executive Board discussion of the FSSA respecting that member or, in the case of the financial sector of a territory of a member, the first deadline for completion of an Article IV consultation discussion with respect to that territory by the Executive Board that follows the fifth anniversary of the date of completion of the previous Executive Board discussion of the FSSA respecting the financial sector of that territory.


  • 9. Review. It is expected that the Fund will review this Decision no later than five years following the date of its adoption and subsequently at intervals of no longer than five years. In particular, as “systemic importance” is a dynamic concept, the Fund will, in the context of each such review, examine and revise, as necessary, the criteria and methodology for determining members with systemically important financial sectors. Moreover, the Fund may review this Decision at any time to take into account major advances in the availability of data and in the development of methodologies for assessing the systemic importance of financial sectors. (SM/13/304, 11/18/13).


Paragraphs 23 to 27 in SM/10/235 (8/31/2010)

  • 23. The point of departure for defining systemic importance for this exercise is the conceptual framework developed by the IMF, BIS, and FSB.3 This framework—originally developed for evaluating the systemic importance of financial institutions, markets, and instruments (SIMIs)—approaches systemic importance from both a domestic and a global point of view. It identifies the following three key concepts: (i) size, i.e., the volume of financial services provided by an individual financial institution or market; (ii) interconnectedness, i.e., the extent of linkages with other financial institutions or markets; and (iii) substitutability, i.e., the extent to which other institutions or markets can provide the same services in the event of the failure of part of the system.

  • 24. Systemic importance of a financial sector is defined below with the focus on its size and interconnectedness. The volume of financial services provided by a financial sector is the main component of systemic importance. Size is measured across several dimensions, to capture the importance of a particular financial sector in the specific jurisdiction (expressed in terms of the jurisdiction’s output) and in the global financial system (expressed in absolute terms and scaled by the jurisdiction’s GDP relative to world GDP). Cross-border interconnectedness is an important complementary measure: it captures the systemic risk that can arise through direct and indirect interlinkages among financial sectors in the global financial system, i.e., the risk that individual failure or malfunction may have severe repercussions on other countries or on systemic stability. As regards the notion of substitutability, while it is important at the level of individual institutions and markets, it is not included in the criteria. As acknowledged in IMF/BIS/FSB (2009), the concept of substitutability is difficult to measure, because it is hard to capture the degree of uniqueness of an individual institution or a specific market in the provision of a financial service. More importantly, substitutability may not be a relevant concept for entire financial sectors.

  • 25. It is important to bear in mind the limitations of this definition of systemic importance:

    • It is not a proxy for a jurisdiction’s systemic importance writ large. The analytical approach used in this paper is focused on the financial sector. It does not purport to measure all aspects of a country’s relative importance in the world economy, such as the size of the domestic market, growth potential, trade linkages, etc. As a result, some large, systemically important economies may be ranked lower than smaller countries that have relatively big and/or highly interconnected financial sectors.

    • It does not capture market perceptions. This approach is entirely data based. Market perception of a financial sector’s systemic importance, though a key component of systemic risk, can be volatile; is influenced by economic and political factors that go beyond the size and interconnectedness of the particular financial sector; and is hard to measure objectively. It is therefore not incorporated into this approach.

    • The extent of vulnerabilities is not a factor. The methodology is focused on systemic importance as measured by size and interconnectedness, not vulnerabilities. This is because the benefits of regular financial stability assessments would be maximized—both for the individual members and for the global financial system—if these assessments were focused on the jurisdictions with the most systemically important financial sectors, not on the most vulnerable. To be sure, members faced with macrofinancial vulnerabilities, regardless of their size or interconnections, would also benefit from an in-depth look at their financial sectors and may need additional Fund support. But there are other instruments, including Article IV surveillance, voluntary FSAPs, and technical assistance, which would continue to provide this analysis.

    • Like all quantitative analyses, it is limited by the quality of data. In particular, it may not reflect accurately the importance of nonbank and unregulated segments of the financial sector, given the difficulties countries often experience in collecting such data, nor can it fully take into account differences in the quality of data collection and reporting across countries.

  • 26. The methodology for identifying jurisdictions with systemically important financial sectors, explained in greater detail in the accompanying Background Paper, is a three-stage process that uses available financial data for the entire Fund membership. The need to apply the criteria uniformly across the entire membership limits the data that can be used. Data for the analysis are mainly drawn from the BIS, the IMF’s World Economic Outlook, the IMF’s International Financial Statistics, the IMF’s Coordinated Portfolio Investment Survey, and the United Nations Conference on Trade and Development’s datasets on foreign direct investment. The sample covers 191 jurisdictions (187 Fund members plus four territories that are subject to Article IV surveillance) for the year 2008.

    • In the first stage, separate ordinal rankings of jurisdictions are developed for size and interconnectedness.

    • The size of a jurisdiction’s financial sector is measured by the volume of financial services. The size ranking is a median of four rankings, three of which are measures of the “absolute” size of the sector (currency and deposits as a proxy for the banking-system balance sheet; volume on nonbank financial services; and the jurisdiction’s international investment position, all measured in U.S. dollars), and the fourth is a measure of the “relative” size of the financial sector (financial depth, measured as a share to the jurisdiction’s output). The first three capture the importance of a jurisdiction’s financial sector in the global financial system and the fourth measures the relative weight of the financial sector within a given jurisdiction. At the same time, since distress in an individual financial sector can propagate to the rest of the world both directly through financial connections and indirectly through real economy linkages, these measures of size are weighted by the relative size of each jurisdiction’s total output to global economic output.

    • Interconnectedness is determined on the basis of bank-based network analysis. The basic idea (see Background Paper) is to infer from the pattern of cross-border linkages to what extent the banking sector of a particular jurisdiction is an important center in the international banking network.4 Data availability has limited the measures of interconnectedness to the banking sector only, so the network is defined as a set of bilateral claims of different banking systems on each other. The importance (or “centrality”) of a banking sector in the network is measured in terms of the number and structure of claims on other banking sectors.

    • In the second stage, the rankings of size and interconnectedness are combined into a single weighted composite index of systemic importance. To derive the single index, the relative weights for size and interconnectedness are set at 0.7 and 0.3, respectively. As size is a more fundamental measure of systemic importance, it is given a relatively higher weight in the composite index than interconnectedness. As a robustness check, alternative composite rankings are calculated for a range of different weight combinations, and different ways of combining the indices of size and interconnectedness (using averages instead of medians), and different types of bilateral financial assets and liabilities (such as equity, debt, and FDI) are tested.

    • In the third stage, cluster analysis is used to identify groups of jurisdictions with financial sectors that have consistently the highest degree of systemic importance. The underlying idea is to “let the data speak for themselves” in identifying groups of financial sectors whose rankings are relatively stable across different weight combinations. To capture this idea, the standard deviation of ordinal rankings across different combinations of weights is calculated for each financial sector as a proxy for the robustness of the ranking. Clusters of jurisdictions are then calculated by iteratively minimizing the within-cluster sum of squared standard deviations from cluster means over several possible clusters of jurisdictions. The final list includes the clusters with the jurisdictions that are not just the highest ranked, but also have the most robust rankings across different weighting schemes and represent a substantial share of the global financial system. This methodology eschews as much as possible a priori judgments on the size and makeup of the list (the number of jurisdictions to be included is not predetermined, and it is not possible to “cherry pick” individual jurisdictions), and allows the data to indicate its final composition.

  • 27. The results identify 25 jurisdictions with the most systemically important financial sectors (Table 1). They cover almost 90 percent of the global financial system and represent almost 80 percent of global economic output. The group contains 15 of the G-20 countries and advanced economies are heavily represented. The United Kingdom’s financial sector has the highest composite rank. The United States’ financial sector is ranked third despite being ranked first in size because of its relatively lower level of cross-border connections. Several euro area economies are also highly ranked because of the high degree of interconnectedness of their financial sectors. Although these connections are largely within the euro area, for the purposes of this exercise they have been treated as all other cross-border flows because first, they may give rise to cross-border systemic risk affecting the domestic stability of the individual countries, as well as the external stability of the euro area as a whole; second, the authorities in these countries still have considerable independence in their domestic financial sector policies; and third, comprehensive cross-border resolution mechanisms are yet to be established. Moreover, Article IV consultations (and FSAPs) with these members are still conducted separately. Given the degree of financial integration of the euro area countries and the gradual move toward a more integrated system of regulation and supervision in the European Union, this treatment of cross-border exposures of these countries could be reconsidered in the future.

Table 1 Ranking of Jurisdictions with Systemically Important Financial Sectors

Jurisdiction Overall Rank5 Size Rank Interconnectedness Rank
United Kingdom 1 3 1
Germany 2 4 2
United States 3 1 10
France 4 6 3
Japan 5 2 14
Italy 6 8 8
Netherlands 7 9 6
Spain 8 7 11
Canada 9 9 14
Switzerland 10 15 4
China 11 4 34
Belgium 12 19 5
Australia 13 14 17
India 14 11 29
Ireland 15 20 9
Hong Kong SAR6 16 17 18
Brazil 17 12 32
Russian Federation 18 13 31
Korea 19 18 22
Austria 20 22 13
Luxembourg 21 26 7
Sweden 22 23 16
Singapore 23 26 12
Turkey 24 21 25
Mexico 25 16 49

Source: Staff estimates.

1 Ed. Note: The texts of paragraphs 23 to 27 of SM/10/235 (8/31/2010) are reproduced in the attachment below.

2 Ed. Note: These paragraphs, which are referred to in paragraph 5 of the Annex to Decision No. 15495-(13/111), December 6, 2013, are included for the reader’s convenience.

3 IMF/BIS/FSB, (2009), Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments: Initial Considerations.

4 Ed. Note: The following text is footnote 14 in the original text: “14 The network analysis is based on von Peter (2007), International Banking Centres: A Network Analysis, BIS Quarterly Review, and Kubelec and Sá (2010), The Geographical Composition of National External Balance Sheets: 1980–2005, Bank of England Working Paper No. 384.”

5 Weighted average of the size and interconnectedness rankings using 70/30 weights respectively.

6 Stability assessments for Hong Kong Special Administrative Region would form part of Article IV consultations with the People’s Republic of China.

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