Front Matter Page
A MACROFINANCIAL APPROACH TO SUPERVISORY STANDARDS ASSESSMENTS
August 18, 2014
Executive Summary
Standards assessments serve several important objectives but are not well integrated into Fund surveillance. Financial standards assessments, when undertaken in the context of FSAPs, are used to identify weaknesses in financial regulation and supervision, or other areas covered by international standards. However, those weaknesses are not specifically linked to the risks and vulnerabilities facing the financial sector. Conversely, the analysis of country-specific vulnerabilities in the FSAP does not contribute to targeting the standard assessment effort, since the assessment must be exhaustive and cover the entire standard.
In addition, in the aftermath of the crisis, financial sector standards have become increasingly complex and assessments much more resource-intensive. Revisions to the core principles and methodologies have extended the length of the assessment process and the final product. As a result, the resource cost of producing assessments has increased considerably, for both the Fund and country authorities. This raises questions about the Fund’s ability to continue delivering high-quality assessments in the current resource environment, as well as about the balance of their costs and benefits for Fund surveillance.
This paper outlines a new approach to streamline standards assessments in FSAPs. The approach allows:
Focusing standards assessments on macrofinancially-relevant principles. A subset of principles is selected, using both empirical analysis and expert judgment, based on the macrofinancial risks for banking, insurance, and securities sectors identified as relevant for financial stability. In essence, the proposed approach builds upon the existing “targeted ROSC” model by replacing the compliance-based criteria for selecting principles with macro-relevant and risk-based criteria. On the basis of the new approach, 11 BCP principles, 11 ICP principles, and 17 IOSCO principles are deemed macrofinancially-relevant.
Incorporating standards assessments’ findings systemically into the FSAP’s overall risk assessment. On the basis of the assessment of compliance with the selected principles, FSAP teams will judge whether the quality of regulation and supervision in these areas mitigates or aggravates the specific risks, and report this systemically into an expanded version of the RAM. This would guarantee full integration of the supervisory findings in the risk assessment, making it easier to prioritize policy recommendations.
Approved By
José Viñals
Prepared by an MCM team supervised by Dimitri G Demekas and Michaela Erbenova, led by Sònia Muñoz, and comprising Timo Broszeit, Mario Catalán, Christina Daniel, Eija Holttinen, Fabiana Melo, Katharine Seal, Nobuyasu Sugimoto, and Laura Valderrama
Contents
GLOSSARY
THE CASE FOR MAPPING MACROFINANCIAL RISKS INTO SUPERVISORY STANDARDS
THE EMPIRICAL METHODOLOGY
A. Macrofinancial Risks
B. The Supervisory Standards Principles Dataset
C. The Methodology
D. Empirical Results
COMBINING EMPIRICAL RESULTS AND EXPERT JUDGMENT IN SELECTING MACROFINANCIALLY-RELEVANT PRINCIPLES
A. The Expert Judgment Approach
B. The Combined Set
INTEGRATING ASSESSMENT RESULTS INTO THE FINANCIAL STABILITY ANALYSIS
BOX
1. Literature Review and Pitfalls
FIGURES
1. Evolution of Standards Assessments Conducted since the Last FSAP Review
2. Dispersion of Compliance Among Countries
3. Binary Tree Including BCPs
4. Selected Principles by Financial Risk for each Standard
TABLES
1. Average Number of ROSCs Conducted During FSAP Missions by Standard
2. Ranking of Compliance Across Time
3. Selected Principles by Standard
APPENDICES
I. Merging Supervisory Standards under Different Methodologies
II. The Methodology
III. Enhanced RAM
GLOSSARY
| ABCP |
Asset-backed commercial paper |
| AE |
Advanced economy |
| AML/CFT |
Anti-Money Laundering/Countering the Financing of Terrorism |
| BCP |
Basel Core Principles for banking supervision |
| BIS |
Bank for International Settlements |
| CDS |
Credit default swap |
| CIS |
Collective investment scheme |
| CISS |
Composite indicator of systemic stress |
| CPSS |
Committee on Payment and Settlement Systems of the BIS |
| DAR |
Detailed Assessment Report on compliance with standards and codes |
| EDF |
Expected default frequency |
| EFA |
Exploratory factor analysis |
| EIOPA |
European Insurance and Occupational Pensions Authority |
| EM |
Emerging market |
| ESMA |
European Securities and Markets Authority |
| FATF |
Financial Action Task Force |
| FSAP |
Financial Sector Assessment Program |
| FSSA |
Financial System Stability Assessment |
| IAIS |
International Association of Insurance Supervisors |
| ICP |
Insurance Core Principles |
| IOSCO |
International Organization od Securities Commissions |
| LIC |
Low-income country |
| MMMF |
Money market mutual fund |
| NPL |
Non-performing loan |
| PCA |
Principal component analysis |
| RAM |
Risk Assessment Matrix |
| ROSC |
Report on Assessment of Standards and Codes |