2011 Review of the Standards and Codes Initiative - Background Paper

This paper serves as background reference to the paper, "2011 Review of the Standards and Codes Initiative." The Initiative, which covers standards in 12 policy areas relevant for Bank and Fund work, was created as an integral part of a global response to promote financial stability in the aftermath of the Asian crisis in the 1990s. This paper discusses developments since the Initiative’s last review in 2005. In particular, it covers the evolution of standards in the 12 policy areas, progress in implementing measures to improve the effectiveness of the Initiative, the role that the Initiative played in the recent global crisis, and perceptions of major stakeholders reflected in survey responses and bilateral consultations conducted by staff.

Abstract

This paper serves as background reference to the paper, "2011 Review of the Standards and Codes Initiative." The Initiative, which covers standards in 12 policy areas relevant for Bank and Fund work, was created as an integral part of a global response to promote financial stability in the aftermath of the Asian crisis in the 1990s. This paper discusses developments since the Initiative’s last review in 2005. In particular, it covers the evolution of standards in the 12 policy areas, progress in implementing measures to improve the effectiveness of the Initiative, the role that the Initiative played in the recent global crisis, and perceptions of major stakeholders reflected in survey responses and bilateral consultations conducted by staff.

I. Overview

This paper serves as background reference to the paper, “2011 Review of the Standards and Codes Initiative.” The Initiative, which covers standards in 12 policy areas relevant for Bank and Fund work, was created as an integral part of a global response to promote financial stability in the aftermath of the Asian crisis in the 1990s. This paper discusses developments since the Initiative’s last review in 2005. In particular, it covers the evolution of standards in the 12 policy areas, progress in implementing measures to improve the effectiveness of the Initiative, the role that the Initiative played in the recent global crisis, and perceptions of major stakeholders reflected in survey responses and bilateral consultations conducted by staff.

Chapter II presents a summary of changes to the standards and codes under the Initiative since the 2005 review. Almost all of the standards and codes have been revised to cover areas that have become important in light of developments in the global economy and the evolution of financial markets. Revisions partly reflect the need to: (i) address gaps in financial sector reporting and monitoring of systemic and institution-level risks; (ii) take into better account cross-border and cross-sectoral linkages;(iii) increase the emphasis on group-wide supervision and regulation; and (iv) cover previously unregulated entities, among others.

Chapter III provides a detailed discussion of progress in implementing the recommendations in the 2005 Review. The recommendations focused on improving three broad areas: coverage and prioritization of Reports on Observance of Standards and Codes (ROSCs), integration with surveillance and technical assistance, and clarity of reporting. While significant efforts were made, progress has been generally limited in implementing the specific measures that were recommended, partly on account of resource constraints. In particular, while some progress was achieved in improving ROSC coverage, limited progress was achieved in integrating ROSC findings with surveillance and measures to better disseminate the findings from ROSCs. More progress has been achieved in better linking ROSCs with technical assistance (TA).

Chapter IV reports on an empirical study which tests the presence of a link between adherence to standards and codes and the impact of the financial crisis on a selected sample of countries. Based on results of the study, for advanced countries, there is some evidence that adherence to banking standards reduced financial stress and increased growth, and adherence to securities standards reduced stress in securities markets. However, these results do not extend to emerging markets or to insurance or corporate governance standards. In addition, the results are not robust in the presence of control variables and, in some cases, yield counterintuitive outcomes.

Chapter V presents four country case studies on the role of ROSCs in identifying vulnerabilities of countries which were significantly affected by the crisis. The studies suggest that ROSCs correctly identified vulnerabilities in Greece, Hungary, Pakistan, and the United Kingdom prior to the crisis. Surveillance immediately after the ROSC missions also incorporated ROSC findings. However, there was no systematic follow up of ROSC recommendations in subsequent Article IV consultations, and the degree to which recommendations were followed largely depended on authorities’ efforts. As a result, many of the weaknesses identified in the ROSCs were still present during the crisis.

Chapter VI presents the results of the survey questionnaires submitted to major stakeholders of the Initiative. Surveys were conducted for country authorities, mission chiefs, standard assessors, and market participants. Results were broadly similar to the results during the 2005 Review. Most stakeholders continue to view the Initiative as useful, particularly in identifying vulnerabilities and establishing priorities for strengthening institutions. ROSCs on payment systems and fiscal transparency were viewed as the most useful. The quality of assessments was also seen as adequate. There was no strong support for adding new standards to the Initiative, but there were calls for strengthening existing standards.

Chapter VII provides a summary of bilateral consultations with major stakeholders. Bilateral meetings were held with all standard setters and selected country authorities and market participants. Outcomes of meetings broadly reflect the findings in the surveys. In addition, standard setters found the Initiative to be useful and called for stronger cooperation with standard assessing bodies. Country authorities expressed the need for more follow up on ROSC recommendations. Market participants called for more frequent updates and better dissemination of ROSC findings.

II. Developments in the Standards and Codes Since the 2005 Review1

1. In view of the 2011 Review of the Standards and Codes Initiative (SCI), this note presents updates and changes in the standards since the last review of the Initiative conducted in 2005. The Initiative, which covers 12 areas and associated standards considered relevant for Bank and Fund work, broadly relates to policy transparency, financial sector regulation and supervision, and market integrity. The following changes have been made to the standards since 2005.

A. Policy Transparency

2. Data: The Data ROSC applies the Data Quality Assessment Framework (DQAF), which is organized around five dimensions of data quality and has a cascading codified structure of elements and indicators (see http://dsbb.imf.org/Pages/DQRS/DQAF.aspx).

  • In addition to the generic (July 2003) DQAF, specific DQAFs have been developed covering national accounts statistics, consumer price index, producer price index, government finance statistics, monetary statistics, balance of payments statistics, and external debt statistics.

  • Not all macroeconomic statistics are covered in every data ROSC. Sometimes, a targeted approach is followed for data ROSCs when only a subset of macroeconomic statistics is evaluated.

  • A data ROSC report comprises three volumes: a summary report; the response by the authorities; and detailed assessments by statistical topic.

  • The data ROSC summary report contains overall assessments categorized by observed (O), largely observed (LO), largely not observed (LNO), not observed (NO), or not applicable (NA), as well as a prioritized set of recommendations, including recommendations that cut across macroeconomic statistical topics.

3. The Fund is planning to update its DQAF which was last revised in 2003 to make it more relevant for use in Data ROSCs. Specifically, it will improve the coverage of non-bank financial institutions, cross-border positions, and IIP, among others, and will take into account more recent versions of statistics manuals (e.g., 2008 SNA, 2001 GFSM, and BPM6). The updated DQAF is expected by end-2012. Due to resource constraints, full standard assessments on Data Transparency will be temporarily suspended until then.2

4. Fiscal Transparency: The Fund’s Code of Good Practices on Fiscal Transparency was updated and approved by the IMF Board in 2007, based on assessments of country observance relative to the good practices identified in the previous version of the Code3 The revised Code retained the original four pillars of fiscal transparency, but it introduced nine new specific good practices and broadened the coverage of others. Issues covered by the new and extended practices include contractual arrangements with private companies; publication of a citizen’s guide’ to the budget; consultation periods for the budget and for proposed changes to laws and regulations; periodic reports on long-term public finances; and openness in the sale and purchase of government assets. The revised Code distinguished key issues and priorities more clearly, and included some emerging issues in more detail:

  • Allow sufficient time for consultation about proposed laws and regulatory changes and, where feasible, broader policy changes.

  • Improve accessibility to the public and clarity of contractual arrangements between the government and public or private entities, including resource companies and operators of government concessions.

  • Explicit legal basis for government liability and asset management, including the granting of rights to use or exploit public assets.

  • Specify and adhere to a budget calendar and allow adequate time to the legislature for consideration and approval of the draft budget.

  • Present supplementary revenue and expenditure proposals during the fiscal year to the legislature in a manner consistent with the original budget presentation.

  • Separately identify in the annual budget receipts all major revenue sources, including resource-related activities and foreign assistance.

  • Publish a periodic report on long-term public finances.

  • Develop a clear and simple summary guide to the budget for wider distribution.

  • Undertake purchases and sales of public assets in an open manner, including separate identification of major transactions.

  • Explain major revisions to historical fiscal data and any changes to data classification.

  • Publish information on the level and composition of central government debt and financial assets, significant non-debt liabilities and natural resource assets.

  • Provide a description of major expenditure and revenue measures, and their contribution to policy objectives, including estimates of their current and future budgetary impact and their broader economic implications.

  • The Guide to Resource Revenue Transparency, which applies the principles of the Code to the unique set of problems and issues faced by countries that derive a significant share of revenues from oil and mineral resources, was also revised in 2007.4

5. As a measure to improve communication with the users, a Fiscal Transparency portal (in the IMF external webpage) was created in 2008.5 This portal provides information on the fiscal transparency code, fiscal transparency manual, guide on resource revenue transparency, country reports, questionnaires, and procedural notes.

6. Monetary and Financial Policy Transparency: The Fund’s Code of Good Practices on Transparency in Monetary and Financial Policies (MFPT). Although no revisions have been made since 1999, the Fund plans to revise the MFPT code to remove the overlap on financial policies currently covered by other standards and update the monetary policy transparency standards in light of the crisis.

B. Financial Sector Standards

7. Banking Supervision: Basel Committee’s Core Principles for Effective Banking Supervision (BCP). In conducting the 2006 Review of the BCP, the Committee specifically aimed to ensure continuity and comparability with the 1997 version.

  • Addition of new “umbrella” principle to cover all aspects of risks.

  • Enhanced criteria for assessing interest rate, liquidity and operational risks.

  • Strengthened the criteria on fight against money laundering and terrorist financing as well as fraud prevention.

  • More comprehensive reflection of cross-border and cross-sectoral trends and developments, as well as the need for closer cooperation and information exchange between supervisors of different sectors and countries.

8. The Basel Committee, together with its oversight body, the Group of Governors and Heads of Supervision, has also developed new micro- and macro-prudential standards which reflect the lessons learned from the crisis, and are collectively referred to as “Basel III.”6 These standards include:

  • Redefinition of capital with greater focus on common equity which is the highest quality component of banks’ capital to ensure banks are better able to absorb losses on both a going concern and a gone concern basis;

  • Increase in the risk coverage of the capital framework, in particular for trading activities, securitizations, exposures to off-balance sheet vehicles and counterparty credit exposures arising from derivatives;

  • Increase in the level of the minimum capital requirements, including an increase in the minimum common equity requirement from 2 percent to 4½ percent and a capital conservation buffer of 2½ percent bringing the total common equity requirement to 7 percent;

  • Introduction of an internationally harmonized leverage ratio to serve as a backstop to the risk-based capital measure and to contain the build-up of excessive leverage in the system;

  • Raising standards for the supervisory review process (Pillar 2) and public disclosures (Pillar 3), together with additional guidance in the areas of sound valuation practices, stress testing, liquidity risk management, corporate governance and compensation;

  • Introduction of minimum global liquidity standards consisting of both a short-term liquidity coverage ratio and a longer-term, structural net stable funding ratio; and

  • Requirement that banks build-up capital buffers in good times that can be drawn down in periods of stress, including both a capital conservation buffer and a countercyclical buffer to protect the banking sector from periods of excess credit growth.

9. Securities: International Organization of Securities Commissions’ (IOSCO) Objectives and Principles for Securities Regulation. In its 2010 Annual Meeting IOSCO approved a revised set of principles, which addresses the main lessons from the crisis. The 38 principles adopted in June 2010 include five revised principles and 8 new principles. The five revised principles include:

  • Collective Investment Schemes (CIS): In addition to determining eligibility, regulators are now required to set standards for governance, organization and operational conduct;

  • Market Intermediaries: requirement that market intermediaries should have an internal function designed to assure it complies with applicable standards for internal organization and conduct;

  • Issuers: In order to fully reflect IOSCO’s disclosure requirements, an issuer is now required to disclose risks, financial results, and other information;

  • Accounting: clarification that the accounting standards referred to in the IOSCO Principles are those used by issuers to prepare financial statements;

  • Secondary markets: clarification that Central Counterparties (CCPs) systems for clearing and settlement are also governed by this principle.

10. The eight new principles integrated by IOSCO include:

  • Systemic risk: security regulators are now required to participate in the process of monitoring, mitigating and managing systemic risk, appropriate to their mandate;

  • Perimeter of regulation: regulators are also required to play a more active role in determining and reviewing the perimeter of regulation on a regular basis;

  • Conflict of interests: regulators should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed, or managed;

  • Auditors’ oversight: adequate levels of oversight should be provided to auditors;

  • Auditors’ independence: auditors are now required to be independent of the issuing entities that they audit;

  • Credit Rating Agencies: these should be subject to adequate levels of oversight. Securities regulators are required to ensure that credit rating agencies, especially those whose ratings are used for regulatory purposes, are subject to registration and ongoing supervision;

  • Information service providers: entities that offer investors analytical or evaluative services should be subject to oversight and regulation depending on their impact on the market or the degree to which the regulatory system relies on them; and

  • Hedge funds: regulators should ensure that hedge funds, hedge funds managers and advisers are subject to appropriate oversight.

11. IOSCO is currently in the process of reviewing the commentary to the principles, as well as the methodology to assess their implementation. The draft methodology has been approved by the Implementation Task Force (ITF) for consultation. The goal is to finish this review by the next Annual Meeting (April 2011).

12. Insurance: International Association of Insurance Supervisors’ (IAIS) Insurance Supervisory Principles (ISP). A number of standards, principles and frameworks have been introduced since 2005, including:

  • Standard on Asset-Liability Management (October 2006).

  • Standard on the structure of regulatory capital requirements (October 2008).

  • Principles on group-wide supervision of financial groups (October 2008).

  • Standard on the use of internal models for regulatory capital purposes (October 2008).

  • Standard on enterprise risk management for capital adequacy and solvency purposes (October 2008).

  • Standard on the structure of capital resources for solvency purposes (October 2009).

  • Development of a common framework for the supervision of internationally active insurance groups and their group-wide risks.

13. Payments and Securities Settlement Systems: Committee on Payments and Settlements Systems (CPSS) Core Principles for Systemically Important Payments Systems and CPSS-IOSCO Joint Task Force’s Recommendations for Securities Settlement Systems.

  • No reviews since the January 2001 publication of the Core Principles for Systemically Important Payments Systems and November 2001 publication of Recommendations for Securities Settlement Systems.

  • The CPSS/IOSCO issued 15 Recommendations for Central Counterparties in November 2004, and assessments on this standard (including in the 2009 U.S. FSAP) have been conducted.

  • There is ongoing work to merge the three standards on payment systems into one consolidated standard. These three include: Core Principles for Systemically Important Payments Systems, Recommendations for Securities Settlement Systems, and Recommendations for Central Counterparties.

14. Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT): Financial Action Task Force’s (FATF) 40+9 Recommendations. The original 40 recommendations developed in 1990 (and revised in 1996 and 2003), as well as the 9 special recommendations developed in 2000 and 2004 (to cover the financing of terrorism) are still in place. To remain effective, however, their accompanying interpretative notes and methodology are continually reviewed, and when necessary, revised. Based upon issues that arise from evaluations or dialogue with members, the following revisions have been made since 2005:

  • Adoption of new interpretative note which clarifies the requirements on non-profit organizations (NPOs) and ensures that NPOs are protected from financing by terrorists (February 2006).

  • Revision of the text of the Methodology criteria on Cash Couriers to address issues relating to the internal borders of a supranational jurisdiction, such as the European Union (EU).

  • Amendment of Interpretative Note to Special Recommendation VII and the AML/CFT Methodology to reflect that intra-European Union wire transfers should be treated as domestic wire transfers (February 2008).

15. Crisis Resolution and Deposit Insurance. The Financial Stability Board (FSB) plenary scheduled on February 28, 2011 will consider a proposal by the Standing Committee on Standards Implementation (SCSI) working group to include this policy area as part of the list of key standards relevant for financial stability. Depending upon the outcome of the FSB plenary meeting, standards under this area could include the IADI’s Core Principles for Effective Deposit Insurance Systems, the Recommendations of the Basel Committee on Cross-Border Bank Resolution, and the FSB’s Key Attributes of Effective Resolution Regimes.

C. Market Integrity Standards

16. Corporate Governance: The Organization for Economic Cooperation and Development’s (OECD’s) Principles of Corporate Governance (PCG). The preamble to these Principles states that they “are evolutionary in nature and should be reviewed in light of significant changes in circumstances.” Given this,

  • The OECD published the Methodology for Assessing Implementation of the OECD Principles on Corporate Governance which underpins the dialogue on implementation of the Principles in a jurisdiction and provides a framework for policy discussions (2007).

  • The OECD recently (2009) launched an action plan to address weaknesses in corporate governance with the aim of developing a set of recommendations for improvements in the Principles’ priority areas, such as board practices, implementation of risk-management, governance of the remuneration process, and the exercise of shareholder rights.

17. Accounting: International Accounting Standards Board’s International Accounting Standards (IAS). Two main developments, both occurring in 2009, are worth noting under accounting standards, namely:

  • Issuance of a separate standard—the International Financial Reporting Standards (IFRS) for Small- and Medium-sized Entities (SMEs)—tailored to the needs and capabilities of smaller businesses around the world. The standard aims to facilitate SMEs’ access to capital by ensuring the provision of comparable, transparent and high quality financial reports.

  • Expediting the process of improving “fair value” based accounting standards. In this regard, the IASB has concluded the first phase of replacing the IAS 39 Financial Instruments: Recognition and Measurement by issuing IFRS nine Financial Instruments.

18. Auditing: International Federation of Accountants’ International Standards on Auditing (ISA). In 2004, the IAASB began a comprehensive program to enhance the clarity of its ISAs. This program, called the Clarity Project, involved the application of new drafting conventions to all ISAs, either as part of a substantive revision or through a limited redrafting, to reflect the new conventions and matters of clarity generally. The Clarity Project reached its completion in February 2009, when the Public Interest Oversight Board approved the due process for the last several clarified ISAs.

19. The final set of clarified standards, which became effective on December 15, 2009, comprises 36 ISAs and International Standard on Quality Control (ISQC) 1, including:

  • One new standard, addressing communication of deficiencies in internal control;

  • 16 standards containing new and revised requirements (referred to as “revised and redrafted ISAs”);

  • 20 standards that have been redrafted to apply the new conventions and reflect matters of general clarity only (referred to as “redrafted ISAs and redrafted ISQC 1”); and

  • Revision and redrafting of ISA 540 on Auditing Accounting Estimates, including Fair Value Accounting Estimates, and Related Disclosures (February 2008).

20. Insolvency and Creditor Rights: In 2005, a revised version of the World Bank Principles for Effective Insolvency and Credit Rights Systems was submitted to the Bank Board and published. A unified standard based on the 2005 World Bank Principles and the Recommendations included in the UNCITRAL Legislative Guide on Insolvency Law has been developed, in consultation with the Fund; the unified standard has been published and presented to the Bank’s Executive Directors for information in March 2009, and the next step would be submission to the Bank Board for endorsement. A new methodology based on the Insolvency and Creditor Rights (ICR) Standard was agreed among the World Bank, IMF, and UNCITRAL, and is currently being used for ROSC assessments.

21. In response to the experience from the recent financial crisis, and to incorporate updates to UNCITRAL’s Legislative Guide on Insolvency Law, the Bank has reviewed and revised the standard, in close consultation with the UNCITRAL Secretariat. In January 2011 the Bank, together with UNCITRAL and the Fund staff, reconvened the Global ICR Task Force (consisting of representatives of international organizations and over 85 internationally recognized experts, policy makers and judges from all regions), to finalize the 2011 Standard for Insolvency and Creditor/Debtor Regimes. The 2011 ICR Standard will be presented to the Executive Directors of the Bank and Fund for formal endorsement for use in the ROSC program.

D. Other Standards Outside the Initiative

22. There are other relevant standards beyond the core set that are assessed in the context of the Initiative. Some of the standards for which the Bank and the Fund do not produce ROSCs but are important include the IMF-issued “Guidelines for Foreign Exchange Reserve Management,” the IMF-facilitated “Santiago Principles” (Generally Accepted Principles and Practices for Sovereign Wealth Funds) and the IMF-facilitated “Stockholm Principles” (Guiding Principles for Managing Sovereign Risk and High Levels of Public Debt). Some of these important standards are included in the FSB Compendium of standards, and the Compendium is currently being revised.

III. Progress in the Implementation of the 2005 Recommendations

A. Introduction

23. Since its launch in 1999, there have been three periodic reviews by the Bank and Fund Boards assessing the effectiveness of the Standards and Codes Initiative (“Initiative”). In each review, staff presented to the Board a progress report on the implementation of the Initiative and proposed ways to improve its effectiveness. This section of the paper focuses on progress made on the proposals in the 2005 Review.

24. The 2011 Review takes place amidst major shifts in the global economy since the last review. These include more highly-integrated financial markets, unprecedented capital flows, asset price bubbles, and the global crisis. During this period, the Bank and Fund also underwent significant changes. In the case of the Fund, large budget cuts were made in the face of a projected sharp deterioration in the Fund’s income position. The 2006 Medium-Term Strategy generated a significant downsizing of the scale of the Fund’s activities, including the number of Reports on Observance of Standards and Codes (ROSCs). In 2006, the ROSC recommendations were crystallized into a summary of actions that took into account both the 2005 Review7 and these new budget constraints.8 9

25. The 2005–06 recommendations were geared towards improving the three operational areas below:

  • (i) Country coverage and prioritization of ROSCs to promote more efficient use of resources;

  • (ii) Integration of ROSCs with Fund surveillance and TA for better use of ROSC findings and greater support of reform efforts; and

  • (iii) Clarity and timeliness of ROSCs.

26. The assessment draws on multiple sources: a document review of the Fund’s Article IV reports; surveys of the Fund’s area and functional department mission chiefs and the authorities; discussions with standard setters and assessors who have been engaged in their respective fields over extended periods; and the business plans of the Fund and respective departments.

27. The chapter concludes that while significant effort has been made to implement the recommendations of 2005 Review, more can be done to enhance its usefulness. Since the last Review, the Bank and Fund have increased focus and selectivity of ROSC updates and the knowledge transfer between ROSCs and TA coordinators and area departments has improved. However, country coverage and prioritization has been constrained by the voluntary nature of the Initiative and the tighter budget envelope. In terms of the clarity of ROSCs, the authorities viewed the ROSC findings and recommendations as well-prioritized with an appropriate level of detail. Nevertheless, there is no systematic attempt to ensure that macro-relevant ROSC recommendations are being reflected in Fund surveillance.

B. Assessing Implementation of 2005–06 Recommendations

Country coverage and prioritization

Recommendation 1: The guiding principle for prioritizing new ROSC:

  • Give priority to systemic and regionally-important countries, other emerging-market countries; and program countries with weaknesses in areas covered by ROSCs.

  • For fiscal transparency ROSCs, give also priority to resource-rich countries.

28. The guiding principle on the country coverage and priority provided broad direction for conducting ROSCs, but there were unavoidable constraints to its implementation. These include: (i) the voluntary nature of ROSC participation; and (ii) the resource constraints and downsizing in the Fund which led the Fund to target countries where ROSCs would yield the most benefits, from either a national or systemic perspective. Also, a significant number of countries have completed only one ROSC.

29. The coverage of systemically-important countries was incomplete. In the case of systemically-important countries, 22 out of 25 jurisdictions considered to have systemically important financial sectors in the context of mandatory FSAPs10 had participated in the FSAP during the period of January 2006–December 2010. However, among them, seven had completed only one ROSC. Among the systemically-important countries, two countries stand out. The need for ROSCs in the US and China was identified at an early stage, but their participation took place much later, only as the recent crisis unfolded and as it became a prerequisite for G-20 countries under the Financial Stability Board (FSB).

30. The rate of new participation by “other emerging market countries”11 was quite high. Thirty-two out of 36 other emerging market countries participated during 2006–10. However, as in the case of systemic countries, about seven of these (Chile, Estonia, Hungary, Malta, Panama, South Africa and Venezuela) had only one ROSC.

31. Progress in achieving an increase in fiscal transparency ROSCs on resource-rich countries was limited. Only six ROSCs on fiscal transparency were carried out among the 33 hydrocarbon- and mineral-rich countries during 2006–10 (Angola, Cameroon, Ecuador, Gabon, Indonesia and Norway). 12

Recommendation 2 : Clearer unconstrained priorities

  • Reflect in staff appraisals of Article IV staff reports, staff’s views on priority areas for standards assessments, independently of the authorities’ perceived or actual (unwillingness to request a ROSC.,

32. To assess its implementation of this recommendation, staff conducted a document review of recent Article IV staff reports. Forty-eight Article IV countries were randomly selected from advanced, emerging market and developing economies (16 countries from each group) to represent the whole membership.13 Staff assessed whether the latest available staff report from each country contained: (i) views on priority areas for standard assessments and (ii) reference to previous ROSCs.

33. The results suggest that recommendation 2 has not been fully implemented:

  • Six out of 48 staff reports (or 13 percent) contained staffs’ views on the need for a future ROSC, of which four were from developing countries;

  • Seventeen (or 35 percent) of the reports discussed FSAP recommendations and follow ups; and

  • Six out of the 41 staff reports (or 15 percent) of the countries that had completed (or are currently engaged in) at least one ROSC contained a reference to or a discussion of the past ROSC recommendations. Half of these staff reports were from developing countries.

34. The relatively low percentage of staff reports that followed up on the recommendation has to be interpreted in light of the fact that most ROSCs are completed in the context of FSAPs and references to ROSCs and FSAPs are often difficult to distinguish.

Recommendation 3: Focus and selectivity of ROSC updates

  • Increase flexibility in the frequency of ROSC updates.

  • Use flexibility to conduct factual updates with participation of functional department experts in Article IV missions.

  • Discontinue the requirement of annual factual updates by area departments.

35. The progress on increasing the flexibility in the ROSC updates has been largely achieved. In the case of fiscal transparency ROSCs, frequent reassessments and updates were carried out for countries that were engaged in Fund programs (Kyrgyz Republic, Mozambique, and Greece). The Monetary and Capital Markets Department (MCM) also had a group of countries mostly in Europe which had three or more reassessments and updates (Russia, Sweden) for different standards (BCP, IOSCO, IAIS and CPSS standards). Since 2005, 67 percent of countries that participated in FSAPs had at least two reassessments and updates on BCP.

36. Factual updates with participation of functional department experts in the Article IV missions appear to have been limited because of resource constraints. Functional department assessors indicated that while the area departments did not object to their participation, the cost of experts’ participation were to be borne by the originating functional departments who were already under pressure to cut spending. Moreover, as a result of downsizing, there were insufficient experts to be deployed to conduct factual updates. Nevertheless, according to the survey of area department mission chiefs, about 75 percent agreed that member countries’ needs could be better served by the participation of functional department experts (see Chapter VI).

Recommendation 4: Increased country ownership of ROSCs

For countries reluctant to engage in ROSCs, propose, when appropriate, combining diagnostics with TA.

37. Except for ROSCs on AML/CFT and data, there are currently no targeted TA programs to follow up on ROSC recommendations. For Data ROSCs, the ROSC priority countries (e.g. G-20 and SDDS subscribers) often do not need TA. For Fiscal Transparency ROSCs, while there are no TA programs exclusively targeted to follow up on ROSC recommendations, TA missions were carried out in the context of Public Financial Management, Expenditure Control, and other projects such as Strengthening Public Sector Investment, and these missions followed up ROSC recommendations whenever they were viewed relevant. For FSAP-related ROSCs, a Fund TA mission is sent to discuss country priorities with the authorities in the context of the FSAP’s recommendations. After a consensus is reached, the TA mission finalizes an action plan for future Fund-related support where issues related to ROSCs can be included.

38. Outreach discussions with emerging market and developing countries, case studies,14 and the answers to the survey questionnaire indicate that there is scope for more systematic TA follow-up. Case studies highlighted the importance of an active TA program, for example, in the case of Poland and Mozambique. In their survey responses, 55 percent of the authorities who responded indicated that ROSCs contributed to prioritizing their TA needs (see Chapter VI).

Integration with Bank and Fund work

Recommendation 1: Post-ROSC wrap-up meeting

  • Hold post-ROSC wrap-up meetings upon the mission’s return for fiscal, data, and stand-alone financial ROSCs, to agree on follow-up actions to be taken in the context of surveillance, use of Fund resources, and/or TA.

39. Post wrap-up meetings, aimed at strengthening coordination between surveillance and TA, have taken place to a large extent. In the case of fiscal transparency ROSCs, wrap-up meetings were arranged, and/or ROSC teams maintained close contact with the area department mission chiefs to transfer knowledge for most of the countries. In the case of the Data ROSC, it has been standard procedure that the STA mission chief meets with the area department mission chiefs to exchange information and agree on follow-up actions. For FSAP-related ROSCs, a mechanism for knowledge transfer already exists, so wrap-up meetings were not expected to be carried out.

40. In the case of the ROSCs conducted by the Bank, post mission review meetings are held with participation of the Country Management Units (CMU) to follow up on ROSC recommendations both for FSAP-related and stand-alone ROSCs. In many cases, these meetings are chaired by the Country Director. The FSAP and ROSCs programs are also coordinated with the Financial Sector Reform and Strengthening (FIRST) Initiative to better facilitate follow up.

41. There is, however, no mechanism to follow up on ROSC recommendations to ensure that subsequent Article IV consultations address macro-relevant ROSC findings. Functional departments have indicated that this was largely due to resource constraints. Follow up on ROSC recommendations appeared to be more evident in the context of Fund financial arrangements than for surveillance cases. As indicated in the case studies, ROSC findings are often included in the conditionality for use of Fund/Bank resources. ROSCs findings have also been used to design prior actions and TA operations.

Recommendation 2: Better coordination with capacity building

  • Synchronize and coordinate ROSC programs with the Resource Allocation Plans (RAP).

  • Establish the Committee on Capacity Building to replace TAMS, TAC and the task force to implement the Independent Evaluation Office’s (IEO) recommendation on TA.

  • Improve communication between departments’ ROSC and TA coordinators; when feasible, assign these two functions to the same person.

  • Include a discussion on ROSC needs and findings in TA country strategy notes.

42. These recommendations were largely met, although implementation has been uneven. ROSC programs are coordinated with the Resource Allocation Plan (RAP), and a Capacity Building Committee has been established at the Fund. However, this Committee has not been actively involved in ROSC-related issues. In the case of both the ROSCs on fiscal transparency and data, there have been efforts to preserve the link between ROSCs and TA by assigning at least one staff to continue covering both. In FSAPs, there are regular internal meetings where the policy division, the ROSC implementation division, and the regional division discuss ROSC findings and TA country strategies.

43. ROSC findings have been used by the Fund’s area departments in the preparation of their annual Regional Strategy Notes, which outline short- to medium-term TA priorities and discuss country strategies for intensive TA users. Moreover, ROSCs were viewed as part of the Fund’s TA effort rather than as a surveillance tool by the program managers, as they provide a systematic and comprehensive approach on a specific topic. In some cases, donors expressed their areas of interest in TA, and ROSC recommendations were helpful for the preparation of a list of priorities.

Recommendation 3: Tools for cross-country and inter-temporal comparisons

  • Create a system of linked departmental databases of ROSC findings to facilitate the prioritization of updates, measurement of progress towards observance of standards, and cross-country analysis.

44. Progress on this recommendation has been generally weak. At the time of the last review, it was envisaged that the new system would allow one-stop access to information across different standards. It would include firewalls for confidential financial sector data.

45. While published ROSCs are available by country and by standard, the database sharing appears ineffective. Access to ROSC detailed assessments managed by MCM is limited, and Fund-wide access is only given to aggregate reports and statistics. Access to country-specific information can be obtained only by contacting the responsible divisions irrespective of degree of confidentiality. In the case of the Fiscal Affairs Department (FAD), a complete database is available, but is not easily accessible to non-FAD staff; and the Statistics Department (STA) has not completed any comprehensive database due to budget constraints.

Clarity and Timeliness of ROSC findings

Recommendations 1–3: Summary findings and recommendations, indicative timeline, and accessible information on ROSCs completed and underway

  • Include an executive summary providing a clear assessment of the overall degree of observance of the standard.

  • Include a prioritized list of key recommendations.

  • Include a principle-by-principle summary matrix of the observance of standards.

  • Target to issue the ROSC to the Board no later than six months after the end of the (last) ROSC mission.

  • Establish a webpage to disseminate information on ROSC participation on the Fund intranet.

46. The decentralized nature of the ROSC Initiative has led to significant variations in the way the 12 standards are assessed and presented. Different ROSC templates are used for different standards. Summary of findings and principles ratings are presented in most ROSCs. However, for some standards (e.g., banking, insurance, and securities), recommendations in the detailed assessments are not explicitly prioritized.15 For fiscal transparency, Accounting and Auditing, Payment and Settlement, and AML/CFT ROSCs, the detailed list of recommendations is prioritized with respect to urgency.

47. Results of the survey show that authorities largely viewed the ROSC findings and recommendations to be clear and well-prioritized. On a scale of 1 being the lowest and 5 the highest, authorizes rated the level of detail to be 3.9 and the degree of prioritization 3.8 on average. Among the 11 standards, the assessments on payment systems were rated the highest both in terms of detail and prioritization.

48. Results on the timeliness of ROSCs are mixed. Fiscal transparency ROSCs were issued in eight months on average. Data ROSCs also averaged 8–9 months, even for some advanced economies. However, for FSAP-related ROSCs, the average delay was close to three months, as timeliness played an important role in determining the value of the report. According to standard assessors, the delays were often due to disagreements within the government, particularly among the central bank, ministry of finance, and other related agencies, on the results of the assessment and recommendations. Language translation was also a factor behind delayed issuance of ROSC documents as it took an extra 2–3 weeks for the official translation to and from English to other official Fund languages.

49. Both the Fund and Bank maintain websites to disseminate information on the ROSC participation of the member countries. They are available on http://www.imf.org/external/np/rosc/rosc.asp and http://www.worldbank.org/ifa/rosc.html

IV. The Role of Standards and Codes in the 2007–08 Crisis: Looking at the Empirical Evidence

A. Introduction

50. The Standards and Codes Initiative was introduced in 1999 in the wake of the Asian financial crisis. Since the Initiative was intended to promote stability in financial crises, a natural question is whether we can find a quantitative link between a country’s observance of standards and codes and the impact of the 2008–09 economic and financial crisis. This chapter carries out an econometric analysis on a group of important advanced and emerging markets to examine this question. The analysis does not examine whether adherence to standards prevented the crisis but rather whether it mitigated the impact.

51. The main result is there is some evidence in advanced countries that adherence to banking standards reduced financial stress and increased economic growth in 2009 and that adherence to securities standards reduced stress in securities markets. However, the results do not carry over to emerging markets or to the insurance or corporate governance standards. In addition, the results are sensitive to the presence of control variables and, in some cases, give paradoxical results (i.e. suggest that adherence to standards increased financial stress).

52. The lack of strong results should not be surprising given that there is a very complex link between standard compliance and crisis resilience. Moreover, compliance ratings focus on minimum standards on a broad range of principles which are not all equally related to crisis resilience. Thus, they may not capture all the qualities of a country’s institutions that are important during a crisis. In addition, promotion of standards may help countries in ways that are not captured by econometric analysis, for example by identifying gaps and supporting a reform agenda. These aspects are discussed in other parts of this study.

B. Literature Review

53. There are two different strands of economic literature of relevance to this analysis. First, there is a literature on the effectiveness of the standards and codes. Some of this was evaluated during the 2005 review of standards and codes. Additional research on the impact of standards and codes has been done since then, although with mixed results. Second, the crisis literature has examined what country-specific factors affected the course of the crisis across countries. However, this literature has so far not examined the relevance of overall adherence to standards and codes for how well countries fared during the crisis.

Research on Standards and Codes

54. The 2005 review cited six econometric studies on the impact of standards and codes. Four of the studies found that adherence to the standards and codes on transparency and banking supervision standards lowered market spreads, improved credit ratings, and improved indicators of market performance.

55. Studies since 2005 have produced more mixed results. Cady and Pellechio (2006) found that the subscription to the Fund’s data standards initiatives reduced borrowing costs on sovereign bonds in private capital markets by an average of 20 basis points for 26 emerging market and developing countries. Das et al. (2005) developed an indicator of financial system stress and found that countries with higher quality financial policies were better able to contain the effects of macroeconomic pressures on the overall level of stress in the financial system. Hameed (2005) found that countries with more transparency policies had better credit ratings, better fiscal discipline, and less corruption, after controlling for other variables. However, Demirguc-Kunt and Detragiache (2009) found that compliance with the Basel Core Principles did not improve bank performance as measured by their Z-scores.

Literature on the 2008–09 Economic and Financial Crisis

56. The emerging literature on the current economic crisis has begun to look at the country specific factors on the cross country impact of the financial crisis. Chapter 4 of the Fund’s April 2009 World Economic Outlook examined how financial stress was transmitted from advanced economies to emerging markets. It found that crises in advanced economies have a large common effect on the banking sectors, stock markets, and foreign exchange markets of emerging economies. In addition, there is a sizable country-specific effect, which appears to be magnified by the intensity of financial linkages. In particular, financial openness and greater current account deficits increased the vulnerability of countries to the crisis.

57. Berkmen, Gelos, Rennhack, and Walsh (2009) used cross-country regressions to explain the factors driving growth forecast revisions after the eruption of the global crisis. They found that countries with more leveraged domestic financial systems and more rapid credit growth tended to suffer larger downward revisions to their growth outlooks. Exchange-rate flexibility helped buffer the impact of the shock while countries with a stronger fiscal position prior to the crisis were hit less severely. They found little evidence for the importance of policy variables.

58. International Monetary Fund (2010) considers how emerging markets were affected by the initial impact of the crisis. It finds that countries with improved policy fundamentals and reduced vulnerabilities in the pre-crisis period performed better. In particular, (i) higher reserve holdings helped protect emerging markets from global risk aversion, (ii) countries with more policy space and less binding financing constraints could react more aggressively with fiscal and monetary policy, (iii) recovery was faster in countries that implemented bigger fiscal stimulus, had better fundamentals, and faster growing trading partners, and (iv) countries face different policy challenges as they exit from the crisis due to different circumstances.

C. Data and Econometrics

59. This analysis extends the work done on the severity of the crisis across countries by examining the impact of adherence to standards and codes. It considers two types of impact from the crisis: financial stress and economic growth. The results of the analysis are mixed. There is some evidence that adherence to standards and codes in securities markets is associated with less financial stress. However, there is little evidence that adherence to standards and codes in banking, insurance, or corporate governance ameliorated the impact of the crisis at a more general level.

60. As a measure of the impact of the global crisis on a country’s financial system, this research uses the Fund’s financial stress index (FSI). This index was developed in the context of the fall 2008 and spring 2009 World Economic Outlooks and measures financial stress as a composite index of stress measures in banking, securities markets, firms, and the exchange market for 17 advanced and 26 emerging market economies.16 17

61. This study examines the impact of individual standards and codes on the aggregate level of stress experienced by countries as measured by peaks in the FSI and the length of time it takes for financial stress to return to normal. It also looks at the impact of banking, securities, insurance, and corporate governance standards on subcomponents of the FSI.

62. Economic stress is measured by changes in annual GDP growth in 2009 and in 2010 (based on WEO projections for 2010). The first corresponded with the global downturn caused by the financial crisis. The second corresponds to a period of partial recovery.

63. To determine the impact of the standards and codes, compliance ratings from the most recent ROSCs conducted before the outbreak of the crisis were used as a measure of adherence to standards. The compliance ratings were obtained from internal Fund and Bank databases. Regressions were conducted on individual standards to gauge their impact on robustness in the face of the crisis. However, it was not possible to obtain compliance ratings for some standards as they are not given (e.g. accounting and auditing and fiscal transparency before 2008) or samples are too small (e.g. fiscal transparency, monetary and financial transparency, and payments systems). Fortunately, compliance ratings are available for the standards that would be expected to most directly affect financial stability (banking, securities, insurance, and corporate governance).

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64. To separate the impact of adherence to standards and codes from other variables that could affect the impact of the crisis, other economic indicators were used as controls. These include measures of integration with world financial markets and economy such as the correlation with advanced countries financial markets, financial openness, and trade openness. In addition, the analysis includes measures of the country’s vulnerability as measured by the current account balance, fiscal balance, oil export balance, and international reserve levels. The crisis most affected advanced countries and these countries are more likely to have high ROSC compliance ratings. To separate these effects, each country’s per capita GDP in US dollars was used as an explanatory variable. All explanatory variables are taken from before the crisis (i.e. 2007) to account for possible endogeneity.

65. As the construction of the FSI is different for advanced and emerging markets, separate regressions were run on each group. For economic growth, regressions could also be run on the full sample. As is visible in Figure 4, the FSI had two distinct peaks (in late 2008 and early 2009) and countries experienced peaks at different times during the crisis. To reflect this, the regressions choose as the dependent variable the FSI maximum in the second half of 2008 and first half of 2009.18 To measure the length of the crisis, the analysis uses the number of months for each country’s FSI to return to its historical average.

Figure 1.
Figure 1.

ROSC Country Coverage and Prioritization (January 2006-July 2010)

Citation: Policy Papers 2011, 014; 10.5089/9781498339322.007.A001

Figure 2.
Figure 2.

Share of staff reports containing staffs views on the priority areas for standards assessments

Citation: Policy Papers 2011, 014; 10.5089/9781498339322.007.A001

Figure 3.
Figure 3.

Authorities’ assessments on level of detail and prioritization of key messages (1=lowest to 5=highest)

Citation: Policy Papers 2011, 014; 10.5089/9781498339322.007.A001

Figure 4.
Figure 4.

Financial Stress During the Crisis (Standard deviations above average)

Citation: Policy Papers 2011, 014; 10.5089/9781498339322.007.A001

Figure 5.
Figure 5.

Real GDP Growth during the Crisis (percent)

Citation: Policy Papers 2011, 014; 10.5089/9781498339322.007.A001

66. To increase power with small sample sizes, variables without statistical significance at the 10-percent level were iteratively deleted.

67. The following econometric specifications were used:19

FSIi=α+βXi+γSCi+iandΔGDPi=α+βXi+γSCi+i

Where: X = country specific factors that could explain the impact of the crisis, e.g.openness and vulnerability indicators; SC = average compliance ratings on given standards and codes assessments,

The various explanatory variables are expected to have the following effects:

68. Financial integration: This is measured by the correlation of the country’s FSI with the advanced country FSI in the 36 months before the crisis (i.e. 2005 to 2007). The higher the correlation with advanced country FSI, the greater and longer is the expected impact of the crisis on financial stress during the crisis and the greater the expected growth downturn in 2009.

69. Trade and financial openness: These are measured by the country’s total exports and imports of goods and services and total assets and liabilities, respectively, to GDP. To the extent that the global crisis was transmitted through the trade and capital accounts, greater openness is expected to be associated with a higher FSI during the crisis and a longer period of financial stress and a greater fall in GDP in 2009. However, a greater fall in growth in 2009 would be expected to be associated with higher growth in 2010 as trade and financial asset prices recover.

70. Current account and fiscal balances and international reserves: Greater current account and fiscal surpluses and higher international reserves are expected to be associated with less concern about a country’s ability to finance imports and expenditures. Thus, greater current account and fiscal surpluses and higher international reserves should be associated with less and shorter financial stress and higher growth in 2009 and 2010.

71. Oil balance: Oil prices fell in 2008 and rebounded in 2009. To the extent that a country relies on oil exports to finance expenditures, a more positive balance should be associated with greater and longer country financial stress, slower growth in 2009, but less financial stress and higher growth in 2010.

72. Per Capita GDP. Per capita GDP in US dollars (in logs) is used as a proxy for level of development. As the crisis affected advanced countries more than other countries, higher per capital GDP is expected to be associated with higher and longer financial stress and lower growth in 2009.

73. Growth in 2009. As the financial crisis eased and trade recovered, it might be expected that those countries that experienced the largest output loss in 2009 would experience the biggest bound back in 2010. Thus, growth in 2009 is used as a variable to explain growth in 2010.

D. Caveats

There are many potential problems that could impact the analysis.

74. ROSC Data. Several issues arise with the use of compliance ratings. First, ROSCs are conducted infrequently. For most of the countries used in this analysis, for any particular standard, only one ROSC was available prior to the financial crisis. Many of these ROSCs were several years old. Thus, there may be measurement error due to compliance ratings being out of date. Second, standards were revised over time. As a result, the compliance ratings for countries on an old standard may be different from countries on a new standard.20 Third, compliance ratings on ROSCs may be imperfect measures of actual adherence to standards. The ROSCs are meant to measure adherence to a minimum standard, and contain no information on the level of adherence beyond this minimum. Fourth, the crisis revealed important weaknesses and gaps across the financial standards themselves. These weaknesses and gaps may limit the information value of ROSC ratings.

75. Advanced Country Crisis. The economic and financial crisis originated in the United States and spread through trade and financial linkages to other advance market economies and the rest of the world. Thus, the crisis had the greatest impact on the economies that were most likely to receive high ROSC compliance ratings. The regression analysis tries to account for this by using independent variables to proxy for development (e.g. correlation with the advanced country FSI and US dollar per capita income).

76. Sample Sizes. For economic growth, regressions could be run for the advanced markets, emerging markets, and full sample. However, the FSI is limited to 17 advanced market and 26 emerging market countries. Because the FSI is constructed differently for these two groups it was not possible to combine the samples. In addition, particular ROSCs may not have been done for some of these countries. For example, corporate governance ROSCs are only available for 19 of the 26 emerging markets and none of the advanced markets.

E. Empirical Results

77. Banking Standards: Banking standards are measured by adherence to the BCPs. Of the 43 countries included in the FSI, all advanced markets and all but two emerging markets had BCP compliance ratings. Table 2 shows the results of the regressions. For advanced markets, the coefficients on the BCP compliance ratings have the expected sign (i.e. higher compliance ratings result in a lower FSI or shorter recovery time). The coefficient for the peak of the FSI in the first half of 2009 is significant at the 5-percent level. But the coefficients for the peak of the FSI in the second half of 2008 for recovery time are not significant at the 10-percent level. For emerging markets, the coefficients on the BCP compliance ratings do not have the expected sign and are generally not statistically significant. However, the coefficient in the regression for recovery time is significant at the 5-percent level. One possible reason for stronger results on the impact of adherence to the BCPs on the FSI is that the FSI is too broad, i.e. it covers more than the banking sector. To test this hypothesis, additional regressions were carried out for the advanced markets using the banking subcomponent of the FSI. The coefficients on the BCPs had the expected sign but were not significant at the 10-percent level.

Table 1.

Completion of New ROSCs (January 1, 2006 – July 30, 2010)

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Source: IMF and World Bank ROSC Database and Staff Calculations.
Table 2.

Effect of Adherence to Basel Core Principles on the FSI

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Notes: Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.10. Specifications obtained by iterated deletion of variables with p>0.10.
Table 2.

Effect of Adherence to Basel Core Principles on Growth

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Notes: Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.10. Specifications obtained by iterated deletion of variables with p>0.10.

78. The continuation of Table 2 shows the results for economic growth. Higher compliance ratings on the BCPs are associated with stronger growth in 2009 and weaker expected growth in 2010 at the 1-percent level for advanced markets. However, there is not a statistically significant relationship for emerging markets or the full sample.

79. Control variables, when significant at the 10-percent level or better, have the expected effects. Measures of trade and financial openness are associated with greater financial stress and longer recovery times. Higher current account and fiscal balances and international reserves are associated with less financial stress and shorter recovery times. Higher oil balances are associated with more stress during the crisis.

80. Securities Standards: Securities standards are measured by adherence to the Objectives and Principles for Securities Regulation. Of the 43 countries included in the FSI, 38 had compliance ratings for this standard. The results are shown in Table 3.

Table 3.

Effect of Adherence to Objectives and Principles for Securities Regulation on the FSI

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Notes: Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.10. Specifications obtained by iterated deletion of variables with p>0.10.
Table 3.

Effect of Adherence to Objectives and Principles for Securities Regulation on the FSI Securities Subindex

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Notes: Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.10. Specifications obtained by iterated deletion of variables with p>0.10.
Table 3.

Effect of Adherence to Objectives and Principles for Securities Regulation on Growth

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Notes: Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.10. Specifications obtained by iterated deletion of variables with p>0.10.

81. Compliance ratings on securities principles were not statistically significant for any of the regressions with the exception of the recovery time for advanced markets. However, in all cases the coefficient does not have the expected sign. As with the BCPs, analysis was also performed on the impact of compliance ratings on securities principles on the FSI securities sub-index. For emerging markets, the results were similar. However, for advanced markets higher compliance ratings on securities standards are associated with reductions in stress in the securities markets in both late 2008 and early 2009 and with a reduction in the recovery time.

82. With regard to growth, there is no statistically significant relationship between compliance ratings on the securities principles and growth in 2009 or 2010.

83. Insurance Standards: Insurance standards are measured by adherence to the Insurance Core Principles (ICPs). Of the 43 countries in the sample, 33 had compliance ratings on the ICPs. The results of the analysis are shown in Table 4. The coefficients for the rating on the ICPs are not statistically significant except for emerging markets’ financial stress. In these cases, the estimated coefficients do not have the expected sign, i.e. higher compliance ratings on the ICPs are associated with higher financial stress and longer recovery times.

Table 4.

Effect of Adherence to Insurance Core Principles on the FSI

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Notes: Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.10. Specifications obtained by iterated deletion of variables with p>0.10.
Table 4.

Effect of Adherence to Insurance Core Principles on Growth

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Notes: Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.10. Specifications obtained by iterated deletion of variables with p>0.10.

84. Corporate Governance: Corporate governance was measured by adherence to the Principles for Corporate Governance (PCG). Of the 43 countries in the sample, only 19 emerging market countries had compliance ratings. The results of the analysis are shown in Table 5. Again, the coefficients on the PCG are not statistically significant for financial stress or economic growth.

Table 5.

Effect of Adherence to Corporate Governance Standards on Growth

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Notes: Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.10. Specifications obtained by iterated deletion of variables with p>0.10.

85. Overall Conclusions: In most cases, this analysis does not find a statistically significant reduction in financial stress or increase in growth due adherence to the banking, securities, insurance, or corporate governance standards. The exceptions are the effects of: (i) the BCPs on financial stress in advanced markets in the first half of 2009, (ii) the BCPs on economic growth in advanced markets in 2009, and (iii) securities principles on the securities sub-index of the FSI for advanced markets. In these cases, adherence to principles is associated with a better outcome.

86. The control variables when statistically significant generally have the expected signs. Measures of financial integration (i.e. higher correlation with advance markets FSI, trade openness and financial openness) are associated with greater financial stress and lower economic growth. Measures of vulnerability (i.e. lower current account and fiscal balances and international reserves) are associated with greater stress and lower growth during the crisis.

V. Standards Assessments and the Global Crisis: Summary of Case Studies21

Selected country case studies show that ROSCs correctly identified many weaknesses that increased countries’ vulnerabilities to the global crisis. There was some evidence that ROSC findings were incorporated in discussions in the context of Article IV consultations. However, due to insufficient follow up either from the authorities and or the Bank/Fund, these weaknesses remained in the run up to the crisis.

A. Introduction

87. This chapter takes a look at the experiences of four countries significantly affected by the global economic and financial crisis. It attempts to determine what caused the crisis in each country and whether ROSC recommendations picked up issues that later were concluded to have been important weaknesses revealed by the crisis. To that end, this chapter examines: (i) each country’s vulnerabilities on the eve of the crisis; (ii) whether ROSCs correctly identified weaknesses; (iii) whether ROSC recommendations were incorporated into Fund surveillance and TA; and (iv) what lessons can be learned for the future.

88. In selecting the four countries surveyed in this chapter—Greece, Hungary, Pakistan, and the United Kingdom—several criteria were taken into consideration. First, countries were screened according to the impact of the crisis (as measured by the Fund’s Financial Stress Index). Second, countries were evaluated based on whether a significant number of recent ROSC reports had been completed ahead of the crisis (a criterion that excluded the United States). Given the nature of the crisis, the resulting list of countries contained primarily European countries. Pakistan was included because its crisis was driven by a mix of domestic and external factors, and also to broaden the regional focus of the case studies. Similarly, to broaden the type of crises considered Greece was added to allow examination of a sovereign debt crisis.

89. The case study approach complements other approaches. While constrained by the small number of country cases covered, it has the advantages of being able to examine details of country circumstances and ROSC implementation.

Greece

The Fiscal Transparency ROSCs identified many of the factors that later contributed to Greece’s fiscal crisis. From 1999 to 2005 Fund Article IV staff reports consistently integrated the findings of ROSCs. After 2005, however, Article IV reports were silent about the ROSC findings and no further follow up was requested. The failure to address weaknesses seems primarily to reflect weak government implementation of the ROSC recommendations.

90. Before the crisis, the main economic concerns in Greece were: (i) high fiscal deficits and public debt; (ii) lack of progress on structural reforms; and (iii) eroding competitiveness. When the crisis hit in late 2008, spreads on Greek 10-year bonds increased to 300 basis points, the highest in the Euro area. However, Greece suffered less direct impact than many other Euro area countries. However, in 2009 Greek output dropped by 2 percent, the fiscal deficit widened to 13.6 percent of GDP, and public debt rose to 115 percent of GDP. Moreover, the government significantly revised fiscal data in October 2009, with the estimated 2009 deficit increasing by almost 10 percent of GDP. The inaccurate data was a consequence of serious institutional problems, shortcomings with data sources, and political interference. 22 Markets were surprised by the revisions and by early 2010 the ability of the Greek government to rollover its debt was called into question. In May 2010, Greece reached agreement with the Fund and EU on a €30 billion Stand-By Arrangement.

91. Greece received a full Data ROSC in 2003 and an update in 2005. These found that Greece met the SDDS standards and largely followed international guidelines. Moreover, statistics agencies generally had the legal and institutional environment to support statistical quality and demonstrated professionalism and transparency in their policies and practices. Two areas of government finance statistics received low ratings. These involved a shortage of resources to compile general government data and no dissemination of metadata on source data and methods. The 2005 ROSC provided an update and stated that “…high priority should be given to addressing remaining weaknesses in general government data and accounting practices.” In sum, aside from the two areas noted above, the reports found that Greece generally met international data standards.

92. Between 1999 and 2006, Fund staff prepared six Fiscal Transparency ROSCs, including two full reports and four updates. The 1999 full report recommended (i) clarifying the treatment of SOEs, investment, quasi-fiscal activities, and state assets; (ii) clearly stating the accounting basis underlying the budget; and (iii) parliamentary hearings on audited financial statements. It also recommended “a comprehensive analysis of the sustainability of the government’s fiscal position in the budget report.” The 2005 full ROSC covered many areas that would become a concern in 2009: (i) budget preparation, (ii) budget procedures and the medium term fiscal framework; (iii) data integrity; and (iv) the monitoring and reporting of government operations. Overall, the fiscal transparency ROSCs correctly identified many of the problems that contributed to the fiscal crisis in Greece, including the adequacy of fiscal data and problems implementing fiscal reforms.

93. From 1999 to 2005, the Fund’s Article IV staff reports consistently reported key ROSC recommendations. The 1999 Article IV staff report summarized the recommendations of the ROSC of that year. The 2004 staff report emphasized the need for timely and accurate fiscal data and urged the government to reinforce the integrity of fiscal accounts. Two boxes summarized the findings and recommendations of the previous fiscal transparency reports and the 2004 update. Finally, the 2005 staff report contained a box on the key recommendations of the 2005 reassessment, which was published as a standalone document. However, after 2005 fiscal transparency issues received less attention as no more ROSCs were conducted.

Hungary

Both the fiscal and financial sector ROSCs identified the factors that were later considered to have contributed to Hungary’s financial crisis. The associated Article IV staff reports consistently integrated ROSC findings into their discussions.

94. Hungary was among the first emerging market countries to suffer significantly from the global crisis. Contributing to Hungary’s difficulties were underlying balance sheet vulnerabilities and significant financial system risks. In particular, fiscal deficits above

8 percent of GDP from 2002–06 increased general government debt to 66 percent of GDP by end-2007. Similarly, banks—including foreign-owned banks—offered foreign currency-denominated loans, which many households and firms found attractive given lower interest rates. As a result, on the eve of the crisis over half of bank lending to the nonfinancial sector was denominated in foreign currency. In addition, substantial financial inflows boosted productivity but added to external liabilities. External debt reached 97 percent of GDP by end-2007. Hungary’s high debt levels and balance sheet mismatches negatively affected investor sentiment, which led to a sharp deterioration in financing conditions in late 2008.

95. The 2001 Fiscal ROSC commended Hungary for its well-working budget process and government accountability. It recommended broadening fiscal coverage to key public institutions and companies and nonprofit organizations that perform government functions. The 2004 update concluded that progress had been made on these items as well as limiting the use of privatization receipts to parliament-approved infrastructure projects and eliminating implicit subsidies on electricity and gas prices. The 2007 ROSC clearly identified, and cautioned against, reliance on transactions which reduced the deficit and debt without changing the underlying fiscal position.

96. The 2002 ROSC on financial sector standards (including banking supervision, securities regulation, insurance, and MFPT) alluded to the progress made by Hungary in assimilating international standards and best practices but pointed to urgent need to address some weaknesses in the system, including more autonomy for the Hungarian Financial Supervisory Authority (HFSA), strengthening of risk management capacity in the banking sector, and providing legal backing to force banks to bring large credit exposures within the prudential limits. The 2005 financial ROSC update also highlighted the need to build more comprehensive requirements for risk management, more rigorous rules on connected lending and on large exposures.

97. There was significant integration of ROSC findings into Article IV reports in the case of Hungary. The 2002 and 2003 staff reports referred to the 2001 data ROSC in discussing data adequacy issues and in updating some tables in the staff report. On budget executions, the 2006 staff report referred to, and aligned with, the 2006 fiscal transparency ROSC which concluded that the authorities’ involvement a particular motorway through a PPP between the government and the state-owned motorway company AAK should be recorded on budget because the motorway ownership will remain with the government.

Pakistan

Staff reports often incorporated ROSC recommendations and followed up with the authorities on implementation. However, given the underlying causes of the economic crisis, progress on ROSC recommendations alone was unlikely to have prevented Pakistan’s economic crisis.

98. Except for persistent current account deficits, Pakistan’s economic performance was generally strong in the years leading up to the crisis. However, in the last quarter of 2008 the macroeconomic situation deteriorated sharply reflecting: (i) the adverse security situation; (ii) exogenous price shocks from oil and food; (iii) the global financial crisis, and (iv) policy inaction during the political transition to the new government. As a result, real GDP growth fell, inflation rose, the current account deficit widened, the stock index fell by one third, and the fiscal deficit rose by 3 percent of GDP in 2008. Although the banking system was well capitalized and liquid at end-June 2008, the crisis led to rising dollarization and an outflow of deposits.

99. The 2000 Fiscal ROSC recommended improving the timeliness and reliability of reports on federal government fiscal activity, as well as improving accounting standards, accounting systems, internal controls, and procurement procedures. The 2004 update welcomed the implementation of some recommendations but noted that important aspects remained to be implemented especially in areas of budget forecasting, fiscal analysis, and reporting of quasi-fiscal activities. In particular, it suggested that efforts should be made to publish budget execution reports according to economic classification to improve fiscal analysis and enhance fiscal management and transparency.

100. The 2004 ROSC on financial sector standards (including banking supervision, securities regulation, and MFPT) indicated that major reforms in the financial sector had led to a more resilient and efficient financial system. However, the report called for a number of reforms including: (i) providing the State Bank of Pakistan (SBP) with legal authority to conduct consolidated supervision; (ii) modifying the SBP Act to either eliminate the prerogative of the Federal Government to supersede the SBP’s Central Board of Directors or clarify the instances where the SBP would fail to reach its objectives; and (iii) formalizing the relationship between the Securities and Exchange Commission of Pakistan (SECP) and the exchanges by entering into an MOU on cooperation and the exchange of information. The 2007 Data ROSC recommended strengthening Pakistan’s adherence to internationally-accepted practices, as well as making monetary statistics more useful by, among others, revaluing the SBP’s Fund positions and gold assets on a monthly basis at end-month exchange rates. The 2008 fiscal update focused primarily on transparency aspects of fiscal management reforms reviewed by the 2004 mission as well as implementation of key ROSC recommendations. The report noted that while the government was at an advanced stage of introducing a comprehensive financial management information system and strengthening the audit function at all levels, there were major institutional changes and practical implementation issues that needed to be resolved.

101. The Fund’s Article IV staff reports frequently referred to recommendations from ROSCs. The 2006 staff report included an appendix that discussed the authorities’ implementation of December 2004 data ROSC. The report also used the assessments provided in that ROSC to complete the Table of Common Indicators Required for Surveillance (TCIRS). The authorities’ redesign of the framework and procedures for compiling and disseminating monetary statistics, as well as the introduction of improved source data for other depository corporations, both key recommendations from the 2003 Data ROSC, were cited in the 2007 Article IV Report. Moreover, the 2009 Article IV report also included a box on financial sector stability that was entirely based on the latest financial sector ROSCs conducted for Pakistan. Most of the recommendations on the financial sector were in line with the findings of the ROSC.

United Kingdom

FSAPs were more effective at identifying risks than stand alone ROSCs. Article IV reports generally discussed weaknesses identified in FSAPs and ROSCs. However, there was a disconnect between the identified vulnerabilities and the call for action. Moreover, the assessment of the prudential and supervisory regime was too sanguine. A more systematic follow up of FSAP and ROSC recommendations was needed.

102. A number of factors contributed to the crisis in the United Kingdom.23 In the 10 years prior to the crisis, there was rapid credit growth to the household sector and mortgage debt increased from 50 percent to 80 percent of GDP. Mortgages were extended at very high initial loan-to-value ratios with the expectation that debt burdens would fall given the rapid appreciation of property prices. Credit to the corporate sector also grew rapidly, with particularly risky exposures building in the commercial real estate segment.

103. Developments in the financial system also contributed to the crisis. First, as a global financial center, the UK was affected by developments in the US and US mutual funds and structured investment vehicles (SIVs) were significant buyers of UK securitized credit. UK banks suffered from large losses on trading book positions and good will. In addition, several of UK’s largest banks were deeply involved in amassing intra-financial system assets and liabilities and relied heavily on short-term wholesale funding. Second, prudential rules were inadequate and supervisory practices were weak. The regulatory approach put too much trust in market discipline as a tool to contain risks, systemic vulnerabilities received too little attention, and supervision was not sufficiently intrusive. Third, there were significant increases in the on-balance sheet leverage of many commercial and investment banks and financial products had very high and imperfectly understood embedded leverage as a result of financial innovation and the search for yield.

104. The 2002 FSAP identified vulnerabilities due to rapid credit growth, particularly due to household mortgages and UK financial institutions’ large international exposure. The report also noted that a slowdown in the global economy would have a detrimental impact on the UK’s financial system given the high interconnectedness of the system to the rest of the world. The FSAP included key recommendations that were relevant to the crisis, in particular the need to: (i) strengthen the monitoring of inter-bank linkages; and (ii) promote market discipline via better disclosure and governance in financial institutions. The FSAP included technical notes on systemic liquidity arrangements and London’s role as global trading center. These advocated improving liquidity risk management and addressing risks in wholesale, over-the-counter (OTC) derivatives, and credit default markets.

105. The ROSC on the Basel Core Principles touched upon issues that were later identified as contributors to the crisis. However, the overall assessment concluded that the UK’s system of supervision and regulation was fully or largely compliant with international financial sector standards. The main recommendations relevant to the crisis included: (i) the need for periodic reports on asset quality; and (ii) the need to develop a new approach to liquidity monitoring.

106. The 2004 Article IV report followed up AML-CFT recommendations and mentioned that banks’ search for yield posed challenges for risk management. In 2005, the Article IV report warned that increasing leverage and search for yield had downside risks. It also mentioned signs of a loosening in corporate lending standards and rapid financial innovation. At the same time, the 2005 Selected Issues Papers followed up some of the 2003 FSAP recommendations and highlighted the risks in credit risk transfer instruments. It noted the under pricing of risks, increasing leverage, rapid financial innovation, and a rapid increase in subprime mortgage lending. Yet, the 2005 Article IV report took an overall sanguine view of the financial sector. In hindsight, the risks identified in the Selected Issues Papers would have warranted stronger measures and a follow up FSAP and banking sector ROSC. The 2006 Article IV report identified the main vulnerabilities that surfaced during the crisis (i.e., increase in high-risk mortgage lending, rapidly increasing leverage, rising exposure to structured credit products and reliance on wholesale funding). Nonetheless, the report praised bank regulation and supervision for responding well to these financial sector developments.

List of ROSCs24

Greece

Anti-Money Laundering and Combating the Financing of Terrorism, January 30, 2009

Anti-Money Laundering and Combating the Financing of Terrorism, January 6, 2006 (Published as part of a Financial System Stability Assessment)

Banking Supervision, January 6, 2006 (Published as part of a Financial System Stability Assessment)

Data (update), February 10, 2005 Data, October 7, 2003

Fiscal Transparency, February 10, 2006 Fiscal Transparency (update), February 10, 2005 Fiscal Transparency (update), June 11, 2003

Fiscal Transparency (update), March 15, 2002

Fiscal Transparency, February 1, 2001

Insurance Supervision, January 6, 2006 (Published as part of a Financial System Stability Assessment)

Securities Regulation, January 6, 2006 (Published as part of a Financial System Stability Assessment)

Hungary

Anti-Money Laundering and Combating the Financing of Terrorism, September 21, 2005

Banking Supervision, June 5, 2002 (Published as part of a Financial System Stability Assessment)

Banking Supervision, April 1, 2001

Data (update), July 9, 2004

Data (update), May 24, 2004

Data (update), May 9, 2003

Data (update), June 5, 2002

Data, May 2, 2001

Fiscal Transparency, January 12, 2007

Fiscal Transparency (update), May 24, 2004

Fiscal Transparency (update), May 9, 2003

Fiscal Transparency (update), June 5, 2002

Fiscal Transparency, April 18, 2001

Insurance Supervision, June 29, 2005 (Published as part of a Financial System Stability Assessment)

Insurance Supervision (PDF file 3079KB), June 5, 2002 (Published as part of a Financial System Stability Assessment)

Insurance Supervision, April 1, 2001

Monetary and Financial Policy Transparency, June 5, 2002 (Published as part of a Financial System Stability Assessment)

Monetary and Financial Policy Transparency, April 1, 2001

Payments Systems, June 5, 2002 (Published as part of a Financial System Stability Assessment)

Payments Systems, April 1, 2001

Securities Regulation, June 5, 2002 (Published as part of a Financial System Stability Assessment)

Securities Regulation, April 1, 2001

Banking Supervision, June 5, 2002 (Published as part of a Financial System Stability Assessment)

Banking Supervision, April 1, 2001

Data (update), July 9, 2004

Data (update), May 24, 2004

Data (update), May 9, 2003

Data (update), June 5, 2002

Data, May 2, 2001

Fiscal Transparency, January 12, 2007

Fiscal Transparency (update), May 24, 2004

Fiscal Transparency (update), May 9, 2003

Fiscal Transparency (update), June 5, 2002

Fiscal Transparency, April 18, 2001

Insurance Supervision, June 29, 2005 (Published as part of a Financial System Stability Assessment)

Insurance Supervision (PDF file 3079KB), June 5, 2002 (Published as part of a Financial System Stability Assessment)

Insurance Supervision, April 1, 2001

Monetary and Financial Policy Transparency, June 5, 2002 (Published as part of a Financial System Stability Assessment)

Monetary and Financial Policy Transparency, April 1, 2001

Payments Systems, June 5, 2002 (Published as part of a Financial System Stability Assessment)

Payments Systems, April 1, 2001

Securities Regulation, June 5, 2002 (Published as part of a Financial System Stability Assessment)

Securities Regulation, April 1, 2001

Pakistan

Anti-Money Laundering and Combating the Financing of Terrorism, December 8, 2004

Banking Supervision, July 22, 2004

(Published as part of a Financial System Stability Assessment)

Data, February 20, 2007

Data, December 7, 2004

Fiscal Transparency (update), April 15, 2008

Fiscal Transparency (update), December 20, 2004

Fiscal Transparency, November 28, 2000

Monetary and Financial Policy Transparency, February 20, 2007

Monetary and Financial Policy Transparency, July 22, 2004 (Published as part of a Financial System Stability Assessment)

Securities Regulation, July 22, 2004 (Published as part of a Financial System Stability Assessment)

United Kingdom

Anti-Money Laundering and Combating the Financing of Terrorism, March 3, 2003 (Published as part of a Financial System Stability Assessment)

Banking Supervision, March 3, 2003 (Published as part of a Financial System Stability Assessment)

Banking Supervision, March 15, 1999

Data, March 15, 1999

Fiscal Transparency, March 15, 1999

Insurance Supervision, March 3, 2003 (Published as part of a Financial System Stability Assessment)

Monetary and Financial Policy Transparency, March 3, 2003 (Published as part of a Financial System Stability Assessment)

Monetary and Financial Policy Transparency, March 15, 1999

Payments Systems, March 3, 2003 (Published as part of a Financial System Stability Assessment)

March 3, 2003

Securities Regulation, March 3, 2003 (Published as part of a Financial System Stability Assessment)

VI. Views of the Stakeholders on the Initiative: Results From the Surveys

A. Summary

107. The 2011 review provides an update of the views of the Initiative’s various stakeholders compared to the 2005 review. In 2005, the views of country authorities, Fund mission chiefs (area and functional department), Bank mission chiefs, and market participants were collected through online surveys. Results from these surveys were compared to responses received from the same groups in the 2010 surveys. The survey questions were kept broadly the same in 2005 and 2010, with additional questions in 2010 focusing on crisis-related issues.

108. The responses in 2010 were broadly similar to those in 2005. In particular:

  • The country authorities’ assessment of the usefulness of the Initiative was slightly less favorable in 2010. However, most of the themes and trends remained relatively similar. Emerging markets and developing countries provided broadly similar responses and viewed the Initiative as useful, while advanced economies found the Initiative significantly less useful compared to results in 2005.

  • For Fund area department mission chiefs, the overall usefulness of the Initiative for their work was viewed to be the same. Fund mission chiefs handling developing countries found the Initiative the most useful.

  • The assessments of Fund functional department mission chiefs were relatively similar to that of 2005. No major changes in point of view were found.

  • The standard setters found the assessment process under the Initiative to be a useful one and were generally satisfied with the process.

  • Due to the limited number of responses from market participants, the results of the 2005 were not updated.25

B. Country Authorities

109. The assessment of country authorities across the different components of the ROSC was slightly less favorable in 2010. Emerging markets and developing countries continued to give the Initiative the highest rankings in different components of the survey and responses from these two groups were broadly similar. On the other hand, advanced economies showed the greatest decrease in rankings between 2005 and 2010, and provided responses that were different from the emerging markets and developing countries.

Taking Stock

110. Ninety-four participants from 60 countries and jurisdictions answered the questionnaire. This translates to a response rate of 25 percent (or 33 percent on a country basis). Among the countries represented, almost half were from Europe (Figure 6). All of the countries in the sample participated in the Initiative or have conducted at least one standard assessment.26

Figure 6.
Figure 6.

Region of Origin of Country Authorities Survey Respondents

Citation: Policy Papers 2011, 014; 10.5089/9781498339322.007.A001

111. For the countries that participated in the Initiative, the primary motivations for participating were, by order of decreasing importance: (i) to signal the country’s commitment to adherence of internationally-recognized standards and codes; (ii) to help foster greater transparency; (iii) to help identify key institutional vulnerabilities; (iv) to help strengthen the economic and policy framework and institutions; and (v) encouragement from the Fund or the Bank. With the exception of motivations (i) and (v), these remain unchanged in their order of importance from the 2005 survey.

112. For the countries that did not publish a ROSC, no predominant reason for such a decision was evident from the questionnaire responses. “Other reasons” was cited by 13 percent of the respondents,27 followed by concern about market reactions (7 percent), and other countries in the region have not published (3 percent).

Usefulness of the Initiative

113. Overall, the country authorities surveyed in 2010 found their participation in the Initiative useful to some extent, although slightly less useful compared to 2005.28 Developing and emerging market countries expressed the highest satisfaction with the Initiative, whereas advanced economies expressed the least satisfaction and also showed a large drop in satisfaction (Figure 7).

Figure 7.
Figure 7.

Overall Usefulness of the Initiative (1 = not at all to 5 = to a great extent)

Citation: Policy Papers 2011, 014; 10.5089/9781498339322.007.A001

114. The benefits derived by country authorities from the Initiative were broadly similar across countries. The authorities surveyed found the Initiative most useful in: identifying vulnerabilities, establishing priorities for strengthening domestic institutions, contributing to greater policy transparency, strengthening of financial infrastructure (for those who undertook an FSAP), and deepening policy dialogue with the Fund and the Bank (Table 6). For the 2011 Review, capturing the build-up of risks in the economy and identifying weakness in institutional capacity were added as new objectives to the survey question.

Table 6.

Usefulness of the Initiative: Country Authorities Answers to the Survey (average rating on a scale of 1 = not at all to 5 = to a great extent)

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Note: shaded cells indicate a rating higher than the average across objectives.

115. For all groups, the role of the Initiative in implementing institutional reforms, strengthening market integrity, and capturing the build-up of risks in the economy were ranked lower than other benefits in both 2005 and 2010. While informing market participants was ranked lower in 2005, advanced and emerging markets ranked this category higher than the average in 2010. The objective of identifying weakness in institutional capacity was found useful overall, except for advanced economies.

116. Of the 12 standards under the Initiative, six standards were most frequently used.29 Payment and settlement systems and fiscal transparency were seen as the most useful overall by emerging markets and developing economies. For advanced economies, AML/CFT and banking supervision were seen as most useful (See Figure 8).

Figure 8.
Figure 8.

Relative Usefulness of ROSCs 1/ (average rank from 1 = least useful to 5 = most useful)

Citation: Policy Papers 2011, 014; 10.5089/9781498339322.007.A001

1/ Standards compared are standards with at least 20 country responses.

117. As a diagnostic tool, payments and settlements, fiscal transparency and data quality/dissemination were seen as the most useful. However, all standards were seen as specifically useful by at least one group of countries for at least one objective in terms of assessment tools (Table 7). Standards were ranked the highest in identifying vulnerabilities and strengthening institutions, particularly for emerging markets and developing countries. However, standards were not ranked to be a particularly useful diagnostic tool by advanced economies. Since the 2005 ROSC, the usefulness of standards in identifying vulnerabilities has increased, driven by responses from emerging markets and developing countries (Figure 9).

Table 7.

Usefulness of Standards as a Diagnostic Tool (average rating on a scale of 1 = not at all to 5 = to a great extent)

article image
Note: shaded cells indicate a rating higher than the average across objectives. ADV = Adanced Economiest, EMC = emering markets, and LDC = developing countries

Statistics based on a total of less than 15 observations.

Figure 9.
Figure 9.

Usefulness of the Initiative in Identifying Vulnerabilities (1 = not at all to 5 = to a great extent]

Citation: Policy Papers 2011, 014; 10.5089/9781498339322.007.A001

Quality of assessments

118. Country authorities considered the standard assessments of good quality. With the exception of insolvency (which has a small sample size), there were no major perceived differences between the standards in terms of quality (Table 8).30 Authorities found the assessments to have the appropriate level of detail, offering well-prioritized, as well as realistic conclusions and recommendations. Authorities were also satisfied with the extent to which the reports reflected their comments and suggestions. These results are consistent with those reported in 2005.

Table 8.

Quality of Assessments (average rank from 1 = least useful to 5 = most useful)

article image

119. By income group, emerging markets and developing countries were the most satisfied with the quality of standard assessments (Table 9). Payments and settlement systems and data were ranked above average for overall quality by all income groups; insolvency and creditor rights and corporate governance were ranked as the lowest in quality compared to other standards.

Table 9.

Quality of Assessments (average rating on a scale of 1 = lowest quality to 5 = highest quality)

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Note: shaded cells indicate a rating higher than the average across objectives. ADV = Adanced Economiest, EMC = emering markets, and LDC = developing countries

Statistics based on a total of less than 15 observations.

In both 2005 and 2010, detailed assessments were considered more useful than ROSCs. However, the relative usefulness of the ROSC compared to the detailed assessment has increased slightly in 2010, and is seen as more useful for the MFPT and Data standards (Figure 10).

Figure 10.
Figure 10.

Which is. more Useful? ( in percent of responses)

Citation: Policy Papers 2011, 014; 10.5089/9781498339322.007.A001

Evolution of the Initiative

120. Country authorities did not call for a major overhaul of the Initiative. While in 2005, three quarters of the respondents favored maintaining the “one-standard-for-all” approach, in 2010, respondents were equally divided between “one-standard-for-all” and the use of different standards for countries with different levels of development.

121. Most respondents did not favor mandatory participation in ROSCs. When asked whether the ROSC should be mandatory, 46 percent of the respondents answered “no.” However, 34 percent favored mandatory participation and some 20 percent remained unsure (Figure 11).

Figure 11.
Figure 11.

Should participation in the ROSC be mandatory? (in percent of respondents)

Citation: Policy Papers 2011, 014; 10.5089/9781498339322.007.A001

122. The majority of respondents agreed that newly created standards should be endorsed under the Initiative. Only 39 percent of the respondents were aware that new standards and codes have been created in response to the 2007– 08 financial crisis. 35 percent were completely unaware of the new standards and 26 percent were unsure whether they had been informed about the new standards and codes. However, when asked whether the Fund or the Bank should endorse these new standards, 63 percent agreed and only 6 percent responded with ‘not at all’. Some country authorities suggested specific standards that could be included under the Initiative (Table 10).

Table 10.

In view of the recent crisis, what type of new standards would you propose to be added?

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123. In terms of implementation, 42 percent of the respondents faced difficulties in implementing standards and codes in their countries to some extent. 45 percent experience little or no difficulty. Out of those that experienced difficulties, reasons such as difficulty in changing the legal system and the nature of inherent financial systems were cited.

C. Fund Area Department Chiefs

124. The survey of Fund area department mission chiefs included similar questions to those included in the country authorities’ survey. The online survey was sent to mission chiefs of 187 economies and had an overall response rate of 21 percent.31 By department, the response rate was as follows: African Department (AFR) at 30 percent, European Department (EUR) at 27 percent, Asia and Pacific Department (APD) at 12 percent, and Middle East and Central Asia (MCD) and Western Hemisphere (WHD) Departments at 10 percent. By type of economy, the response rate was highest for developing countries (60 percent) followed by advanced economies (24 percent) and emerging markets (15 percent).32

Usefulness of the Initiative

125. Mission chiefs of countries that have not participated in the Initiative provided some insights on the reasons for non-participation and main ROSCs of interest.

  • 91 percent of the countries that did not participate in the Initiative were developing countries.

  • From their point of view, the most likely reason for non-participation was “little interest from the authorities and the Fund” and a minority of the respondents noted “interest from the Fund but none from the authorities (unwillingness to participate)” and “interest from the authorities but low priority for the Fund.”

  • Overall, mission chiefs in area departments found the Initiative to be only slightly more useful than in the past (Figure 12). Mission chiefs of advanced economies found the standards the most useful and mission chiefs from emerging countries the least useful (Table 11). Usefulness was based on questions gauging to what extent participation in the Initiative had helped in identifying vulnerabilities, in strengthening domestic institutions or in prioritizing TA needs.

Figure 12.
Figure 12.

Overall Usefulness (1 = not at all to 5 = very)

Citation: Policy Papers 2011, 014; 10.5089/9781498339322.007.A001

Table 11.

Usefulness of Standards

(1= not at all to 5 = very useful)

article image

126. Mission chiefs’ view of the usefulness of the Initiative in informing surveillance has improved since 2005. Mission chiefs were asked to what extent ROSCs or detailed assessments were useful in identifying vulnerabilities and information gaps, and in contributing to Article IV surveillance. The overall response was an average score of 3.7, suggesting that the mission chiefs’ view of ROSC usefulness to surveillance has increased.

Evolution of the Initiative

127. Area department mission chiefs did not see a need for major changes to the Initiative. Over 96 percent of the mission chiefs thought the number of standards was appropriate. However, in light of the recent crisis, several mission chiefs acknowledged the importance of compliance with the standards. Over 96 percent found the standards to be up to date. When questioned about the shelf-life of the ROSC, 80 percent of the mission chiefs responded that the findings in the ROSC remained relevant between one and four years. 20 percent responded that the information is still relevant after a four-year period. The area mission chiefs did not think that participation in the ROSC should be mandatory.

128. The existing approach of having one standard applicable for all countries received support from mission chiefs. However, a few mission chiefs suggested that there may be a need to adapt standards for low-income and fragile countries.

129. Area department mission chiefs saw merit in experts’ participation in Article IV missions. They believe that their country’s needs in the areas covered by the Initiative would be better served if experts joined Article IV (and other surveillance) missions to some extent. They responded that such needs can also be better served to some extent by TA rather than by participation in the Initiative. To increase the effectiveness of the Initiative, mission chiefs suggested that staff recommendations be better prioritized, recognizing countries’ limited implementation capacity.

D. Functional Department Mission Chiefs

130. The views of the mission chiefs who led ROSC/FSAP missions were also gathered through an on-line survey. The survey garnered a 36 percent response rate across the four ROSC-producing departments. Half of the responses originated from FAD (43 percent), and the rest distributed between MCM (24 percent), Legal Department (LEG) (19 percent), and STA (14 percent).33 The responses captured the views of mission chiefs with experience ranging from those having led one ROSC or FSAP to those having led up to six ROSCs or FSAP missions. Overall, the assessment of the mission chiefs was comparable to the survey results produced in 2005, without major changes to the mission chiefs’ point of views.

Usefulness of the Initiative

131. Similar to 2005, the mission chiefs generally found the Standards and Codes Initiative to be useful. In particular, most respondents believed that the Initiative has been useful in identifying vulnerabilities, in establishing priorities for strengthening domestic institutions and in prioritizing assistance (Table 12). No large discrepancy exists between FAD mission chiefs and those from other departments, even though roughly half of the responses were from FAD. The two areas in which the ratings differed between FAD and other departments were contributions to greater policy transparency, which was ranked significantly higher by FAD mission chiefs, and identification of weakness in institutional capacity, which was ranked significantly lower by FAD.

Table 12.

Usefulness of the Initiative: Breakdown by Department

(1 = not at all to 5 = to a very great extent)

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132. In general, ratings for the usefulness of the Initiative have either remained the same or improved. This is with the exception of strengthening financial infrastructure and analysis of macro-relevant issues in surveillance standards (Figure 13). Mission chiefs also thought that surveillance was greatly strengthened by members’ participation in the Initiative.

Figure 13.
Figure 13.

The Usefulness of the Initiative (1 = not at all to 5 = to a very great extent)

Citation: Policy Papers 2011, 014; 10.5089/9781498339322.007.A001

Evolution of the Initiative

133. Functional department mission chiefs did not see the need for major changes to the Initiative. Similar to 2005, the number of standards was judged to be appropriate. In 2005, some respondents thought that the AML/CFT standard should be dropped. In 2010, corporate governance and monetary and financial policy transparency were suggested for elimination.34 In view of the recent crisis, mission chiefs thought that while new standards should not be added, they felt that there is room for updating and strengthening existing standards. In particular, it was suggested that the fiscal transparency standard can benefit from a focus on financial risk and debt management, and that transparency can be strengthened overall. Mission chiefs did not think that the standards were outdated. However, they suggested that this issue s