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IMF Survey : IMF Broadens Financial Surveillance

January 13, 2014

• Four new countries to get mandatory financial reviews: Finland, Poland, Denmark, Norway
• Expanded criteria emphasize connections between financial sectors, institutions
• More emphasis on how problems in one country affect others

The IMF has revamped its methodology to determine which countries are required to go under the financial microscope on a regular basis and added four new ones to the list: Poland, Denmark, Finland, and Norway. This brings to 29 the total number of countries to undergo mandatory financial sector assessments. These assessments remain voluntary for the rest of the member countries, undertaken by the IMF at their request.

In 2014 the IMF’s experts plan to evaluate 13 countries’ financial health in mandatory and voluntary reviews (photo: IMF)

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FINANCIAL SECTOR ASSESSMENT PROGRAM

In September 2010, in response to the global crisis, the IMF’s Executive Board agreed the world’s top 25 financial sectors would undergo a mandatory financial check-up every five years. To date, 24 out of the 25 countries or jurisdictions have undergone or will soon undergo their assessments.

Last December, the IMF Board reviewed the methodology that determines whether a country’s financial sector is systemically important. In light of the experience since the crisis, it agreed to place even more emphasis on the connections between financial sectors and institutions, expand the coverage of cross-border linkages to cover not only banking but also equity and debt exposures, and capture the potential for pure price contagion. Based on these revamped criteria, the IMF added the four countries to the original 25.

“The experience of the global financial crisis and the government debt crisis in Europe has shown that events in relatively small countries that are highly connected to others can have significant spillovers,” said Dimitri Demekas, an assistant director in the IMF’s Monetary and Capital Markets Department, which manages the Financial Sector Assessment Program. “Their impact on the global financial system often far exceeds the size of their financial sector or their economy.”

Of the four new additions to the list, Finland and Poland had financial reviews in 2010 and 2013 respectively. Denmark’s review will take place in 2014 and IMF experts plan to visit Norway in 2015.

Spotting trouble on the horizon

Since 1999 the IMF has monitored countries’ financial sectors on a voluntary basis through the Financial Sector Assessment Program. In developing and emerging market countries, the World Bank participates in these assessments, focusing on long-term financial development issues.

In the context of these financial sector assessments, the IMF examines three key components in all countries:

• the soundness of banks and other financial institutions, including stress tests;

• the quality of financial market oversight in banking and, if appropriate, insurance and securities; and

• the ability of supervisors, policymakers, and financial safety nets to respond effectively in case of a crisis.

One size does not fit all in these assessments. The IMF tailors its focus in each of these areas to a country’s individual circumstances, and takes into account the potential sources that might make the country in question vulnerable.

The objective is to assess countries’ crisis prevention and management frameworks, with the goal of supporting both national and global financial stability.

In 2014 the IMF’s experts plan to evaluate 13 countries’ financial health to spot any potential trouble on the horizon, including both mandatory and voluntary assessments [see box].

The IMF then produces a detailed report that includes recommendations for the country on how to strengthen its financial stability.

New methods for new risks

In the wake of the crisis, the IMF has strengthened the framework for surveillance of countries’ financial systems.

In 2010, the IMF made financial sector assessments mandatory for the countries with most important financial sectors in the global system, initially 25 and now 29.

The IMF is also focusing on how problems in one country can affect others, and on the connections between financial institutions. The IMF, among others, has developed what are known as network models to try and understand how events in one financial institution, market, or country will impact others.

Given the growing reach of global banks, the IMF also closely examines cross-border supervisory cooperation arrangements. In countries where foreign-owned banks are systemically important, it is essential that the host country supervisor has enough tools and good communications with the parent banks’ regulators.

Specific recommendations call for action

The IMF’s financial assessments provide countries with specific, actionable recommendations on how to reduce risks, improve supervision, and strengthen crisis management. Each report has a table with key recommendations, and rates them according to priority and time-frame for implementation.

Countries are free to implement or not, but the IMF follows up and monitors countries’ implementation.