Copyright Page
IMF POLICY PAPER
2021 FINANCIAL SECTOR ASSESSMENT PROGRAM REVIEW—TOWARDS A MORE STABLE AND SUSTAINABLE FINANCIAL SYSTEM
May 2021
IMF staff regularly produces papers proposing new IMF policies, exploring options for reform, or reviewing existing IMF policies and operations. The following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its May 12, 2021 consideration of report.
The 2021 Financial Sector Assessment Program Review—Towards a More Stable and Sustainable Financial System report, prepared by IMF staff and completed on April 15, 2021 for the Executive Board’s consideration on May 12, 2021.
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Electronic copies of IMF Policy Papers are available to the public from
http://www.imf.org/external/pp/ppindex.aspx
International Monetary Fund
Washington, D.C.
© 2021 International Monetary Fund
Press Release
PR21/143
IMF Executive Board Concludes Periodic Review of the Financial Sector Assessment Program
FOR IMMEDIATE RELEASE
Washington, DC – May 27, 2021: The Executive Board of the International Monetary Fund (IMF) completed a periodic review of the Financial Sector Assessment Program (FSAP) on May 12.
This review examined the Fund’s role and responsibilities in the Financial Sector Assessment Program (FSAP) as the global financial stability landscape has continued to evolve. The pandemic has highlighted the importance of assessing financial stability risks from vulnerabilities in the nonfinancial sectors, possibly long-lasting scarring effects, and digitalization. Climate change also has important implications for the financial sector. The review assessed how the FSAP has adapted to the transformation of financial systems and emerging new risks and provided proposals on enhancing the value of the FSAP for national authorities and further strengthening its contribution to Fund financial surveillance. The review was based on background staff analyses and surveys of country authorities and Executive Directo rs.
The FSAP provides in-depth assessments of financial sectors and provides important input to Fund surveillance. Assessments of financial sectors are usually conducted jointly with the World Bank in emerging market and developing economies and by the Fund alone in advanced economies. These assessments provide valuable analysis and policy recommendations for surveillance and capacity development. A landmark change in the FSAP took place in 2010 when the IMF’s Executive Board mandated that jurisdictions with Systemically Important Financial Sectors (SIFS) participate in financial stability assessments as a part of Fund surveillance. Since 2013, the list of such jurisdictions has been set at 29— so-called S29. Since the program’s inception in 1999, 157 Fund members have undergone individual or regional FSAPs. In recent years, the Fund has been conducting 12–14 FSAPs per year. More than half has been voluntary assessments and for emerging market and developing economies.
This review builds on past assessments of the program. The 2014 review emphasized systemic risk and deeper analysis of nonbank financial institutions and interconnectedness. It called f or more work on macroprudential policies, more f lexible use of international standards, and greater integration with bilateral surveillance. The 2019 evaluation of IMF financial surveillance by the Independent Evaluation Office called for further integration of FSAP and Article IV consultations and making the frequency of FSAP assessments more risk-based.
Executive Board Assessment1
Executive Directors welcomed the Financial Sector Assessment Program (FSAP) Review and its background papers. They noted that the FSAP has made an important contribution to Fund surveillance and capacity development. They also noted the potential strains facing financial systems across the Fund membership in the wake of the COVID-19 pandemic which have highlighted the significance of risks from the nonfinancial sector and vulnerabilities in nonbank financial institutions (NBFIs) and financial market infrastructures. In addition, the membership is facing important new opportunities and challenges, including from climate change and digitalization.
Directors emphasized that the three-pillar approach to conducting FSAPs—focusing on risk analysis, oversight, and safety nets—has worked well. The risk-focused approach to scoping Financial Stability Assessments (FSA) has provided flexibility to address relevant risks while helping to prioritize and contain the program’s resource footprint in the face of increasingly complex financial stability challenges since the previous review. Going forward, greater use could be made of the flexibility within the framework when scoping issues for FSAPs, balancing current coverage with emerging risks and issues, with continued tailoring of FSAPs to country specifics, effective prioritization, and in close consultation with the country authorities. The risk-based approach would help decide whether to conduct a full standard assessment versus a focused review and leverage the findings of recent standards assessment to tailor the scope of FSAs. Directors endorsed the Key Attributes of Effective Resolution Regimes as the assessment benchmark for insurance resolution frameworks in FSAPs and stand-alone assessments.
Directors welcomed ongoing efforts to further enrich the FSAP’s risk analysis toolkit. They stressed the importance of strengthening the development of tools to assess interactions between solvency, liquidity, and contagion risks, vulnerabilities among NBFIs, risks in nonfinancial sectors, interconnectedness, macrofinancial interactions, the macroprudential policy stance and new risks. Directors emphasized the importance of continued efforts to increase the efficiency, dissemination, and ease of use of the FSAP toolkit and to ease data constraints. They also stressed the need for continued efforts to strengthen the toolkit to enhance the assessment of financial vulnerabilities in low and lower-middle income countries.
Directors welcomed the proposals to improve the traction of FSAPs. While most FSAP recommendations were implemented, challenges arose when members faced political economy constraints or where there may have been differences in technical views. In this context, Directors welcomed the introduction of the authorities’ views in FSSAs. Directors also welcomed efforts to leverage the FSAP to develop risk analysis tools for use in bilateral surveillance and looked forward to further progress in this direction. They emphasized the importance of closer integration of the Article IV consultation process with the FSAP.
Directors welcomed the update and expansion of the list of jurisdictions with Systemically Important Financial Sectors (SIFS) that are subject to periodic mandatory FSAs, and a few Directors recalled that Fund policy requires the periodic review of the list and assessment frequency. They recognized that the cost of the FSAP had been broadly stable over time. Going forward, the slight cost increase from expanding the list of mandatory FSAs while maintaining space for voluntary FSAs could be accommodated within the current resource envelope.
Directors clarified the framework for expected periodic FSAs with supra-national authorities. A periodic FSA with a supra-national authority would be conducted if at least one member with a SIFS has delegated financial sector policies to the supra-national authority. The individual member country FSAs would be scoped to leverage the planned work on the supra-national FSA to avoid duplication.
Title Page
2021 FINANCIAL SECTOR ASSESSMENT PROGRAM REVIEW—TOWARDS A MORE STABLE AND SUSTAINABLE FINANCIAL SYSTEM
April 15, 2021
FSAP: The Financial Sector Assessment Program (FSAP) provides in-depth assessments of financial sectors. FSAPs are usually conducted jointly with the World Bank in emerging market and developing economies and by the Fund alone in advanced economies. FSAPs provide valuable analysis and policy recommendations for surveillance and capacity development. Since the program’s inception, 157 Fund members have undergone individual or regional FSAPs. In recent years, the Fund has been conducting 12–14 FSAPs per year at a cost of about 3 percent of the Fund’s direct spending.
Past Reviews: The FSAP has been transformed since the Global Financial Crisis. The 2009 Review delineated the Fund’s focus on stability from the Bank’s on development. A landmark change in the FSAP took place in 2010 when the IMF’s Executive Board mandated that jurisdictions with Systemically Important Financial Sectors (SIFS) participate in financial stability assessments as a part of Fund surveillance. The 2014 Review focused on building on these gains. It emphasized systemic risk and deeper analysis of nonbank financial institutions and interconnectedness. The Review called for more work on macroprudential policies, more flexible use of international standards, and greater integration with bilateral surveillance.
Progress: Stakeholders highly and increasingly value the program’s contributions to surveillance, especially the independent assessment. Most are comfortable with the framework, breadth, depth, and focus of financial stability assessments. Progress has been made on operationalizing strengthened analytics in FSAPs and more risk-based scoping. Overall FSAP costs have been stable over time; the variation in cost across jurisdictions reflects differences in financial system size and complexity.
2021 Review: Staff propose to build on past progress and leverage the FSAP’s flexibility to balance resources with priorities—including risks from climate and technological change—when deciding the scope of individual assessments. Deepening analytical approaches to assess and mitigate systemic risk as well as grappling with the aftereffects of the pandemic are priorities. Staff offer specific proposals to better support financial surveillance in Article IV consultations and proposes to strengthen the risk-based approach to mandatory assessments by adding an additional level of risk tolerance to identify additional jurisdictions assessed at a lower frequency.
Approved By
Tobias Adrian
Prepared by the Monetary and Capital Markets Department in collaboration with other departments and coordinated by Hiroko Oura under the overall guidance of Vikram Haksar and James Morsink (all MCM). The team for the main and background papers comprised Xiaodan Ding, Kelly Eckhold, Alan Xiaochen Feng, Pierpaolo Grippa, Marco Gross, Heedon Kang, Darryl King, Ivo Krznar, Tumer Kapan, Dimitrios Laliotis, Mindaugas Leika, Fabian Lipinsky, Inutu Lukonga, Pavel Lukyantsau, Fabiana Melo, Hunter Monroe, Erlend Nier, Thorvardur Olafsson, Liliana Schumacher, Katharine Seal, Nobuyasu Sugimoto, Thierry Tressel, Constant Verkoren, Chris Wilson, and Peter Windsor (all MCM), Julianne Ams, Ke Chen, Francisca Fernando, Grace Jackson, Olya Kroytor, David McDonnell, Jonathan Pampolina, Nadia Rendak, Mario Tamez (all LEG), Kevin Baily (ITD), Mario Catalan (ICD), Martin Cihak (SPR), Galen Sher (RES), Christopher Towe (external consultant), Laura Valderrama (EUR), Francis Vitek (FAD), and Teng Teng Xu (APD), with valuable documentation and logistical assistance from Lilly Siblesz de Doldan and Ashley Abraham.
Contents
Glossary
EXECUTIVE SUMMARY
CONTEXT
AIM I: SCOPE
A. Overall Scope
B. Pillar 1: Scope of Quantitative Risk Analysis
C. Pillar 2: Oversight
D. Pillar 3: Financial Safety Net
E. Coverage of Cross-Cutting Issues
F. Coverage of Risks from Climate Change, Cyber, and Fintech
G. Collaboration with the World Bank
H. Proposals to Strengthen Scoping
AIM II: QUANTITATIVE TOOLS
AIM III: TRACTION
A. Traction with Authorities
B. Integration Between FSAP and Article IV Surveillance
C. Integration with the GFSR and TA
D. Traction with the Public
E. Proposals to Increase Traction
AIM IV: COUNTRY PARTICIPATION
A. Overall Considerations
B. Mandatory Assessments
C. Voluntary Assessments
D. Supra-National and Regional Assessments
E. Proposals on Participation
AIM V: RESOURCES
A. Analysis
B. Cost of Proposal to Make Country Participation More Risk-Based
SUMMARY
A. Proposals
B. Implications for the Fund’s Risk Profile
ISSUES FOR DISCUSSION
BOXES
1. The FSAP Agenda: Toward a More Stable and Sustainable Financial System
2. The Funds’ Approach to Assessing Climate Change Risk in the FSAP
3. Participation of Supra-National Authorities in Mandatory FSAs
FIGURES
1. The Value of the FSAP in IMF’s Financial Surveillance
2. FSAP Prioritization—Survey Results
3. FSAP Experiences with Remote Engagements
4. Changes in Scope: Detailed Assessment Reports and Technical Notes, 2009–14
5. Changes in Scope: FSSAs and FSRs, 2009–14
6. FSAP Analytical Focus—Survey Results
7. FSAP’s Quantitative Tools
8. FSAP Recommendations
9. National Authorities’ Positive Views on Article IV Staff Reports
10. Traction: Integration with Article IV Consultations
11. Public Awareness of the FSAP
12. FSAP Coverage
13. Prioritizing the Voluntary Assessments
14. IMF’s Overall FSAP Costs
15. Distribution of IMF’s FSAP Costs Across Assessments, 2009–18
16. FSAP Costs and Financial System Size
17. FSAP Costs to Authorities
TABLES
1. Aim I: Proposals to Strengthen Scoping
2. Aim II: Proposals to Strengthen Quantitative Toolkit
3. Aim III: Proposals to Increase Traction
4. Jurisdictions with Mandatory Assessments—S47
5. Aim IV: Proposals on Participation
6. 2021 FSAP Review—Summary of Proposals
APPENDICES
I. A Brief History of the FSAP
II. The 2014 FSAP Review Agenda and Follow Up
III. Anti-Money Laundering and Combating the Financing of Terrorism
IV. FSSR and FSAP: Complementarities and Differences
V. Methodology for Determining Systemically Important Financial Sectors
VI. FSAP Review Surveys
VII. Integrating Stability Assessments Under the Financial Sector Assessment Program into Article IV Surveillance: Text of Amended Decision
References
Glossary
| ADs | Area departments (of the International Monetary Fund) |
| CCP | Central Counterparty |
| CSR | Comprehensive Surveillance Review |
| CPM | Clique Percolation Method |
| DAR | Detailed Assessment Report |
| ED | Executive Director (of the International Monetary Fund) |
| EMDE | Emerging Markets and Developing Economies |
| ELA | Emergency Liquidity Assistance |
| FATF | Financial Action Task Force |
| FMI | Financial market infrastructures |
| FSAP | Financial Sector Assessment Program |
| FSB | Financial Stability Board |
| FSSA | Financial System Stability Assessment |
| FSSR | Financial Sector Stability Review |
| FSR | Financial Stability Report (published by a central bank) |
| FTE | Full-Time Equivalent |
| FY | Financial year |
| GFSR | Global Financial Stability Report |
| ICT | Information and communication technology |
| IEO | Independent Evaluation Office (of the International Monetary Fund) |
| IMF | International Monetary Fund |
| MCM | Monetary and Capital Markets Department |
| NBFI | Nonbank financial institution |
| NGFS | Network of Central Banks and Supervisors for Greening of the Financial System |
| ROSC | Report on Observance of Standards and Codes |
| S29 | The 29 jurisdictions with systemically important financial sectors in 2013 |
| SIFS | Systemically Important Financial Sector |
| SPR | Strategy and Policy Review Department |
| SSB | Standard Setting Body |
| TA | Technical Assistance |
| TN | Technical Note |
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm
