Financial Surveillance Strategy - Progress Report

This note provides background to the informal Board briefing on the one-year progress in implementation of the FSS. The Board will have the opportunity to review progress in implementing the FSS in the context of the 2014 TSR and the 2014 review of the Financial Sector Assessment Program (FSAP), as well as through periodic reports to the International Monetary and Financial Committee and the semi-annual work program.

Abstract

This note provides background to the informal Board briefing on the one-year progress in implementation of the FSS. The Board will have the opportunity to review progress in implementing the FSS in the context of the 2014 TSR and the 2014 review of the Financial Sector Assessment Program (FSAP), as well as through periodic reports to the International Monetary and Financial Committee and the semi-annual work program.

1. The IMF's Financial Surveillance Strategy (FSS) was adopted by the Executive Board in September 2012 in line with a key recommendation of the 2011 Triennial Surveillance Review (TSR). The strategy sets out concrete and prioritized actions over three to five years to strengthen financial surveillance to help the Fund fulfill its mandate of ensuring the effective operation of the international monetary system and supporting global financial stability (Table 1). It is built on three main pillars: (i) improving risk identification and policy analysis; (ii) fostering an integrated view of financial sector risks in products and instruments; and (iii) engaging more effectively with stakeholders.

Table 1.

Financial Surveillance: Strategic Priorities

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Source: IMF's Financial Surveillance Strategy.

“None” means existing resources will be reprioritized, or processes or products will be streamlined.

Area departments (ADs) play a key role in shaping policy lines given their operational experiences.

2. This note provides background to the informal Board briefing on the one-year progress in implementation of the FSS. The Board will have the opportunity to review progress in implementing the FSS in the context of the 2014 TSR and the 2014 review of the Financial Sector Assessment Program (FSAP), as well as through periodic reports to the International Monetary and Financial Committee and the semi-annual work program.

3. Over the first year of implementation, progress has been made on each of the three pillars, especially on improving risk identification and policy analysis. This lays the necessary groundwork for strengthening financial surveillance. (Table 2) provides details on the progress achieved on each pillar. In summary:

  • Improving risk identification and policy analysis: the analytical basis for Fund policy advice has seen most advancement in the areas of capital flow management and macroprudential policy. Significant progress has also been made in the assessment of regulatory reforms and the effectiveness of unconventional monetary policy. Some progress has been made in other areas, such as sovereign-bank feedback loops, cross-border linkages and spillover analysis, and financial deepening in countries with shallow financial systems.

  • Fostering an integrated view of financial sector risks: good progress has been made in incorporating global risks into bilateral surveillance through enhanced inter-departmental collaboration, such as coordinating the underlying work on Risk Assessment Matrices (RAMs). In Article IV consultations, some aspects of financial surveillance are generally well covered, such as key vulnerabilities and regulation and supervision, but others, such as the risk aspects of macrofinancial linkages, are less well covered. Institutional support for financial surveillance has been reinforced with new staff guidance notes, reinvigorated interdepartmental collaboration groups in critical policy areas, the increased availability of financial risk monitoring tools, and the development of guidance to MCM participants in Article IV missions. However, cluster-level surveillance is at an early pilot stage and resource constraints have prevented an increase in FSAPs to non-S25 vulnerable countries.

  • Engaging more actively with stakeholders: some progress has been made in all the areas identified in the FSS. The Fund has facilitated global dialogue through various high-level events in key policy areas, such as macroprudential policy and risks to the global financial system, and, under the leadership of the FSB, continues to make contributions to the work on the global regulatory reform agenda. At the same time, some progress has been made in addressing data gaps and deepening collaboration with the World Bank.

Table 2.

Highlights of Progress to Date (October 2012–September 2013

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4. The implementation of the FSS continues to face important challenges. In the area of risk and policy analysis, the development of a unified macrofinancial framework as a workhorse for Fund surveillance remains incomplete. Resource constraints have impeded progress in other areas. Specifically, the goal of increasing the frequency of FSAPs to non-S25 vulnerable countries has not been met. In addition, the continued need to support crisis countries with specific skills has meant that other requests for MCM support have not been fully met. Moreover, while the pilot project on enhancing financial surveillance in low-income countries was welcomed by the relevant authorities, it has proved to be resource intensive. Finally, although implementation of the 2012 Integrated Surveillance Decision is at an early stage, increasing traction on issues involving outward policy spillovers has proved challenging.

5. Over the next year, implementation will focus on those areas where further progress is most needed (Table 3). On risk and policy analysis, further work will be needed on exit from unconventional monetary policies (as events unfold), the design of future monetary policy frameworks, and the policy implications of sovereign-bank spillovers and of financial interconnectedness between countries. In products and instruments, more progress is needed on strengthening financial surveillance within Article IV consultations by better incorporating macrofinancial linkages, systematically following up on FSAP recommendations, and using the new guidance notes. Engagement with stakeholders will focus in part on helping member countries strengthen financial sector oversight, enhancing collaboration with central banks and the BIS on interconnectedness analysis, and continuing to facilitate global discussions on key emerging policy areas. In order to fulfill the mandate on supporting global financial stability, staff will continue to make the case for greater data dissemination to the Fund.

Table 3.

Work Ahead for Next Year

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Financial Surveillance Strategy - Progress Report
Author: International Monetary Fund