On December 6, 2013, the Executive Board of the International Monetary Fund (IMF) reviewed experience with the implementation of the decision adopted in 2010 to integrate financial stability assessments under the Financial Sector Assessment Program (FSAP) into Article IV Surveillance on a mandatory basis for member countries with systemically important financial sectors.
In September 2010, the Executive Board made stability assessments under the Financial Sector Assessment program (FSAP) a mandatory part of bilateral surveillance under the Article IV for 25 jurisdictions with systemically important financial sectors. That decision resulted in a more risk-based approach to financial sector surveillance and better integration of FSAPs into Article IV consultations in these jurisdictions.
The current review is based on the experience with the implementation of the first cycle of mandatory assessments and the lessons learned from the financial crisis. In particular, the Executive Board revisited the original approach for determining jurisdictions with systemically important financial sectors and adopted a new methodology for determining jurisdictions with systemically important financial sectors.
The new methodology places greater emphasis on interconnectedness; expands the range of covered exposures; takes into consideration the potential for price contagion across financial sectors; and uses the most recent available data, while adhering to the principles of relevance, transparency, and even-handedness established by the 2010 Executive Board decision. Based on the new methodology, four additional jurisdictions—Denmark, Norway, Poland, and Finland—were added to the list of jurisdictions whose financial sectors are deemed to be systemically important. Since systemic importance is a dynamic concept, both the list of jurisdictions and the methodology for assessing systemic importance will continue to be reviewed periodically.
The Executive Board also updated the legal framework governing mandatory financial stability assessments to reflect the Integrated Surveillance Decision adopted in July 2012, and to allow a more comprehensive analysis of spillovers arising from members’ financial sector policies.
Executive Board Assessment
Executive Directors welcomed the opportunity to consider the review of the 2010 Board Decision that made stability assessments under the FSAP a regular and mandatory part of bilateral surveillance under Article IV for jurisdictions with systemically important financial sectors. Directors highlighted the success in implementing the 2010 Decision, with mandatory financial stability assessments already completed or underway for almost all of the jurisdictions identified pursuant to the 2010 Decision. They noted that the use of a more risk-based approach to financial sector surveillance has enabled the Fund to allocate FSAP resources more effectively and helped strengthen the integration of FSAPs and Article IV consultations in these jurisdictions.
Directors agreed that it is necessary to align the legal basis for mandatory financial stability assessments with the 2012 Integrated Surveillance Decision (ISD). The ISD made Article IV consultations a vehicle for both bilateral and multilateral surveillance, enabling the Fund, in an Article IV consultation, to examine spillovers arising from a member’s domestic policies when these may significantly influence the effective operation of the international monetary system. Consistent with the approach under the ISD, mandatory financial stability assessments would also cover spillovers from a member’s financial sector policies when those policies undermine either the member’s own stability or may significantly influence the effective operation of the international monetary system, for example by undermining global economic and financial stability.
Directors endorsed the proposal to modify the methodology for determining systemically important financial sectors to incorporate lessons from the crisis, in particular the importance of interconnectedness. They agreed that the systemic importance of a jurisdiction’s financial sector should be determined not only on the basis of size and cross-border banking linkages, as was the case in the original 2010 methodology, but also take into account other potential transmission channels for shocks. In this regard, Directors considered the new methodology to be a substantial improvement, as it shifts the emphasis to interconnectedness, expands the range of covered exposures, and brings into consideration complexity and the potential for price contagion across financial sectors while remaining rules-based, data-driven, and transparent. A few Directors, however, considered the new methodology to be somewhat complex and less transparent than the previous one. Some Directors were also concerned that it omits certain countries that experienced banking and financial crisis during the post-2008 period.
Directors took note of the 29 jurisdictions whose financial sectors have been determined by the Managing Director to be systemically important. Directors considered that the list and the methodology itself would need to be periodically reviewed as members’ financial sectors and markets evolve, and analytical methods and data sources improve, including for nonbank, central counterparty clearing houses, hedge funds, and unregulated segments of the financial sector. Continued efforts to improve the reporting and quality of data will be important. Some Directors considered that the methodology for determining systemic importance should leave some room for judgment in assessing the potential risk that some jurisdictions not subject to mandatory FSAPs can pose to the global financial system, and a few Directors considered that vulnerability could be captured in the methodology.
Directors noted that the incremental resource impact on the FSAP program of the increase in the number of jurisdictions with systemically important financial sectors would be modest and manageable. Most Directors, however, expressed concern that the shift toward a more risk-based approach to financial sector surveillance has reduced the availability of voluntary FSAPs in jurisdictions with non-systemic financial sectors. Directors emphasized the need to make sufficient resources available to ensure continued delivery of non-mandatory FSAPs. Various suggestions were made in this regard, including better prioritization of the workload, reallocation of resources, or higher budgetary allocation. A few Directors also suggested promoting self-assessments, backed by quality checks by the Fund. Directors looked forward to the budget framework discussions and the FSAP review in 2014 to further consider these and other issues.