1. Mandate: The Fund has the responsibility to ensure the effective operation of the international monetary system, thereby promoting economic and financial stability and growth. The recent crisis was a reminder that these goals are best served by Fund surveillance that seeks to ensure that members’ financial systems are properly regulated and supervised, and maintain the right balance between dynamism and stability.
2. Motivation: Against this background, the recent Triennial Surveillance Review (TSR) called for a report on the key elements of the Fund’s strategy in this area. This call was particularly timely in view of the profound changes in the international financial landscape and policy agenda since the crisis, notably the significant multilateral commitments to financial reform and the emergence of important new global actors, such as the G-20 and the Financial Stability Board (FSB). However, articulating a fully-fledged strategy in this environment is a challenge, since the shape of the reform agenda and the institutional architecture are still evolving. Reflecting this constraint, this paper represents a stocktaking and statement of the Fund’s current financial surveillance work agenda and priorities, in order to solicit input from the IMFC and other stakeholders in preparing such a strategy. It is intended, moreover, to provide a basis for the Fund to cooperate with and contribute to the work of other global actors, building on the Fund’s broader mandate and membership and leveraging its comparative advantages.
3. Scope: The Fund’s current financial surveillance has been strengthened considerably in recent years, shaped by two key lessons from the crisis. First, at a national level, macroeconomic policymakers and micro-prudential regulators need to expand their focus to take into account the implications of their actions for the stability of their domestic financial systems. Second, at the multilateral level, effective surveillance of the global financial system requires improved systemic risk monitoring and enhanced cooperation. The Fund is uniquely placed to help turn these lessons into practice: it has global membership, an independent voice, extensive analytical capabilities, and well-established vehicles for macrofinancial surveillance at both the national and the global level. These comparative advantages leave the Fund well positioned to assist its members to contain the effects of the current crisis and, over the medium term, strengthen financial systems, at both the national and global levels, to remain resilient and support growth.
4. Instruments: The instruments for the Fund’s work in this area are multi-faceted. At the bilateral level, Article IV surveillance remains the main vehicle for financial surveillance, but the Financial Sector Assessment Program (FSAP) provides the principal instrument for an in-depth assessment of systemic risks and of the robustness of regulatory, supervisory, and crisis management systems. At the multilateral level, financial sector surveillance is undertaken mainly through the Global Financial Stability Report, in an integrated manner with the World Economic Outlook, the Fund’s regional surveillance documents, and through various policy papers. In addition, the Fund’s vulnerability exercises are part of a broader commitment to integrate better its bilateral and multilateral surveillance. Moreover, surveillance operations have been strengthened and expanded in light of the crisis, notably through the Early Warning Exercise (EWE), thematic multi-country reports, spillover reports, and the introduction of more flexible procedures for FSAPs and the adoption of mandatory FSAPs for 25 jurisdictions with systemically important financial sectors. In addition, the Managing Director’s Action Plan following the recent TSR also launched a number of initiatives to enhance the coverage of financial sector issues in surveillance (see Box). Last but not least, cooperation and joint work with other stakeholders has been intensified.
5. Accountability: A review of progress on all recommendations in the Managing Director’s Action Plan for Surveillance will be conducted ahead of the 2012 Annual Meetings. This will include a follow up on the financial sector surveillance work agenda identified in this paper and on the broader commitment under the Triennial Surveillance Review to better integrate financial sector issues into bilateral surveillance. Moreover, as noted above, a detailed strategic plan for the Fund’s work in these areas will be forthcoming, which will define the policy priorities that will emerge as the global economy exits from the crisis and the attendant resource implications and tradeoffs. This strategy will also help clarify the Fund’s role in the evolving global architecture and, in particular, its relationship with the FSB once its role and legal status are clarified in light of the direction provided by the G-20.
To this end, the Fund—like other international financial institutions—has clarified that it is not bound to support any decisions that are inconsistent with its own legal and policy framework. This is particularly important in the case of the FSB’s cooperation and information exchange initiative, under which the Fund does not participate in decisions regarding the listing of non-cooperative jurisdictions and the adoption of negative measures relating to those jurisdictions that are not in accordance with the Fund’s legal framework and policies.