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Policy: New tools to help gauge financial soundness

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
February 2005
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Statistical coordinators and compilers from about sixty countries met late last year in Washington, D.C., to launch a Coordinated Compilation Exercise that is intended to catalyze the collection of cross-country comparable Financial Soundness Indicators (FSIs). These indicators, which assess weaknesses and strengths in countries’ financial systems, alert national authorities to potential threats and help the international community and the IMF safeguard the stability of the international financial system.

After the Asian and other financial crises of the late 1990s, it was clear the world needed new tools to detect vulnerabilities in financial systems. The IMF developed a broad set of indicators and analytical techniques under the general rubric of “macroprudential analysis.” FSIs are a part of this new tool kit. This set of core and encouraged indicators, developed in cooperation with experts and with inputs from countries, is designed to evaluate the health of a country’s entire financial system, in contrast to bank prudential indicators, which help gauge the well-being of individual institutions.

Once the set of indicators was agreed upon, however, there was still the matter of how the IMF could help countries develop their capacity to compile these indicators, and what the IMF could do to promote cross-country comparability of FSIs, coordinate the compilation efforts of national authorities, and disseminate the FSIs to increase transparency and strengthen market discipline. All of these tasks fell to a Coordinated Compilation Exercise endorsed by the IMF’s Executive Board.

A first step was the preparation of a Compilation Guide on Financial Soundness Indicators by IMF staff, which reflected the consensus of experts as well as the comments of the public. The Guide sets definitions and provides guidance on how indicators should be compiled and disseminated. It discusses in detail the set of 12 core indicators, which cover the banking sector. Also discussed are the 27 encouraged indicators for the banking and other sectors. The practicality and relevance of these encouraged indicators, the Guide acknowledges, may vary across countries.

Once the Guide was finalized, the IMF’s Executive Board recommended that a Coordinated Compilation Exercise be undertaken in support of country compilation efforts. The exercise was conceived as a pilot project that would involve some 60 member countries of the IMF. Participation, which was by invitation and voluntary, entailed a commitment to compiling and submitting to the IMF at least the core set of indicators for year-end 2005 data.

Participating countries were encouraged to use the Guide’s recommendations as far as possible in compiling their indicators, as this would contribute to greater cross-country comparability. But flexibility was built in, too, with countries permitted to use existing methodologies. Given this flexibility, the exercise will also prepare “metadata”—that is, textual descriptions of the methodology and compilation practices actually used in compiling the FSIs (and which may differ from those recommended in the Guide). The IMF will publish the data and metadata on FSIs in one release by end-2006.

With the broad goals of the exercise in place, the IMF’s Statistics Department convened a meeting in Washington, D.C., on November 18-19, 2004, to give participants the opportunity to discuss and finalize the specific terms of reference for the exercise. Participating countries also gave feedback to IMF staff on the draft report forms that will be used by their countries to disseminate FSI data and metadata. The results of a staff survey of current FSI compilation practices served as the starting point for the exercise.

The meeting also provided participants with the opportunity to benefit from each others’ views and experiences. One issue that featured prominently was the trade-off between flexibility in using national practices in the compilation of FSIs and the potential gains from producing cross-country comparable FSIs on the basis of the Guide.

By end-March 2005, countries will send the IMF an interim progress report, including the first draft of FSI metadata using the standard report form. In addition to continuous consultation by correspondence, regional meetings will be held in mid-2005 and mid-2006. The regional meetings in 2005 will focus on further progress under countries’ work programs, while the regional meetings planned in 2006 will discuss the penultimate draft FSI metadata and preliminary FSI data.

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