The 2017 Joint Review of the Standards and Codes Initiative

Abstract

The 2017 Joint Review of the Standards and Codes Initiative

Background

1. The standards and codes (S&C) initiative was launched in the wake of the emerging market crises of the 1990s as part of efforts to strengthen the international financial architecture. As conceived, the initiative promotes adoption of S&C to improve economic and financial resilience through three intermediate objectives: assist countries in strengthening their economic institutions, inform World Bank and IMF work, and inform market participants.

2. Under the initiative, the Fund and the Bank recognized a set of policy areas and their associated S&C as important for maintaining sound financial systems. It comprises 12 policy areas and their standards and codes relevant to economic and financial policy making and implementation. These “rules of the game” are typically grouped into three categories:

  • The transparency S&C, set by the Fund, include the data dissemination standards and quality framework, the fiscal transparency code (FTC), and the monetary and financial policy transparency (MFPT) code.

  • A second group pertains directly to the financial sector. It includes financial supervisory standards for banking supervision (BCP), securities regulation (IOSCO), and insurance supervision (ICP), and standards for financial market infrastructures (FMI) and crisis resolution and deposit insurance (CRDI). These are set by external standard setting bodies (SSBs) and typically assessed in the context of the Financial Sector Assessment Program (FSAP).

  • A third set of “institutional and market infrastructure” standards includes insolvency and creditor rights (ICR), corporate governance (CG), and accounting and auditing (A&A). This group also includes the international standards on combating money laundering and the financing of terrorism and proliferation (the AML/CFT standard). The Bank is the standard setter, jointly with the United Nations Commission on International Trade Law (UNCITRAL), for ICR. The other standards are set by external SSBs.

Figure 1.
Figure 1.

S&C Policy Areas

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A001

1/ CRDI is underpinned by the International Association of Deposit Insurers’ Core Principles for Effective Deposit Insurance Systems, which the Fund’s Board endorsed in 2011. A second standard, the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions and its modular assessment methodology have been under development in the period since. The standard is being submitted to the Board for endorsement as part of this review.2/ The Bank is the standard setter, jointly with UNCITRAL, in consultation with the IMF, for ICR; the other Bank-led S&C are set externally.3/ Classification has been revised to be consistent with FSB classification of AML/CFT.

3. The four prior reviews of the S&C initiative have focused on improving its operational effectiveness, especially with regard to Bank and Fund work. The initiative has been found to have success identifying vulnerabilities and establishing priorities, although it has been acknowledged that compliance with S&C is only one building block for ensuring macro financial stability and crisis prevention. Prior reviews have recognized the inherent balance that S&C outputs1 must strike between clarity and transparency on the one hand, and a focus on reform efforts and country ownership on the other. Across reviews, there have been persistent calls for better linkages with surveillance and capacity development. The 2011 review concluded that integration of Reports on the Observance of Standards and Codes (ROSCs) into Fund surveillance remained mixed, but integration with Bank and Fund financial assistance appeared stronger. It also noted the progress made in integrating ROSCs with technical assistance (TA), although this, too, was cited as an area where further efforts could be made.

4. This review builds on recent evidence that the initiative continues to be well appreciated by member countries. Previous surveys have shown that emerging market (EM) members, which constitute the initiative’s original focus, as well as low income and developing countries (LIDCs), generally perceive the initiative as most useful. At the same time, the recent surveys in some individual policy areas reaffirm that there is scope to better adapt the initiative to the policy needs of member countries and to support capacity development efforts and Fund surveillance and Bank operational work.

5. The set of papers for the review is a result of a collaborative effort by numerous Bank and Fund departments, reflecting the diverse array of work under the initiative. The review follows two informal briefings for the Fund Board. This paper has two parts: (i) an assessment of the evolution of the initiative since the last review in 2011, and (ii) a set of recommendations going forward. This paper is accompanied by two background papers. One summarizes developments within individual policy areas, including survey results, and the outlook for each individual policy area. The other, produced by external consultants under the direction of staff, takes a thematic perspective to assess developments across the initiative since 2011.

A Strategic Approach to Reviews of the S&C Initiative

6. Evolution of S&C work under the initiative has accelerated in several policy areas. As noted in the February 2017 Board paper on the “Scope and Focus of the 2017 Review of the Standards and Codes Initiative,” this progress reflects most policy areas’ channels of direct Board engagement at the Fund through policy reviews in individual areas, which have been used since the 2011 review to improve operational effectiveness. In fiscal transparency, 2012 and 2014 Board papers detailed efforts toward a revised fiscal transparency code and a new assessment output. Through the 2012 and 2015 reviews, data dissemination standards were enhanced and a 2016 IEO evaluation is informing plans to review the broader framework for assessing data quality for closer alignment with the Fund’s surveillance work. New and revised international standards for safe and efficient financial market infrastructures were adopted by the Fund and Bank Boards in 2012. The 2014 Review of the FSAP assessed the impact of changes to the program since the 2009 review to make it more effective going forward, including its S&C work. Finally, the 2014 Review of the Fund’s Strategy on AML/CFT updated the Board on the 2012 strengthening of the Financial Action Task Force (FATF) Recommendations, the 2013 revision of the assessment methodology, and the enhancement of review mechanisms to ensure the quality and consistency of assessments across the range of external assessor bodies.

7. Notwithstanding this Board engagement, implementation of the recommendations from the 2011 review of the S&C initiative has been mixed. Staff had called for closing gaps in the architecture of the initiative and for strengthening “compliance in practice,” especially among countries with systemically important financial sectors. Specifically, the 2011 review recommended to (i) adapt the coverage of the initiative to better safeguard financial stability, (ii) improve prioritization of standards assessments, (iii) better integrate the initiative in Fund surveillance and capacity development efforts and improve access to findings, and (iv) implement modest changes to improve the efficiency of resource use. Those recommendations were not pursued systematically in policy area reviews. This review concludes that substantial efforts have been made to adapt the coverage of the initiative to better safeguard financial stability, while prioritization across policy areas can still be improved, as can linkages to Fund surveillance outside of FSAPs. The review also finds that resource intensity of standards assessments, especially in the financial sector, has increased for both member countries and assessors.

8. The contrast between the dynamic evolution of S&C work in individual policy areas and follow-through on the earlier review of the initiative calls for a new approach. The initiative is unique in that it covers 12 very different and highly technical areas across both Bank and Fund work. Its decentralized nature has led to appropriate variations in the way the standards are assessed and presented across the 12 policy areas, as acknowledged in the 2011 review. However, experience with the 2011 and prior S&C reviews has confirmed the challenge of advancing certain long-standing goals through specific operational guidance at the overall initiative-level, for example, improving the link with surveillance. Nevertheless, recent innovations developed in individual policy areas since 2011 may be helping to overcome this challenge. In this respect, a better role for reviews of the overall initiative may be to address emerging gaps and weaknesses in the overall architecture of the initiative and facilitate, as appropriate, cross-fertilization of promising innovations across policy areas.

9. This review adopts such a “strategic approach” to maximize the impact of Board engagement and reinforce the initiative’s contribution to international financial stability through institution-building. The review seeks to capitalize on the progress made by purposely devolving responsibility for operational reviews and effectiveness considerations to individual policy areas. This and future reviews would look “top-down” to identify gaps and weaknesses in the S&C framework, while at the same time identifying “bottom-up” innovations in individual policy areas that can be proposed for consideration in the context of forthcoming policy areas reviews. Finally, to maintain focus and momentum of S&C work, the review calls for increased engagement with member countries and external SSBs/assessors, as well as continued collaboration across policy areas.

Figure 2.
Figure 2.

S&C Coverage Across the Membership

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A001

Source: IMF and World Bank S&C database and staff calculations.
Figure 3.
Figure 3.

Key Trends in S&C Coverage

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A001

1/ Includes MFPT, FTC, data, AML/CFT (Fund-produced outputs), A&A, CG, and ICR outputs for individual members.2/ Includes BCP, IOSCO, IAIS, FMI, and CRDI outputs for individual members.Source: IMF and World Bank S&C database and staff calculations.

Evolution of the Initiative Since 2011

A. Progress in Implementing the 2011 Recommendations1

10. The 2011 Review pointed to the need to incorporate lessons from more than a decade of implementation and the global financial crisis. The review had followed significant downsizing of the scale of the Fund’s activities in this area to adapt to new budget constraints in line with a projected sharp deterioration in the Fund’s income position. As in earlier reviews, staff found a fairly high appreciation of the overall initiative. The review also raised questions about the initiative’s link to surveillance and capacity development efforts, relevance to market participants, and traction with policy makers. The review stressed that the usefulness of the initiative hinges on its ability to identify gaps and weaknesses in institutional frameworks, set reform agendas, and enhance transparency. The section below discusses the progress implementing the recommendations of the 2011 review (Box 1).

Recommendations of the 2011 Review of the S&C Initiative

The IMF Executive Board endorsed the following recommendations in 2011:

1. Adapt the coverage of the initiative to better safeguard financial stability, including by:

  • strengthening arrangements dealing with weak institutions and cross-border arrangements;

  • reviewing and updating transparency areas (data, fiscal, and monetary and financial) and finalizing the insolvency and creditor rights standard;

  • enhancing coordination between SSBs and assessors through a more systematic feedback mechanism, to ensure that lessons from standards implementation inform standards revisions and that the voluntary nature of the ROSC exercise is maintained.

2. Improved prioritization of standards assessments across policy areas, countries, and principles. Specifically:

  • ensuring that the focus on countries with systemically important financial sectors does not crowd out low-income and emerging market countries;

  • improving the link between ROSC assessments and capacity building.

3. Better integrate ROSC findings into Fund surveillance, including by:

  • continuing efforts to improve the public’s access to ROSCs and efforts to encourage countries to publish ROSCs.

4. Enhance efficiency of the initiative through:

  • a broader application of targeted ROSCs;

  • fostering ownership and more frequent updates through country self-assessments.

2011 Recommendation 1: Adapt Coverage of Initiative to Better Safeguard Financial Stability2

11. The crisis pointed to gaps in the initiative’s overall architecture, especially with regard to credible safety nets and resolution mechanisms. Thus, a new policy area on Crisis Resolution and Deposit Insurance (CRDI) was incorporated in the 2011 S&C review. It is underpinned by the International Association of Deposit Insurers’ (IADI) Core Principles for Effective Deposit Insurance Systems (DICP), which the Fund’s Board endorsed in 2011. A second standard, the Financial Stability Board’s (FSB) Key Attributes of Effective Resolution Regimes for Financial Institutions (KA) and its modular assessment methodology (by sector) have been under development in the period since. The standard and the assessment methodology for the banking sector are being submitted to the Board for endorsement as part of this review.

12. Additionally, most other policy areas have been revised to reflect lessons from the financial crisis. The financial sector standards have been revised substantially, mainly to address the gaps and issues related to systemic risks, systemically important institutions, cross border collaboration, safety nets, and crisis resolution. Greater attention to fiscal sustainability has brought about a complete revision of the FTC. These changes, as well as changes to the market integrity codes, are discussed in detail in section B. However, the process of revising the ICR standard is still ongoing3 and the MFPT code was not revised as envisaged.

13. Some of the changes to standards, while welcome and anticipated, have come with increased resource costs of assessments. With stronger focus on actual effectiveness, complexity, and comprehensive coverage, these changes have especially made financial sector standards assessments more directly relevant to macrofinancial stability. At the same time, these assessments require greater technical expertise and quality and consistency checks, thus making financial S&C more resource intensive. 4

14. The 2011 review raised a particular concern regarding the enhanced cooperation between SSBs and assessors. Specifically, the review noted that some potentially coercive elements of the external parties’ framework in dealing with “non-cooperative jurisdictions” may be contrary to the cooperative nature of the Fund’s relationship with its members, as well as the voluntary nature of the S&C initiative.5 This has been resolved by ensuring that the Fund and the Bank play a “good offices” role in those processes, while refraining from participating in those aspects of the process that are coercive in nature, and by the SSBs’ ensuring that such processes respect the Fund’s legal framework, the cooperative nature of the Fund’s relationship with its members, and the voluntary nature of the ROSC exercise. More generally, this cooperation has been developed to encourage increased adherence with international standards, particularly in the financial sector area (Box 5).

15. The SSBs in the financial standards area are beginning to increase their implementation monitoring activities. Some SSBs have embarked on their own implementation monitoring exercises, including related to the post-crisis reform agenda. The International Organization of Securities Commissions (IOSCO) has started experimenting with its own member reviews involving members’ self-assessments of the implementation of IOSCO principles. The Committee on Payments and Market Infrastructures (CPMI)-IOSCO is now regularly monitoring the implementation of the Principles for Financial Market Infrastructures (PFMI). In insurance supervision, the International Association of Insurance Supervisors (IAIS) is intending to launch its own TA program to support implementation of the ICP. In the area of banking supervision, members of the Basel Committee on Banking Supervision (BCBS) are placing greater importance on supervisory issues and practices, and have also successfully started programs to monitor Basel III standards adoption and to assess the consistency and completeness of implementation via its Regulatory Consistency Assessment Program (RCAP). In its S&C work, the Fund and the Bank have close, ongoing collaborations with the BCBS, CPMI, FSB, IADI, IAIS, and IOSCO.

16. In the financial area, a substantial number of peer reviews of FSB member jurisdictions have been undertaken. The focus of country reviews includes the steps taken or planned by national authorities to address FSAP and ROSC recommendations made by the Fund and the Bank, as well as reforms and standards in other G20 priority areas. 6 While FSB jurisdictions have committed to undergo an FSAP every five years, country peer reviews have typically taken place 2-3 years afterward. Going forward, this frequency will change as the FSB’s review cycle has recently been moved to eight from five years.7 The table below illustrates FSB peer reviews and IMF and World Bank S&C outputs with members.

Table 1.

Members’ FSB Peer Reviews and S&C Outputs 1/

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Number indicates annual total of Fund and/or Bank S&C outputs; gray shaded area indicates year during which FSB peer review was scheduled.

Total includes Fund/Bank S&C outputs and FSB peer reviews. The FSB peer review for Hong Kong SAR is scheduled for 2017.

Source: IMF and World Bank S&C database, FSB peer review schedule, and staff calculations.

17. Similarly, SSBs outside the financial supervisory area have increased their involvement in the initiative. This is particularly the case for S&C work in AML/CFT, as the FATF and the nine FATF-style regional bodies (FSRBs)9 have increased member mutual assessment activities, which has substantially increased the total number of AML/CFT assessments. They are expected to move from their current output of 17 to 20 mutual evaluations per year, to up to 25 evaluations per year. The Bank has been collaborating with the Organization for Economic Cooperation and Development (OECD) in the area of corporate governance, and with the International Auditing and Assurance Standards Board (IAASB) in the area of accounting and auditing. Fund staff has worked closely with other organizations on the revised FTC, including the Global Initiative for Fiscal Transparency (GIFT), the International Budget Partnership (IBP), the OECD, and the World Bank, in order to help anchor their work and ensure complementarity.

18. Although welcome, the increased activity by SSBs in undertaking S&C work has introduced new challenges. One challenge, even amid ongoing efforts to closely coordinate, relates to minimizing scheduling conflicts, availability of experts, avoidance of overlaps, and pressures on resources. Another challenge is the increased intensity of S&C assessments, which now involves a stronger emphasis on actual implementation. This, together with increased self-assessments and surveys that inform the formal S&C output (discussed below), may potentially be leading to “assessment fatigue” for participating members, especially among some of the S29 jurisdictions. If so, it could undermine efforts to build ownership, and more generally, efforts to encourage adherence to international standards.10

2011 Recommendation 2: Improved Prioritization of Standards Assessments

19. There has always been an inherent tension around prioritization within the S&C initiative. As pointed out in the 2011 review, the initiative lacks “an overall framework for prioritization across standards, and there is no mechanism to ensure that the choice of ROSCs is aligned with Bank and Fund priorities.” In the context of the FSAP program, however, a framework exists to prioritize financial sector work, including standards assessments. At the same time, the decentralized structure of the initiative has also allowed innovative practices to flourish. It has reflected ownership by individual policy areas and direct engagement with member states. It has also provided scope for the IMF Board to consider operational and effectiveness issues in a policy area-specific context.

20. In terms of financial sector work, prioritization has been guided by the Fund Board’s 2010 decision to make financial stability assessments mandatory for countries with systemically important financial sectors (S25/S29). The 2010 decision11 reflected an effort to address the challenge of integrating financial sector issues into bilateral surveillance by adopting a more global, risk-based approach. Consequently, in terms of S&C work, almost all S29 jurisdictions were covered during 2012-16 and they received on average of four financial S&C outputs during that period.

21. As S&C output for S29 jurisdictions picked up, it declined for EM and LIDC countries. With roughly six FSAPs for non-S29 member countries per year, financial sector S&C outputs to those countries have fallen by 18 percent during 2012-16 compared to the prior period, while S&C country coverage fell from close to 40 percent to around one-quarter (Figure 3). These developments were consistent with the 2011 S&C review’s expectation that “tradeoffs will be unavoidable. For example, balancing the additional requirement from the G20 versus the need for assessments of emerging markets and low-income countries.” Thus, while the S25/S29 decision ensured a global, risk-based allocation of FSAP resources, it also implied a shift in financial sector S&C assessments in the same direction, especially as stand-alone financial sector standards assessments outside the FSAP program became increasingly rare.12

22. The strengthening of some standards also increased their complexity, which may have further constrained non-S29 financial sector coverage under the initiative. The increased costs of financial standards assessments for S29 jurisdictions may have crowded out S&C work in non-S29 countries.13 These increased costs were documented in the paper “A Macrofinancial Approach to Supervisory Standards Assessments,” which proposed selective assessments of a subset of principles as one of the ways to integrate the S&C into surveillance and help offset the assessment costs.14

23. At the same time, the increase in financial sector TA has likely offset some of the demand for S&C work under the initiative to non S29 countries. Overall, financial sector TA delivery (in person years) increased by more than 37 percent between 2011 and 2016, much of it targeting low- and lower-middle income countries.15 Some of these activities are directly aimed at improving compliance with financial sector standards, especially in banking supervision and payments systems. Still, there is high unmet demand for financial sector diagnostics,16 which has led to the development of Financial Sector Stability Reviews (Box 2). While FSSRs are not part of the S&C initiative, a fully funded Financial Sector Stability Fund (FSSF) would be expected to support about 4-5 missions per year, which would amount to 15 percent of non-S29 countries over a five-year period. With commitments from Italy and Luxembourg, funding is currently in place for just under 15 percent of the total envisaged under the FSSF.

24. Bank-led S&C work has remained focused on non-systemic and low income countries, offsetting some of the shift in S&C coverage under the initiative, and recently started to incorporate, as needed and requested by the authorities, financial sector S&C work in FSAP development modules. However, overall Bank S&C output fell as selection criteria became more restrictive, and was impacted by changes to the budgetary allocation process. Also, the demand from member countries fell in a large part because baseline assessments have been done in most countries. Thus, while overall S&C outputs for EM and LIDC members declined by 37 percent between 2007-11 and 201216, the decline in the relative share of total output was less steep (to 55 percent from 69 percent) as overall S&C output also fell. Going forward, the Bank will continue to incorporate S&C work in FSAP development modules through full assessments or technical notes as may be relevant for the country.

Financial Sector Stability Reviews

As a recent innovation, the Fund’s Monetary and Capital Markets Department has developed and piloted a new instrument, the Financial Sector Stability Review (FSSR). FSSRs are expected to be a diagnostic upon which financial sector reform programs can be built and implemented. FSSRs assess country-specific risks and vulnerabilities; the adequacy of institutional frameworks; and capacity in financial regulation and supervision, as well as crisis prevention and management. FSSRs provide recommendations for enhancing prudential frameworks and safety nets. Follow-up TA would draw on the Fund’s experience in helping LIDCs ensure that they pursue financial inclusion and deepening in a manner that is consistent with financial stability. Training will focus on sustainably strengthening capacity to offset often high attrition rates in regulatory agency staffing, combining face-to-face training with new online tools to be developed.

Over the past two years, MCM has conducted several TA missions that may be seen as precursors of the FSSR. These include TA to Mongolia, Lesotho, El Salvador, Sri Lanka, and Sudan. Each mission proposed medium-term plans to strengthen financial sector stability in areas including financial regulation and supervision, the regulatory perimeter, lender-of-last-resort facilities, crisis prevention and management frameworks, and stress testing capacity. The work is expected to be funded by a multi-donor trust fund, and also cover related capacity development activities and development of financial sector statistics. Italy and Luxembourg have become the first member countries to support the Financial Sector Stability Fund.

Source: Macroeconomic Developments and Prospects in Low Income Developing Countries—2016.

25. In this context, low income countries have seen a particularly sharp decline in S&C outputs. This group of countries constitutes around 35 percent of Fund and Bank membership but received only 16 percent of Fund/Bank-produced S&C outputs over 2012-16. After an uptick over 2007-11 to 19 percent, the share of financial sector S&C output with LIDC members fell to 8 percent in the recent period. By S&C policy area, the greatest output for LIDCs over the 2012-16 period was in A&A, followed by ICR and BCP. No S&C work was undertaken with LIDCs in the recent period in the areas of data or MFPT and only one output was produced in each of the areas of IOSCO, FMI, CRDI, and AML/CFT.

26. The overall trends in coverage under the initiative were also affected by a pause in outputs based on the Fund’s transparency areas. The 2011 review envisaged a pick-up in activity in this area in line with planned revisions to ensure continued alignment with member needs. Surveys had repeatedly shown that these codes were perceived as the most useful by country authorities (Figure 5). However, output across all three areas declined, most likely reflecting that countries that had undergone initial assessments saw limited gains to undertaking further updates in the absence of significant changes to the original structure of the underlying S&C (Table 2).

27. With the recent revamp of the fiscal transparency code, activity is picking up. More than 20 such assessments have recently been completed and have been positively received by members. This seems related to the introduction of graduated assessment of conformity to the best international practice, making it a more effective tool for low-and middle-income countries to chart progress of reform efforts, and strengthened links to capacity development efforts. However, the data quality framework remained unchanged since 2003, with a recent IEO report highlighting that it “is more focused on statistical processes than on passing judgement on the quality of statistical output itself.” Additionally, the revision to the MFPT, which has remained unchanged since 1999, is also pending. In total, there were only seven assessments under the MFPT code and data policy area during 2012-16.

Table 2.

Organizational Structure of the Original Transparency S&C

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2011 Recommendation 3: Better Integrate ROSC Findings into Fund Surveillance

28. The Board’s 2010 decision to make financial stability assessments mandatory for countries with systemically important financial sectors was by far the most important vehicle to integrate the use of S&C into Fund surveillance. This decision was reaffirmed in the 2014 review of the FSAP program, where surveys confirmed a high degree of satisfaction with the FSAP. The Fund Board also agreed in the 2014 FSAP review that “S&C remain a valuable tool for an exhaustive and comprehensive assessment of financial supervision.” The review noted the high rate of implementation of FSAP recommendations and the increasing rate of publication of the Financial System Stability Assessment (FSSA). Finally, the review also concluded that “FSAP findings in systemic countries provided critical input into the Fund’s surveillance, including policy recommendations to address vulnerabilities that had contributed to the most severe bout of global instabilities in decades.”

29. Outside the FSAP, the direct link between S&C outputs and Article IV consultation reports appears to have weakened. ROSCs are intended to make results of standards assessments more accessible by providing summary findings and prioritized recommendations. However, in some policy areas, there has been a trend toward foregoing ROSCs and only publishing Detailed Assessment Reports (DARs). Meanwhile, DARs have become longer and more complicated, reflecting the increased complexity and comprehensiveness of many of the revised standards. The increased resource intensity of producing ROSCs and DARs has led to more frequent use of technical notes, some of which are also complex. The limited accessibility and clarity of some of these S&C outputs may hamper integration with Fund surveillance and Bank operational work.17

30. Developments in individual policy areas present both a challenge and an opportunity for improving the link between S&C work and surveillance. As already discussed, the increased complexity of many of the revised standards has, in some cases, resulted in longer and more complicated outputs. This could hinder take-up of findings in surveillance. On the other hand, in the case of the financial S&C, for example, the post-crisis revisions were intended to account for pre-crisis gaps and a focus on outcomes, including in some cases the stability of the system as a whole (macroprudential focus). In still other policy areas, innovations and emerging best practices are helping to better align and present the findings of S&C work in a surveillance-compatible manner.

31. In particular, the new fiscal transparency evaluation (FTE) shows promise in building more effective links to surveillance. This redesigned fiscal ROSC, with prioritized, easily accessible findings and recommendations, enhances its relevance to surveillance and other operational work. In several cases, findings and recommendations from FTEs have fed into area departments’ policy notes and staff reports in the context of Article IV consultation or other surveillance related missions. Even within a short time-frame, there also have been direct linkages between FTE findings and recommendations and Fund program design, including setting of structural benchmarks. As discussed later, the approach to the FTE could be considered a “good practice” from which other policy areas could draw insights.

32. Thus, it may be time to redefine what constitutes progress toward the key objective of strengthening the link between S&C work and Fund surveillance. This would recognize that surveillance can guide assessments (where to look) as much as assessments should feed into surveillance. Since the outset, the overall objective of the initiative has been to strengthen institutions and therefore indirectly improve the effectiveness of a country’s policy making environment. Follow-up on some of the specific technical issues identified in S&C reviews may thus be tangential to concerns that should be the focus of Article IV consultation reports. Additionally, such a direct link to surveillance may be less important if S&C work continues to increase its orientation around risks and outcomes, thereby aligning with surveillance in another, more fundamental way. Facilitating cross-fertilization of such innovation across policy areas, as appropriate, could help further promote alignment with surveillance.

33. The publication rate of S&C outputs has continued to increase. Publication rates increased from 70 percent between 2007-11 to 81 percent between 2012 and 2016 (Figure 4). Rates vary by income groups, having increased in the recent period for advanced economies (AEs) (now approaching 100 percent) and even more so for EMs (rising 14 percentage points from the prior period to 76 percent), while declining for LIDCs. In most of the 12 policy areas, a larger share of reports is published today; an exception is ICR as publication rates declined further.

Figure 4.
Figure 4.

Publication Trends

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A001

Source: IMF and World Bank S&C database and staff calculations.

34. While publication rates are up, the challenge of improving access to S&C findings remains. While the 2011 review called for better access to ROSC findings, this review finds that access through the Fund and Bank websites appears to have deteriorated for outputs in many policy areas. For the Bank, in particular, as a result of its recent budget restructuring, there is no longer a centralized website where reports could be made easily available. Policy areas where accessibility has been prioritized-for example, new outputs like the FTE-have demonstrated improvements on this front. Consistent with the decision to devolve operational issues to individual policy areas, it is recommended that going forward policy areas maintain their own web platforms for dissemination of S&C outputs, links to which can be compiled for ease of reference on a central S&C initiative site.

35. The scope of uptake by market participants remains limited at best. Both the 2005 and 2011 reviews questioned the realism of promoting the initiative’s use by market participants, one of its original goals. The 2005 review found that this would require substantial changes to the initiative, and by the 2011 review use by market participants was found to have dropped further. The 2011 review acknowledged a tension between the needs of market participants, such as frequently updated quantitative ratings, and those of surveillance activities and capacity building efforts.

2011 Recommendation 4: Enhance the Efficiency of the Initiative

36. The 2011 review called for more focused and frequent updates of ROSCs. Anticipating that pressures would emerge from the FSB/S29 commitments, staff proposed extending targeted ROSCs to all policy areas except for AML/CFT 18 and increasing the use of self-assessments. Targeted ROSCs were envisioned as partial graded assessments, focused on a subset of a standard’s principles or areas. At the time, methodologies had been developed for three financial supervisory standards (BCP, IOSCO, ICP). Piloting had begun based on these methodologies and it was envisaged that other policy areas would follow a similar approach. Targeted ROSCs were expected to improve resource use by allowing assessors to focus on key areas of weakness. They also were expected to enhance transparency and consistency of updates by following a clear framework, in contrast to technical notes and factual updates.

37. Ultimately, targeted ROSCs were not adopted, in some cases reflecting guidance from the Fund Board in its direct engagement with policy areas. In the 2014 FSAP review, the Fund Board instructed staff to pursue proposals that balance the need to streamline with that of maintaining a proper coverage of standards. The Fund Board was recently informed about a staff-level agreement with the financial supervisory SSBs on how and when to use graded assessments or focused (non-graded) reviews that would result in an FSAP technical note or be a direct input into the FSSA. The issue of targeted ROSCs was not considered in the 2012 and 2015 reviews of the Data Dissemination Initiative, although the data ROSC assessment already takes a modular approach with a focus on one or several data domains.19 As a result of revisions to the FTC approved by the Fund Board in 2014, a modular structure was adopted, which allows the code’s four “pillars” to be assessed individually or together with one or more of the other modules.20

38. Increased use of self-assessments by members was envisaged in the last review to complement ROSCs, bolster ownership, and build capacity. Given that these assessments are produced by member countries and not necessarily with staff involvement, a full overview of implementation across policy areas is not feasible.21 However, in the financial area, self-assessments have been inputs to S&C assessments under FSAPs. Additionally, S&C assessments and self-assessments are increasingly being used as a source of verifiable indicators for reporting progress to external donors.

B. Policy Area Reviews

39. The progress made since 2011 largely reflects the direction provided by the IMF Board. Most of the changes in individual policy areas referenced above were undertaken during policy area reviews, reflecting efforts to bolster both the underlying S&C and the approaches to using them based on the lessons of the crisis. The use of direct channels to engage the Board outside of the comprehensive S&C reviews has established priorities in individual policy areas and fostered innovations that adapt operational approaches to better achieve them. The initiative thus now comprises a broad array of work around the long-standing objective of promoting greater financial stability through S&C. The section below summarizes these developments, which are described in more detail in the background papers.

The Fund’s Transparency Areas

40. Gradually, the focus of the transparency S&C is shifting towards supporting policy making, policy dialogue, and accountability. At their launch, these S&C were mainly focusing on ensuring disclosure of content and openness around operational processes. Increasingly, the focus is on the framework that facilitates implementation of policy objectives, to support effectiveness and address macroeconomic risks. New approaches also can provide a baseline to assess progress over time. The fiscal area has led this transformation and survey results indicate that it is strongly welcomed by the authorities. Early thinking on potential reforms to the data quality framework and the MFPT also recognize the benefits of such a shift (section D).

Data

41. The 2012 and 2015 reviews of the data standards focused on addressing gaps and enhancing incentives to improve compliance. The 2012 review introduced a new top tier (Special Data Dissemination Standard (SDDS) Plus) for AEs, especially those countries with systemically important financial sectors. It was coordinated with the IMF/FSB G20 Data Gaps initiative, which sought to address data gaps identified in the wake of the crisis. The 2015 review revamped the basic tier to align and promote publication of the datasets used for surveillance and policy making. The basic tier now includes incentives to reach a higher data standard and monitoring is facilitated by recent technological enhancements. The data dissemination standards now have almost global membership coverage (Table 3).

42. Domain-specific data quality assessment modules were introduced in 2012. Whereas the overall data quality assessment framework (DQAF) remained unchanged, the dataset-specific framework can now be applied to one or several of the seven key macroeconomic statistical datasets: (i) national accounts, (ii) consumer price index, (iii) producer price index, (iv) government finance statistics, (v) monetary statistics, (vi) balance of payments, and (vii) external debt statistics. This has facilitated the production of data quality assessments on the individual datasets. It also enabled the integration of the framework with statistical capacity development programs (Box 6).

43. Data ROSCs have been the vehicle to assess jointly the country practices for data compilation and dissemination relative to international standards. The de-coupling between data quality and dissemination was discussed in a recent IEO report, which noted that the data dissemination standard leaves “the responsibility for [data] accuracy and reliability with the subscribing country” and that “this setup implies that a country may be in full observance of the dissemination standards, and reported as such in the Dissemination Standards Bulletin Board (DSBB), while at the same time providing faulty data—potentially in breach of its obligations under Article VIII, Section 5.” A task force has been established to address the recommendations of the report, and is expected to finalize its report by December 2017.

Table 3.

Membership Coverage of the Data Dissemination Standards

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Fiscal Transparency

44. The global financial crisis underscored the importance of fiscal transparency, but also the need to revise the underlying code. The crisis revealed shortcomings in fiscal analysis, in part due to insufficient understanding of countries’ fiscal positions and the scale and the likelihood of exogenous shocks. This was highlighted in the 2011 S&C review.

45. Based on stakeholder consultation and engagement with the Board since the 2011 review, the FTC and its assessment output have been dramatically transformed. After a policy area-specific review in 2012, the FTC was revised in 2014. The new code has four pillars: (i) fiscal reporting, (ii) fiscal forecasting and budgeting, (iii) fiscal risk analysis and management, and (iv) resource revenue management.22 The revised FTC forms the basis of the new FTEs, which replaced the fiscal ROSCs.

46. Compared to the prior code, the revised FTC focuses more on information needed for good fiscal management and decision-making. FTEs provide more rigorous and quantified analyses of the scale and sources of fiscal vulnerabilities. They also include a summary of the strengths and weaknesses of country practices and their relative importance, and provide the option of a sequenced fiscal transparency action plan to help define reform priorities. Flexibility has been enhanced with the scope for modular assessments of the FTC’s individual pillars and the approach taken to the assessment of transparency issues in resource-rich countries.

Financial Sector S&C

47. Financial S&C have been improved to fill pre-crisis gaps, focus on outcomes, and bring a system-wide (macroprudential) perspective. The BCP now requires that supervisors take account not only of the risk profile of individual institutions, but also of the systemic risks they pose to the financial system and the economy. IOSCO addresses systemic risk by including a new core principle (CP) that identifies the role of the securities’ regulator in contributing to the regulatory process to identify and mitigate systemic risk. The ICP includes a new CP on macroprudential surveillance requiring the insurance supervisor to take account of systemic factors in insurance supervision. The KA identifies an effective framework for systemic risk identification and mitigation as one of the preconditions for effective resolution regimes. The PFMI includes a section on systemic risks in its introductory chapter and stresses that financial market infrastructures should have objectives that “explicitly support financial stability.”

48. Many financial S&C have thus undergone far-reaching revisions, building on work ongoing at the time of the last review. International SSBs reviewed and revised the BCP (2012), ICP (2011), and IOSCO (2011), and the new PFMI (2012) resulted from a review of three existing standards for financial market infrastructures. The KA was adopted by the FSB in 2011 as a multi-sectoral standard (with focus on banking, insurance, and central counterparties) and revised in 2014; the assessment methodology for the banking sector was completed in 2016. The DICP was revised in 2014, with its assessment handbook completed in 2016. Fund and Bank staff was actively involved in this work though participation in the relevant standard setting groups. The Fund also carried out two trial or pilot reviews of the KA—jointly with the FSB and the Bank—as part of efforts to develop an assessment methodology. A third review was conducted by Fund staff in the context of the mandatory financial stability assessment with a member. 23

49. The FSAP program continues to be an effective platform for S&C work with participating members. In the 2014 review of the FSAP, Directors agreed that key S&C are a valuable tool for an exhaustive and comprehensive assessment of financial supervision. Many saw scope for streamlining and targeting these assessments in a manner consistent with the FSAP’s focus on systemic risk and, more broadly, the Fund’s macrofinancial surveillance mandate. As noted earlier, Directors encouraged staff to explore ways to focus these assessments on key areas from the perspective of financial stability. Staff-level understandings have now been reached with the relevant SSBs on the most effective ways to use the three supervisory standards in FSAPs.

50. Collaboration with the financial supervisory SSBs has helped formalize the flexible approach to S&C work in FSAPs. In November 2016 and June 2017, the Fund Board was updated on the understanding reached between staff at the Fund and the financial supervisory SSBs on the continued approach to the use of financial sector supervisory standards for graded assessments and focused reviews.24 The latter is now being informed by sets of “base principles” that will serve as the starting point for discussions between staff and the authorities about the scope of focused reviews. The Fund’s 2019 FSAP review will provide an opportunity to take stock of the experience with this approach.

AML/CFT

51. Important changes occurred in the area of AML/CFT since 2011, with an increased focus on its risk-based application and on outcomes. The 2012 review of the FATF recommendations (the AML/CFT standard) enhanced the focus on the risk-based application of AML/CFT measures (described below), strengthened parts of the previous standard, and addressed new threats such as the financing of the proliferation of weapons of mass destruction. The 2013 assessment methodology added the systematic assessment of the effectiveness of national AML/CFT systems reflecting that, with most countries having AML/CFT laws in place, attention should concentrate on an informed discussion of the effective implementation of the standard. In 2014, the IMF Board endorsed the revised FATF AML/CFT standard and assessment methodology.

52. Changes that were implemented also reflected attention to issues around burden sharing with external SSBs. Responding to concerns about the varying quality of assessment reports, especially those produced by some of the FSRBs, the FATF strengthened the review mechanisms in 2013. In the 2014 review of the Fund’s Strategy on AML/CFT, the IMF Board encouraged staff to continue efforts to integrate financial integrity issues into its surveillance and in the context of Fund-supported programs. The Board also decided AML/CFT issues should continue to be addressed in all FSAPs, albeit on a more flexible basis. It was agreed that reports adopted by the FATF and FSRBs would continue to be converted into AML/CFT ROSCs following a pro forma review by staff.

53. To help foster country capacity and ownership, the international financial institutions have developed an advisory and capacity development package to assist countries in establishing a process for assessing and regularly updating the assessment of their money laundering/terrorist finance (ML/TF) risks. FATF’s Recommendation 1 requires countries to assess and understand their ML/TF risks, then design an AML/CFT regime that is based on this risk assessment and corresponds to the risk context and realities of the country. Both the Fund and the Bank have developed CD tools to assist countries in conducting a National Risk Assessment through a systematic process, with the broad participation of public and private sector stakeholders.

World Bank-Led Codes

54. Advancements were made in all the Bank-led policy areas. These changes, some substantial and others more evolutionary, came about at the technical level rather than through a systematic review with Board engagement as at the Fund. The Bank’s ongoing collaboration with external SSBs, along with revisions to the S&C and adjustments to assessment approaches in some cases, has improved Bank S&C work with clients and yielded benefits for other Bank activities even as the operational environment has been impacted by recent budgetary developments.

Corporate Governance

55. A more focused and differentiated approach has been developed to conduct assessments of the CG code. This approach is tailored to the size and sophistication of the client country and is consistent with a more limited resource envelope. The ROSC methodology has been updated to incorporate the 2015 revisions to the Principles and the OECD assessment methodology, streamline the Detailed Country Assessment and benchmarking process to ease the burden on assessors and lower costs, and restructure the standard report format to shorten reports and simplify presentation. The benchmarking approach for different tiers of countries is expected to lead to more impactful assessments, while being more closely tied to other Bank activities in the assessed countries.

56. The goal of this approach is to improve traction. For countries with the basic regulatory framework for corporate governance, CG ROSCs will be carried out as a part of ongoing World Bank/International Finance Corporation (IFC) capital markets/corporate governance programs. Detailed policy recommendations and country action plans will be developed, with implementation of recommendations provided through follow-up advisory work. The CG ROSC will also serve as a monitoring and evaluation tool for long-term programmatic interventions. For smaller countries without active equity markets (so-called “Tier 3” countries), a CG ROSC will not typically be carried out. The approach is instead to provide high-level recommendations to improve the basic CG framework, generally in the area of company and securities law reforms, and to raise awareness of the importance of CG longer term. Technical notes will be used to provide targeted, confidential advice to client country governments in specific areas.

Insolvency and Creditor Rights

57. Bank staff finalized revisions to the Principles for Insolvency and Creditor/Debtor Rights in 2015. Responding to the lessons of the crisis, these revisions included a focus on the institutional framework for risk management, as well as substantive aspects of formal insolvency proceedings. As a result, the revised draft of the standard now contains more detailed provisions on the issue of director liability and adopts a more nuanced approach to the treatment of financial contracts in insolvency.

58. However, additional steps are required before the ICR standard can be finalized, as anticipated in the 2011 S&C review. The 2015 changes were endorsed by Bank Management (the Office of the General Counsel). The next step, currently underway, is for UNCITRAL and the Bank to jointly undertake revisions to the Unified Insolvency and Creditor Rights Standards. This last step is expected to be finalized in FY 2018 followed by Bank Management endorsement, while the Bank Board will be informed about the revisions to the Unified ICR Standards.

59. The ICR standard has been beneficial to other aspects of the World Bank Group’s work, apart from its traditional S&C output. The ICR standard supported revisions to the methodology of the “Resolving Insolvency” indicator of the World Bank’s Doing Business report. In 2014, an “offline” pilot was conducted, using 16 different aspects of the ICR standard as a proxy for the measurement of the quality of an insolvency law. This index was found to correct many of the anomalies associated with the original case-study methodology. In 2015, it was introduced to complement the case-study and represents the single largest change to the Doing Business methodology since its inception. Additionally, in 2017, the IFC launched a new Investment Risk Platform designed to serve as the primary risk assessment tool for IFC investments. Its loss given default methodology relies, in part, on a high-level measurement of a given country’s insolvency regime and the regime’s consistency with the ICR standard.

Accounting and Auditing

60. The global financial crisis underscored various shortcomings with international financial reporting and auditing standards, and with their implementation. The crisis raised concerns about the effectiveness of corporate governance arrangements and the quality of financial and other information provided by companies. While the A&A standards were not the root causes of the crisis, contributing factors included financial intermediaries’ inappropriate application of the fair value standard in the valuation of financial instruments in suddenly illiquid markets, the timeliness of asset impairment recognition, the (lack of) consolidation of certain investment vehicles, and the transparency of auditors’ work.

61. In response, the International Accounting Standards Board (IASB) introduced a series of significant changes to International Financial Reporting Standards (IFRS). These encompass interalia financial instruments (IFRS 9; particularly on impairment, e.g., new expected loss model, classification, measurement), fair value measurement (IFRS 13, particularly for illiquid instruments), and off-balance sheet vehicles (IFRS 10, with consolidation based on control). The scope and depth of the changes adopted pose a very significant implementation challenge.

62. In turn, the IAASB has launched a broad process of reforms of several International Standards on Auditing (ISA). In particular, it revised the structure and content of the auditors’ report (ISA 700) and introduced a new standard (ISA 701 Communicating Key Audit Matters in the Independent Auditor’s Report) requiring from December 2016 onwards that auditors publicly report on the issues they consider to be most significant during the audit (“key audit matters”).

63. The A&A diagnostic tool was overhauled in 2016. The overhaul of its assessment methodology, first developed in 2001, followed changes in the underlying standards. It reflected the need to adapt the tool to countries where the A&A framework is at an early stage of development, incorporate lessons drawn from 15 years of experience,25 and improve the value of the A&A ROSC assessment to country management units and country stakeholders. In particular, the initial assessment tool had been designed at a time when important features of modern corporate financial reporting had not yet been introduced (e.g., quality assurance and public oversight of the work of auditors, IFRS for small and medium-sized enterprises (SMEs)). Furthermore, implementation had in practice been tweaked in an ad hoc manner, trying to fit the single methodology to a wide range of country circumstances and weakening the consistency of assessment across countries.

Figure 5.
Figure 5.
Figure 5.

Membership Appreciation of the S&C Initiative

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A001

* For the 2011 survey, 94 participants from 60 countries and jurisdictions responded. All of the countries in the sample participated in the initiative or had conducted at least one standard assessment.Source: 2011 IMF and World Bank Review of the Standards and Codes Initiative.* In the area of fiscal transparency, a survey questionnaire on the revised Code and FTE was sent to the authorities of 20 countries who have conducted FTEs, of which 10 countries responded to the survey. In the area of A&A, a survey questionnaire on recent experience with S&C work in this area was sent to the 101 authorities in 31 countries, of which 37 authorities in 20 countries responded to the survey.Source: IMF and World Bank surveys and staff calculations.

64. This new tool includes three modules, and guidance to assessors seeks to sharpen the materiality of the findings while providing flexibility within the modules. Module A (Accounting and Auditing Standards) seeks to document material differences between country and international standards. Module B (Institutional Framework for Corporate Financial Reporting) has nine questionnaires covering various aspects of the country’s A&A framework (including commercial enterprises; listed companies; banks; insurance; and audit regulation, quality assurance and public oversight) with implementation guidance providing room to assessors to select which questionnaires are materially relevant to country circumstance. Module C (Observed Reporting Practices and Perceptions) seeks to corroborate the findings from Modules A and B, and to gather perceptions of the demand for and quality of financial information from users of financial statements.

65. The new methodology also takes a further step towards assessing effective implementation. This is done by placing significant emphasis on the institutions underpinning a country’s A&A framework. This is further supported by the assessors’ review of a sample of financial statements (albeit of small number) and by the systematic canvassing of users’ views of quality of financial statements in the country. The new methodology has already been deployed in Pakistan with positive initial feedback.

C. Policy Area Best Practices

66. A key goal of this review is to identify best practices in individual policy areas that can be shared across the initiative. In this context, “best practices” may reflect approaches that are particularly effective in promoting adherence with international standards and codes. They may be more supportive of countries’ efforts to strengthen economic institutions, and/or better inform other World Bank and IMF work with the member. Implementing a best practice may improve the prospects of the policy area meaningfully contributing to promoting economic and financial resilience. This may be achieved by gauging key weaknesses (i.e., noncompliance with S&C) and improving traction to address them, or by helping authorities address the weaknesses in a more efficient or effective way. As the initiative has reflected a partnership between the Fund and Bank and external SSBs since the outset, collaboration with external bodies will remain a core element and can be further enhanced.

Collaboration with External Bodies/Standard Setters

67. Enhanced interaction between the SSB and the Fund and/or Bank as assessor has proven to be beneficial. The advantage of this dialogue is that it provides two-way feedback between the standard setter and the assessor institutions. The February paper “Scope and Focus of the 2017 Review of the Standards and Codes Initiative” foresaw scope for strengthening this relationship to (i) keep the S&C current as external conditions change; (ii) ensure effective implementation; (iii) align priorities, including with regard to the tradeoff between the complexity of S&C and their assessment methodologies and the capacity to meet demand within resource constraints; and (iv) reinforce a focus on Bank and Fund operational priorities.

68. Recent experience shows that such engagement can benefit a broader set of activities. In the area of financial sector standards (Box 5), staff has engaged with the external SSBs on how to most effectively use standards in financial stability assessments. This dialogue also has been useful in developing and cooperating on delivering TA, including coordinating closely with countries to prioritize deployment of TA and ensure timely advice. Another benefit has been informing the development of guidance for regulation and supervision in particular areas of the underlying standard.

Innovations to S&C and Assessment Modalities

69. Innovations to improve the cost-benefit tradeoff of S&C work are necessary if the initiative is to continue to make a positive contribution to economic and financial resilience. From the outset of the initiative, S&C have been relied on to confirm whether a country meets internationally-agreed minimum standards at a specific point in time. This has resulted in technical compliance assessments which are increasingly lengthy and dense. The FSAP program has an established approach to working with the underlying S&C as agreed with SSBs, but for several other policy areas these challenges remain.

70. Institutional capacity can be a binding constraint to members’ willingness or ability to participate in the S&C initiative. For countries that have sufficient capacity, technical compliance assessments fulfill an important function and are helpful to promote ongoing compliance with international S&C. However, for other parts of the membership, compliance in some policy areas may be unrealistic in the short or medium term and repeat assessments may be perceived as resource-intensive and less useful. In the context of a voluntary initiative, the challenge is to embrace innovation that will improve adherence to international standards. Different policy areas have developed different approaches to tackle this challenge.

71. A common feature of the best practices identified in this review is that they involve specific assessment modalities that allow for more systematic tailoring to country circumstances. The underlying premise is that progress towards adherence with a standard can be more effectively promoted when country circumstances are taken into account.26 The fiscal code, and early thinking on the data policy area, sheds light on how this transformation is taking place. The direction is to adopt a risk-based approach in considering the implications of deviations from the standard, which aligns well with a focus on vulnerabilities. Embracing such an approach would, therefore, promote closer linkages with surveillance. It also would facilitate prioritizing actions to address identified deviations, charting a realistic path to attaining the standard and, in the interim, managing vulnerabilities associated with those deviations. This aligns well with a focus on capacity development. The FTE brings this together through summary heat maps that feature analysis of the scale and sources of fiscal vulnerability and provide a visual account of fiscal transparency strengths and reform priorities (Annex 3).

72. This review has identified three “best practice” approaches to standards assessments. These modalities are discussed below and explained in detail in the thematic background paper. They are (i) modular (tiered) approach, (ii) graduated approach; and (iii) effectiveness/outcome focus. Figure 6 shows the extent to which these innovations have been adopted so far in the various policy areas. The recommendations section below also discusses the extent to which these innovations and best practices may be considered for adoption across the initiative, as relevant.

Modular Approach

73. Perhaps the development that may have the broadest appeal is employing modules or pillars to better tailor assessments to country needs and capacity. This can be done by focusing on certain categories of principles in the underlying code, such as one or more of the FTC’s four pillars. Another, more established practice is to focus only on certain areas, for example, on the consumer price index instead of the whole set of macroeconomic statistics.

74. The new fiscal code illustrates the potential usefulness of the modular approach. When a reassessment focuses on the module that was previously found to be most problematic, the authorities would be able to assess and demonstrate progress in a cost-effective way, without undergoing another full assessment. Even if the country previously scored well on all modules but has had staff turnover or is facing new risks in specific areas, an assessment against the relevant module(s) would facilitate deployment of targeted S&C work.

Figure 6.
Figure 6.

Current Prevalence of Best Practice Assessment Modalities

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A001

Graduated Approach

75. Some standards assessments have begun to clarify “distance to standard” relative to comparable country groupings or other reference points. Historically, almost all standards assessments have been graded based on observance of the international best practice or “minima” and typically scored as “observed,” “largely observed,” or “not observed.” The advantage of this new approach is that it allows for relativity, by benchmarking performance against peers, level of development, or progress since the previous assessment. This can help inform a realistic path toward compliance with standards—taking into account the vulnerabilities associated with non-compliance that require the most immediate attention when paired with the effectiveness/outcome focus (see below)—and can better facilitate measurement of progress over time.

76. The new fiscal code is leading the way in implementing a graduated approach. This entails providing all countries with a set of achievable milestones on the way towards full compliance with the international standard. For each principle under the fiscal code, the countries are scored: (i) basic—practices would be considered as a minimum achievable by all countries; (ii) good—practices would require more developed institutional, human, and technological capacities; and (iii) best—practices would entail full compliance with relevant international standards and being in line with the current state-of-the-art.

77. Survey results indicate that the graduated approach is one of the most valued aspects of the new FTE. About 90 percent of countries agreed that the graduated approach was, to a great or large extent, valuable in assessing their scores against comparator countries. It was also perceived as helpful in setting priorities for reforms and milestones as countries seek to implement their reform agenda as part of capacity building efforts (Figure 5).

Effectiveness/Outcome Focus

78. Another key innovation has been assessing actual effectiveness, or “outcomes.” This is done in some policy areas by assessing S&C vis-à-vis the risk profile, which is based on the threat, the vulnerability, and the potential impact. This goes beyond merely technical compliance by attempting to assess the extent to which compliance achieves risk mitigation. Such assessments are generally more resource intensive, as they require assessors possessing different skills than those that focus only on the role of the authorities. They also entail greater tailoring to the country context and the risk environment.

79. Experience in the AML/CFT area shows the fundamental difference between the assessment of effectiveness and that of technical compliance (Box 4). For every assessment, the AML/CFT assessment methodology establishes as a starting point an understanding of the country’s risks and context, which is critical to evaluating technical compliance with the standard and effectiveness. This requires that assessors must, for each outcome, use their judgment to reach a holistic conclusion as to how well a country is operating, with a focus on the extent to which the framework is producing the expected results. The expectations in terms of results vary from one country to another, according to the country context and the risk environment. 27

Direct integration with Capacity Development

80. The 2011 review, as well as prior reviews, have noted the challenge of achieving better formal integration of S&C work with the capacity development (CD) framework. It seems likely that the persistent weak linkages to CD are rooted in the initiative’s traditional outputs, which were technical assessment rather than diagnostic tools. As such, these assessments were not cost-effective tools to measure interim progress in a CD program. This may be changing with the Fund’s introduction of the Results-Based Management (RBM) system, which requires benchmarking against a starting point, identification, prioritization, and sequencing of reforms, and measuring progress against agreed milestones (Box 6).

81. The data quality framework provides a useful example how S&C work can be directly integrated with CD. The framework was originally developed for data ROSCs, but is now being used more widely “to improve the statistical basis for surveillance and program design and monitoring, as well as to enhance the effectiveness of the Fund’s technical assistance.” Specifically, the framework was used to inspire a comprehensive catalog of CD work streams, objectives, outcomes (results), and related indicators, baselines, and milestones. This tool also facilitates the measurement of progress of CD efforts to achieve an outcome (e.g., achieving a particular data standard) and eventually achieve the overall objective such as better data for policy making.

Strategic Strengthening of the Initiative

82. This review concludes that evolution of S&C work has accelerated in several areas, against a mixed backdrop of uptake of operational recommendations from the 2011 review. As noted, most externally-set S&C have been revised based on the lessons of the crisis, and assessment methodologies have been updated in several areas. In some cases, this has contributed to greater complexity and resource intensity of assessments. The Bank has undergone a budget restructuring, which has impacted its S&C output. Priorities established in Fund policy area reviews since 2011 set the direction for work in individual areas, but they often have not emphasized implementation of the 2011 recommendations. The Fund’s S&C output also has declined, partly reflecting anticipated or implemented revisions to its transparency S&C, and the allocation of output has shifted across countries and income groups. Revisions to the FTC offer a promising way forward for the relevance of Fund-set transparency S&C. While publication rates of S&C outputs have improved, access to these outputs has deteriorated in many cases.

83. At the same time, important progress made in individual areas is ensuring the initiative’s ongoing relevance in supporting efforts to strengthen international financial stability. After almost two decades of implementation, the 12 policy areas have found their natural place in the initiative and many are demonstrating a substantial amount of ownership and innovation to align S&C work with risks and vulnerabilities. Best practices are emerging that may help advance the long-standing objective of promoting greater linkages with surveillance and capacity development and bolster member participation. Greater member awareness of the range of recent developments could support this demand-driven initiative.

84. This review proposes a shift to a strategic approach to this and future reviews of the S&C initiative to address persistent challenges and capitalize on progress made. This approach entails looking “top-down” to address gaps and weaknesses in the S&C framework. At the same time, the approach devolves operational reviews and responsibilities to policy areas—and in the case of the Fund’s transparency areas, assessing the underlying S&C—while establishing the expectation that they will continue to make effective contributions to international financial stability through institution-building. Under Board guidance, forthcoming policy area reviews should therefore address gaps and weaknesses identified by the reviews of the S&C initiative and consider adopting relevant recent innovations (best practices). The overall objective of these reforms would be to improve the linkages between S&C work and surveillance, and its integration with capacity development. The scope of uptake by market participants remains limited and this review consequently does not assess further prospects in this regard. Finally, increased engagement with member countries and continued collaboration across policy areas would be required to strengthen follow-through on priorities established in reviews of the initiative.

85. This review makes specific recommendations for actions before the next review. Updates to strengthen the MFPT and the Fund’s data policy area should proceed, and the KA and assessment methodology for the banking sector should be endorsed to underpin work in the CRDI policy area. There are no major gaps in the architecture that merit an expansion of the initiative in this review, nor are there compelling reasons to streamline policy areas. Work is ongoing in areas that could be considered for future inclusion. Upcoming policy area reviews should consider the scope for improvements based on the identified best practices drawn from across the policy areas and should include an assessment of how new elements could improve linkages to surveillance and capacity development. Increased collaboration across policy areas and engagement with external SSBs and member countries should continue to promote the alignment of overall S&C work with the strategic priorities of the Bank and Fund and the needs of the membership.28 These recommendations are discussed below, listed in Annex 4, and elaborated in the policy area background paper.

Figure 7.
Figure 7.

Strategic Approach for 2017 Review of the S&C Initiative

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A001

A. Top Down—Address Weaknesses in the Overall Initiative

86. Looking across the initiative, no gaps have been identified but some policy areas need strengthening. Updating two of the Fund’s transparency S&C is the most pressing need. The 2011 S&C review called for revision of the MFPT, while a recent IEO report pointed to a need to revise the data ROSC to make it more outcome-focused. Fundamental principles that should guide updates to individual transparency areas include ensuring broad applicability to the membership, reflecting lessons learned in other policy areas, and promoting alignment with surveillance and capacity development. In addition, this review proposes that the Board endorse the KA as one of the two standards underpinning work in the CRDI policy area. This review also notes that Islamic Banking is another area for potential consideration under the initiative. These proposals are discussed below.

The Fund’s Transparency Areas

A New MFPT

87. The long-awaited revision of the MFPT should proceed without further delay. This revision was envisaged in the 2011 review, but was put on hold as monetary policy practices continued to evolve in the aftermath of the crisis, especially unconventional monetary policies, which altered some of the accepted wisdom outlined in the MFPT. Since then, the code gradually has fallen into disuse for a variety of reasons, including that many of the principles in the code were incorporated in the financial sector standards that are assessed in the context of FSAPs.

88. The successful transformation of the Fiscal Transparency Code may provide useful insights. As noted above, the old fiscal code and the MFPT are nearly identical, also in terms of the drop in usage in recent years. Yet, even though most underlying principles were carried over in the new fiscal code, the revamped code has clearly filled an unmet demand under the initiative. This was done by focusing on outputs rather than processes, systematically taking account of different levels of country capacity, greater emphasis on risks, and aligning the code with recent advances in other standards and best practices. This is also done in the context of FSAPs and technical assistance provided by the Fund and the Bank.

89. The revision of the MFPT will be staged. Given that many of the financial sector principles in the original MFPT have been incorporated in other standards already, the process will start on the monetary side with an early update to ensure the code can serve as a guide for good monetary policy transparency practices. It could be transformed into a diagnostic tool to guide policy advice. Such a framework would provide authorities and country teams with a structured baseline assessment of the key elements for effective monetary policy-making and facilitate tracking priority areas in surveillance and capacity-building. In this regard, the updated code could become a more modular, analytical, and calibrated tool to evaluate member countries’ progress. This would provide better clarity as to what would be good benchmarks for countries at different levels of economic and financial development.

90. This will be followed by an assessment of if and how an updated financial part of the MFPT could form the basis to support diagnostic financial sector work. This could consider transparency practices relating to the powers, responsibilities, and accountability of the financial regulatory and supervisory bodies. In doing so, staff will be guided by lessons of the GFC, recent developments in other international standards, and feedback from standard setting bodies, country teams, and authorities. Staff will prepare a Board Paper during FY 2019 that will discuss concrete proposals for the way forward.

Modifying Data Standards Framework

91. This policy area will be revised to further promote transparency and support effective economic decision-making. This policy area will continue to comprise the data standards (SDDS, SDDS Plus, and e-GDDS) and the data quality assessment framework (DQAF), and revisions will focus on data needs for effective policy making (“operational data”), and thus also facilitate better Fund surveillance of member policies. The approach will be to continue to take into account varying statistical capacity levels across the IMF membership, with the content updated, as necessary, to reflect member countries’ operational needs. This will require a continuation of the overlap with the new MFPT, and modification of the data standards to ensure an overlap with the FTC’s pillar one on data content.

92. The new data quality assessment will seek to adopt the best practices identified in this review. The new data quality assessment is envisaged to be directly integrated with the Fund’s CD efforts, and should support development of a sequenced action plan to address any identified weaknesses. This assessment is expected to be a data quality diagnostic exercise and risk-focused, reflecting IMF macro-critical surveillance and program needs. Some envisaged characteristics of the module include adoption of the FTC’s graduated approach (basic, good, best) and introduction of a heat map to present the assessment results. It is also envisaged that, as relevant, the new data quality assessment would be based on and complement other standards and diagnostics, such as the FTC and the new MFPT.

93. The new data quality assessment would be tested through pilot exercises. Lessons from the pilots would be applied to refine the module in close collaboration with country teams, as well as other departments in the Fund involved with the Fund’s transparency areas. The outcome will be reported in the 10th review of the Fund’s data standards, scheduled for 2019/20.

Endorsement of Key Attributes

94. In the period since the 2011 S&C review, important progress has been made to establish a standard for crisis resolution and to operationalize its assessment methodology. The global financial crisis underscored the need to develop effective frameworks to resolve financial institutions, and to strengthen financial safety nets. Reflecting this, in the 2011 S&C review the Board endorsed the creation of the new CRDI policy area. The DICP was endorsed by the Board in 2011 as one of the standards underpinning it.

95. The Key Attributes set out the core elements that the FSB considers to be necessary for an effective resolution regime. The G20 Heads of State and Government have endorsed the KA as an international standard for resolution regimes. The implementation of the KA should allow national authorities to resolve financial institutions in an orderly manner without taxpayer exposure to loss, while maintaining continuity of their vital economic functions. The KA sets out the essential features that should be part of a resolution regime for any type of financial institution that could be systemically critical or significant if it fails. These essential features include designating an administrative resolution authority and vesting it with a range of resolution powers enabling it to resolve a financial institution that is no longer viable and has no reasonable prospect of becoming so. These powers aim to achieve continuity of systemically important functions through effective resolution tools such as the sale or transfer of assets and liabilities, the write down and/or conversion of liabilities, or orderly wind down in a manner that protects insured creditors. The KA seeks to foster international cooperation, by requiring recovery and resolution planning to be coordinated across borders. It also calls for national resolution regimes to be designed in a manner that enables and encourages the resolution authorities to cooperate with their foreign counterparts in a cross-border resolution. The FSB’s Key Attributes Assessment Methodology for the Banking Sector guides the assessment of a jurisdiction’s compliance with the KA.

96. The Bank and the Fund intend to use the new KA as benchmark for assessments of bank resolution frameworks either in the context of FSAPs or in stand-alone ROSCs. Accordingly, the Board is asked to endorse the KA as it applies to assessment of bank resolution regimes and the related assessment methodology for use in the crisis resolution policy area (see Proposed Decision). The new standard will be used as benchmark for both voluntary and mandatory FSAPs; ROSCs using the KA will continue to be voluntary in the context of the financial stability assessments (FSAs). Given the modular, sequenced approach to developing the KA assessment methodology, staff initially intends to use the KA only for banking sector assessments, as a methodology has been finalized; assessments in other sectors (insurance, central counterparties) would become possible after completion of the assessment modules for these sectors. Staff continues to work with the FSB to develop the assessment methodology for the insurance sector, which is expected to be completed by end 2018. Once assessment methodologies for other sectors are finalized, staff will present them to the Board for endorsement.

97. The size and complexity of the KA and the depth of review expected of assessors will be high, requiring additional resources for full KA assessments. The banking sector methodology is exhaustive, requiring deeper review of the resolution regime than would normally be conducted for technical notes on crisis preparedness and management. It also should be noted that the latter cover a wider range of issues, not only bank resolution but also deposit insurance and crisis management arrangements, which will still need to be covered under FSAPs. Careful prioritization and allocation of resources will therefore be needed to ensure that KA assessments, when undertaken in the context of FSAPs and TA, are appropriately resourced, so that quality is maintained.

Islamic Finance

98. Islamic banking is another area for potential consideration for the initiative. This type of finance continues to grow rapidly, in size and complexity, posing a challenge to central banks and supervisory authorities. While the BCP generally applies to IB, gaps exist reflecting the specific features of IB and their associated risks. The Core Principles for Islamic Finance Regulations (CPIFR) have been developed to complement international standards,29 including, interalia, on capital adequacy, and the supervisory process. The CPIFR can be used to undertake a self-assessment of IB regulatory and supervisory frameworks. The adoption of these standards into legal and regulatory frameworks has progressed, albeit at different speeds across jurisdictions.

99. Staff plans to prepare a Board paper by April 2018 on S&C work related to Islamic banking. The paper is expected to ask for formal endorsement of the “Core Principles for Islamic Finance Regulation for Banking,” prepared by the Islamic Financial Services Board, as a standard under the Fund/Bank S&C initiative.30

B. Bottom Up—Adopt Best Practices in Upcoming Policy Area Reviews

100. For the most part, the evolution of S&C work under the initiative accelerated in recent years. As noted above, since the 2011 review of the initiative, individual policy areas’ channels of direct Board engagement have been an important vehicle for promoting the relevance and usefulness of S&C work. For all Fund-led areas, the next round of individual policy reviews has already been scheduled (Figure 8). In contrast, the Bank lacks formal review mechanisms and has typically handled modifications on a technical level. Going forward, the Bank has identified an effective modality for engagement, as discussed below.

Figure 8.
Figure 8.

Policy Area Review Cycles

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A001

101. This review proposes that all upcoming policy area reviews should consider certain improvements going forward. As noted above, the responsibility for operational and effectiveness reviews would be devolved to individual policy areas, building on emerging best practices, in the context of planned reviews. In general, the reviews should report on the allocation of outputs across the membership and should consider and report on whether there is scope for making modifications to standards assessments to improve the linkages to surveillance and integration with capacity development efforts. This assessment should be informed by surveys of area departments, which—based on their close ongoing relationship with country authorities—are particularly well positioned to gauge alignment with member needs. Periodic surveys of members could also be used on a frequency deemed appropriate for individual policy areas. The reviews should also consider the accessibility of standards assessments in their area, and if necessary, make recommendations on how this can be improved going forward. Leveraging existing mechanisms within the Fund to draw in perspectives of staff working most closely with members, as discussed later, should enable area departments and others to provide effective input into policy area reviews.

102. All best practices discussed above should be considered for potential adoption to the extent they are feasible and relevant to the particular policy area. Each area will be expected to assess the relevance and prospective implementation of increased collaboration with standard setters/assessors, the best practice assessment modalities, and direct integration with CD, and report these findings in reviews planned for 2018-20 (Figure 8). In certain cases, combinations of these modalities already have been—or could be—implemented together to complement each other and further enhance the effectiveness of S&C work and its relevance to members. These plans are outlined in Table 4, listed in Annex 4, and described in further detail in the background paper covering each policy area. 31

Table 4.

Policy Areas’ Planned Consideration of Best Practices

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103. To implement the recommendations of this review, the Bank will need to adopt a model for reviews of the individual policy areas it leads. While the World Bank Board is not formally involved in endorsing changes to the standards for which the Bank is a joint standard setter (i.e., ICR), reports on World Bank Management-endorsed changes would continue to be provided for the information of the Bank’s Board. In addition, the results of reviews on the implementation of the S&C initiative with regard to the Bank-led standards, including on emerging issues in those areas that, interalia, may call for adjustments to standards assessment methodology (e.g., ICR, A&A), would be presented to the Bank’s Board as part of the FSAP program reviews and discussed in informal Board sessions or during Technical Briefings.32 The Bank’s next FSAP review is planned for 2019 and it is anticipated that the best practices will be considered, drawing from the insights of this strategic review (see Table 4 and Annex 4).

104. The World Bank’s upcoming FSAP Review also will offer an opportunity to explore options to reposition the Bank-led ROSCs (B-ROSCs) as a closely-coordinated valuable suite of services available to member countries and country management units (CMUs). Under the new funding modality CMUs could take a more holistic approach to the provision of developmental support to countries, including through well-sequenced and coordinated S&C ROSC assessments. To help achieve this outcome, the managers of the Bank-led ROSCs should strengthen coordination and jointly “market” the ROSC program to CMUs and to other units in the Finance and Markets Global Practice.33

C. Strengthening Mechanisms

105. Individual policy area reviews should be complemented by a mechanism that sustains momentum between S&C reviews and preserves alignment of S&C work with strategic priorities and member needs. The 2011 review previously highlighted the risk of a potential inconsistency between demand driven S&C work and the alignment of the choice of ROSCs with Bank and Fund priorities. Since then, there has been uneven follow-through on some policy area priorities envisaged in the 2011 review and challenges have emerged in select areas of S&C work following the Bank’s budget restructuring.

106. The decision to delegate consideration of operational issues to policy areas’ reviews with structured consideration of good practices and reporting should help. As noted earlier, this should promote cross-fertilization of innovative approaches and promote ongoing consideration of how to strengthen the linkage with surveillance and capacity development activities.

107. To sustain momentum and support S&C work under the initiative more broadly, staff proposes a loose framework focused on two fronts: enhanced collaboration across policy areas and increased engagement with members. Such an approach would promote internal collaboration across the initiative in the five-year period between S&C reviews. External engagement would aim to present this broad and technically-oriented initiative in a holistic way to help members determine which areas may be the most relevant for them. Considering the 12 areas as a menu for strengthening institutions and identifying vulnerabilities may be the most useful perspective for member countries. At the same time, the role for S&C in identifying vulnerabilities that could negatively impact a member’s stability and lead to spillovers for other members would remain.

Continued Collaboration Across Policy Areas

108. Closer, more continuous collaboration among the policy areas seems needed. Reviews of individual Fund-led policy areas are effective in identifying the scope for targeted adjustments and innovations, as staff draws on their familiarity with relevant standards, practical experience working with policymakers, and knowledge of how to deploy resources most efficiently. However, engagement across the 12 policy areas appears to occur mainly at the time of the quinquennial reviews of the S&C initiative, which may delay identification of emerging gaps in the initiative and timely consideration of adoption of good practices.

109. Staff plans to leverage mechanisms to promote alignment between S&C work and the needs of the membership and follow-through on recommendations from reviews of the S&C initiative. In line with the focus of this and prior reviews on improving linkages between S&C work and surveillance and capacity development, staff plans to utilize existing mechanisms, such as departmental surveillance contacts and the Committee on Capacity Development to seek ongoing feedback on S&C work. This should help promote the usefulness of S&C work and increase country team awareness of policy area innovations that could benefit surveillance work and improve the link to follow-up TA. This also would draw in perspectives of staff working most closely with members to enable Fund area departments and others to provide effective input into policy area reviews. Finally, to ensure engagement between Bank-led ROSC areas and the other policy areas under the initiative, particularly those pertaining to financial sector standards, emerging issues in any of those standards assessment programs with a bearing on other ROSCs should be brought for information and discussion within the aegis of the IMF-World Bank Financial Sector Liaison Committee (FSLC).

Increased Engagement with Member Countries and SSBs

110. Periodic fora should be established to bring together policy areas and members, and facilitate an exchange of information that can further enhance S&C work under the initiative. For a demand-driven initiative, accessibility and relevance are decisive factors determining the extent to which members request S&C work. In line with the design of the initiative as a coherent set of policy areas to improve economic and financial resilience, Fund/Bank S&C work should be promoted as a menu of tools for strengthening institutions, policy dialogue, and capacity development. In a new forum, potentially launched on the margins of the IMF/World Bank Annual Meetings, policy areas would come together to familiarize members with what the initiative offers and recent developments in individual policy areas, and to share members’ experiences incorporating S&C work in policy development strategies. Participating SSBs would obtain more direct exposure to the practical side of Bank/Fund S&C work, potentially strengthening the alignment of priorities. This engagement would also support efforts to keep the initiative current by providing an informal opportunity for more frequent, direct feedback from members. To best inform participants in these engagements, policy areas could provide fact sheets outlining the latest developments in member coverage of their S&C work, updates on the evolution of the underlying standards and their assessment methodologies, and recent S&C work with members by external SSBs/assessors.

111. The Annual Meeting also offers a venue for Bank staff to reach out and engage with member countries and SSBs. The IMF Board encouraged AEs to undergo B-ROSC assessments, but none have been undertaken since the last review of the initiative. The Bank could showcase the rigor of these assessments and the applicability of the standards for AEs to dispel misperceptions that may be harbored by those countries and other stakeholders. The Bank could showcase these frameworks and how they have helped several countries analyze and address development challenges in a fairly wide range of country circumstances.

Resource Implications

112. The recommendations in this review may result in higher costs. The expected continued evolution of the initiative and plans to adopt best practices across policy areas, address weaknesses, and conduct reviews will all entail some investment. Moreover, if it is decided to develop and implement assessment programs in new areas, this may require additional resources or crowd out existing priorities.

113. The tradeoffs between competing priorities should be done at the policy area level. To the extent the adoption of best practices, modifications to the data policy area and MFPT code, and other changes in policy areas will have resource implications, they will be considered at the appropriate time as part of the individual policy area reviews or proposals. As discussed above, this will require closer engagement with member authorities and country teams to ensure that decisions do not simply reflect supply-side considerations. Close engagement with SSBs would also be required, to ensure that Fund and Bank priorities are also well-aligned with SSB perspectives.

Issues for Discussion

114. Directors may wish to comment on the following issues:

  • Do Directors agree with the proposed strategic approach to devolve operational responsibilities to individual policy areas, while maintaining strategic oversight?

  • Do Directors agree with the proposed approach to modify the data policy area and the MFPT?

  • Do Directors agree that forthcoming policy area reviews should report on actions taken in line with recommendations of this review to improve the links between S&C work and surveillance and capacity development, including on the prospects for adoption of best practices developed in the initiative?

  • Do Directors have further guidance on how to align the initiative with the priorities of the Fund and the membership? Are there additional modalities that should be considered to help strengthen the involvement of member countries to set priorities in the initiative?

Proposed Decision

The following decision, which may be adopted by a majority of the votes cast, is proposed for adoption by the Executive Board.

1. The Fund takes note of the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions (the “Key Attributes”) and the Key Attributes Assessment Methodology for the Banking Sector.

2. The Fund endorses the Key Attributes as they apply to bank resolution regimes and the related assessment methodology for the purposes of undertaking assessments and preparing Reports on the Observance of Standards and Codes (ROSCs).

Fiscal Transparency’s—Implementing the Modular and Graduated Approache1/

The revised Fiscal Transparency Code (FTC) is built around four pillars and comprises a set of principles that reflect the IMF’s focus on macro-critical issues. The pillar approach makes it possible to undertake modular Fiscal Transparency Evaluations (FTEs, the FTC’s main assessment output) oriented around one or more pillar. This feature helps meet the need for more targeted evaluations aimed at addressing the most pressing transparency issues in a particular country.

Additionally, adopting the graduated approach to assessments has made the FTC more relevant to the full range of Fund member countries and capacity building efforts. The FTC differentiates between basic, good, and advanced practices against each of its 36 principles, offering countries at all levels of development a clear set of checks and milestones toward full compliance with international standards. These graduated levels of practice reflect recent developments in the public financial management profession and have been harmonized with other standards and diagnostic tools to ensure complementarity and consistency in analysis. By providing more analytical, accessible, and targeted assessments and the option of a fiscal transparency action plan, FTEs also better support the prioritization and delivery of TA.

Results from a recent survey show that the majority of countries with a completed FTE since 2013 value the revised FTC and FTE. In particular, the country authorities welcomed the increased emphasis on fiscal risks in the revised FTC; responded favorably to the graduated approach to evaluating countries; and agreed that FTEs were useful in identifying key fiscal institutional strengths and weaknesses, shaping reform programs, and prioritizing TA needs. The majority of survey respondents also believe that repeat FTEs should be considered to help countries assess their progress in meeting the principles of the FTC. The modular approach should facilitate well-targeted reassessments that strike the right balance for the country between relevance and resource intensity, while the graduated approach should help gauge progress toward compliance in a meaningful way.

1/ The groundwork for revision of the Fiscal Transparency Code (FTC) was laid in a 2012 policy paper “Fiscal Transparency, Accountability, and Risk and is described in the 2014 Update on the Fiscal Transparency initiative.

Assessing the Effectiveness of AML/CFT Systems

Changes to the AML/CFT assessment methodology were driven by the consideration that, while laws and regulations remain important, it is more important that they are effectively used to protect the financial system and prevent money laundering (ML) and terrorist financing (TF).

While previous methodologies focused primarily on countries’ legal, regulatory, and institutional framework, the 2013 Methodology for Assessing Compliance with the FATF Recommendations and Effectiveness of AML/CFT Systems focuses both on the legal and institutional framework, and on the results achieved from their implementation against the country’s specific ML/TF risk profile. It provides for an interrelated, two-step approach that consists of a mainly desk-based assessment of technical compliance with the AML/CFT standard, followed by an on-site assessment of the effectiveness of the AML/CFT regime as measured by the extent to which specific objectives are being met.

The starting point for assessors is to understand the country’s risks and context. The concept of “risk” takes account of the threats (e.g., criminals with money to launder); the vulnerabilities (e.g., weaknesses in the financial system that criminals will use to launder that money); and the harm caused (e.g., damage done by the original crime and the laundering). The notion of “context” includes:

  • The country’s situation (e.g., general makeup of the economy and financial sector);

  • The structural foundations of the AML/CFT regime (e.g., an effective judicial system, sound government institutions and rule of law); and

  • Other factors that affect the implementation of AML/CFT measures (e.g., level of corruption or maturity of the country’s regulatory regime).

This understanding of the country’s risks and context then guides:

  • The assessment of technical compliance, which looks at whether the country meets the requirements of the FATF 40 Recommendations, principally as they relate to the legal and institutional framework.

  • The assessment of effectiveness, which looks at the extent to which 11 immediate outcomes are met. These predefined outcomes are central to a robust AML/CFT system. They cover, for example, the country’s understanding of its ML/TF risks, supervision of reporting entities (i.e., financial institutions and designated non-financial businesses and professions), confiscation of the proceeds and instrumentalities of crime, and international cooperation in AML/CFT.

The assessment of effectiveness differs fundamentally from that of technical compliance. Assessors must, for each outcome, use their judgment to reach a holistic conclusion as to how well a country is operating. The focus is on the extent to which the AML/CFT framework is producing the expected results. The expectations in terms of results vary from one country to another, according to the country’s ML/TF risks and context. For example, assessors will look at the number and type of ML cases that a country has reported. Depending on the countries’ risk profile, a certain number of cases can be sufficiently effective for one country, but insufficient for another.

Technical compliance and effectiveness are rated separately, but are considered together in the conclusions. These conclusions provide prioritized recommendations for AML/CFT regime improvements, focusing on the key deficiencies identified in the context of the country’s risks.

Fund and Bank Staff Engagement with Financial Sector Standard Setting Bodies

Drawing on their close engagement with member countries and experience with standards assessments, Fund and Bank staff provide valuable feedback to the financial sector standard setting bodies (SSBs). Staff participates on the SSBs’ main committees and subcommittees tasked with the development of financial sector standards and guidance. Engagement with countries at all income and development levels also enables staff to play a supportive role in broadening engagement on international standards. Recent collaboration has included:

  • Providing feedback to the FSB on the development of the Key Attributes for Effective Resolution Regimes for Financial Institutions and its sectoral assessment methodologies based on its experience with pilot reviews and assessments.

  • Contributing to development and implementation of IAIS insurance standards, including based on Fund/Bank staff experience in FSAPs. Staff is actively contributing to the IAIS’s key standard setting activities, such as new globally consistent capital requirements, and resolution frameworks. The IAIS is exploring an Activities-Based Approach for assessment and mitigation of systemic risk of the insurance sector, which was influenced by Fund’s Global Financial Stability Report analysis.

  • Collaborating with the BCBS on developing guidance for the regulation and supervision of small and non-complex institutions, which provide financial services to unserved and underserved customers and typically engage in small transactions.1/

  • Facilitating efforts by member countries to become members of IOSCO, which is key to improving the ability of securities supervisors to cooperate domestically and internationally and to meet IOSCO standards on enforcement and cooperation. To become an IOSCO member, a jurisdiction must become a signatory to the IOSCO Multilateral Memorandum of Understanding, which can be technically challenging and politically complicated.2/ Fund staff has provided TA to three jurisdictions to help them identify the obstacles to becoming a signatory and design an appropriate plan to undertake the needed amendments. Staff closely coordinates with IOSCO to select appropriate TA recipients and ensure timely advice.

This collaboration has also facilitated efforts to identify different ways of working with supervisory standards to better align S&C work in FSAPs with country-specific systemic risk factors. Given that FSAPs use supervisory standards by either undertaking full graded-assessments or through non-graded analytical deep-dives, staff and SSB teams worked to identify methods that ensured the most effective use of supervisory standards in the latter case, as outlined in the FSAP Review. This led to the understandings reached with the BCBS, IAIS, and IOSCO on a set of “base” principles to help guide the scope of analysis in cases where supervisory issues are reviewed through a deep-dive and are not graded (as outlined in the June 2017 Board paper). These agreements are intended to ensure the operational flexibility needed in FSAPs to adopt a more tailored approach to country-specific financial stability issues where appropriate.

1/ Where a key component is the “use of technology to assist supervisors and financial institutions in gathering, transmitting and processing data and information.” (Guidance on the application of the Core Principles for Effective Banking Supervision to the regulation and supervision of institutions relevant to financial inclusion—Sept 2016)2/ Usually, it involves legislative amendments to waive bank secrecy and other confidentiality provisions for securities enforcement investigations.

Linking Work in Data Policy Area to Capacity Development

The implementation of the results based management (RBM) system aims to ensure that statistical development efforts support effective policy making. The purpose of RBM is to monitor progress towards the provision of high-quality data to ensure effective policy making. This encompasses seven data domains: national accounts, consumer price index, producer price index, government finance statistics, monetary statistics, balance of payments and international investment position statistics, and external debt statistics. The RBM employs a standard framework to ensure that all statistical and capacity development efforts are directed towards achieving the desired outcomes, such as meeting appropriate data standards, with a view to supporting effective policy making.

The RBM allows using a graduated strategy to better integrate statistical capacity development programs and make the data policy area cost effective and relevant to all Fund members. Specifically, the data policy area is used to prepare comprehensive (baseline) assessments covering the institutional environment, statistical processes, and characteristics of statistical products. This baseline is then used to identify data gaps, or distance to desired outcomes (e.g., meeting e-GDDS, SDDS, SDDS-Plus) in each of the seven data domains and deploy more effectively capacity development programs. This allows for developing graduated country-specific strategies that set key milestones based on the RBM catalog, in line with country needs, with the view to meeting the desired objectives in cost-efficient way. The RBM catalog also facilitates the use of objective indicators to validate achievements of various milestones.

A01ufig2

Figure: RBM Results Chain

Citation: Policy Papers 2017, 009; 10.5089/9781498346450.007.A001

The RBM catalog is partially based on the Data Quality Assessment Framework and helps guide a variety of statistical capacity development (CD) work streams. The catalog includes objectives, outcomes (results) and related indicators, baselines, and milestones. Examples of milestones include the compilation and dissemination of high quality data using concepts, definitions, coverage and scope, classification, sectorization, basis of recording, and statistical techniques, consistent with the latest statistical manual or guide. The RBM catalog could also be used to track improvements in operational data as a result of CD activities by STA.

Annex I. Key Terms

  • Formal Assessment: refers to a full assessment against all the principles for the relevant standard and code (S&C) based on an agreed assessment methodology (AM). For most standards, they are synonymous with graded assessments. However, some standards and assessment methodologies (e.g. A&A, CG, and ICR) do not include grades. The output of a formal assessment is either a detailed assessment report (DAR), or a summary report on observance of standards and codes (ROSC), or both.

    • Detailed Assessment Reports (DARs) provide a detailed principle-by-principle assessment of a country’s compliance with a given standard. DARs may or may not include ratings depending on the standard assessed.

    • Reports on the Observance of Standards and Codes (ROSCs) provide a summary of the DAR, sometimes including principle-by-principle ratings.

  • Focused Review: uses the relevant S&C as a benchmark to analyze a specific issue or subset of principles. It does not involve a graded assessment. The output of a focused review is either a technical note (TN), a Background Note (BN), or an input into a Financial System Stability Assessment (FSSA) report. For the standards for banking, insurance, and securities markets, the IMF and standard setting bodies (SSBs) reached agreement on sets of base principles that serve as the starting point for discussions between staff and the authorities regarding the scope of a focused review.

    • Technical notes (TNs) do not follow a standardized approach, but instead are structured to facilitate a focused review involving all or a subset of a standard’s principles. TNs were originally introduced in financial sector S&C work and their use has since expanded to other policy areas. This approach provides a more flexible platform for working with S&C, including to tailor it to the specific country context and risk profile, in a resource constrained environment. The use of TNs continued to increase (in areas such as CG and A&A), especially recently, and 52 technical notes have been published since 2011.1

  • Financial Sector Assessment Program (FSAP): is a comprehensive examination of the financial system of a country that assess risks and ways to promote development. Many of the S&C are incorporated into an FSAP. The resulting DARs, ROSCs, and/or TNs become inputs for the FSSA report at the IMF and the Financial Sector Assessment (FSA) at the World Bank, the main outputs of the FSAP.

Annex II. Profile of S&C Outputs

A01ufig3
Source: IMF and World Bank S&C database and staff calculations.

Annex III. Fiscal Transparency Evaluation Heat Map

While the previous Fiscal ROSCs usually provided long narrative accounts of strengths and weaknesses, FTEs provide a more accessible summary of strengths and weaknesses in the form of “heat maps” which also highlight reform priorities based on criticality of gaps. In particular, FTEs and heat maps:

  • Provide an objective snapshot of current practices and benchmarking against comparator countries. Heat maps in FTEs provide countries with a clear picture of where their fiscal transparency practices stand relative to comparator countries and international standards.

  • Identify priorities for policy dialogue. This is achieved through quantification of gaps/fiscal vulnerabilities using a set of new fiscal transparency indicators. By combining the results of the assessment of practices (in the heat maps) with a set of quantitative fiscal transparency indicators,1 FTEs distinguish between more and less serious deficiencies in countries’ fiscal transparency practices on the basis of their relative importance (see attached heat map).2 Recommendations are based on criticality/importance.

  • Clear guidance for reform and CD. FTEs help provide countries with a more targeted and sequenced action plan for addressing the main transparency weaknesses identified in heat maps, including a set of achievable milestones on the way towards full compliance with international standards.

  • Help discover unknown fiscal risks. Discovery of fiscal risks and measurement of them, previously unknown to authorities, or confirmation of the absence of risks, are one of the key contribution of an FTE. This sometimes provides the motivations for a country to undertake an FTE.

New Fiscal Transparency Evaluation-Heat Map and Criticality of Gaps

Example: Russia-Summary Assessment of Fiscal Reporting

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Annex IV. Expected Content of Policy Area Reviews1

Fiscal Transparency Code

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Financial Sector Codes

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AML/CFT

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Corporate Governance

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Insolvency & Creditor Rights

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  • Additionally, there is a need to consider the effect of insolvency regimes on micro, small, and medium-sized enterprises (MSMEs), given that they represent a very large proportion of private sector economic activity in developing economies and legal and regulatory regimes are broadly underdeveloped when it comes to dealing with their insolvency. The process of developing such standards is already underway with the ICR Task Force—chaired by the Bank—drafting a report on the challenges, needs, and responses to MSME insolvency. When final, it would be presented to Working Group V of UNCITRAL later this year.

Accounting & Auditing

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  • Additionally, the review would cover among other issues: (i) overview of changes in the standards since the previous review; and (ii) progress in observance based on summary of scores, key weaknesses, and main areas where improvements have been noted.

1

Overall, while the objective of standards has remained as envisioned at the outset of the initiative, the coverage, use, and outputs have witnessed significant shifts. S&C outputs for member countries are informed by standards in the 12 areas recognized as useful for the operational work of the Fund and the World Bank. Such outputs are prepared and published at the request of the member country and include Detailed Assessment Reports (DARs), Reports on the Observance of Standards and Codes (ROSCs), Technical Notes (TNs), as well as newer outputs such as Fiscal Transparency Evaluations (FTEs). Annex 1 provides an overview of the key features of these outputs and the 2017 Joint Review of the Standards and Codes Initiative Background Paper provides examples of S&C use in Bank and Fund work that are not directly associated with formal S&C outputs as shared with the IMF’s Executive Board.

1

This section draws on background papers prepared by World Bank and Fund staff, the consultants’ background paper, surveys from the 2014 FSAP review, and new targeted surveys undertaken for Accounting and Auditing and Fiscal Transparency.

2

See the “2017 Joint Review of the Standards and Codes Initiative Thematic Review of Case Studies—Background Paper” for more detail.

3

Revisions of ICR involve a three-stage process, with the first step (World Bank revisions to the Principles) completed in 2015. The second step involving UNCITRAL is underway, and the process is expected to be concluded in FY2018.

4

For a further, detailed analysis of such costs, please see “A Macrofinancial Approach to Supervisory Standards Assessments.”

5

Although the concern was mainly with the Non-Cooperative Jurisdiction (NCJ) processes of the FSB, it was also a concern regarding similar processes of other SSBs, such as that of the FATF’s International Cooperation and Review Group. For further elaboration, see “2011 Review of the Standards and Codes Initiative,” section G, p. 34.

6

See FSB Charter and the FSB Framework for Strengthening Adherence to International Standards. Unlike the FSAP, a peer review does not comprehensively analyze a jurisdiction’s financial system structure or policies, or its compliance with international financial standards.

7

Handbook for FSB Peer Reviews, section 3.2.: “Standing Committee on Standards Implementation will conduct around three country reviews per year, i.e., a full cycle of reviews for all FSB member jurisdictions will be completed over an eight-year time period.”

9

Asia/Pacific Group on Money Laundering; Caribbean Financial Action Task Force; Eurasian Group; Eastern and Southern Africa Anti-Money Laundering Group; Central Africa Anti-Money Laundering Group; Latin America Anti-Money Laundering Group; West Africa Money Laundering Group; Middle East and North Africa Financial Action Task Force; and Council of Europe Anti-Money Laundering Group.

10

FSB’s “Proposed Framework for Post-Implementation Evaluation of the Effects of the G20 Financial Regulatory Reforms Consultation document on main elements” (April 2017).

11

Pursuant to that decision, 25 jurisdictions were determined to have systemically important financial sectors, based on 2008 data. A revision of the methodology in 2013, using updated data, expanded the list to 29 jurisdictions.

12

Stand-alone financial sector ROSCs are down to less than two per year from about 10 per year during 2007-11.

13

The 2014 FSAP review found that the modest rise in the resource envelope for the program had been more than offset by the shift to S29 jurisdictions, where FSAPs were on average twice as costly as for other countries. The FSAP review also stated that the resulting decline in FSAPs was found to have primarily affected LIDCs and other non-systemic countries (p. 34).

14

See “2017 Review of the Standards and Codes Initiative Background paper,” Financial Sector S&C, Figure 1.

15

MCM Technical Assistance Annual Report 2016.

16

MCM, STA, and ICD Financial Sector Stability Fund Presentation for Donors (October 19, 2016).

17

As mentioned above, stand-alone ROSCs are generally no longer conducted in the financial sector. Therefore, this analysis refers mainly to non-financial S&C work.

18

The Executive Board subsequently agreed in 2014 that targeted AML/CFT ROSCs could be issued in due course on the basis of the follow-up assessment reports.

19

For example, consumer price indices, the system of national accounts, and balance of payments data. Three of the seven data ROSCs conducted since the 2011 S&C review have taken a modular approach.

20

So far, however, none of the 21 FTEs has employed this possibility; each has covered all three of the finalized modules. It may be that reassessments would be more likely to employ the alternative of a targeted assessment.

21

Additionally, many self-assessments may be partial, drafts, or used for setting priorities and reforms based on related frameworks such as the DQAF.

22

The first three pillars were approved in 2014, while the fourth pillar is under development.

23

All three covered bank resolution, and one also covered insurance resolution; no pilot assessment of resolution for central counterparties has been conducted to-date.

24

Use of Supervisory Standards in the Financial Sector Assessment Program—Understandings with Standard Setting Bodies, (June 9, 2017).

25

The Bank’s Operations Policy and Country Services review of the A&A ROSC program in 2010 had recommended a revision of the diagnostic tool and guidelines to ensure its continued relevance.

26

The Basel Core Principles for Effective Supervision notes that “by reinforcing the proportionality concept, the revised Core Principles and their assessment criteria accommodate a diverse range of banking systems.”

27

For example, assessors will look at the number and type of AML/CFT cases that a country has reported, although a different number of cases may be considered sufficient depending on the country’s risk profile.

28

Staff-level understandings have been reached with global SSBs on the use of the three financial sector supervisory standards in FSAPs. See “Use of Supervisory Standards in the Financial Sector Assessment Program—Understandings with Standard Setting Bodies” (June 2017).

29

To promote and enhance the soundness and stability of financial services Islamic finance, the IFSB issued core principles in 2015.

30

The criteria applied for the FSB for determining the list of key standards for sound financial systems is outlined here.

31

For example, modifications may be most easily implemented among the transparency S&C where the Fund is the standard-setter. On the other hand, they may be less relevant to financial sector S&C work, which is closely tied to FSAPs. For the other policy areas, these innovations may help to broaden the policy area’s appeal to the full membership and promote adherence to international standards.

32

Specific governance arrangements apply to the A&A ROSC Program, which may be subject to separate reviews.

33

Because B-ROSCs have different country authorities’ counterparts, there would remain a risk that the authorities themselves might have a different set of sequencing priorities than those of the B-ROSCs programs/CMUs.

1

The 2014 FSAP review notes that historically, the evaluation of the quality of supervision or other aspects of the financial system in most FSAPs was often done not through formal standards assessments (DARs and ROSCs) but through informal targeted assessments (summarized in FSAP technical notes).

1

This allows the assessors to triangulate on the areas of major concern. Thus, even if a country is meeting good practice—as Ireland is in coverage, if the gaps are sufficiently large, this warrants concern, and will be the focus of one of FTE’s limited number of recommendations. Similarly, if the practice was not met, if the importance of the gap was low, the report would not be too concerned. This is another major step up from the old ROSCs, that tended to provide a long, prioritized list of recommendations.

2

Because of the emphasis on quantitative indicators, FTEs require quite a bit of preparatory work. Interactions/collaborations with area departments—almost all the 21 FTEs done so far have seen participation or at a minimum close collaboration of area department. In many cases the Statistics Department has also participated.

1

These are only part of the expected content of the upcoming policy area reviews, i.e., those currently envisioned that are relevant from the perspective of the S&C review.

The 2017 Joint Review of the Standards and Codes Initiative
Author: International Monetary Fund