Using the Core Principles as Part of the Financial Sector Assessment Program International Association of Deposit Insurers 13 th Annual General Meeting in Port of Spain, Trinidad October 22, 2014

Using the Core Principles as Part of the Financial Sector Assessment Program What is the Financial Sector Assessment Program (FSAP)? What are Reports on the Observance of Standards and Codes (ROSCs) and Technical Notes (TNs)? Incorporating the Deposit Insurance Core Principles into your country’s FSAP Benefits of using the Core Principles in the FSAP process

What is the FSAP Program? The FSAP program began in 1999 in the aftermath of the Asian financial crisis. It is an in-depth assessment of a country’s financial sector. Since the program’s inception more than 140 countries have requested and undergone FSAPs, most of them more than once. In developing and emerging market countries the World Bank and the IMF conduct joint FSAPs.

What is the FSAP Program (II)? There are 29 jurisdictions deemed to have systemically important financial sectors that must undergo FSAPs every five years; for all other jurisdictions FSAP participation continues to be voluntary. Each FSAP concludes with a Financial System Stability Assessment (FSSA) prepared by the IMF and, for relevant countries, a Financial System Development Assessment or FSA prepared by the World Bank. For the IMF the FSAP is a key pillar of its financial sector surveillance required under Article IV of its Articles of Agreement. For the World Bank the FSAP is a vehicle to address the needs of Emerging Markets and Developing Economies (EMDEs).

What is the FSAP Program (III)? In 2009 the FSAP program was adjusted so that financial safety nets were elevated in importance by being made part of the three components reviewed as part of the FSSA. This is in keeping with the need for FSAPs to evaluate crisis preparedness and crisis management frameworks and has resulted in an increase in the share of FSAP recommendations related to these issues. It is increasingly common for the FSSAs and FSAs to be published with the FSSAs focused to a greater and greater extent on systemic risk as outlined in the September 2014 IMF Review of the Financial Sector Assessment Program: Further Adaptation to the Post Crisis Era. This requires looking at the most relevant assessment principles for financial stability. Country authorities often see the benefit of communicating their country’s progress through disclosure of various FSAP documents. In countries assessed by the World Bank there has been slow but consistent progress in compliance with international standards of regulation and supervision.

What are ROSCs and TNs? Report on Observance of Standards and Codes (ROSCs) ROSCs are formal assessments of compliance with international standards summarized in a Detailed Assessment Report (DAR) and a shorter ROSC for each standard assessed. These are time and resource intensive reviews with the methodology for the assessment prescribed by the standard setters. Technical Notes (TNs) Where a full compliance assessment is not necessary or not requested by the authorities the evaluation is done through a more focused, targeted process culminating in the preparation of a TN. These assessments are guided by the same methodology as the formal assessments but are more limited and do not generate a DAR with assessment grades. Deposit insurance is assessed as part of the Safety Nets TN.

Incorporating the Core Principles Into Your Country’s FSAP A formal request to conduct a FSAP is made by the country authorities to the World Bank and/or the IMF, usually by the Minister of Finance or its equivalent. The areas to be considered for in-depth assessments and preparation of ROSCs are negotiated between the authorities and the FSAP mission chief/chiefs. Regardless of whether a ROSC and DAR will be prepared using the Core Principles, the deposit insurance framework will be considered as part of the review of safety nets and will be addressed as part of the safety net TN. If the deposit insurer wants a full Core Principles assessment resulting in a ROSC and DAR the country authorities should make that known to the mission chief/chiefs early in the planning process. What are the options and how can the deposit insurer be part of the decision-making process?

Incorporating the Core Principles Into Your Country’s FSAP (II) A ROSC will be completed by a dedicated assessor or team of assessors that will ask for detailed information before the on-site portion of the FSAP. Ideally the questionnaires sent by the individual completing the TN on safety nets and the ROSC assessor will be coordinated to avoid duplicative requests for information and meetings. Requests will be made for documents on the deposit insurer’s operations, any completed self- assessments or assessments completed by others, information on the target fund and potential exposure of the fund on a bank-by-bank basis, reports from any crisis simulation exercises, and complete copies of all relevant laws and regulations (often to be provided in English). The deposit insurer will be asked to complete (or update) a Core Principles assessment. What should the deposit insurer expect if there is a full ROSC and DAR using the Core Principles?

Incorporating the Core Principles Into Your Country’s FSAP (III) A substantial commitment of time is necessary by the deposit insurer to the ROSC process both before, during and after the field visit/s by the FSAP team. A team of individuals will be necessary to properly respond to the many requests for information for the ROSC. In addition the deposit insurer will have to coordinate with other financial sector authorities to set up the necessary meetings and coordinate the entire process. There may also be requests from the FSAP team to meet with outside parties and questions on the process from those parties may be directed to the deposit insurer. What should the deposit insurer expect if there is a full ROSC and DAR using the Core Principles?

Incorporating the Core Principles Into Your Country’s FSAP (IV) Careful review of reports generated during the FSAP will be necessary. All authorities should review the relevant portions of all ROSCs for consistency and accuracy as there are areas that are discussed in several different standards (for example in the Basel Core Principles and the Deposit Insurance Core Principles). The deposit insurer should also carefully review the TN on safety nets and the Aide-Memoire (which is a confidential document left with the authorities at the end of the on-site portion of the FSAP) as well as the FSSA and FSA which are produced after completion of all field work. What should the deposit insurer expect if there is a full ROSC and DAR using the Core Principles?

Benefits of Using the Core Principles in the FSAP Process There have been relatively few ROSCs using the Core Principles (Malaysia, Uruguay, Poland, Albania, Moldova (pending completion) and Bosnia and Herzegovina (upcoming)). Three ROSCs and accompanying DARs have been published: Malaysia, Poland and Albania (available on the IMF and World Bank websites). The Core Principles have been used as a benchmark in a large number of TNs on Crisis Preparedness and Safety Nets and many of these TNs are available on the IMF website. These published documents, particularly the ROSCs and DARs, provide an opportunity for interested parties to see an in-depth report on how the deposit insurance system in a given country operates and can aid in the dissemination of good practices for deposit insurers.

Benefits of Using the Core Principles in the FSAP Process (II) The necessary FSAP preparation for the deposit insurer provides an opportunity for an internal in-depth review of its operations and completion of a self- assessment, providing learning opportunities for staff and early identification of areas of potential weakness. Full participation by a deposit insurer in the FSAP process makes clear that the DI is an equal partner in its country’s financial sector regulatory scheme. Collaboration and communication among the safety net participants can improve as a result of having to cooperate in completing the FSAP process. An inter-disciplinary FSAP team looks at the operations of the DI as part of the country’s entire financial system thereby broadening the resulting report. Key messages on financial sector strengths and weaknesses, including any enhancements needed to increase the effectiveness of the deposit insurer, can be communicated in a comprehensive fashion to the country’s key decision makers.

Thank you for your attention! Questions or Comments? International Association of Deposit Insurers 13 th Annual General Meeting in Port of Spain, Trinidad October 22, 2014 Presentation by: Claire L. McGuire