Financial Stability and Systemically Important Countries -IMF-FSAP

Financial Stability and Systemically Important Countries -IMF-FSAP

 

IMF – FSAP

Assess financial stability and development

From The Financial Sector Assessment Program (FSAP)

The goal of FSAP assessments is twofold: to gauge the stability and soundness of the financial sector, and to assess its potential contribution to growth and development.

To assess the stability of the financial sector, FSAP teams examine the resilience of the banking and other non bank financial sectors; conduct stress tests and analyze systemic risks including linkages among banks and nonbanks and domestic and cross border spillovers; examine microprudential and macroprudential frameworks; review the quality of bank and non bank supervision, and financial market infrastructure oversight against accepted international standards; and evaluate the ability of central banks, regulators and supervisors, policymakers, and backstops and financial safety nets to respond effectively in case of systemic stress. While FSAPs do not evaluate the health of individual financial institutions and cannot predict or prevent financial crises, they identify the main vulnerabilities that could trigger one.

To assess the development aspects of the financial sector, FSAPs examine the development needs in terms of institutions, markets, infrastructure, and inclusiveness; quality of the legal framework and of payments and settlements system; identify obstacles to the competitiveness and efficiency of the sector; topics relating to financial inclusion and retail payments; and examine its contribution to economic growth and development. Issues related to development of domestic capital markets are particularly important in developing and low-income countries. While focusing on development issues, FSAPs also keep in view financial stability dimensions .

Since 1999 the IMF has monitored countries’ financial sectors on a voluntary basis through the Financial Sector Assessment Program. In developing and emerging market countries, the World Bank participates in these assessments, focusing on long-term financial development issues.

In the context of these financial sector assessments, the IMF examines three key components in all countries:

• the soundness of banks and other financial institutions, including stress tests;

• the quality of financial market oversight in banking and, if appropriate, insurance and securities; and

• the ability of supervisors, policymakers, and financial safety nets to respond effectively in case of a crisis.

One size does not fit all in these assessments. The IMF tailors its focus in each of these areas to a country’s individual circumstances, and takes into account the potential sources that might make the country in question vulnerable.

The objective is to assess countries’ crisis prevention and management frameworks, with the goal of supporting both national and global financial stability.

 

Based on 2010 IMF-FSAP, these are the counties having the systemically important Financial Sectors:

  • Australia
  • Austria
  • Belgium
  • Brazil
  • Canada
  • China
  • France
  • Germany
  • Hong Kong SAR
  • Italy
  • Japan
  • India
  • Ireland
  • Luxembourg
  • Mexico
  • the Netherlands
  • Russia
  • Singapore
  • South Korea
  • Spain
  • Sweden
  • Switzerland
  • Turkey
  • the United Kingdom
  • the United States

 

In 2014, Four new countries were added to the list based on expanded criteria for financial stability:

  • Finland,
  • Poland,
  • Denmark,
  • Norway

Expanded criteria emphasize connections between financial sectors, institutions

More emphasis on how problems in one country affect others

 

From Press Release: IMF Expanding Surveillance to Require Mandatory Financial Stability Assessments of Countries with Systemically Important Financial Sectors

September 27, 2010

Press Release No. 10/357
September 27, 2010

The Executive Board of the International Monetary Fund (IMF) has approved making financial stability assessments under the Financial Sector Assessment Program (FSAP) a regular and mandatory part of the Fund’s surveillance for members with systemically important financial sectors. While participation in the FSAP program has been voluntary for all Fund members, the Executive Board’s decision will make financial stability assessments mandatory for members with systemically important financial sectors under Article IV of the Fund’s Articles of Agreement.

The decision adopted on September 21, 2010 to raise the profile of financial stability assessments under the FSAP for members with systemically important financial sectors is a recognition of the central role of financial systems in the domestic economy of its members, as well as in the overall stability of the global economy. It is a major step toward enhancing the Fund’s economic surveillance to take into account the lessons from the recent crisis, which originated in financial imbalances in large and globally interconnected countries.

The FSAP provides the framework for comprehensive and in-depth assessments of a country’s financial sector, and was established in 1999, in the aftermath of the Asian crisis. FSAP assessments are conducted by joint IMF-World Bank teams in developing and emerging market countries, and by the Fund alone in advanced economies. FSAPs have two components, which may also be conducted in separate modules: a financial stability assessment, which is the responsibility of the IMF and, in developing and emerging market countries, a financial development assessment, the responsibility of the World Bank.

These mandatory financial stability assessments will comprise three elements: 1) An evaluation of the source, probability, and potential impact of the main risks to macro-financial stability in the near term, based on an analysis of the structure and soundness of the financial system and its interlinkages with the rest of the economy; 2) An assessment of each countries’ financial stability policy framework, involving an evaluation of the effectiveness of financial sector supervision against international standards; and 3) An assessment of the authorities’ capacity to manage and resolve a financial crisis should the risks materialize, looking at the country’s liquidity management framework, financial safety nets, crisis preparedness and crisis resolution frameworks.

“The FSAP program has been a key tool for analyzing the strengths and weaknesses of the financial systems of IMF member countries. This is why more than three-quarters of the Fund’s members have volunteered for these assessments, some more than once. However, the recent crisis has made clear the need for mandatory and regular assessments of financial stability for countries with large and interconnected financial systems. The Board’s decision represents an important part of the international community’s response to the recent crisis and will buttress our ability to exercise surveillance over a key aspect of the global economic machinery – the financial system,” said John Lipsky, First Deputy Managing Director of the IMF.

A total of 25 jurisdictions were identified as having systemically important financial sectors, based on a methodology that combines the size and interconnectedness of each country’s financial sector.

They are in alphabetical order: Australia, Austria, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, Italy, Japan, India, Ireland, Luxembourg, Mexico, the Netherlands, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.

This group of countries covers almost 90 percent of the global financial system and 80 percent of global economic activity. It includes 15 of the Group of 20 member countries, and a majority of members of the Financial Stability Board, which has been working with the IMF on monitoring compliance with international banking regulations and standards. Each country on this list will have a mandatory financial stability assessment every five years. Countries may undergo more frequent assessments, if appropriate, on a voluntary basis. The methodology and list of jurisdictions will be reviewed periodically to make sure it continues to capture the countries with the most systemically important financial sectors that need to be covered by regular, in-depth, mandatory financial stability assessments.

“Going forward, regular stability assessments of systemically important financial sectors should contribute to a deeper the public understanding of the risks to economic stability arising from the financial sector. Financial instability can have a major impact on economic activity and job creation.” Mr. Lipsky said. “At the same time, we are committed—with the World Bank—to ensuring that this new mandate does not crowd out FSAP assessments in other countries.”

 

From IMF Survey : IMF Broadens Financial Surveillance

New methods for new risks

In the wake of the crisis, the IMF has strengthened the framework for surveillance of countries’ financial systems.

In 2010, the IMF made financial sector assessments mandatory for the countries with most important financial sectors in the global system, initially 25 and now 29.

The IMF is also focusing on how problems in one country can affect others, and on the connections between financial institutions. The IMF, among others, has developed what are known as network models to try and understand how events in one financial institution, market, or country will impact others.

Given the growing reach of global banks, the IMF also closely examines cross-border supervisory cooperation arrangements. In countries where foreign-owned banks are systemically important, it is essential that the host country supervisor has enough tools and good communications with the parent banks’ regulators.

Last December, the IMF Board reviewed the methodology that determines whether a country’s financial sector is systemically important. In light of the experience since the crisis, it agreed to place even more emphasis on the connections between financial sectors and institutions, expand the coverage of cross-border linkages to cover not only banking but also equity and debt exposures, and capture the potential for pure price contagion. Based on these revamped criteria, the IMF added the four countries to the original 25.

 

From Systemic Risk: From measurement to the New Financial Stability Agenda

interinter-2inter-3

 

Broad coverage of possible cross-border transmission channels for shocks:

  1. Banking claims (BIS Locational Statistics)
  2. Debt portfolio holdings (IMF CPIS Data)
  3. Equity portfolio holdings  (IMF CPIS Data)
  4. Price effects (“contagion”) (MSCI Price Indices)

 

Key Terms:

  •  FSAP – Financial Sector Assessment Program
  • IMF – International Monetary Fund
  • FSB – Financial Stability Board
  • BIS – Bank for International Settlements
  • FSSA – Financial Sector Stability Assessment

 

 

Key Sources of Research :

 

The Financial Sector Assessment Program (FSAP)

http://www.imf.org/About/Factsheets/Sheets/2016/08/01/16/14/Financial-Sector-Assessment-Program?pdf=1

 

 

MANDATORY FINANCIAL STABILITY ASSESSMENTS UNDER THE FINANCIAL SECTOR ASSESSMENT PROGRAM: UPDATE

2013

http://www.imf.org/external/np/pp/eng/2013/111513.pdf

 

 

IMF Survey: Top 25 Financial Sectors to Get Mandatory IMF Check-Up

2010

http://www.imf.org/external/pubs/ft/survey/so/2010/NEW092710A.htm

 

 

The Financial Sector Assessment Program (FSAP)

http://www.imf.org/external/np/exr/facts/fsap.htm

 

 

Press Release: IMF Executive Board Reviews Mandatory Financial Stability Assessments Under the Financial Sector Assessment Program

2014

http://www.imf.org/external/np/sec/pr/2014/pr1408.htm

 

 

IMF Survey : IMF Broadens Financial Surveillance

 

2015

http://www.imf.org/en/News/Articles/2015/09/28/04/53/sopol011314a

 

 

Strengthening Surveillance—Lessons from the Financial Crisis

 

http://www.imf.org/external/np/pp/eng/2010/082710.pdfhttp://www.imf.org/external/np/exr/facts/refsurv.htm

 

 

External Sector Report

 

http://www.imf.org/external/np/pp/eng/2014/062614.pdf

 

 

Identifying Global Systemically Important Financial Institutions

Mustafa Yuksel

 

https://www.rba.gov.au/publications/bulletin/2014/dec/pdf/bu-1214-8.pdf

 

 

A Comparison of U.S. and International Global Systemically Important Banks

by Paul Glasserman and Bert Loudis

 

https://www.financialresearch.gov/briefs/files/OFRbr-2015-07_A-Comparison-of-US-and-International-Global-Systemically-Important-Banks.pdf

 

 

Integrating Stability Assessments Under the Financial Sector Assessment Program into Article IV Surveillance: Background Material

Prepared by the Monetary and Capital Markets Department Approved by José Viñals

August 27, 2010

 

http://www.imf.org/external/np/pp/eng/2010/082710a.pdf

 

 

Integrating Stability Assessments Under the Financial Sector Assessment Program into Article IV Surveillance

Prepared by the Monetary and Capital Markets, Legal, and Strategy, Policy, and Review Departments

Approved by José Viñals, Reza Moghadam, and Sean Hagan August 27, 2010

 

http://www.imf.org/external/np/pp/eng/2010/082710.pdf

 

 

The geographical composition of national external balance sheets: 1980–2005

Chris Kubelec and Filipa Sá

March 2010

http://www.bankofengland.co.uk/research/Documents/workingpapers/2010/wp384.pdf

 

 

The role of external balance sheets in the financial crisis

Yaser Al-Saffar, Wolfgang Ridinger and Simon Whitaker

http://www.bankofengland.co.uk/financialstability/Documents/fpc/fspapers/fs_paper24.pdf

 

 

Evidence on Financial Globalization and Crisis: Geographic/Bilateral External Balance Sheets

Filipa Sá

August 3, 2010

http://www.econ.cam.ac.uk/dae/repec/cam/pdf/cwpe1038.pdf

 

 

Bilateral Financial Linkages and Global Imbalances: a View on The Eve of the Financial Crisis

Gian Maria Milesi-Ferretti, Francesco Strobbe, and Natalia Tamirisa

2010

 

https://www.imf.org/external/pubs/ft/wp/2010/wp10257.pdf

 

 

International banking centres: a network perspective

Goetz von Peter

2007

 

http://www.bis.org/publ/qtrpdf/r_qt0712e.pdf

 

 

Financial Sector Assessment Program: an Update

Presented by Mario Guadamillas and Christine Sampic

October 18-22, 2010

 

http://siteresources.worldbank.org/FINANCIALSECTOR/Resources/282044-1260476242691/Guadamillas_Sampic_FSAP.pdf

 

 

 

Systemic Risk: From measurement to the New Financial Stability Agenda

Jorge A. Chan-Lau

April 4, 2014

 

http://www4.fsa.ulaval.ca/wp-content/uploads/2015/04/Chan_lau_4avril2014.pdf

 

 

Changing Perceptions of Systemic Risk in Financial Regulation

Caroline Bradley

 

http://blenderlaw.umlaw.net/wp-content/uploads/2015/03/riskparadigmshift.0061.pdf

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Author: Mayank Chaturvedi

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