1. The FSAP Program Practice and Potential
Include both logos to indicate coop

2. Financial Sector Assessment Program
Diagnosis of potential vulnerabilities
and analysis of development priorities
in the financial sectors of member countries
(To include national and spillover issues)
Spillover: financial contagion -- systemically important systems and AML

3. Outline of presentation
The FSAP program to date
Use of standards and codes
Stability aspects
Development aspects

4. The FSAP program seeks to…
Identify strengths and vulnerabilities
Determine how key risks are being managed;
Ascertain development and TA needs; and
Help prioritize policy responses

5. Some institutional features
Joint product of the IMF and the World Bank
joint Bank-Fund Financial Sector Liaison Committee (FSLC)
designed to strengthen IMF bilateral surveillance and World Bank’s financial sector development work.
An international cooperative effort drawing on financial sector experts from collaborating official institutions as well as Bank-Fund staff
Started May 1999 (pilot basis)
Voluntary participation

6. FSAPs: 1999-2004 Completed FSAPs: 73 countries
FSAPs underway: 18 countries
Future participation confirmed: 14 countries
FSAP updates: 9 countries

7. FSAPs completed ( : 97)

8. FSAPs underway or agreed (25)

9. Building blocks Assembly of data on system functioning
Including scale, liquidity, efficiency, reach, exposure
Standards and codes assessments
Detailed structured discussions with authorities
Formal stress-testing
Interviews with market participants
 Overall assessment
Exposure: credit concentrations; risks insured, capitalization, deposit concentration, exchange mismatch

10. Codes are selected from…
Basel Core Principles for Effective Banking Supervision (BCP)
Transparency (Monetary & Financial Policies)
Systemically Important Payment Systems (CPSIPS)
Securities Regulation (IOSCO)
Insurance (IAIS)
AML-CFT (FATF)
For reviews:
Cover (i) financial sector regulation and supervision; (ii) institutional and market infrastructure; and (iii) policy transparency.
The standards routinely assessed consist of the: (i) IMF Code of Good Practices on Transparency in Monetary and Financial Policies (MFP Code); (ii) Basel Core Principles for Effective Banking Supervision (BCP); (iii) Core Principles for Systemically Important Payment Systems (CPSIPS); (iv) International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation (IOSCO Principles); (v) International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICP); and more recently, (vi) the Financial Action Task Force (FATF) Recommendations for Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT).
In addition, other standards, principles and In addition, other standards, principles and guidelines may be used to inform the FSAP analysis, including: (i) the OECD Corporate Governance Principles; (ii) World Bank Principles for Effective Insolvency and Creditors Rights; (iii) CPSS-IOSCO Recommendations for Securities Settlement System (RSSS); and (iv) International Accounting and Auditing Standards. (The last four will not be covered in future except perhaps RSSS). Use is also made of Bank-Fund Public Debt Management Guidelines and Reserves Management Guidelines for informing the analysis in these areas.
The number of standards assessed per FSAP has increased from two to four in the pilot cases (average of 3.7 per FSAP), to three to six more recently (average of 4.9 per FSAP in FY 2003), excluding AML/CFT assessments.

11. Basel Core Principles for Effective Banking Supervision
Standards and Codes
Basel Core Principles for Effective Banking Supervision
Objectives, Autonomy, Powers, and Resources
Licensing and Structure
Prudential Regulations and Requirements
Methods of Ongoing Supervision
Information Requirements
Formal Powers of Supervisors
Cross-border Banking

12. IAIS Insurance Core Principles
Standards and Codes
IAIS Insurance Core Principles
Organisation of an Insurance Supervisor Licensing and Changes in Control
Corporate Governance
Internal Controls
Prudential Rules
Market Conduct
Monitoring, Inspection and Sanctions
Cross-border Business Operations
Supervisory Coordination and Cooperation, and Confidentiality

13. IOSCO Objectives and Principles for Securities Regulation
Standards and Codes
IOSCO Objectives and Principles for Securities Regulation
The regulator
Self-regulation
Enforcement
Cooperation in regulation
Issuers
Collective investment schemes
Market intermediaries
The secondary market

14. Standards and Codes
IMF Code of Good Practices on Transparency in Monetary and Financial Policies
Clarity of roles, responsibilities and objectives of central banks / financial policies
Open process for formulating and reporting monetary / financial policies decisions
Public availability of information on monetary / financial policies
Accountability and assurance of integrity by the central bank / financial policies

15. CPSS Core Principles for Systemically Important Payment Systems
Standards and Codes
CPSS Core Principles for Systemically Important Payment Systems
Legal basis
System’s impact on risks and procedures for management of risks
Final settlement
Assets for settlement
Security and operational reliability and contingency arrangements
Practicality of the system
Objective and publicly disclosed criteria for participation
Governance of the system – its effectiveness, transparency and accountability
Responsibilities of the central bank in applying the Core Principles
Securities settlement systems

16. Standards and Codes
Anti-Money Laundering & Countering the Financing of Terrorism (AML-CFT)
Criminal justice measures
Including FIU, confiscation of proceeds, enforcement, international co-operation,
Preventive measures for financial institutions
Legal & institutional framework & implementation
Banking, Insurance, Securities: sector-specific criteria
Information on controls and monitoring of cash and cross border transactions

17. Frequency of codes in early FSAPs
Average was 4.9 (not incl AML; but yes including A&A, Corporate Governance; Insolvency and creditor rights) per country: new proposal: average of 3 per country. Achieved: 2.6+AML in Calendar 2004.; 2.1 if advanced economies are excluded.
to Dec 2002

18. FSAPs vs. code assessments: What’s the difference? (1)
Not all relevant codes can be covered
So need to be supplemented by less formal work
Cross-sectoral issues
Interaction between different sectors
Regulatory overlap or underlap
Coverage gaps
e.g. contractual savings/social insurance (financial sector aspects); deposit insurance
Narrow issues: Some sectors/institutions have no agreed standards also e.g.:
Credit cooperatives
Currency unions

19. FSAPs vs. code assessments: What’s the difference? (2)
Codes developed by regulatory bodies and reflect their partial focus
Mechanical code diagnosis may miss national features
Prioritization and highlighting

20. FSAPs vs. code assessments: What’s the difference? (3)
No standards for key stability & development issues such as
Macrofinancial crisis management
Competition environment,
Tax, quasi-tax and subsidy issues
Access to financial services
Missing markets
Overall legal framework

21. The future (1): less reliance on full code assessments
Subtlety and sophistication inapplicable in many environments (small, less developed systems)
Attempt to retain enough of the essence of the code without excessively detailed questioning?
Avoid “Fiddling while Rome burns” by selecting only most relevant codes…
…and switching resources to country needs
Fewer codes: Average of 3 only for the future (+AML) cf. 4-6 in 2002

22. The future (2): FSAP updates
Evolving towards a more flexible model differentiated in line with country needs
Elements will include:
Ongoing surveillance (with Art. IV)
Coverage of additional sectors (rolling assessment)
Updates of ROSCs if warranted by changes
More in-depth development studies (e.g. involving more continuous engagement)
Greater emphasis on TA/follow-up

23. Crisis prevention vs. prediction
Can FSAPs predict a crisis?
Is the system in “Zone of vulnerability”?
Identifying channels of vulnerability
Crisis management mechanisms
There’s no standard for crisis management, deposit insurance

24. Risks x Systemic Weakness
Vulnerability =
Risks x Systemic Weakness

25. Stress testing (1) Quality of stress test results =
quality of data X relevance & scale of shocks
Methodological reviews

26. Stress testing (2)
(Mainly banking system)
Typical shocks: exchange rate, interest rate, liquidity, commodity price; housing prices; quality of loan classification
Scale of shocks: reference to history
Correlations: usually scenarios
(More elaborate procedures used for some advanced economies)
Exchange rate: direct, indirect;
Interest rate: buckets
Liquidity -- runs
Quality of loan classification: migration, or underestimation
A few have done insurance
Shocks chosen in consultation with authorities
Elaborations: empirical correlations; stock market crash; 3 used Monte Carlo!
Inadequate for complex institutions/derivatives

27. Stress testing (3)
Account sometimes taken of sectoral pattern of lending, market portfolio.
Must be bank-by-bank: averages can conceal
The essence: recalculate bank’s capital after shock
Impact of shock on loan performance usually judgmental -- occasionally use of historic relations; rarely use information on non-financial corporate finances
Future:
More work on contagion
More work on peer group of countries -- how bad is bad
More work on regression links

28. Approach to the development assessment
Builds on information gathering part of the stability part & regulatory code assessments
But takes a functional and systemic approach
Seeks to trace deficiencies to (i) gaps in financial infractructure and (ii) flaws in policy
Optimal policy recommendation highly country specific
Laissez-faire inadequate; activism often counterproductive
Political, governance & admin. preconditions important

29. Development assessment: the information gathering phase
Quantitative benchmarking
size, depth, cost and price efficiency and penetration
Infrastructural reviews
legal, informational and transaction technology
Sectoral reviews
service provision, structure and regulation
(incl specialized development institutions)
Demand-side reviews
Other cross-cutting aspects of policy environment

30. Development assessment: the analytical and reporting phase
Delivering the message:
Describe the functional gaps
E.g. lack of term finance; no venture capital; high intermediation costs; limited access; nascent insurance industry…
Pinpoint the source(s) of the difficulty
Propose strategic approach to solution
highlighting cross-sectoral aspects

31. Outputs Aide Mémoire Working document, not for publication
FSSA* (IMF Board) Financial sector stability assessment
FSA** (WB Board) Financial sector assessment
ROSCs* Summary report on observance of standards & codes (annexed to FSSA)
Technical Notes On selected issues
Detailed standards & codes assessments
Mexico examples: * **
Aide memoire (to help remember the wrap-up meeting) -- often slide show presentation

32. Publication policy Aide Memoire given only to authorities
FSSAs and FSAs:
are confidential but do not contain information concerning the health or prospects of individual financial institutions.
voluntary publication (same publication and deletions policy as Article IV staff reports)
Financial sector ROSCs:
voluntary publication; could be published separately from FSSA
Detailed assessments of observance of standards and codes
can be published by authorities with the consent of IMF-WB
Technical Notes
can be published by authorities with the consent of IMF-WB management, with exception of stress test results and information on individual institutions, and with appropriate deletions for highly market-sensitive information.

33. What can we conclude from an FSAP?
Is the system stable? If not, what actions required?
How to strengthen the financial system further?
Improve code compliance;
Build infrastructure (human, organizational, physical);
Prioritize and sequence reform plans.
How to help the process with technical assistance?

34. What countries like about the FSAP
Informs domestic policy making
Provides a consistent, comprehensive framework for financial sector stability issues and development needs
Helps country ownership of the reform process
Provides a basis and incentive for national authorities to conduct self-assessments
“Peer review” aspect — use of experts from collaborating official institutions from other countries

35. For the Bank and Fund… The FSAP findings:
Help strengthen the IMF's Article IV surveillance process
Inform the work program between WB and authorities, and identify priority areas for support.

36. « Glögt er gests augađ » (“Keen is the eye of the visitor”
-- an Icelandic saying)
The greatest potential of the FSAP is not so much the ratings
or the overall risk assessment,
but its ability to bring
a new perspective to
financial sector policy in the host country