Wednesday, July 25, 2007

3.5 The Financial Sector Assessment Programme (FSAP)

Question 3.5

5.2.3 The Financial Sector Assessment Programme (FSAP)
The most comprehensive medium term response of the IMF to the financial crises that arose from 1997 was the development of the Financial Sector Assessment Programme, or FSAP. The FSAP consists of a detailed assessment and diagnosis of the state of health of a country’s financial system. It is an assessment conducted by a variety of agencies, including particularly the IMF and the World Bank. Importantly, however, it also uses the services of financial sector experts from the central banks and Finance Ministries of a wide range of countries.

The FSAP was introduced in May 1999, less than a year after the East Asian crisis had set in. It was established by the IMF and the World Bank to strengthen the monitoring of financial systems in the context of the IMF’s bilateral surveillance and the Bank’s financial sector development work. The overall purpose of the FSAP is to assist the countries for which this assessment exercise is conducted, to strengthen their resistance to crises and cross-border contagion, and to foster growth, by promoting financial system soundness and financial sector diversity.
Objectives
The FSAP aims to alert national authorities to likely vulnerabilities in their financial sectors – whether originating from inside the country or from outside
sources – and to assist them in the design of measures to reduce these vulnerabilities. The emphasis of the FSAP is on prevention and mitigation rather than
crisis resolution. At the same time, it ascertains the financial sector's development
needs. Sectoral developments, risks, and vulnerabilities are analysed using a range of measures known as Financial Soundness Indicators. You will soon read a Report that describes the Financial Soundness Indicators for one country. Other structural underpinnings of financial stability, which include systemic liquidity arrangements, the institutional and legal framework for crisis management and loan recovery, transparency, accountability, and governance structures, are also examined as needed to ensure a comprehensive assessment of both stability and developmental needs. As part of the process, the FSAP provides assessments of observance of various internationally accepted financial sector standards set within the broader institutional and macro-prudential context. You will examine these standards and codes, in particular those relevant to financial system soundness, in the next section of the unit.

FSAP reports are designed to assess the stability of the financial system as a whole, and not that of individual institutions. Furthermore, FSAP reports represent the views of the assessment team, and not necessarily the views of the country’s own authorities or the Executive Boards of the Fund or Bank.
Implications for the work of the IMF and World Bank
The FSAP fosters consistent analysis and advice in the financial sector work of the Fund and Bank, optimises scarce expert resources, and reduces duplication of efforts by involving broader cooperation and drawing on experts from national and international agencies. It informs the IMF's surveillance process and the Bank’s other financial system activities. Both IMF-supported programmes and technical assistance build on FSAP findings.

The IMF’s focus in the FSAP is on the linkages between the soundness and operations of the financial sector and macroeconomic performance, and the support of policies that make financial systems more resilient to shocks or lessen the likelihood and severity of financial system crises. The World Bank’s focus in the FSAP is on strengthening the financial sector to promote economic development and reduce poverty. For industrialised countries, FSAP work is entirely the responsibility of the IMF, although the World Bank may provide experts in specific fields.
The process following FSAP preparation
Once the FSAP assessment has been made by the IMF and World Bank, working with a range of international experts, the IMF and the Bank staff then each prepare separate reports for their Executive Boards. The IMF staff prepare what is known as a Financial System Stability Assessment (FSSA), and the World Bank staff prepare a Financial Sector Assessment (FSA). Each of these reports focuses on the issues identified in the overall FSAP assessment as most directly relevant to the mandate of the institution. Once the Executive Boards of the two institutions have discussed the documents, technical assistance and other forms of support are then agreed upon and provided to countries where vulnerabilities and development needs have been identified.
Progress
By the end of August 2003, 101 countries had participated or were participating in the FSAP, and thirty-three of these countries have posted their associated Financial System Stability Assessments (FSSAs) on the IMF's website.

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