Front Matter

Front Matter

Author(s):
International Monetary Fund
Published Date:
September 2005
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    Financial Sector Assessment

    A HANDBOOK

    © 2005 The International Bank for Reconstruction and Development/The World Bank/The International

    Monetary Fund

    1818 H Street NW

    Washington DC 20433

    Telephone: 202-473-1000

    Internet: www.worldbank.org

    E-mail: feedback@worldbank.org

    All rights reserved

    First printing September 2005

    1 2 3 4 5 09 08 07 06 05

    This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank/The International Monetary Fund. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the World Bank, the International Monetary Fund, their Executive Directors, or the governments they represent.

    The World Bank and International Monetary Fund do not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank or International Monetary Fund concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

    Rights and Permissions

    The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/The World Bank/The International Monetary Fund encourage dissemination of their work and will normally grant permission to reproduce portions of the work promptly.

    For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com.

    All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org.

    ISBN-10: 0-8213-6432-4

    ISBN-13: 9780821364321

    eISBN: 0-8213-6433-8

    DOI: 10.1596/978-0-8213-6432-1

    Library of Congress Cataloging-in-Publication Data has been applied for.

    Cover and publication design: James E. Quigley, World Bank Institute.

    Original cover photo: Getty Images.

    Contents

    Abbreviations and Acronyms

    A&A

    Accounting and auditing

    AML–CFT

    Anti-Money Laundering and Combating the Financing of Terrorism

    ARIC

    Asia Regional Information Center

    ATM

    Automated teller machine

    BAAC

    Bank for Agriculture and Agricultural Cooperatives [Thailand]

    BCBS

    Basel Committee on Banking Supervision

    BCP

    Basel Core Principles (for Effective Banking Supervision)

    BIS

    Bank for International Settlements

    BRI

    Bank Rakyat Indonesia

    CAMEL

    Capital adequacy, Asset quality, Management soundness, Earnings and profitability, Liquidity, and Sensitivity to market risk

    CARAMELS

    Capital adequacy, Asset quality, Reinsurance, Adequacy of claims and actuarial, Management soundness, Earnings and profitability, Liquidity, and Sensitivity to market risk

    CGAP

    Consultative Group to Assist the Poorest

    CIDA

    Canadian International Development Agency

    CPSIPS

    Core Principles of Systemically Important Payment Systems

    CPSS

    Committee on Payment Settlement Systems or Committee on Payments and Settlements Systems

    CSD

    Central securities depository

    CSFB

    Credit Suisse First Boston

    DB

    Defined Benefit

    DC

    Defined Contribution

    DCP

    Domestic credit to the private sector

    DFI

    Development finance institution

    DFID

    UK Department for International Development

    DIS

    Deposit insurance system

    ECB

    European Central Bank

    EMDB

    Emerging Markets Database

    EWS

    Early warning systems

    FAO

    Food and Agriculture Organization of the United Nations

    FASB

    Financial Accounting Standards Board

    FATF

    Financial Action Task Force on Money Laundering

    FCRA

    Fair Credit Reporting Act

    FIRST

    Financial Sector Reform and Strengthening Initiative

    FIU

    Financial Intelligence Units

    FSAP

    Financial Sector Assessment Program

    FSIs

    Financial soundness indicators

    FSLC

    Financial Sector Liaison Committee

    FSRB

    FATF-Style Regional Body

    FSSA

    Financial System Stability Assessment

    FX

    foreign exchange

    GAAP

    Generally Accepted Accounting Principles

    GDDS

    General Data Dissemination System

    GDP

    Gross domestic product

    GNP

    Gross national product

    GTZ

    Deutsche Gesellschaft für Technische Zusammenarbeit

    HI

    Herfindahl Index

    IAASB

    International Auditing and Assurance Board

    IAIS

    International Association of Insurance Supervisors

    IASs

    International Accounting Standards

    IASB

    International Accounting Standards Board

    IASC

    International Accounting Standards Committee

    ICP

    Insurance Core Principle

    ICR

    Insolvency and creditor rights

    IDA

    International Development Association

    IFAC

    International Federation of Accountants

    IFC

    International Finance Corporation

    IFCs

    International Financial Centers

    IFRSs

    International Financial Reporting Standards

    IFS

    International financial statistics

    IFSB

    Islamic Financial Services Board

    IIFS

    Institutions offering Islamic Financial Services

    IMF

    International Monetary Fund

    IOSCO

    International Organization of Securities Commissions

    IPSAS

    International Public Sector Accounting Standards

    ISA

    International Standards for Auditing

    KYC

    Know-your-customer

    LCFI

    Large and complex financial institution

    LGD

    Loss given default

    LIBOR

    London interbank offer rate

    LOLR

    Lender of last resort

    LSMS

    Living Standards Measurement Survey

    MFI

    Microfinance institution

    MFP

    Monetary and financial policies

    MIX

    Microfinance Information exchange

    NBFI

    Non-bank financial institution

    NCD

    Negotiable certificate of deposits

    NGO

    Non-governmental organization

    NPL

    Non-performing loans

    OECD

    Organisation for Economic Co-operation and Development

    OFC

    Offshore Financial Center

    OFI

    Other Financial Intermediary

    OMO

    Open market operations

    OTC

    Over-the-counter

    PAYG

    Pay-as-you-go

    POS

    Point of sale

    PSB

    Postal savings bank

    ROA

    Return on assets

    ROE

    Return on equity

    ROSCs

    Reports on Observance of Standards and Codes

    RSSS

    Recommendations for Securities Settlement Systems

    SACCOs

    Savings and credit cooperative organizations

    SDDS

    Special Data Dissemination Standard

    SIC

    Standard Industrial Classification

    SIDA

    Swedish International Development Co-Operation Agency

    SME

    Small and medium enterprise

    SOE

    State-owned enterprise

    SRO

    self-regulatory organization

    TRWA

    Total risk-weighted assets

    UNCITRAL

    United Nations Commission on International Trade Law

    UNDP

    United Nations Development Programme

    USD

    U.S. dollars

    VAR

    Value-at-risk

    VAT

    Value-added tax

    WOCCU

    World Council of Credit Unions

    Preface

    The experience of many countries around the world clearly shows that while financial sector development can spur economic growth, financial fragility and instability can seriously harm growth. Following the financial crises of the late 1990s, there has been increasing interest in the systematic assessment of the strengths and weaknesses of financial systems, with the ultimate goal of formulating appropriate policies to foster financial stability and stimulate financial sector development. The Financial Sector Assessment Program (FSAP), a joint World Bank-IMF program introduced in 1999, represents a response to this demand for systematic assessments. The emergence of various financial sector Standards and Codes and the associated Reports on Observance of Standards and Codes (ROSCs) are further examples of the increased focus on financial sector assessments.

    Consequently, there has been an increased demand from financial sector authorities in many countries, as well as from World Bank and IMF staff for information on key issues and sound practices in the assessment of financial systems and in the design of policy responses. This Handbook of Financial Sector Assessment is a response to this demand. The Handbook presents an overall analytical framework for assessing financial system stability and developmental needs, providing broad guidance on approaches, methodologies, and techniques of assessing financial systems.

    Although the Handbook draws substantially on World Bank and IMF experience with the FSAPs and from the broader policy and operational work in both institutions, it is designed for generic use in financial sector assessments, whether conducted by country authorities themselves, or by World Bank and IMF teams. It is, therefore, our hope that the Handbook will serve as an authoritative source on the objectives, analytical framework and methodologies of financial sector assessments as well as a comprehensive reference book for training on the techniques of such assessments.

    The Handbook was prepared under the general oversight of Messrs. Alexander E. Fleming (Sector Manager, Finance and Private Sector Division, World Bank Institute), Tomás J. T. Baliño (Deputy Director, Monetary and Financial Systems Department, IMF), and Larry Promisel (former Director, Financial Sector Global Partnership, World Bank). It is the product of intense collaboration among a large number of staff and experts from both the World Bank and the IMF (primary contributors are listed on the next page). The design, drafting, and editing of the Handbook was coordinated by a team consisting of Mr. V. Sundararajan (Lead Project Consultant, Centennial Group Holdings and former Deputy Director, IMF), Mr. Abayomi A. Alawode (Senior Financial Sector Specialist, World Bank Institute), Mr. Mathew Jones (Senior Economist, IMF), and Mr. Martin Čihák (Economist, IMF).

    We wish to thank the entire team for their valuable efforts in bringing this project to fruition.

    Cesare Calari

    Vice-President

    Financial Sector Network

    World Bank

    Stefan Ingves

    Director

    Monetary and Financial Systems Department

    International Monetary Fund

    Contributors

    Lead Project Consultant: Mr. V. Sundararajan, Lead Project Consultant, Centennial Group Holdings and former Deputy Director, IMF

    World Bank Contributors: Rawan Abdelrazek, Ernesto Aguirre, Abayomi A. Alawode, Nagavalli Annamalai, Mehmet Can Atacik, Thorsten Beck, John Bruce, Alexander E. Fleming, Felice Friedman, Joselito Gallardo, Eric Haythorne, Patrick Honohan, Gordon Johnson, Peter Kyle, Margaret Miller, Bikki Randhawa, Dory Reiling, Paul Allan Schott, Vijay Tata, Craig Thorburn, and Fatouma Ibrahima Wane

    IMF Contributors: Greta Mitchell Casselle, Martin Čihák, Peter Clark, R. Sean Craig, Nigel Davies, Paulus Dijkstra, Jennifer Elliot, Gilda Fernandez, Mats Filipson, Eva Gutierrez, Geoffrey Heenan, Socorro Heysen, Matthew Jones, Cem Karacadag, Elias Kazarian, Richard Lalonde, Michael Moore, Aditya Narain, Obert Nyawata, Thordur Olafsson, Eric Parrado, Marc Quintyn, Michael Taylor, In Won Song, Kalin Tintchev, Jan-Willem van der Vossen, and Jan Woltjer

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