Scope and Focus of the 2017 Review of the Standards and Codes Initiative
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International Monetary Fund
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Publication Date:
02 Aug 2017
eISBN:
9781498347105
Language:
English
Keywords:
PP; standards and code; Fund staff; market; Fund surveillance; Fund S&C output; measure progress; policy dialogue; market participant
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The standards and codes (S&C) initiative was launched in 1999 as part of efforts to strengthen the international financial architecture. The initiative aims at promoting international best practices 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. The four previous reviews confirmed a fairly high appreciation of the overall initiative. However, the related comprehensive surveys and engagement with stakeholders raised questions about the initiative’s link to surveillance and capacity-building efforts, as well traction with market participants and policy makers. This paper is designed to engage with the Executive Board on the overall scope and focus of the 2017 review of the S&C initiative. The continuous evolution of the S&C and work under the initiative has accelerated in several policy areas since the financial crisis. Several areas of the S&C have been substantially reformed (fiscal and financial codes) or updated (corporate governance and insolvency and creditor rights) to reflect evolving international best practices, while potential changes in some others are still under consideration (data and monetary and financial policy transparency). The overall level of assessment activity under the initiative has fallen moderately, with a sharp drop in formal Reports on the Observance of Standards and Codes (ROSCs) partly offset by an increase in other types of S&C based outputs, such as evaluations. Since the 2011 review, most of the changes to individual S&C policy areas under the initiative have involved direct Board engagement, and have aimed at improving operational effectiveness to promote international best practice in the specific area. The review is an opportunity to discuss how the initiative may be adapted to maintain its relevance, and to capitalize on its achievements. The review will look at changes to the S&C and their applications—across and within the individual policy areas—and make recommendations on the overall initiative. This informal session to engage provides a factual update of the S&C initiative since the last review in 2011, and proposes a strategic approach to address gaps and weaknesses, coordinate reviews of individual policy areas and the overall initiative, and continue to strengthen the relationship with external standard setters and assessors.

Abstract

The standards and codes (S&C) initiative was launched in 1999 as part of efforts to strengthen the international financial architecture. The initiative aims at promoting international best practices 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. The four previous reviews confirmed a fairly high appreciation of the overall initiative. However, the related comprehensive surveys and engagement with stakeholders raised questions about the initiative’s link to surveillance and capacity-building efforts, as well traction with market participants and policy makers. This paper is designed to engage with the Executive Board on the overall scope and focus of the 2017 review of the S&C initiative. The continuous evolution of the S&C and work under the initiative has accelerated in several policy areas since the financial crisis. Several areas of the S&C have been substantially reformed (fiscal and financial codes) or updated (corporate governance and insolvency and creditor rights) to reflect evolving international best practices, while potential changes in some others are still under consideration (data and monetary and financial policy transparency). The overall level of assessment activity under the initiative has fallen moderately, with a sharp drop in formal Reports on the Observance of Standards and Codes (ROSCs) partly offset by an increase in other types of S&C based outputs, such as evaluations. Since the 2011 review, most of the changes to individual S&C policy areas under the initiative have involved direct Board engagement, and have aimed at improving operational effectiveness to promote international best practice in the specific area. The review is an opportunity to discuss how the initiative may be adapted to maintain its relevance, and to capitalize on its achievements. The review will look at changes to the S&C and their applications—across and within the individual policy areas—and make recommendations on the overall initiative. This informal session to engage provides a factual update of the S&C initiative since the last review in 2011, and proposes a strategic approach to address gaps and weaknesses, coordinate reviews of individual policy areas and the overall initiative, and continue to strengthen the relationship with external standard setters and assessors.

Background

1. The IMF and World Bank’s Standards and Codes Initiative (the initiative) was launched in 1999—in the wake of crisis—to strengthen the international financial architecture. One year earlier, G-7 Finance Ministers and Central Bank Governors had called on the Fund and the Bank to play a central role in the promotion of standards, including with the Fund monitoring “in close cooperation with the standards-setting bodies, the implementation of these codes and standards” and the Fund, Bank, OECD and international regulatory and supervisory organizations “working closely together to provide advice and, where necessary, assistance to countries to help them meet these internationally agreed codes and standards.”1 In 1999, the G-7 endorsed convening the Financial Stability Forum (re-established and expanded in 2009 as the Financial Stability Board, or FSB) with activities to include “where necessary, the development or strengthening of international best practices and standards and defining priorities for addressing and implementing them.” 2,3

2. These efforts reflected a recognition that, “in a globally integrated environment, international financial stability requires widespread domestic financial stability”4. During this period, the Fund and Bank also were developing the Financial Sector Assessment Program (FSAP). A 1998 report of the G-22 Working Group on Transparency and Accountability recommended that the Fund prepare Transparency Reports to summarize “the degree to which an economy meets internationally recognized disclosure standards.” In the early 2000s, these reports were broadened to include an assessment of countries’ observance of standards5 and became known as Reports on the Observance of Standards and Codes (ROSCs). Participation by member countries is voluntary.

3. Under the initiative, the Fund and the Bank Boards recognized a set of policy areas and their associated standards and codes (S&C) as important for maintaining sound financial systems (Annex 1). These areas align with the FSB’s Key Standards for Sound Financial Systems,6 and have been categorized by the Fund and Bank in different ways over the life of the initiative.

  • The transparency standards, all set by the Fund, have included the data dissemination initiative (complemented by the Data Quality Assessment Framework), the fiscal transparency code, and the monetary and financial policy transparency (MFPT) code. These were initially identified as within the Fund’s direct operational focus when the ROSC pilot was initiated.

  • A second group of standards pertains directly to the financial sector and has been recognized as an area of direct operational focus for the Fund and the Bank. This includes financial supervisory standards covering banking supervision, securities regulation, and insurance supervision, as well as those standards related to financial market infrastructures, crisis resolution and deposit insurance, and anti-money laundering and combating the financing of terrorism (AML/CFT). These standards are all set by external standard setting bodies.

  • A third set of standards, referred to as “market integrity” standards, includes insolvency and creditor rights, corporate governance, and accounting and auditing. The Bank is the standard setter, in consultation with the United Nations Commission on International Trade Law (UNCITRAL), for insolvency and creditor rights. The other standards are set by external standard setting bodies.

4. The early phase of this global initiative was marked by learning by doing by the Fund and the Bank on the modalities for monitoring and assessing compliance with standards. Traditionally, the FSAP provided an opportunity for the most expansive formal assessment of many of the standards,7 although the initiative has seen variations in the way standards in the 12 policy areas are used, assessed, and published. As noted in the 2011 review, S&C work operates under a light administrative structure and without a central budget. The practices and adaptations reflect decisions made in different departments of the Bank and the Fund. Overall, while the objective of standards has remained as envisioned under the initiative, the coverage, use, and outputs have witnessed significant shifts.

5. The experience with some innovative S&C outputs, such as the new fiscal transparency evaluation, has been encouraging. The Fund and the Bank have produced new outputs that use S&C to promote resilience and financial system development, taking into account materiality of the topics and the needs of the authorities. These include technical notes, direct reporting in Article IV reports, Selected Issues Papers, and Financial System Stability Assessments that delve more deeply into linkages between standards implementation and institutional conditions, and facilitate work with increasingly sophisticated or comprehensive standards. In the fiscal area, the Fund has revised its toolkit to enable a more rigorous and quantified analysis of countries’ fiscal vulnerabilities, and has produced an accessible summary of the strengths and weaknesses of country practices (in the form of summary heat maps) and more targeted recommendations. Experience with such outputs in other S&C work varies across the policy areas, reflecting the perspective that formal comprehensive assessments are but one mode among alternatives to support strengthened oversight and policy frameworks. The Bank also has developed toolkits drawing on selected standards to help countries develop their pension systems and foster financial inclusion.8 In addition, external standard setting bodies and the FSB have been stepping up their own efforts at monitoring and supporting implementation and propagating assisted self-assessments across member countries.

6. Nearly all of the membership has participated in the initiative. As of end-2016, the Fund and/or Bank had produced S&C outputs for 95 percent of member countries. In terms of regional coverage, participation in Europe and the Western Hemisphere has been broadest (100 percent), while Asia Pacific has had the smallest take-up (80 percent) (Figures 1 and 2). Much of Sub-Saharan Africa has had less than five S&C outputs per country, although some of its larger economies have had close to 10 or more. Financial sector standards have accounted for nearly half of all Bank and Fund S&C outputs.9 About 73 percent of ROSCs and 82 percent of other S&C outputs have been published. The upcoming review will reflect on the variance of S&C output across countries—for example, according to income level and region—with particular attention to trends in participation by Low Income Countries.

7. Periodic reviews of the initiative have typically focused on how S&C output could be made more useful. The reviews have acknowledged the difficult balancing act between clarity and transparency on the one hand, and a focus on reform efforts and country ownership on the other. Recurring themes from the prior reviews of the initiative include the need to better integrate ROSC findings into surveillance and capacity building activities (Annex 2). The 2011 review concluded that the integration of ROSCs into Fund surveillance remained mixed, but the integration with Bank and Fund financial assistance appeared stronger. It also noted that more progress had been made in integrating ROSCs with TA, although this, too, was cited as an area where further efforts could be made.

8. Compliance with standards has increased the resilience of the international financial system. The 2011 review used econometric analysis to determine whether adherence to standards mitigated the impact of the 2008–09 global financial crisis. While that analysis did not yield strong results, it was acknowledged that there is a complex link between standard compliance and resilience, and compliance ratings tend to focus on minimum standards on a broad range of principles that are not equally related to resilience. It also was emphasized that promotion of standards may help countries in ways that are not captured by econometric analysis, including by identifying gaps and supporting a reform agenda. Selected country case studies revealed that ROSCs correctly identified many weaknesses that increased countries’ vulnerabilities to the crisis, although follow-up by the authorities and/or the Fund and the Bank tended to be insufficient.

9. Even with this important progress, S&C output has not gained traction with market participants. A key original ambition of the initiative, to help improve the efficiency of international capital markets, was questioned even before the global financial crisis. The 2003 review noted that the initiative was generating increased attention from financial market participants and rating agencies, including as part of the process of risk assessment. However, by the time of the 2005 review, staff concluded that direct use by market participants remained low, raising questions about the realism of achieving greater use given the substantial changes market participants were seeking. In the 2011 review, use by market participants was found to have dropped further, a trend attributed to the lack of frequent updates and easily accessible and comparable quantitative information.

10. The global financial crisis made clear that compliance with agreed standards was only one of the building blocks for crisis prevention. The crisis also highlighted gaps and weaknesses in the initiative’s architecture and the need to ensure rigorous follow-up implementation. Even prior to the crisis, countries’ FSAPs, as well as the standard setting bodies and the Financial Stability Forum, had been flagging inadequacies in the supervisory standards and important implementation gaps. Some of these issues contributed to the growth of risks in unregulated entities, excessive risk-taking, and weak liquidity risk management. These insights—and the lessons of the crisis—triggered a more intensive period of reviews across a number of the initiative’s policy areas since 2011, reflecting the urgency of addressing shortcomings that had been revealed and tackling operational and effectiveness issues specific to individual policy areas.

11. Refinements made in individual policy areas since the 2011 review have contributed to the continuing evolution of the initiative. Effectively, S&C work has been “organically mainstreamed” into the Fund’s and the Bank’s core operations reflecting the use of direct channels to engage the Board on standard-specific developments outside of the periodic reviews of the S&C initiative, in the context of the review cycles of individual policy areas (see Annex 3). This sustained reflection on, and refinement of, work in individual policy areas has yielded useful innovations. More than 15 years since the initiative was launched, it now comprises a broad array of S&C work around the long-standing objective of promoting greater financial stability through the development, dissemination, adoption, and implementation of international S&C.

Figure 1.
Figure 1.

S&C Output across the Membership

Citation: Policy Papers 2017, 049; 10.5089/9781498347105.007.A001

Evolution of the S&C Initiative Since 2011

12. The pace of the evolution of the S&C and work under the initiative has accelerated in several policy areas since the 2011 review. Most of these changes have been undertaken through specific policy area reviews with direct Board engagement, and have generally been in line with recommendations of the 2011 review of the overall initiative. The motivation has typically been to reflect the changes in the global economic and financial landscape and the rethinking of policy frameworks. The recommendations of the 2011 review included adapting the coverage of the initiative to better safeguard financial stability, improving presentation and accessibility of ROSCs, cooperating with other bodies that use S&C, and making modest changes to improve efficiency in resource use. The 2017 review will assess implementation of these recommendations, but some initial impressions are described below.

A. Policy Area Developments

13. Changes to the initiative since 2011 have tended to focus on increasing operational effectiveness in individual policy areas (Annex 4). Some of these modifications have addressed weaknesses in traction of Fund surveillance, focused on covering gaps identified by the crisis, or aimed to help guide capacity building efforts in the particular area. The main reforms since 2011 are as follows:

  • The fiscal transparency code has been overhauled to focus on outputs and core aspects of fiscal transparency rather than processes and procedural issues. It puts greater emphasis on the quality of published information as a more objective basis for evaluating the degree of effective fiscal transparency. It also places greater emphasis on fiscal risk by devoting a full pillar (with 12 principles) to the disclosure, analysis, and management of the most important sources of fiscal risks, including quantification of the impact of the largest fiscal risks.

  • The data standards have been modified to put greater emphasis on promoting the publication of data needed to support surveillance. Under the e-GDDS, participants are encouraged to disseminate data supplied to the Fund for surveillance via a national summary data page in an easily accessible and internationally comparable format. The establishment of the SDDS Plus—the most demanding standard—is intended principally for countries that (i) feature a systemically important financial sector; (ii) play a leading role in international financial markets; and (iii) have institutions that are interconnected through cross-border operations. Under the SDDS Plus, adherents are required to use open format software to disseminate new data identified as critical during the global financial crisis.

  • The financial sector standards10 generally have become more complex and assessment methodologies have become more detailed, in many cases better reflecting financial risks. Incorporation of new principles or areas into existing standards, often targeted to large and complex financial systems and institutions, has necessitated significant expansion in the assessment methodologies. This has resulted in an increase in the amount of technical work and depth of expertise needed by both country authorities and Fund and Bank staff to assess compliance with the particular standard. The number of standards concomitant to the S&C initiative11 has also grown, and their use in Fund work also has entailed resource costs. As for the monetary and financial policy transparency code, it has yet to be updated as recommended in the 2011 review of the initiative.

  • The AML/CFT standard has been strengthened and the relevant assessment methodology has been overhauled to include a new focus on assessing the level of effectiveness of AML/CFT systems. Revisions to the Financial Action Task Force (FATF) 40 Recommendations and its assessment methodology were implemented in 2012–2013. In addition to establishing countries’ level of technical compliance with the standard (which is mainly a desk-based review of laws, regulations, and other polices), current AML/CFT assessments now seek to establish which countries are achieving the 11 determined objectives (the so-called “immediate outcomes”) set out in the methodology. This component is largely dependent on in-depth discussions with the authorities on the outputs of their AML/CFT systems relative to a country’s money laundering/terrorist financing risk profile.12

  • The Bank has been updating assessment methodologies to make assessments more flexible and relevant. The Bank recently revised the Principles for Insolvency and Creditor/Debtor Rights (2015), the first step in a process that involves UNCITRAL revising its “Legislative Guide on Insolvency Law” and later, through a collaborative process, the revision to the assessment methodology (the “Unified Insolvency and Creditor Rights Standards”).13 Revisions to the methodology for assessing corporate governance are currently underway to inter-alia reflect changes to the standard recently introduced by the OECD, with the aim of simplifying the assessment. Finally, regarding accounting and auditing, the Bank has recently concluded major changes to the assessment methodology that would allow for more flexibility through the use of modules, while placing special focus on the role of Boards of Directors to reflect their specific responsibility on the integrity of financial statements. In addition, an indicator set is being prepared to better communicate findings, drawing on the experience of recent fiscal transparency evaluations and the Public Expenditure and Financial Accountability (PEFA) framework.

B. Trends in Output

14. Overall Bank/Fund output under the initiative has fallen moderately, with a sharp drop in ROSCs partly offset by an increase in other types of output. Almost all of the 25 percent decline in ROSCs was attributable to reduced output associated with the transparency codes and AML/CFT. At the same time, technical notes and evaluations (which have replaced ROSCs in some cases) increased five-fold partly due to developments in the underlying codes (Figure 2). The reasons for these trends and shifts in output in 2012–16 from 2007–11 can be summarized as follows:

  • Transparency codes. Data ROSCs14 fell to only 6 from 22 due to budget constraints and a focus on content (standardized data dissemination under the e-GDDS and the SDDS Plus) rather than data quality assessments. Fiscal ROSCs have ceased and been replaced by fiscal transparency evaluations based on the code approved by the Board in 2014 (Annex 4). The level of evaluations concluded under the new framework (19) are similar to the previous period. Only one monetary and financial policy transparency ROSC was concluded since 2011.

  • Financial sector. The number of financial ROSCs increased somewhat, and they continue to account for about half of total ROSCs. The increase was mainly driven by demand from those jurisdictions (S-29) deemed systemically important, which participate in mandatory financial stability assessments every five years. Of the financial standards, the supervisory standards for banking, insurance, and securities are by far the most frequently assessed (in that order).

  • Bank-led policy areas. Trends in these areas—accounting for about a quarter of total output-mirror the overall trends as most of the decline in ROSCs has been offset by an increase in technical notes. The increase in technical notes is mostly found in the area of insolvency and creditor rights, reflecting a more tailored approach in this area. Most recently, these overall trends have been exacerbated by more restrictive selection criteria, changes to the budgetary allocation process, and with baseline assessments now in place in many countries.

  • AML/CFT. ROSCs in this area fell to 16 from 63, reflecting the temporary suspension of assessments during the 2012–13 revisions of the standard and assessment methodology. In the period since, the Fund has conducted 1–2 assessments per year15 in the context of burden sharing with external assessor bodies, mainly focused on jurisdictions with larger financial sectors.16

15. The ease of accessing ROSCs appears to have worsened, rather than improved as envisaged in the 2011 review. Some difficulty has been experienced in obtaining all recent ROSCs for the 2017 review, including some published reports (Annex 5). Policy areas where accessibility has been prioritized have demonstrated improvements on this front, while others have shown less progress. Lack of external demand for such reports may be an additional factor. The 2017 review will undertake a more complete assessment of access and develop recommendations in this area.

C. Cooperation with Other Bodies that use S&C

16. The role of external standard setting bodies and external assessor bodies has increased substantially in certain policy areas. This has become particularly important in the areas of AML/CFT, financial sector, and corporate governance, as the Fund and the Bank have collaborated with the FATF, FATF-style regional bodies (FSRBs), the FSB, and the OECD. Fund staff has also worked closely with other organizations on the revised fiscal transparency code, including the Global Initiative for Fiscal Transparency (GIFT), International Budget Partnership (IBP), OECD, and the World Bank to help to anchor their work and ensure complementarity of fiscal standards and evaluation tools.17 In addition, the Fund has close, ongoing collaborations with the BCBS, CPMI, IADI, IAIS, and IOSCO.

17. The increased role of external financial standard setting and assessor bodies has enhanced the capacity to undertake S&C work globally:

  • Overall, self-monitoring by external standard setting bodies has gone up significantly since the 2011 review. Staff welcomes these initiatives and discussions are ongoing with the standard setting bodies on how best to use this information in FSAPs, in particular. In many cases, these exercises take the form of peer reviews or assisted self-assessments, rather than independent third-party assessments.

  • Some financial standard setting bodies also have embarked on their own implementation monitoring exercises. In the areas of banking supervision, members of the Basel Committee on Banking Supervision have started programs to monitor the adoption of the standards and to assess the consistency and completeness of their implementation (such as the Regulatory Consistency Assessment Program). In securities regulation, IOSCO has begun country reviews, involving members’ self-assessments on the implementation of principles in this area. In addition, CPMI-IOSCO is monitoring the implementation of the financial market infrastructures standards by members through peer reviews. Finally, in insurance supervision, IAIS is launching its own technical assistance program to support implementation of its standard.

  • In recent years, the FATF and FSRBs have expanded their networks, and with them, the footprint of AML/CFT assessments. They have expanded their output to encompass both longer Detailed Assessment Reports (or Mutual Evaluation Reports), and the summary ROSCs, which have traditionally been produced only by the Fund.

18. The work of the FSB has helped strengthen adherence to financial sector standards. The FSB conducts peer reviews of its members that include an assessment of progress in addressing FSAP recommendations and implementation of measures to improve effectiveness of regulatory, supervisory or other financial sector standards. FSB peer reviews do not, however, formally assess compliance with international financial standards.

19. This increased activity, although welcome, has introduced new challenges. One challenge relates to minimizing scheduling conflicts, availability of experts, overlaps, and pressures on resources, notwithstanding all good efforts to closely coordinate. In terms of AML/CFT, as encouraged by the Fund Board in 2014, staff participates in the review of the quality and consistency of reports produced by FATF and FSRBs and, so far, those reports appear to be benefitting from strengthened review mechanisms.

A Strategic Approach to the 2017 Review

20. The review should seek to leverage the individual S&C policy areas’ recent progress under the initiative. In particular, the review will focus squarely on the question of how recent S&C developments have contributed to strengthening surveillance and capacity-building efforts and what further may be required in that regard, including as a result of developments in individual policy areas since the 2011 review (Annex 4). At the same time, the review would need to remain cognizant of the inherent tensions between comprehensive technical compliance assessments and usefulness in prioritizing or assessing progress on TA activities, informing market participants, and facilitating a policy dialogue in the context of surveillance, which has been a continuing struggle in past reviews (Annex 2). The review will seek to find ways to mitigate the tensions, while recognizing that eliminating them entirely will likely not be feasible given the multiple objectives of the initiative.

21. Potential changes to the initiative should be considered to enhance efforts to promote international financial stability. Ideally, the content and coverage of the initiative should match evolving international best practices and emerging areas relevant for financial stability, and its output should be designed to maximize policy traction, capacity building efforts, and market information. In practice, the S&C review could adopt a “top-down approach” to see how coverage is aligned with risks and vulnerabilities overall and in individual policy areas, and identify gaps and weaknesses in the S&C framework. At the same time, bottom-up innovations in individual policy areas—in terms of how S&C are used in Bank and Fund work with member countries— should be considered to the extent they may be relevant to other policy areas. In addition, maintaining relevance of the S&C initiative may become increasingly challenging, including due to the impact of

technological and financial trends on policy frameworks. The review of the initiative would be an opportunity to consider these issues simultaneously.

A. Improve the Overall Coverage and Content of the Initiative

22. The review would consider several sets of changes to the content and coverage of the initiative to address gaps and weaknesses. Some examples of potential changes include:

  • Outstanding revisions: The monetary and financial policy transparency code. Despite the proposal to revise the code in the 2011 review, this has yet to be undertaken as monetary policy frameworks have continued to evolve in the post-crisis period. The 2017 review will include a fuller account of the state of this code and make recommendations on the way forward.

  • Pending endorsements: The Key Attributes of Effective Resolution Regimes for Financial Institutions. In the context of the review, it is expected that the Board will be asked to endorse this code under the S&C initiative. This was envisaged in the 2011 review and its assessment methodology has been employed, as documented to the Board in 2012, on a pilot basis.

  • Recommended revisions: The Data Quality Assessment Framework. The March 2016 IEO report called for a revision to the framework underpinning Data ROSCs with an increased focus on the quality of outputs rather than on processes. The report also emphasized that data ROSCs are highly valued by the Fund membership and called for a more active use of this framework.

  • Potential future gaps. The review could discuss how standards could be more easily updated to reflect new challenges in existing areas, as well as evolving international best practices. This also could include a discussion on how to integrate the implications of the digital economy in the initiative, including issues around financial technology and cybersecurity.

B. Build on Policy Area Reviews

23. Recent developments suggest that reviews of individual policy areas may be the best vehicle to identify the scope for targeted adjustments and innovations. Since 2011, such reviews have made progress in tackling the long-standing challenges of improving traction in both surveillance and capacity building. Staff has drawn on its familiarity with relevant standards, practical experience working with policymakers, and knowledge of how to deploy resources most efficiently in each area reviewed.

24. Staff proposes to continue with individual policy reviews, and closely coordinate their assessments and priorities with those of the review of the initiative. For most Fund led policy areas this would mainly be a question of coordination, as their reviews have already been scheduled (Annex 3). However, the World Bank lacks such formal review mechanisms, and has typically handled modifications on a technical level. Where a more fundamental review of policy areas under the Bank’s purview may be needed, effective modalities would need to be established. Adopting such an approach to reviews would eliminate duplication of operational and effectiveness considerations taking place in individual policy areas, and enable a more strategic perspective.

25. For the 2017 review, this would entail building on, and complementing as necessary, the 2012–16 IMF reviews already undertaken and filling in gaps where needed. Recent surveys that have been done for some individual policy areas, such as the in the context of the 2014 Review of the FSAP, will be incorporated in the review. In other areas where substantial shifts in approach have occurred (such as in the area of fiscal transparency) or where no surveys have recently been conducted in active policy areas (such as accounting and auditing), staff has launched targeted surveys of participating members.

26. The review could also assess recent developments in certain policy areas that may be of broader interest for the initiative. One such example is the new fiscal transparency evaluations, which include heat maps and the option of a sequenced fiscal transparency action plan to help countries assess, prioritize, and measure progress on needed reforms. Additional potential useful innovations developed in other areas include a tiered approach tailoring to country capacity, and a modular approach. Taking a more strategic view to draw out good practices from individual areas could promote effectiveness, although their applicability to other areas would vary.

C. Further Enhance Collaboration with External Users of S&Cs

27. Staff will propose to continue to strengthen the relationship between individual policy areas and continue engagement with external standard setters and assessors. This could help with:

  • Keeping the S&C current as external conditions change. Accelerating technological and financial developments can be expected to heighten the challenges of keeping the initiative relevant. This may necessitate an even closer dialogue with all S&C stakeholders to ensure that the initiative is updated on a more continuous basis. It also may warrant flexibility to revisit individual areas, as needed, on an ad hoc basis outside of the initiative’s current review cycle.

  • Effective implementation. Continued engagement with external bodies may help build ownership and support to enable better integration of peer-reviews and self-assessments into individual policy areas under the initiative. Coordination between the Bank, Fund, and external bodies has long been important to the success of the initiative, and assessment activity by external bodies makes this coordination all the more important.

  • Aligning priorities. For example, bringing external standard setters into the assessment process would also enable collaboration in gauging the tradeoff between more expansive and complex codes and assessment methodologies and the capacity to meet demand for assessments within resource constraints.

  • Ensuring a focus on Bank and Fund operational priorities. A closer engagement with standard setters, in particular, may help to bring the perspective of financial stability and risk, as well as benchmarking and setting milestones to promote capacity building—which are core priorities of the Fund and Bank—into consideration in the development of codes and related assessment methodologies.

Issues for Discussion

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

  • Does the initiative remain a useful means to promote international financial stability by strengthening economic and financial institutions in member countries?

  • Do Directors support the proposed strategic approach for the forthcoming review of the S&C initiative that builds on and complements policy area reviews?

  • Do Directors have views on particular gaps in the overall coverage and content of the initiative that should be addressed in the 2017 review? Do the Directors see areas in which specific good practices in some policy areas should be promulgated across the initiative?

Figure 2.
Figure 2.
Figure 2.

An Evolution of IMF and World Bank S&C Outputs

Citation: Policy Papers 2017, 049; 10.5089/9781498347105.007.A001

Annex I. Architecture of the Standards and Codes Initiative

uA01fig01
1/ Expected to be submitted for IMF Board endorsement in the context of the 2017 Review of Standards and Codes.

Annex II. Key Takeaways from Prior Reviews of the Standards and Codes Initiative

article image

Annex III. Policy Area Review Cycles

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(1) Includes the policy areas of banking supervision, securities regulation, insurance supervision, financial market infrastructure, crisis re solution and deposit insurance, and monetary and financial policy transparency.(2) Includes the policy areas of accounting and auditing, corporate governance, and insolvency and creditor rights. The 2015 revisions affected each of these policy areas.

Annex IV. Policy Area Reviews, 2012–2016

Fiscal Policy Transparency: In the 2012 Board paper “Fiscal Transparency, Accountability, and Risk,” the state of fiscal transparency in the wake of the financial crisis was reviewed. The paper recommended improvements in the Fund’s fiscal transparency standards and evaluation. In the subsequent period, a new fiscal transparency code was prepared comprising a set of principles built around four pillars: (i) fiscal reporting; (ii) fiscal forecasting and budgeting; (iii) fiscal risk analysis and management; and (iv) resource revenue management, as outlined in the 2014 Board paper “Update on the Fiscal Transparency Initiative.” At that time, the IMF Board decided to replace the 2007 Code of Good Practices on Fiscal Transparency with this new Fiscal Transparency Code, and replace the fiscal module ROSC with the new fiscal transparency evaluation. Pillars (i)-(iii) have been issued (after approval by the Board in 2014), while a draft of pillar (iv) has undergone two rounds of public consultation and is being piloted in the field.

Data: Through the 8th and 9th reviews of the Data Dissemination Initiative, the Fund enhanced the dissemination standards with plans to review the broader framework used for assessing data quality (DQAF) for closer alignment with the Fund’s surveillance work, as well as greater efficiency.

• The current version of the DQAF (May 2012) is an update of the July 2003 version that was implemented to reflect the experience gained through ROSC missions, and in response to international statistical developments such as the update of the 2008 System of National Accounts statistical methodology and the sixth edition of the Balance of Payments Manual (BPM6). It also was adjusted to reflect the expanded recommended coverage of the monetary statistics.

• Data Dissemination Initiatives have been enhanced with a view to covering new data needs and to address slow statistical progress in GDDS countries. The SDDS enhancements approved by the Board in 2012 added the sectoral balance sheet, general government gross debt at nominal value, and financial soundness indicators, while making international investment position and reserve data required categories. The SDDS Plus approved by the Board in February 2012 was created to help address data gaps identified during the global financial crisis, requiring nine additional data categories, focused on economies with systemically important financial sectors. Finally, e-GDDS was adopted in May 2015 to align data categories more closely with IMF surveillance by promoting publication of the data supplied to the Fund for surveillance.

AML/CFT: Since the 2011 review of the S&C initiative, the approach to AML/CFT assessments has been substantially revised. The FATF Recommendations were strengthened in 2012 to ensure their continued relevance. The review notably introduced stronger requirements with respect to transparency of legal persons and arrangements, and an increased focus on risk-based application of AML/CFT measures. It also introduced some measures to combat the financing of the proliferation of weapons of mass destruction. The revised 2013 methodology for assessing technical compliance with the FATF Recommendations and the effectiveness of AML/CFT systems introduced a new component to AML/CFT assessments, namely the systematic assessment of the effectiveness of national AML/CFT systems. This fundamental change in the way assessments are conducted was introduced to respond to concerns expressed throughout the AML/CFT community that, with most countries now having AML/CFT laws and regulations in place, there was a need to concentrate on an informed discussion of the outcomes of AML/CFT systems.1 To ensure the quality and consistency of AML/CFT assessments across the range of assessor bodies, the FATF strengthened the review mechanisms for assessments conducted under the 2013 methodology. Fund staff plays an active role in the global reviews of the quality and consistency of assessment reports across all assessor bodies.

Financial Sector: Work in the financial sector policy areas encompasses the three financial supervisory standards often assessed in the context of FSAPs, as well as those standards related to financial market infrastructure (payment systems that are systemically important, central securities depositories, securities settlement systems, and central counterparties) and crisis resolution and deposit insurance. Across these areas, there has been an exploration of how to focus S&C assessments on key areas from the perspective of systemic risk and financial stability, with the aim of maximizing the value added. With the adoption of mandatory FSAPs for the S-29, there also has been interest in using S&C in more targeted TA and dissemination of best practices via training and workshops to members with non-systemic financial sectors.

• At the time of the 2011 S&C Review, the FSB had yet to take a decision on which standard to include for the crisis resolution policy area in its Key Standards as work on its Key Attributes of Effective Resolution Regimes for Financial Institutions was still underway. In 2012, Fund staff briefed the IMF Board on the purposes and principal features of the Key Attributes and staffs recent work in this area.

• Also in 2012, the Committee on Payment and Settlement Systems and IOSCO reviewed the existing sets of standards for financial market infrastructures—which facilitate the clearing, settlement, and recording of monetary and other financial transactions, such as payments, securities and derivatives contracts—and replaced them with one new set of Principles for Financial Market Infrastructures. The revised standards incorporate additional guidance for over-the-counter derivatives, central counterparties, and trade repositories. The new and revised international standards for safe and efficient financial market infrastructure were adopted by the IMF and World Bank Boards in 2012.

• The 2014 Review of the FSAP assessed the impact of the changes to the program since the 2009 review to make it more effective going forward. It highlighted the need for: (i) a continued strengthening of the systemic risk focus of all components of the FSAP; (ii) a cutting-edge analytical toolkit for the analysis of vulnerabilities and resilience while, at the same time, being realistic and transparent about the limits of this analysis; and (iii) ongoing improvement of the clarity and quality of the Financial Sector Stability Assessment to ensure continuing traction with external audiences and a better input into Article IV surveillance.

(1) This is done by assessing the extent to which countries are effective in achieving 11 predefined outcomes relative to their money laundering/terrorist financing risks. The implementation of the new assessment methodology is still in the early stages, having only started in 2014 for some of the AML/CFT assessor bodies.

Annex V. Inventory of Standards and Codes Published Outputs (2011–2016)

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Annex VI. Summary of Changes to Standards and Codes (2010–2016)

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1

Declaration of G-7 Finance Ministers and Central Bank Governors, October 30, 1998.

2

Standards already established by the Fund included the Code of Good Practices on Fiscal Transparency and the Special Data Dissemination Standard; work was underway for a code of conduct on monetary and financial policy.

3

Communiqué of G-7 Finance Ministers and Central Bank Governors, February, 20, 1999.

4

International Standards and Fund Surveillance (EBS/98/116, July 10, 1998).

5

International Standards and Fund Surveillance—Progress and Issues (EBS/99/158, August 16, 1999).

6

The FSB also maintains a broader Compendium of Standards that lists economic and financial standards that are internationally accepted as important for sound, stable, and well-functioning financial systems.

7

The financial sector standards are typically assessed jointly with the Bank except for advanced countries for which the Fund is solely responsible to undertake FSAPs.

8

For example, the Bank has developed a modular package to help countries conduct self-assessments —AML/CFT Risk Assessment Advisory—that is built on a model identifying main drivers of money laundering/terrorist financing risks and on a broad participatory process involving private and public sector stakeholders. There is a separate module for financial inclusion that helps identify areas for simplification in AML/CFT controls to facilitate access to financial services.

9

Outputs include initial detailed assessment and reassessment reports, both of which typically result in a ROSC, as well as updates to assessments, technical notes, and evaluations.

10

These include the standards for bank supervision (BCP), insurance supervision (ICP), securities regulation (IOSCO) crisis resolution (FSB Key Attributes of Effective Resolution Regimes), deposit insurance (IADI principles), financial market infrastructure (CPMI/IOSCO PFMI), and monetary and financial policy transparency (MFPT).

11

For example, the Core Principles for Islamic Finance Regulations as described in Ensuring Financial Stability in Countries with Islamic Banking (SM/17/3).

12

For example, number of convictions for money laundering, number and scope of AML/CFT inspections of reporting entities, amounts of illegitimate assets confiscated, etc.

13

Key changes include provisions on officers’ and directors’ liability and the treatment of financial contracts on insolvency.

14

The 2011 review reported that data ROSCs were the most resource intensive assessments along with insolvency and creditor rights ROSCs.

15

In 2014, the IMF Executive Board reduced the number of Fund-led assessments from approximately 6–7 per year to 2–3 per year to compensate for the increased resources required for assessments under the current methodology; as a result of resource constraints, the actual number of Fund-led assessments has been 1–2 per year.

16

Fund staff completed the assessments of Italy and Canada under the new methodology, and has launched the assessments of Mexico and Colombia.

17

Such tools include the PEFA framework and the Open Budget Index.

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Cover Policy Papers
Scope and Focus of the 2017 Review of the Standards and Codes Initiative
Author:
International Monetary Fund
Volume/Issue:
Volume 2017: Issue 049
Publisher:
International Monetary Fund
ISBN:
9781498347105
ISSN:
2663-3493
Pages:
33
DOI:
https://doi.org/10.5089/9781498347105.007
Figure 1.

S&C Output across the Membership
Figure 2.

An Evolution of IMF and World Bank S&C Outputs
Figure 2.

An Evolution of IMF and World Bank S&C Outputs