IEO Annual Report 2005-06
Chapter

Appendix 13 Evaluation of the Financial Sector Assessment Program: Recommendations, Board Response, and Subsequent Follow-Up

Author(s):
International Monetary Fund. Independent Evaluation Office
Published Date:
January 2007
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IEO RecommendationExecutive Board Response1Follow-Up2
Incentives for participation, clarifying priorities, and strengthening the links with surveillance
Recommendation 1. The IMF Board and management should refine the criteria for setting priorities on IMF resource inputs into financial sector surveillance, including the FSAP. Based on these priorities, IMF staff should indicate, as part of its medium-term planning, what components are needed for strengthening financial sector surveillance in each country, drawing upon a range of possible modalities. These strategies would form the basis for more explicit accountability on results.While some did not see sufficient evidence that current mechanisms are inadequate, many Directors agreed on the need for clearer guidance—including on the trade-off between assessments of vulnerability and development issues—as part of a medium-term strategy aimed at efficient resource allocation in line with the IMF’s core mandate.Consideration is being given to the three pillars of recommendations in the context of ongoing work on the Medium-Term Strategy (MTS) and a task force on integration of regular and financial sector surveillance.
The country prioritization process has been strengthened by distinguishing more clearly between the intrinsic country priorities—in a program that over time should cover all countries—and the likely work program that is affected by authorities’ willingness to participate.
On a region-wide basis, FSAP prioritization is carried out every six months through consultations between MCM and area departments and through the FSLC.
The modalities of financial sector surveillance in individual countries, including an initial assessment or FSAP update, are assessed in Article IV briefing papers and staff reports, and other country-specific discussions between MCM and area departments.
Recommendation 2. To strengthen incentives and drawing upon these country-specific plans, IMF management should clearly signal to the Board those countries that it sees as the highest priorities for FSAPs and updates, irrespective of whether these countries have volunteered. These lists should be the basis for periodic discussions by the Board of country-specific priorities.Most Directors agreed with the IEO proposal that, to better align FSAP coverage with the needs of surveillance, management should indicate to the Board which countries it considers the highest priorities for FSAP assessments and updates. Annual reporting on participation could provide useful information to guide discussion of priorities.The IMF-Bank FSLC has already identified countries that should be given the highest priority under the FSAP, following the general criteria approved by the IMF and Bank Boards and based on inputs from staff of both institutions.
Staff plan to use a two-pronged approach, using (1) the regular Article IV process to signal a need for intensified financial sector surveillance and to indicate the need to explicitly recommend in the Article IV report an initial FSAP or FSAP update in priority cases, and (2) providing more frequent information on FSAP participation.
Staff plan to use the annual report on FSAP participation (introduced in the 2005 Board review of the FSAP) to provide the Executive Board with overall information on program coverage, including information on the relative size of systems covered and not covered. The first such report was sent to management and the Board in June 2006.
Recommendation 3. Strengthen the links between the FSAP and surveillance by mainstreaming FSAPs and follow-up work into regular surveillance activities.Directors concurred with the recommendation to strengthen links between FSAPs and surveillance. They underscored the need to follow up on key vulnerabilities and gaps and integrate such issues into Article IV surveillance reports. Directors stressed that in cases where financial stability issues, including any potential global repercussions, are judged to be of high importance, they should be a major focus of Article IV consultations.Following the MTS, area departments are to identify a senior staff member who will be responsible for the department’s financial sector surveillance and coordination of the financial sector surveillance work program with MCM. Financial sector surveillance training will be provided to staff at all levels as needed.
Moreover, the introduction (by the MTS) of country-specific three-year surveillance agendas should help ensure adequate follow-through of financial sector surveillance priorities.
A Financial Sector Steering Group including representatives of area and relevant functional departments has been set up by the Managing Director to ensure high-level coordination of the work of all departments involved in financial sector surveillance. Separately, an ad hoc internal Financial Sector Task Force is preparing specific recommendations on how to integrate the analysis of financial sector issues into bilateral surveillance.
The internal review process of FSAP-related documents and Article IV reports is being strengthened to ensure that the Executive Summary summarizes the main macro-relevant findings using candid language, the FSSAs clearly highlight and summarize macro-relevant findings, and that these findings are adequately reflected and incorporated in the analysis of the Article IV report.
Improving the quality and impact of the FSAP and organizational changes
Recommendation 4. Implement steps to improve further the quality of the FSAP and strengthen its impact.Directors encouraged the staff to follow up on IEO recommendations to improve further the quality of FSAPs and strengthen their impact. They noted that recommendations should be clearly prioritized and the potential consequences candidly discussed. Directors emphasized in particular the importance of treating financial sector and cross-border linkages more systematically in FSAP analysis.FSAP procedures are being revised to stress that (1) recommendations need to be candidly discussed and clearly prioritized, given the authorities’ capacity constraints and (2) missions should cover all major risks, including those that may be politically sensitive. In cases where adequate data are lacking, potential major risks should nevertheless be explicitly identified and limitations transparently discussed. The revised procedures will also stress the need to have more informative and candid discussions on methodological and data limitations in FSSAs.
Staff is developing the stress testing methodology and establishing “minimum standards” for stress tests, to ensure that stress test methodologies are applied more consistently across countries.
Work on regional financial sector assessments and cross-border issues has been stepped up and off-shore financial center reports are now expected to include a section on cross-border cooperation and information exchange.
A program is being initiated to improve standards assessments, including the establishment of a core set of experienced assessors; the role of cooperating institutions and standard setters; and the review process and quality control. An internal review was conducted to evaluate assessments of the Basel Core Principles, International Organization of Securities Commissions (IOSCO), and International Association of Insurance Supervisors in order to improve the quality and consistency of the assessments. Staff will participate in a December 2006 IOSCO meeting to improve standards assessments.
Regular courses and seminars are offered to IMF staff on the use of financial sector indicators, stress testing, and relevant financial sector issues to enhance practical experience and expertise.
Recommendation 5. Introduce changes in the organization of IMF mission activities to utilize scarce financial sector technical expertise (especially in MFD and ICM) more effectively in the surveillance process.Many Directors welcomed the IEO’s recommendation to introduce changes in the organization of IMF mission activities to utilize more effectively scarce financial sector expertise within the IMF. Directors noted that this will be considered in the broader context of improving financial sector surveillance, as part of the medium-term strategic review.The modalities to do this are being assessed as part of the MTS and also in the assessment of the pilot project on financial sector surveillance.
Joint IMF–World Bank Nature of the FSAP
Recommendation 6. Maintain the current joint approach, but clarify further the distinctive contributions the IMF and Bank can make, with the IMF taking the lead where significant domestic or global stability issues are present, and the Bank taking the lead where financial sector development issues are more paramount. Such clarity should include a clear delineation of primary responsibilities for setting priorities (and contributing resources).Directors were in broad agreement with the recommendations regarding Bank-IMF collaboration. They concurred that the current joint approach, including the central role for the Bank-IMF FSLC, should be maintained. At the same time, further efforts should be made to take full advantage of the distinctive contributions that the two institutions can make—with the IMF focusing on stability issues and the Bank on financial sector development and institution building.The delineation of responsibilities between the Bank and the IMF will be addressed more fully by the Bank-IMF Collaboration Task Force. Staff will step up its efforts to ensure at the scoping stage that the Bank indeed takes the lead regarding financial sector development issues.
Recommendation 7. The IMF, in conjunction with the World Bank and other technical assistance providers, should seek to establish a clearer framework for coordinating follow-up capacity-building technical assistance activities, based on the country’s own action plans.Directors concurred that there is room to improve the coordination of FSAP-related technical assistance activities, based on the country’s own action plan. At the same time, Directors cautioned against overburdening the FSAP with additional expectations regarding the technical assistance needs.Staff has organized post-FSAP TA meetings in some recent cases. Staff will include in the transmittal letter for the FSAP package, when appropriate, a suggestion that a follow-up meeting or “providers forum” on TA be organized. The decision on whether to include such a suggestion will be based on discussion with the area departments and the World Bank, and following the Board’s guidance not to overburden the FSAP with additional expectations and excessively formal approaches to follow-up.

This column summarizes the reaction of the Executive Board on each recommendation as reported in the Summing Up by the Chair. Although care has been taken to ensure accuracy, readers are invited to refer to the full text of the summary of the discussion, which is included in the published version of the report and can be accessed from the IEO website (www.imf.org/External/NP/ieo/2006/fsap/eng/index.htm).

The description of follow-up is intended to provide a factual indication of any additional steps taken since the Board discussion. It is not intended to be an evaluation of any follow-up by management or the Board.

This column summarizes the reaction of the Executive Board on each recommendation as reported in the Summing Up by the Chair. Although care has been taken to ensure accuracy, readers are invited to refer to the full text of the summary of the discussion, which is included in the published version of the report and can be accessed from the IEO website (www.imf.org/External/NP/ieo/2006/fsap/eng/index.htm).

The description of follow-up is intended to provide a factual indication of any additional steps taken since the Board discussion. It is not intended to be an evaluation of any follow-up by management or the Board.

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