What FSAPs do
The FSAP was created to help identify the strengths and vulnerabilities of a country’s financial system, determine how key sources of risk are being managed, ascertain the sector’s developmental and technical assistance needs, and help prioritize policy responses. The FSAP relies heavily on the expert support of about 50 cooperating official institutions—central banks, regulatory and supervisory agencies, standard-setting bodies, and multilateral development banks. This support has been particularly useful in the program’s peer assessment of how well countries are adhering to financial sector standards and codes, although it has also been valuable in various areas of central bank operations. The IMF and the World Bank have been working closely with the stan-dard-setting bodies and with the standards’ assessors who have participated in the FSAP to improve the quality of assessments and develop and refine assessment methodologies. As background for the recent discussions, the participants were briefed on the latest developments in these areas.
Can they be improved?
The FSAP is basically well designed and is achieving its objectives, the participants agreed. Representatives from developing and emerging market countries noted that the FSAP helped them to identify and prioritize reforms and also to focus attention domestically on the need for ongoing reforms in their financial sectors. Industrial country representatives emphasized the benefits of undergoing a comprehensive review of stability issues with an objective and expert counterpart team. Many industrial and developing countries have a particular interest in this aspect of the FSAP because it gives them a third-party assessment of where they stand relative to international best practices regarding financial system transparency, regulation, and supervision. There was also a consensus that the simultaneous review of financial subsectors and of financial sector regulatory and supervisory agencies helped national authorities focus on cross-sectoral links and similarities more than they otherwise might.
Although a comprehensive assessment under the FSAP is time consuming and resource intensive—FSAP teams tend to be large, and the assessments typically involve two country visits and extensive preparation by the assessment teams and country authorities—the process has been refined over time and has become both more consistent across countries and more efficient. While countries felt that the advantages of a more comprehensive assessment offset the burden involved, several participants felt that further improvements could be made. Most participants favored spreading the FSAP work over stages but agreed that, in all cases, discussions of the scope and coverage of the FSAP and the provision of questionnaires and so on should start well in advance.
There was an active discussion of ways to gain greater value from the analytical tools used in the FSAP, particularly stress testing, financial soundness indicators, and assessments of financial sector standards. The participants strongly supported further research and development in these areas, including in identifying the links between the macroeconomy and the financial sector. In particular, they debated stress testing—an evolving area of analysis that entails examining the resiliency of financial institutions to large but plausible shocks (for example, changes in exchange rates, interest rates, or asset prices). For each country, a wide range of possible approaches to stress testing needs to be considered, as data quality and availability vary significantly. In some cases, national authorities or financial institutions have only limited familiarity with stress testing and wish to take advantage of the FSAP to gain more experience. Participants agreed that, before tests are conducted, detailed discussions between a country’s authorities and the FSAP teams would generally help ensure that the most appropriate approaches and test scenarios are used.
Participants also shared the view that assessing how well countries observe financial sector standards plays a critical role in the FSAP process, both in evaluating financial system stability and in identifying developmental priorities and gaps in implementation. That dual role highlights the close relationship between immediate stability considerations and more medium-term development issues and thus underscores the advantages of having the IMF and the World Bank undertake the FSAP jointly.
Were there significant gaps in the coverage of the FSAP? Some participants thought the emphasis on current stability issues was appropriate and essential but that, in some countries, the FSAP should pay more attention to either gaps in the legal and institutional infrastructure that may be impeding financial system deepening or to factors that may be limiting access to credit. Most participants felt that stability and development were intertwined.
Publishing the results
After participating in the FSAP, countries have the choice of publishing any or all of a number of documents: the Financial System Stability Assessment, which the IMF staff prepares and presents to the IMF’s Executive Board and which identifies surveillance issues; the Financial Sector Assessment, which the Bank staff prepares and which focuses on development issues; and the summary assessments of financial sector standards called Reports on Standards and Codes, prepared as part of the FSAP.
A number of countries have chosen to publish some or all of these documents, agreeing to have them posted on the IMF and the World Bank web-sites (see http://www.imf.org/external/np/fsap/fsap.asp). There was a clear concern that the contents of the documents should be current at the time of publication. Because changes in financial systems and regulation can be rapid, especially in emerging markets, it is critically important that the lags between undertaking the FSAP mission work and finalizing the findings be kept to a minimum.
What happens after an FSAP?
Another topic of particular interest was how the FSAP could best support the ongoing work of national authorities, as well as of the IMF—which conducts FSAPs during annual country checkups—and the World Bank. In the process of undergoing an FSAP, a country amasses extensive information about its financial system, its strengths and vulnerabilities, and its ties to the macroeconomy. Participants agreed that it would be desirable to keep this information updated to reflect changing circumstances and ongoing reforms.
While some participants favored reassessments more frequently than every 5 or 6 years—as is implied by the current rate of 24 a year—resource constraints limit the extent to which this can be done. Mechanisms to complement full FSAPs must therefore be found. Participants generally supported the idea of updating their information in the context of the IMF’s bilateral surveillance, which is an ongoing process. A range of detailed follow-up and updating could be performed in the context of technical assistance missions by both the IMF and the World Bank. In countries where significant changes had occurred, making an in-depth review necessary, small focused FSAP-update missions might be required.
Representatives from Croatia, the Czech Republic, the Dominican Republic, Finland, Gabon, Georgia, Iceland, Latvia, Mexico, Senegal, Slovenia, Tunisia, and Uganda participated in the recently concluded outreach meeting, which was part of an ongoing effort to learn from country experiences. In October 2000, a similar meeting was held, which fed into the previous review of FSAP experience by the Boards of the IMF and the World Bank.
The other countries whose financial systems have been, or are currently being, assessed under the FSAP are Armenia, Bulgaria, Cameroon, Canada, Colombia, Costa Rica, Croatia, El Salvador, Estonia, Ghana, Guatemala, Hungary, India, the Islamic Republic of Iran, Ireland, Israel, Kazakhstan, Korea, Lebanon, Lithuania, Luxembourg, Morocco, Nigeria, Peru, the Philippines, Poland, South Africa, Sri Lanka, Sweden, Switzerland, the United Arab Emirates, the United Kingdom, Uruguay, and Yemen.
Assessments are under way or are being planned for the near future for industrial economies (Switzerland and the United Kingdom), transition economies (the Kyrgyz Republic and Ukraine), emerging market economies (Brazil), developing countries (Bangladesh and Zambia), and international financial centers (Hong Kong SAR and Singapore). The FSAP will continue to be refined as diverse economies undergo assessments.