Integrating Financial Sector Issues and FSAP Assessments into Surveillance - Progress Report

Improving the quality of the Fund’s financial sector analysis and integrating it with surveillance is a major undertaking that involves action on several fronts. The 2007 Financial Sector Taskforce Report (“Taskforce Report”) provided a comprehensive assessment of the status of financial sector analysis in the Fund and established a broad organizing framework on how to integrate better finance into Article IV surveillance. The 2008 Triennial Surveillance Review (TSR) and supplements developed this theme further, and the Board’s ensuing Statement on Surveillance Priorities made the integration of macroeconomic and financial sector surveillance one of the four overarching operational priorities for Fund surveillance.


Improving the quality of the Fund’s financial sector analysis and integrating it with surveillance is a major undertaking that involves action on several fronts. The 2007 Financial Sector Taskforce Report (“Taskforce Report”) provided a comprehensive assessment of the status of financial sector analysis in the Fund and established a broad organizing framework on how to integrate better finance into Article IV surveillance. The 2008 Triennial Surveillance Review (TSR) and supplements developed this theme further, and the Board’s ensuing Statement on Surveillance Priorities made the integration of macroeconomic and financial sector surveillance one of the four overarching operational priorities for Fund surveillance.

I. Introduction

1 Improving the quality of the Fund’s financial sector analysis and integrating it with surveillance is a major undertaking that involves action on several fronts The 2007 Financial Sector Taskforce Report (“Taskforce Report”) provided a comprehensive assessment of the status of financial sector analysis in the Fund and established a broad organizing framework on how to integrate better finance into Article IV surveillance.* The 2008 Triennial Surveillance Review (TSR) and supplements) developed this theme further, and the Board’s ensuing Statement on Surveillance Priorities made the integration of macroeconomic and financial sector surveillance one of the four overarching operational priorities for Fund surveillance.

2 Carrying out this agenda involves efforts at several levels At the conceptual level, these are aimed at enhancing the Fund’s methodological toolkit. At the operational level, they involve adaptations of the existing surveillance instruments to improve the coverage of the financial sector and its linkages with the real economy, as well as organizational changes to enhance the delivery of financial sector expertise. Human resource management is also being refocused in an effort to strengthen the financial sector expertise of the institution. These efforts are taking place in the context of a more stringent budget environment, which entails difficult tradeoffs for the allocation of financial sector expert resources between bilateral surveillance, multilateral surveillance, and capacity building.

3 At the same time, the environment in which the Fund is conducting its financial sector surveillance is changing rapidly, creating new challenges The financial crisis has pushed macro-financial sector issues into center stage in IMF surveillance and program work, straining its financial sector expert resources. It underscored the importance of linkages across markets, sectors, and national borders. It spotlighted the need to expand financial sector analysis beyond the traditional core areas of banking stability and regulation and central bank operations.1 And it revealed the need for closer collaboration with standard setters and international organizations, such as the Financial Stability Forum (FSF), and prompted calls for strengthening further the Fund’s role in early warning and crisis prevention.2

4 This paper reviews the key challenges in integrating financial sector issues into surveillance and of the work underway to address them It does not make specific policy proposals, but is intended mainly to provide the basis for an early, informal Board discussion of key issues and priorities. The TSR, which already provided extensive analysis and outlined the overall framework for addressing financial sector issues in surveillance, is the main point of reference for the discussion in this paper. Moreover, most of the initiatives to improve financial sector surveillance and respond to the financial crisis are still evolving: several of them are presented in separate, more detailed papers,3 while others, such as the Financial Sector Assessment Program (FSAP) review, are still at their initial stage. This paper should thus be seen as an overview of the key issues and the various strands of work underway.

II. Filling The Gaps: What Is Being Done To Strengthen Financial Sector Surveillance

5. The Taskforce Report and the TSR identified three major areas for improvement in financial sector surveillance:

  • closing the gaps between multilateral and bilateral surveillance by introducing greater cross-country perspective in Article IV consultations and by improving the analysis of regional, thematic, and market issues;

  • improving the degree of coverage and the quality of analysis of financial sector issues in Article IV consultations, including by strengthening the integration of FSAP assessments into surveillance; and

  • strengthening the analytical framework and toolkit for studying macro-financial linkages.

Both reports also recognized that the institution needs to build further financial sector expertise and deploy it strategically.

6 Major initiatives are underway in all three areas Closer collaboration with the FSF and other international fora, as well as the proposed Early Warning Exercise (EWE) and regional/thematic studies, will help bridge the gap between multilateral and bilateral surveillance. There has been a major shift in focus of recent Article IV consultations toward financial sector issues, reflecting in large part the impact of the financial crisis. The forthcoming review of the FSAP provides an opportunity to make the program more flexible and better integrated with surveillance, as called for by the October 2008 International Monetary and Financial Committee (IMFC) Communiqué.** And efforts are underway to strengthen the Fund’s methodological toolkit, disseminate the new tools to staff through training, and build financial sector expertise through recruiting, external assignments, and staff mobility. The following Sections provide a snapshot of these initiatives.

7. At the same time, these initiatives are highlighting a number of key tradeoffs and questions that need to be recognized and resolved. These include developing the right instruments for regional/thematic assessments; finding the right balance—and allocating resources accordingly—between more extensive coverage of financial sector issues in Article IV consultations and the Fund’s other financial sector work (including the FSAP, multilateral surveillance, program work, and capacity building); and adapting the FSAP, which is a joint Bank-Fund program with voluntary country participation, to the exigencies of Fund surveillance. The concluding Section summarizes these issues for further discussion.

A. Enhancing Multilateral and Regional Financial Surveillance and Early Warning Systems, and Bridging the Gap with Bilateral Surveillance

8. The World Economic Outlook (WEO) and the Global Financial Stability Report (GFSR) remain the main vehicles for multilateral surveillance, and the focus of recent issues naturally reflected topics of current concern, notably the financial turmoil and its implications. In these recent issues, the respective overview chapters cross-reference each other more carefully to ensure a consistent global view, and the supporting analytical chapters illustrate a deepened analysis of key aspects of the turmoil. Appendix Table 1 summarizes the topics of the analytical chapters of recent WEOs and GFSRs. The October 2008 GFSR, in particular, provided a preliminary road map for financial sector policy makers on how to exit from the crisis and restore confidence.

9. Closer collaboration with standard setters and other international fora of policy makers, notably the FSF, is gaining in importance. Participation in standing Working Groups and events hosted by these organizations has provided an opportunity for staff to present the Fund’s analysis and contribute to the emerging consensus on lessons learned and implications for policy, regulation, and international standards. It has also provided a platform for intense collaboration between the Fund and those organizations, reflecting calls by the Fund’s governing bodies, as well as the international community. This facet of the Fund’s multilateral work is still evolving. Appendix Table 2 presents a list of international working groups to which staff participates. The modalities of collaboration with the FSF, in particular, were discussed in detail in The Fund’s Response to the 2007–08 Financial Crisis – Stocktaking and Collaboration with the Financial Stability Forum (September, 2008).

10 The key challenge in this area remains to bridge the gap between multilateral activities and bilateral surveillance. The TSR found that bilateral surveillance is not sufficiently informed by either cross-border considerations or lessons derived by cross-country work. This gap, of course, is not limited to financial sector issues; but the rapid financial globalization of recent years, highlighted by cross-border contagion during the recent crisis, underscores the importance of these issues for Fund surveillance. As the TSR noted, bridging this gap has several dimensions:

  • ensuring that the findings of WEO and GFSR, as well as those emerging from joint work with the FSF and other international fora, are leveraged in bilateral consultations;

  • improving access to cross-country knowledge and informing bilateral consultation discussions with cross-country perspectives; and developing regional/thematic surveillance initiatives and instruments.

11 An initiative that can help bridge this gap is the Early Warning Exercise currently under preparation. The joint IMF-FSF EWE aims at identifying emerging pressures in the global economic and financial system and ranking them. As well, the EWE will attempt to outline options for policy makers to mitigate these risks. Tools and indicators used in this exercise will focus extensively on financial linkages and analyze not only global risks, but also sectoral vulnerabilities, cross-border distress dependencies, and spillovers across markets. The Surveillance Committee and Management would finalize the prioritization and the Board would discuss it at an informal session, following which the results would be disseminated to the IMFC, Development Committee, G7/G20, and other policy makers. Area Department participation in the process would ensure that the results reflect, as well as inform, Article IV consultations.

12 Appropriate instruments need to be developed for conducting regional/thematic assessments with a financial sector focus. Article IV consultations and FSAPs have so far predominantly been vehicles for bilateral assessments, with few exceptions (notably the Euro area for Article IV consultations and cases of currency unions with regional supervisory arrangements, like the West African Economic and Monetary Union, for the FSAP). There is need, however, for financial sector work with a cross-country perspective. The 2007 review of Nordic-Baltic supervisory and regulatory frameworks provides a useful model. But one could also envisage more focused, multi-country thematic studies, concentrating on issues common to several countries, rather than regions. A natural starting point for such assessments would be issues highlighted by the recent crisis, such as cross-border and cross-functional supervision and crisis management frameworks, or issues identified in the EWE. Regional/thematic assessments would permit staff to experiment in the space between bilateral and multilateral surveillance and “connect the dots” observed bilaterally or from broader market developments.

13 Several other initiatives have the potential of bringing multilateral and crosscountry perspectives into bilateral surveillance

  • Staff continues to work on drawing and disseminating lessons from the crisis In June 2008, following the report to the IMFC on preliminary lessons from the crisis, MCM issued detailed operational guidance to Article IV and FSAP mission teams. Continuing this work, MCM internal working groups have been constituted to study more deeply the gaps that contributed to the crisis and derive policy recommendations in the areas of cross-border/cross-functional regulation, the perimeter of regulation, procyclicality in accounting and prudential frameworks, leverage, and systemic liquidity management. Separately, MCM and the Legal Department (LEG) are studying crisis management and bank resolution frameworks, while another strand of analytical work has focused on learning from the experience of major central banks’ efforts to restore the smooth functioning of money markets.

  • Staff is expanding the coverage of financial sector issues in Regional Economic Outlooks and other regional activities. Regional Economic Outlooks (REOs) are becoming more sophisticated in their analysis of financial linkages and potential spillovers. New, flexible forms of engagement at the regional level (seminars, ad hoc meetings) have been deployed in the aftermath of the financial turmoil to supplement and enrich bilateral surveillance. Appendix Table 3 presents a sample of recent financial sector themes in REOs and regional surveillance activities.

B. Improving Financial Sector Analysis in Bilateral Surveillance

14 The drive to improve bilateral financial sector surveillance within existing budget constraints implies tradeoffs between the various instruments at the Fund’s disposal The Article IV consultation is the main vehicle for all bilateral surveillance, but it receives critical support from the FSAP, which provides a more in-depth, but much less frequent, assessment of financial stability. At the same time, the TSR found—and recent experience confirms—that the quality of financial sector coverage in Article IV consultations depends importantly on the availability of expert resources to participate in Article IV missions. These expert resources currently reside mainly in MCM, and there are tradeoffs between their deployment for Article IV support, FSAP assessments, as well as support of Fund programs, capacity-building, multilateral surveillance, and methodological development.

15 Effective financial sector surveillance also requires difficult choices as regards allocation of resources across countries. Given resource constraints, the TSR stressed the need to “deploy financial sector expertise strategically, using a risk-based approach, and prioritizing according to the criteria of systemic or regional importance, importance of vulnerabilities, and importance of financial development issues for present or prospective macroeconomic or external stability.” This is relatively straightforward for financial sector expert resources allocated to Article IV consultations. Participation in the FSAP, however, is voluntary for member countries: in this sense, the FSAP is akin to technical assistance. Therefore, although a majority of members has undergone assessments (Appendix Table 4 and Figures 13), the Fund is not always able to direct FSAP resources where the needs are most urgent. In addition, although there is no obligation for the Fund and the Bank to provide an FSAP assessment to any member that requests it, both institutions try in practice to respond positively to all requests (although possibly with delay), which further limits the scope to focus resources on high-priority cases.

Figure 1.
Figure 1.

Number of Assessments, FY00-FY10 1/

Citation: Policy Papers 2009, 004; 10.5089/9781498336390.007.A001

1/ Numbers for FY09 reflect initiated assessments and updates as of end-November 2008, and requests planned for the remainder of the fiscal year. Numbers for FY10 reflect the remaining requests to date. The pipeline of requests for FY10 is expected to fill up further over time.
Figure 2.
Figure 2.

Coverage by Assessments, FY00-FY10 1/2/

Citation: Policy Papers 2009, 004; 10.5089/9781498336390.007.A001

1/ The numbers include member countries covered by regional FSAPs. Countries covered both by an individual FSAP and a regional FSAP, or by two updates, are counted in the year of the first assessment.2/ The numbers for FY09 reflect the FY08 total plus completed, ongoing assessments and updates and requests planned for FY09. The numbers for FY10 reflect the FY09 total plus requests planned for FY10.
Figure 3.
Figure 3.

FSAP Coverage

Citation: Policy Papers 2009, 004; 10.5089/9781498336390.007.A001

Article IV consultations

16. Financial sector issues have become more central to Article IV consultations, in part reflecting the recent focus on the financial turmoil. Progress in this area was documented in the TSR, and further background is contained in Appendix Table 5, which lists the actual financial sector topics on which the most recent Article IV consultations have focused. Not surprisingly, these were dominated by issues related to the financial turmoil, such as the vulnerability of domestic banking systems to contagion, risks emanating from housing credit and new financial instruments, financial safety nets and crisis management frameworks, and central bank liquidity management. This focus was even more prominent in cases where Article IV consultations were combined with FSAPs.

17. Financial sector analysis in Article IV consultations will be further supported by the Financial Sector Guidance Note for staff, currently under preparation by MCM and the Strategy. Policy. and Review Department (SPR). This Guidance Note will help codify standards and expectations regarding the depth and breadth of analysis of financial sector issues in bilateral surveillance, while at the same time providing operational guidance to staff in key areas. This resource would both enhance the quality and evenness of analysis and make it easier for Article IV consultation teams to bring cross-country perspectives on financial sector issues to bear in consultation discussions.

18. Nevertheless, obstacles to boosting financial sector coverage remain and, in some cases, have become more acute. While progress continues to be made in improving the analytical toolkit available to staff,4 an organizing framework for more systematic macro-financial surveillance, including the analysis of macro-financial linkages, is still not well-established. And while MCM has continued to provide both analytical support and staff resources to Article IV consultation missions, its contribution in this area was cut in the context of the recent restructuring of the Fund.

19. Further progress in this area will inevitably be gradual and, at least in the short run, conditional on resource availability. Section C highlights a number of initiatives aimed at enhancing the toolkit for analyzing financial sector issues and spreading financial sector expertise more widely through staff recruiting, mobility, and training. These initiatives, however, will generate benefits gradually, by enabling Area Department staff to play a greater role in financial sector work. At least in the near term, the prospects for bringing financial sector issues to the core of bilateral surveillance will continue to be determined to a large extent by the availability of specialized staff resources for participation in Article IV consultation missions.


20 Since its inception a decade ago, the FSAP has achieved significant success As noted above, its contribution to raising the quality of financial sector analysis in Article IV consultations has been considerable. It has an established “brand name” as a comprehensive assessment of both stability and developmental needs of the financial sector. The involvement of the Bank in non-industrial countries helps ensure consistent advice and allows the Fund to leverage its limited resources. Moreover, with the increasing shift to updates, the resource cost of the program has been contained, and the recent crisis has illustrated the scope for the focus of assessments to respond to emerging priorities (Box 1).

The Focus of Recent FSAPs

In the last 18 months, 35 FSAP assessments were initiated, of which 25 were updates (not including the FSAP updates in the Crown Dependencies of the U.K.). In almost all cases, the focus of the assessments—and of the Article IV consultation that followed—was influenced by the turmoil.

  • In the three advanced economies that underwent assessments during this period (Canada, Austria, and Iceland), the focus was predominantly on evaluating the risks of exposure to U.S. subprime-related products or, more broadly, the risks from external contagion through, e.g., a sharp rise in finding costs; as well as cross-border coordination and—particularly in the case of Iceland—crisis management and problem bank resolution.

  • FSAP assessments in emerging market countries focused on assessing resilience to a range of possible shocks that could be triggered as a consequence of the unfolding crisis. Given the large external funding needs of some of these countries, particular attention was paid to stress-testing “sudden stop” scenarios. Particular emphasis was placed on crisis management frameworks and, in countries where foreign banks predominate, attention was given to assessing cross-border cooperation arrangements among host and home country supervisors.

21 However, the FSAP also has limitations as a surveillance instrument Its voluntary nature constrains the scope for prioritization. And despite the streamlining of FSAP updates endorsed by the Board in 2005, the combination of joint Bank-Fund missions, the requirement that assessments be relatively comprehensive, and resource constraints at the Fund mean that missions still take long to prepare and are infrequent (the gap between updates is 5–7 years).

22 Nevertheless, the FSAP—appropriately reshaped—should continue to be a key element of the strategy for integrating financial sector work into surveillance Its comprehensiveness would be difficult to duplicate in Article IV consultations, and its brand name carries considerable value, both for the Fund and for members. But there is scope for the FSAP to make a bigger contribution to integrated financial sector surveillance. Recognizing this, the October 2008 IMFC Communiqué called for “a reshaped FSAP that is more flexible, better integrated with the Fund’s core surveillance mandate, and embraces regional perspectives.”

23 Discussions among Bank and Fund staff on this reshaping are ongoing in the context of the forthcoming FSAP review, but three proposals warrant consideration

  • “Modular” FSAPs. Currently, FSAP assessments are supposed to be comprehensive, covering both stability and developmental issues. When circumstances call for—and the authorities request—a more flexible approach, a modular model would provide the option for the Fund and the Bank to launch separate, stand-alone stability and developmental assessment modules, respectively. Individual modules would not be substitutes for a “complete” assessment, but could be conducted separately or together. Existing mechanisms of institutional coordination, notably the Financial Sector Liaison Committee, would continue to ensure the joint nature of the program, including with regard to country prioritization, consistency of advice, and effective synergies. This approach would help the program become more responsive to circumstances: both in-depth and comprehensive, as well as quicker and more focused assessments would be possible, depending on country need (and demand), as well as institutional priorities. It would also strengthen accountability along each institution’s mandate and comparative advantage, and permit the Fund to mold the stability modules more closely to the needs of surveillance and—resources permitting—increase their frequency relative to the current comprehensive FSAPs.

  • Stronger integration of analytical content and offsite monitoring The Bank and the Fund would continue to develop the analytical framework for financial sector assessments, focusing on systemic links and dynamics, cross-country benchmarks and indicators, and a more systematic approach to stability and developmental assessments to make these more comparable across countries. They would also develop the capacity for a more continuous offsite monitoring to bridge the information gap between assessments, subject to resource constraints. These efforts would enhance the integration of both institutions’ policy advice, both within and across countries.

  • Risk-based ROSCs. Currently, ROSCs—be they initial assessments or updates—must be based on a comprehensive detailed assessment of all principles. In recent years, financial standards and assessment methodologies have become more complex while FSAPs have been resource-constrained. As a result, the number of ROSCs has dropped from five per initial FSAP in FY2002 to about two in FY2007 (and to less than one in FSAP updates). Instead, staff is producing technical notes on selected principles (usually those with which the authorities were less than fully compliant in earlier assessments). This is arguably less transparent (technical notes are not, as a rule, issued to the Board) and less effective (full ROSCs have been found to spur authorities to take remedial action). The proposal thus would be to modify the existing requirement so that, following the initial comprehensive assessment, staff could undertake either a full or a partial ROSC update.5 The principles selected for a partial reassessment would be determined in advance of the mission on the basis of key risks and vulnerabilities (“risk-based”), with appropriate safeguards against “cherry-picking.” This proposal would help streamline the FSAP and improve the transparency of standards assessments.

24. These proposals also have caveats. The modular approach, if taken too far, risks diluting the quality of FSAP assessments. The frequency of updates, modular or otherwise, would continue to be ultimately determined by the resource constraint. And even if these proposals are implemented in full, so long as the FSAP continues to be voluntary, seamless integration into the Fund’s surveillance would remain elusive.

25 In the absence of these—or similar—reforms to the FSAP, the alternative would be to expand the financial stability work done in the context of Article IV consultations Indeed this is already taking place gradually, as financial sector expertise is being built up in Area Departments. However, a decisive push in this direction could only happen through a substantial increase of MCM resources devoted to Article IV participation or other Area Department mission support. Under the current resource envelope, this could only take place at the expense of other MCM activities, including notably the FSAP, capacity building, and multilateral surveillance. Therefore, reforms to make the FSAP more flexible would not only result in better integration with surveillance but also ensure the continued strength of the program.

C. Improving the Analytical Toolkit and Building Financial Sector Expertise

26 Work in the Research Department (RES) is underway to strengthen the tools that would permit a more rigorous analysis of macro-financial linkages This work can be grouped under four headings (Appendix Table 6 provides a selective list of recent papers and conferences in these areas). The first is an umbrella project on the fundamentals of the various links between the real economy and the financial sector, and the next three cover more specialized topics, each serving the general goal of understanding macro-financial linkages.

  • Fundamentals of macro-financial linkages This project attempts to provide a systematic overview of the links between the financial sector and the real economy; the effect of the financial sector on the conduct of macroeconomic policies; the role of the financial sector in initiating, amplifying, or muting disturbances to the economy; and the potential cross-border spillovers of financial sector developments.

  • Boom-bust cycles in financial and macro variables This work examines the main characteristics of credit booms, the linkages between credit booms and crises, and the optimal policy responses.

  • Implications of financial globalization, in particular the measurement of financial globalization, its impact on economic growth and macroeconomic volatility, and the policies that can best promote the benefits of globalization.

  • Financial system performance and governance Work under this heading is focusing on how competition, foreign bank entry, financial conglomerates, and diversification affect financial sector performance; the relationship between corporate governance and corporate performance; measures of corporate sector vulnerabilities; and the impact of regulation on financial stability.

27 Within MCM, work is underway to develop and apply enhanced methodologies for stress testing and other quantitative analyses of financial sector vulnerabilities The recent financial market turmoil has lent further impetus to this work. Important progress has been made in the following areas, in particular.

  • Credit risk. Stress-testing has built on new approaches to modeling credit portfolio loss distributions more rigorously, so as to better quantify the impact of macroeconomic shocks on banks’ economic capital in the presence of both limited data series and default correlations that vary over the credit cycle.

  • Liquidity risk. Methods to stress-test liquidity risk exposures are increasingly incorporating non-traditional funding liquidity risks (e.g., through securitization), market liquidity risks (e.g., effects of “fire sales”), and off-balance sheet concentration risk (e.g., excessive credit lines extended to a single counterparty).

  • Second-round effects. New models capture more fully the potential importance of correlations between individual financial institutions within a system as a reflection of potential contagion channels or simply similar exposures (e.g., based on banks’ joint probability of default). New contagion models can also capture better the specificities of extreme shock transmission across financial systems.

  • Risk-adjusted balance sheets. The contingent claims approach (CCA) to constructing risk-adjusted balance sheets has also been increasingly used for scenario analysis. In addition, a framework integrating the CCA approach with various aspects of macroeconomic models has been applied in several cases.

  • Summary fragility measures. Some of the methodologies developed for better risk modeling and system level stress testing can also be used to produce summary measures of financial stability on a time series basis.6 As well as being applied to national banking systems, these methods are being applied to analysis of cross-border and cross-sector correlations between groups of institutions, as well as the potential implications of counterparty risk exposures.

28 Several initiatives in the Statistics Department (STA) should also help strengthen financial sector analysis and transparency. Efforts to collect better data for balance sheet analysis (through the Supplementary Report Forms for monetary and financial statistics) are helping to construct a better picture of linkages between the financial and others sectors, and within the financial sector. Also, STA is working to initiate regular collection and dissemination of data of Financial Soundness Indicators (FSIs) for banks, their client sectors, and financial and real estate markets for around 50 IMF member countries in the second quarter of 2009, and to subsequently expand coverage to other member countries. To consolidate this effort, STA is working on the possibility to broadening the SDDS on financial indicators to provide early warning signals and monitoring information to markets and policymakers, which are comparable across countries. Moreover, in order to further help assess macrofinancial risks and systemic vulnerabilities, there is a need to improve the availability, timeliness, and frequency of data, particularly on nonbank financial institutions, and on housing-related statistics, as well as gain a better understanding of credit risk transfers. Further, better information will be needed on the financial operations of large nonfinancial corporates that have significant links in both the national economy, but also potentially across borders as well. To advance this statistical work, assess other data gaps, and leverage resources and expertise, STA is chairing an Inter-Agency Group on Finance Statistics (involving the BIS, the ECB, Eurostat, OECD, the UN, and the World Bank).

29 In addition to developing analytical tools, efforts are also underway to disseminate them more widely to staff, particularly Area Department economists As noted in the TSR, new training programs have been developed by the IMF Institute (INS) and MCM aimed at increasing the staffs familiarity and comfort with financial sector surveillance diagnostic tools and indicators. A key priority in designing these courses has been to make them operationally relevant. In this way, these courses would not only introduce Fund staff to the terminology of finance, but also deepen the dialogue with country authorities and the private sector on financial issues.

  • The course Foundations of Macro-Financial Surveillance presents analytical tools used by practitioners (e.g., risk managers and bank supervisors) to assess financial risks and vulnerabilities. In addition to balance sheet analysis and related financial soundness indicators, the course examines regulatory policy issues and cross-border supervision and cooperation. The analysis of macro-financial linkages stresses how risks can propagate to the real economy and vice versa. The course also examines how to apply such analytical methods to improve the manner in which macroeconomic and financial surveillance is conducted by the Fund.

  • A second course on Extracting Information from Financial Data is targeted toward introducing staff to market indicators from which information on expectations can be extracted for diagnostic and policy design purposes. At the core of the course is the analysis of yield curves, options prices, and spreads. It is expected that market indicators and related analytical tools will increasingly be applied in surveillance work as more staff become familiar with their strengths and limitations.

30 Here too, however, resources are a major constraint Internal staff training is a time-intensive activity for both trainees and trainers. Since these courses are delivered primarily by staff with background and experience in financial systems, they represent a competing claim on these experts’ time with the increasing demand for financial sector work and mission staffing.

31 Recruiting, staff mobility, and external training can help ease this constraint, although these methods take time to deliver results

  • Securing financial sector expertise has been a part of the Fund’s general recruitment drive over several years, but has gained more emphasis recently. The Fund increasingly seeks economists with training and experience in financial economics, financial sector policy, and financial regulation and governance. HRD has advertised internally and externally for financial experts (Economist, December 20, 2008) and is working with departments to identify more accurately the specific skill requirements.

  • Swap arrangements and temporary assignments (TAPs) provide the opportunity for on-the-job training in financial sector issues. However, the uptake has so far been limited (one senior staff on TAP to MCM), largely due to increased work pressures in Area Departments.

  • To facilitate external assignments to the private financial sector, Management lifted restrictions on these types of assignments under leave without pay (LWOP) arrangements.

  • Staff also have the opportunity to enhance their skills/knowledge through a number of programs that support external study.

III. Issues for Discussion

32 This paper raises several issues related to how the Fund can integrate financial sector issues into surveillance and summarizes the work underway to address them The paper offers an overview of the issues and does not make specific policy proposals. These will be presented in follow-up work, including in the context of the forthcoming FSAP review. Directors may wish to indicate their views on the following issues:

  • Especially in light of the financial crisis, has the focus and depth of analysis of macro-financial issues in Article IV surveillance been appropriate, and in what areas would there be scope for further improvement?

  • Given budget constraints, is the Fund’s limited financial expertise appropriately targeted between Article IV surveillance, FSAPs, and other areas, including programs, capacity building, multilateral surveillance, and methodological development?

  • Where do Directors see the priorities for reshaping the FSAP and integrating it more effectively into bilateral surveillance? Is there a need to reconsider the voluntary nature of the program and the manner in which assessments are prioritized in the forthcoming FSAP review? Is there merit in introducing more modular FSAP assessments, stronger offsite monitoring, and risk-based ROSCs, currently under discussion with the Bank?

  • What are the appropriate vehicles for regional and thematic financial sector assessments, and do Directors view these as a useful approach to bridging the gap between multilateral and bilateral surveillance?

Appendix Table 1.

Analytical Chapters in Recent Global Financial Stability Reports and World Economic Outlooks on Financial Sector Issues

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Appendix Table 2.

MCM Staff Participation in International Working Groups

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Appendix Table 3.

Integration of Financial Sector Issues in Bilateral Surveillance—Recent Activities in Selected Countries

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Appendix Table 4.

FSAP Country Coverage, FY00–09

(Countries with completed assessments as a percentage of all countries in the category, cumulative)

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Source: MCM’s FSAP tracking database and staff calculations.

Weighted by the FSAP countries’ GDP in total GDP of the respective category.

Numbers reflect initial assessments and updates completed as of November 2008. Regional FSAPs in ECCU and CEMAC are not counted, but all their member countries are counted as covered. WAEMU members are counted only if they have had an individual assessment following the regiona FSAP. Countries covered both by an individual FSAP and a regional FSAP, or by two updates, are counted in the year of the first assessment.

Level of development is based on the World Bank’s classification of countries by income and the following criteria: all high income countries are classified as advanced; upper middle income and lower middle income as emerging; and low income as developing.

Appendix Table 5.

Integration of Financial Sector Issues in Surveillance at the Regional Level—Recent Examples

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Appendix Table 6.

Recent Papers and Conferences on Macro-Financial Linkages

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The papers cited in this report are publicly available, including at


For instance, in response to the IMFC’s October 2007 Communiqué, the Monetary and Capital Markets Department (MCM) created five working groups to draw policy lessons in the areas of risk management; credit rating agencies; valuation, disclosure, and accounting; central bank liquidity frameworks; and supervision and crisis management. Many of these topics had not previously been covered by the Fund’s surveillance activities.


IMFC Communiqué, April 12, 2008; Statement of the G8 Finance Ministers, June 14, 2008; G20 Declaration, November 15, 2008.


Notably the April 2008 report to the IMFC on The Recent Financial Market Turmoil: Initial Assessment, Policy Lessons, and Implications for Fund Surveillance; the recent report on The Fund’s Response to the 200 7–08 Financial Crisis—Stocktaking and Collaboration with the Financial Stability Forum; and the paper on the Causes of the Crisis and Lessons for Macroeconomic Policy and Regulation.


The review of the FSAP was completed on September 21 2009, and the papers are available at


Recent IMF research in this area has focused on the use of contingent claims analysis. For a summary, see Dale Gray and Samuel Malone, Macrofinancial Risk Analysis, 2008.


This option would not apply to AML/CFT standards, which would continue to be assessed in their entirety.


See, for example, Box 1.5 on the “Banking Stability Index” in the April 2008 GFSR.

Integrating Financial Sector Issues and FSAP Assessments into Surveillance - Progress Report
Author: International Monetary Fund