Top 25 financial sectors:
Mandatory IMF check-up
Economies with financial sectors that have the greatest impact on
global financial stability are now required to undergo in-depth reviews
of their financial health by the International Monetary Fund every five
years.
The landmark decision by the IMF’s Executive Board on September 21
converts the financial stability component of the voluntary Financial
Sector Assessment Program (FSAP) into a mandatory part of the IMF’s
surveillance for the world’s top 25 financial sectors.
The global economic crisis laid bare the devastating economic
consequences a financial crisis in one country can have on the global
economy.
Money all around |
This decision is a concrete step toward strengthening the IMF’s
surveillance of those members whose financial sectors could have the
biggest potential impact on global stability.
It is one of the key steps taken by the Fund to modernize its
surveillance mandate and modalities in light of the recent crisis, and
is consistent with the commitment made by the leaders of the Group of 20
advanced and emerging economies at the Washington Summit in November
2008 to subject their financial sectors to greater scrutiny.
The IMF chose the 25 economies (see box) based on the size of their
financial sectors and their connections with financial sectors in other
countries. The IMF criteria do not reflect a country’s broader economic
or political importance, and would be periodically reevaluated as
financials sectors develop and their size and connections change over
time. Casting a wider net on financial stability issues
All of the IMF’s 187 member countries are already required to undergo
an annual economic health check-up, known as an Article IV consultation.
In addition, the FSAP offers the opportunity to all member countries
to undergo, on a voluntary basis, a comprehensive financial sector
assessment. More than three-quarters of the Fund’s membership have so
far volunteered for FSAPs.
All FSAPs include an in-depth assessment of financial stability done
by the Fund. In addition, in developing and emerging market countries,
FSAPs include an evaluation of developmental and structural aspects of
the financial sector conducted by the World Bank.
* Financial stability assessments examine the soundness of the
banking and other financial sectors; conduct stress tests; evaluate the
quality of bank, insurance, and financial market supervision against
accepted international standards; and assess the ability of supervisors,
policymakers, and financial safety nets to respond effectively in case
of systemic stress.
While these financial stability assessments 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.
* Financial development assessments examine the quality of the legal
framework and of financial infrastructure, such as the payments and
settlements system; identify obstacles to the competitiveness and
efficiency of the sector; and examine its contribution to economic
growth and development. Issues related to access to banking services and
the development of domestic capital markets are particularly important
in low-income countries.
The recent Executive Board decision bridges the gap between the
Fund’s Article IV consultation and the FSAP and expands considerably the
financial component of the former in a risk-based manner, by
concentrating on the most important financial sectors.
Financial development issues are, of course, important in developing
and emerging market countries, where they could also have repercussions
on financial stability.
Financial development assessments under the FSAP will therefore
continue to be made available to these countries by the World Bank on a
voluntary basis, as at present.
The Fund and the Bank will continue to collaborate closely in these
countries.
The review of a country’s financial stability would cover three core
elements.
* Risk - the source, probability, and potential impact of the main
risks to financial stability
* Policies - the country’s financial stability policy framework
* Crisis resolution - the authorities’ capacity to manage and resolve
a financial crisis.
The reports produced by the IMF are typically made public by
countries, and used to improve the functioning of their financial
sector.
IMF Survey online |