Financial Sector Assessment Program (FSAP) of IMF

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 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, and 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;

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.

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.

The FSAP program has been a key tool for analysing the strengths and weaknesses of the financial systems of IMF member countries. 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. Financial instability can have a major impact on economic activity and job creation. 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.