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Business and Economics > Banks and Banking

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Cover IMF Working Papers
Implementing Risk-Based Solvency for Insurers—Lessons from Kenya, Mexico, and South Africa
Peter Windsor
,
Suzette J Vogelsang
,
Christiaan Henning
,
Kerwin Martin
,
Elias Omondi
,
Gerardo Rubio
, and
Jooste Steynberg
International standards and best practice supports the implementation of a risk-based solvency regime in the regulation and supervision of insurers. Several emerging market and developing economies are transitioning to such a solvency regime or planning to do so. This paper discusses Kenya, Mexico, and South Africa’s journey to putting in place a risk-based solvency regime which had several common elements notwithstanding significantly different insurance sectors. The transition was a multi-year project requiring dedicated additional resources; restructuring of the regulator, including redesigning supervisory processes and tools and upgrading information technology systems; and significantly greater coordination between the regulator and the insurance industry.
Keywords:
Insurance; Risk-based Solvency; Risk-based supervision; solvency regime; Penetration rate; RBS project; solvency assessment; RBS implementation; supervision of insurer; Insurance companies; Solvency; Financial statements; Africa; Global
Cover IMF Working Papers
Managing Remittances Inflows with Foreign Exchange Intervention
Maria-Angels Oliva
and
Nika Khinashvili
In a 157 emerging markets and developing countries sample, remittances continue to grow fast, outpacing other financial inflows (as a share of GDP), particularly in Asia. Without alternative policy instruments, foreign exchange interventions (FXIs) have often been the authorities’ go-to tool to manage the short-term effects of these remittance inflows. However, this practice comes at a cost. This paper shows that FXIs are quick, temporary solutions that often may hinder the development of the recipient country’s financial sector and may not support financial stability over the medium term. The analysis suggests that FXIs act as an insurance tool that, by mitigating FX volatility, protect remittance recipients and tradable sectors from FX risks, encouraging less bank deposits (consistent with more spending) and lower buffers in the banking sector. These costs add to other direct FXI-related costs already identified in the literature. The development of private sector market risk management tools should support longer-term structural reforms required to increase the absorptive capacity of additional FX inflows.
Keywords:
remittance inflow; remittance recipient; FX volatility; FX risk; FX inflow; Remittances; Commercial banks; Bank deposits; Foreign direct investment; Asia and Pacific; Eastern Europe; Africa; Western Hemisphere; Middle East
Cover Climate Change Challenges and Opportunities in Latin America and the Caribbean
Climate Change Challenges and Opportunities in Latin America and the Caribbean

Abstract

The analysis in the book suggests that LAC countries are facing substantial challenges related to climate change but have tools at their disposal to seize the opportunities that the climate change presents. To maximize opportunities and minimize the risks LAC countries will need to improve flexibility and adaptability of their economies. Policies aimed at supporting the reallocation of labor and capital across sectors, investing in basic skills and human capital, improving transparency and economic governance to encourage investment in technology and know-how, and creating fiscal space to manage the climate transition would help LAC countries position themselves to take advantage of the opportunities afforded by the climate transition.

Keywords:
Climate; Latin America and the Caribbean; mitigation; adaptation; building resilience; IMF staff calculation; climate ambition; bank asset quality; financing climate policy; adaptation investment; Climate change; Greenhouse gas emissions; Climate policy; Natural disasters; Non-renewable resources; Caribbean; Central America; Global; South America; Middle East and Central Asia
Cover Analytical Notes
Guidance Note For Developing Government Local Currency Bond Markets
International Monetary Fund
and
World Bank
This guidance note was prepared by International Monetary Fund (IMF) and World Bank Group staff under a project undertaken with the support of grants from the Financial Sector Reform and Strengthening Initiative, (FIRST).The aim of the project was to deliver a report that provides emerging market and developing economies with guidance and a roadmap in developing their local currency bond markets (LCBMs). This note will also inform technical assistance missions in advising authorities on the formulation of policies to deepen LCBMs.
Keywords:
AN; market development; repo market; investor base; reverse repo; government securities; price discovery; banking sector; market-making privilege; market regulation; market fragmentation; repo market development; market infrastructure; Government securities; Securities; Bonds; Securities markets; Government debt management; Global; Africa; East Asia; currency bond markets; IMF expert; government bond market development; bond market reform plans; government debt market; bond market Association; IMF Library; Yield curve; Southeast Asia; Money markets
Cover IMF Working Papers
A Framework for Systemwide Liquidity Analysis
Xiaodan Ding
,
Dimitrios Laliotis
, and
Priscilla Toffano
We developed a novel Systemwide Liquidity (SWL) framework to identify liquidity stress in the system that goes beyond banks and to assess the role played by non-bank financial institutions (NBFIs) in episodes of liquidity stress. The framework, which complements standard liquidity and interconnectedness analyses, traces the flow of liquidity among various agents in the economy and explores possible transmission channels and amplification mechanisms of correlated liquidity shocks. The framework uses unique balance sheet and asset encumbrance data to demonstrate the importance of assessing liquidity at the system level by allowing for (i) analyses of each agent’s contribution to liquidity stress, (ii) analyses of the impact of different behavioral assumptions (e.g., pecking order of collateral utilization, negative externalities of fire-sales and margin positions), and (iii) policy simulations. Since this framework covers a comprehensive set of financial instruments and transactions, it paves the way for harmonization of systemwide liquidity analysis across countries. We applied this general framework to Mexico in the context of the FSAP. Results for Mexico show that commercial banks safeguard the resiliency of the financial system by backstopping the liquidity needs of other agents. Moreover, certain sectors appear more vulnerable when binding regulatory liquidity constraints trigger risk-averse behavioral responses.
Keywords:
Systemwide liquidity analysis; liquidity at risk; nonbank financial institution; liquidity stress testing; haircut; asset encumberance; margin calls; repurchase agreement; fire-sales; derivative positions; liquidity analysis; liquidity shock; liquidity stress; net liquidity position; liquidity needs; liquidity constraint; Liquidity; Commercial banks; Mutual funds; Securities; Liquidity risk; Global
Cover Policy Papers
Review of the Fund’s Income Position for FY 2024 and FY 2025-2026
International Monetary Fund. Finance Dept.
This paper updates the projections of the Fund’s income position for FY 2024 and FY 2025-2026 and proposes related decisions for the current and the following financial years. The paper also includes a proposed decision to keep the margin for the rate of charge unchanged until completion of the review of surcharges, but until no later than end FY 2025, at which time the Board would set the margin for the rest of FY 2025 and FY 2026. The Fund’s overall net income for FY 2024 is projected at about SDR 4.4 billion after taking into account pension-related remeasurement gain and estimated retained investment income of the Endowment Account.
Keywords:
Income Position; Lending Income; Investment Income; Expenditures; Margin for the Rate of Charge; Reserve Accumulation; Precautionary Balances; Pension; Provisioning; Payout; Reimbursement; Remeasurement; Surcharges; outlook factor; GRA FY; FY 2024; review of surcharge; market condition; transparency policy; Income; SDR interest rate; Budget planning and preparation; Credit; Discount rates; Global
Cover Regional Economic Outlook, Western Hemisphere, October 2023
Regional Economic Outlook, Western Hemisphere, October 2023
Securing Low Inflation and Nurturing Potential Growth
International Monetary Fund. Western Hemisphere Dept.

Abstract

After a stronger-than-expected recovery from the pandemic and continued resilience in early 2023, economic growth in Latin America and the Caribbean (LAC) is softening as the effect of tighter policies to combat inflation is taking hold and the external environment is weakening. The early and swift monetary tightening across the region since 2021, together with the withdrawal of most of the pandemic fiscal stimulus and the reversal of external price pressures, have helped put headline inflation on a downward trajectory. Core inflation has also started to ease, as price pressures are becoming less generalized, although it remains elevated amid strong labor markets and positive output gaps in some countries. Banking systems have weathered the rise in interest rates well and are generally healthy, though credit to the private sector is decelerating amid tighter supply conditions and weaker demand.

Keywords:
inflation; regional outlook; fragmentation; global trade; Latin America and the Caribbean; banking systems; volatility; IMF staff calculation; inflation expectation; cash equivalent; contractionary monetary policy; end-of-period inflation; price pressure; inflation gap; inflation projection; headline inflation in Brazil; inflation shock; return on equity; inflation from the inflation target; Fiscal stance; Central bank policy rate; Emerging and frontier financial markets; Purchasing power parity; Caribbean; Central America; South America; Global; Asia and Pacific
Cover IMF Working Papers
Delays in Climate Transition Can Increase Financial Tail Risks: A Global Lesson from a Study in Mexico
Mr. Dimitrios Laliotis
and
Sujan Lamichhane
This paper explores a novel forward-looking approach to study the financial stability implications of climate-related transition risks. We develop an integrated micro-macro framework with a new class of scenario called delayed-uncertain pathways. An additional stochastic financial modeling layer via a jump-diffusion process is considered to capture continuously changing risks, as well as the potential of large/sudden shocks in the financial markets. We applied this approach to study transition risks in the Mexican financial sector. But the implications are global in scope, and the framework is easily adaptable to other countries. We quantify the projections of future distributions of various risk metrics and, hence, the evolving tail risks due to compounding effects from delays in transitioning to a low-carbon economy and the consequent uncertainty of the future policy path. We find that the longer the delays in transition, the larger the future tail financial risks, which could be material to the overall system.
Keywords:
Climate change; transition risk; greenhouse gas emissions; financial stability; stress testing; default risk; jump-diffusion; mapping CGE model sector; tail risk; NAICS sector classification; probabilities of default; vulnerability indicator; Credit risk; Global
Cover IMF Staff Country Reports
Mexico: Financial Sector Assessment Program-Detailed Assessment of Observance of Basel Core Principles for Effective Banking Supervision
International Monetary Fund. Monetary and Capital Markets Department
This paper presents Detailed Assessment of Observance of the Basel Core Principles for Effective Banking Supervision for the Mexico Financial Sector Assessment Program. The mandate of National Banking and Securities Commission (CNBV) is to supervise and regulate, within its remit, the entities that make up the Mexican financial system, as described in the Law of Credit Institutions and other relevant laws concerning financial institutions. Mexico chose to be assessed and graded against Essential Criteria only. The standards were evaluated in the context of Mexico’s financial system’s sophistication and complexity. The assessment focuses on the supervision of private banks. The report highlights that the level of capitalization and the liquidity position of commercial banks is robust and have improved recently. CNBV adopted a number of regulatory measures related to coronavirus disease 2019. Credit to the private sector is recovering slowly and has not yet reached pre-pandemic levels, albeit not homogeneously. The strongest demand is from households, mainly consumer credit and housing, whereas credit to firms continues to drop.
Keywords:
IMF-World Bank Financial Sector Assessment Program; Banco de México; Constitución Política de los Estados Unidos Mexicanos; banking Stability Committee; Comisión Nacional; y de Valores; Credit risk; Market risk; Credit; Internal audit; Operational risk; Global
Cover IMF Working Papers
Systemwide Liquidity Stress Testing Tool
Ms. Hiroko Oura
Developing a systemic liquidity stress testing tool is challenging due to data constraints and hard-to-model behavioral factors. There has yet to be a uniformly accepted model partly because the nature of systemic liquidity risks differs significantly across countries. This paper offers a simple Excel-based tool to assess the high-level impact of aggregate liquidity stress on the whole economy and gauge its spillover across banks, non-bank financial institutions (NBFIs), and non-financial economic sectors. It primarily uses the balance sheet approach (BSA) data—a sector-aggregate matrix of financial exposure by counterpart—that have become increasingly available for various economies with all income levels. The results can identify systemically important financial linkages to be analyzed further and help calibrate macroprudential measures and a liquidity support framework. When liquidity stress stems from capital outflows, the tool can enrich policy discussion based on integrated policy framework (IPF) and international reserve adequacy perspectives.
Keywords:
Systemic liquidity; NBFIs; stress test; integrated policy framework; capital flow; international reserve adequacy; interconnectedness; balance sheet approach; macroprudential policy; financial stability; central bank FX liquidity buffer; cashflow liquidity stress test; liquidity support framework; systemwide liquidity risk; central bank liquidity provision; Liquidity; Liquidity stress testing; International reserves; Stress testing; Global