Financial Sector Assessment Program (FSAP) Progress Reports on the Bank-Fund Financial Sector Liaison Committee (FSLC) Offshore Financial Centers (OFCs): IMF Staff Assessments Reports on Observance of Standards and Codes (ROSCs) Guide to Progress in Strengthening the Architecture of the International Financial System World Bank

September 2001 Progress Report on the Bank-Fund Financial Sector Liaison Committee (FSLC) Prepared by the Bank-Fund Financial Sector Liaison Committee Approved by Cesare Calari and Stefan Ingves September 27, 2001 The Committee's recent activities Financial Sector Assessment Program Other activities The Committee's future work program Conclusion This is the fourth report on the activities of the Bank-Fund Financial Sector Liaison Committee (FSLC).1 The FSLC was established in September 1998 and is comprised of senior staff from both institutions. Its main objective is to enhance operational coordination between the Bank and the Fund on financial sector issues.2 The strengthening of Bank-Fund collaboration in financial sector work has been widely promoted as a means of ensuring more effective organization and deployment of resources. Over recent years, the International Monetary and Financial Committee (IMFC) and the Development Committee have consistently stressed the importance of closer Bank-Fund cooperation to detect weaknesses and needed structural improvements in financial systems at an early stage; to reduce the likelihood and severity of financial crises by making financial systems more resilient to shocks; to improve the design and delivery of financial sector reform programs and technical assistance for member countries; and to improve the understanding and implementation of international standards, codes and good practices. Other international groupings have also urged not only the strengthening of Bank-Fund collaboration, but also their collaboration with relevant national and international regulatory and supervisory bodies.3

The FSLC initially focused on facilitating coordination in three areas: (1) work programs in countries facing important financial sector issues; (2) the development of guidelines and procedures for sharing documents and confidential information; and (3) Bank-Fund work on standards and sound practices regarding financial sector issues. The Financial Sector Assessment Program (FSAP) was initiated in April 1999 as a principal instrument for Bank-Fund collaboration in their financial sector work. Contributing to the development of the FSAP has been the a major focus of the FSLC's attention since then. However, the role of the FSLC has continued to evolve over the intervening period. In particular, the international community has continued to urge the Fund and the Bank to take on additional tasks--e.g., paying more attention to assessing and encouraging greater observance of a broadening range of international standards and codes, assessing supervisory cooperation and information exchange between supervisors in offshore financial centers and their counterparts in major countries, and helping to reduce the scope for money laundering. The FSLC has thus become a forum not only for enhancing coordination of the financial sector work programs of the Bank and the Fund, but also and more broadly for helping to integrate the various tasks assigned to the two institutions into a coherent joint work program, and facilitating coordination with the work programs of other institutions. The Committee's recent activities In the period since the last FSLC progress report issued in April 2000, the Committee has continued to spend significant time on supporting and coordinating the further development of the FSAP, reflecting both the still evolving nature of the program and the substantial resource commitment that it represents for both the Fund and the Bank.4 At the same time, the Committee has continued investigating ways to broaden the policy discussions between the Bank and the Fund on financial sector issues, facilitating coordination of the two institutions' financial sector work, and ensuring that the Bank and the Fund contribute to the various international efforts pertaining to reform of the financial sector in a coordinated way. Particular issues with which the Committee has been involved since the last report include enhancing coordination on the ongoing work on offshore financial centers (OFCs), anti-money laundering, and the new Basel Capital Accord. The Committee has also enhanced the coordination among the Fund, the Bank and others with respect to technical assistance related to the financial sector. Financial Sector Assessment Program The implementation of the FSAP calls for a high degree of coordination owing to its linkages with: the Article IV process in the Fund; design of Fund-supported programs; a range of lending and non-lending activities in the Bank; technical assistance related to the financial sector by both institutions; the activities of major financial standard setting bodies; and a large number of cooperating official institutions that provide experts for the assessments. While the Committee is not involved in the preparation of individual country assessments conducted under the FSAP, it has continued to be the body responsible for facilitating the program's coordination and implementation. Specific issues addressed by the FSLC in the period since the last FSLC progress report have included: The implementation of the guidance for further development of the FSAP that was provided by the Executive Boards of the Bank and the Fund during their recent review of experience with the program. The two Boards decided that while all member countries should participate in the FSAP over time, greater priority for participation in any one year should be given to systemically important countries. The FSLC has worked with Bank regions and Fund area departments to refine the FSAP country selection process to reflect this reweighting of the country selection criteria, while maintaining reasonable balance geographically and across countries at various stages of development. A table showing the status of participation in the FSAP as of August 2001 is attached; Following up on the request by the Executive Boards of the Bank and the Fund that the staffs of both institutions press ahead with the work to refine analytical techniques. These include macroprudential analysis and indicators of financial system soundness, stress tests and scenario analysis, and assessment methodologies for financial sector standards. Improving the quality and consistency of analysis is an ongoing process that will be reported on in detail in the next review of the FSAP in mid-2002; Fostering the improvement of the FSAP by building on the experiences gained thus far. In this connection, the Committee has prepared a formal feedback form on the strengths and weaknesses of the program that the FSAP missions send to the national authorities for completion at the conclusion of their participation in the FSAP. In addition, in October 2000 the Committee organized an outreach meeting aimed at gaining feedback on the program from participating countries, standard setting bodies and experts from national central banks and supervisory agencies that had contributed to the FSAP missions. Based on these initiatives, as well as on internal review in both institutions, the procedures to be followed in the FSAP have been updated, and the coverage and formats of FSAP reports have been adjusted. The outreach meeting was judged by participants to have been constructive, and another such meeting is being planned for early next year. Other activities The Committee has overseen the work being undertaken by the Bank and the Fund with international standard setting bodies to develop and refine financial sector standards and their assessment methodologies (see Box 1).5 This work is aimed at helping to strengthen the quality and consistency of assessments and, together with the work being undertaken by the Bank and the Fund to disseminate and support the implementation of financial sector standards and codes, it is making a major contribution to the development of financial infrastructure by member countries. Box 1. Financial Sector Standards Assessment methodologies, as well as financial sector standards themselves, are still evolving. Work has been proceeding in the Fund and the Bank on several different tracks with the objective of improving the quality, uniformity and consistency of assessments of observance of financial sector standards. Assessments of observance of financial sector standards play an integral role in the FSAP, serving as a key input into the overall assessments of financial system stability and the identification of development needs, and this has motivated much of the work in the Bank and the Fund in this area. However, Fund-Bank work on standards also extends beyond the FSAP context and includes the development and refinement of standards, developing incentives to adopt standards, and facilitating implementation through technical assistance. An important feature of this work is that it is being undertaken in close collaboration with standard setting bodies. The experience gained from assessing observance of financial sector standards in the FSAP context is being compiled and shared with the standard setting bodies, so that standards and assessment methodologies can be improved and streamlined. This experience is also being shared with the Boards of the Bank and the Fund in a series of reviews of individual standards. To ensure greater consistency and to streamline assessments, the experience gained with the assessment of observance of standards in the FSAP is also being shared directly with cooperating official institutions who have provided experts to FSAP mission teams. Standardized templates are also being developed to improve presentation of the assessments of observance of financial sector standards that are carried out by the Fund and the Bank. The FSLC has facilitated coordination of anti-money laundering work in the two institutions, including in particular the development of a methodology for assessing anti-money laundering supervisory principles.6 Early in 2001, the Boards of the Bank and the Fund undertook a review of ways for the two institutions to contribute to anti-money laundering efforts, based on a policy paper and a background paper jointly produced by the two staffs.7 It was agreed that the two institutions have a role to play in protecting the integrity of the international financial system, including through efforts to combat money laundering, but that their involvement should focus on their core areas of competence, such as the assessment of observance of supervisory principles in existing financial sector standards that are relevant to combating money laundering. The work of the Fund and the Bank will, in the near term, involve: an intensified focus on anti-money laundering elements when assessing financial regulation and supervision; increasing the provision of technical assistance to strengthen financial regulation and supervision; the inclusion of anti-money laundering issues, when relevant, in surveillance and development work; and working more closely with major international anti-money laundering groups, in particular with the Financial Action Task Force (FATF). The Committee has also been involved in facilitating coordination regarding the initiative to undertake assessments of OFCs.8 While this work is primarily the responsibility of the Fund, it is being undertaken jointly with the Bank in those cases where the assessments are carried out in the context of a country's participation in the FSAP. In a similar manner, the Committee has provided a forum to discuss the development of acceptable practices on insolvency and creditor rights systems. This work is being undertaken by the Bank (Draft Principles and Guidelines for Effective Insolvency and Creditor Rights Systems). However, given the importance of well developed laws and practices in this area to an efficient financial system, the Fund has a strong interest in it and has contributed to it. The FSLC has also provided a forum for discussion regarding the recent preparation of joint Bank-Fund comments on the new Capital Adequacy Framework by the Basel Committee on Banking Supervision. The two institutions are supportive of the objectives of the new proposals, and in particular the goal of achieving a more comprehensive risk-based approach to the regulation of capital that would eliminate some arbitrariness in the classification of risks and reduce incentives for capital arbitrage. At the same time, both institutions expressed concerns about how the proposed framework could be implemented in many developing countries and suggested that additional guidance might be useful in that regard. The FSLC has been closely involved in the ongoing discussions between the Fund and the Bank on how to better coordinate financial sector technical assistance. This issue has been a matter of discussion by the Committee since its beginnings. However, it has recently become more important in light of the increasing requests for technical assistance resulting from the recommendations given to countries under the FSAP, raising questions of how best to support these joint recommendations. Mechanisms by which the broad range of financial sector technical assistance can be coordinated in a more systematic way, not only between the Bank and the Fund, but also with a range of donors and technical assistance providers, are also under review. The Committee's future work program The Committee will continue to oversee the further development of the FSAP. In particular, areas that would require attention include the appropriate scope and coverage of the program in countries with specific characteristics, such as those that share supervisory authorities with other countries, those that have especially large and complex financial systems, those that include major offshore centers, and those that follow Islamic banking principles. The Committee will also focus on the critical issue of FSAP follow-up. Due to resource constraints FSAP assessments can only be undertaken periodically. Therefore, mechanisms need to be designed to update FSAPs in the periods between full assessments. This involves the updating of both the specific findings as well as the full assessments. FSAP findings also need to feed appropriately into the financial sector technical assistance and lending activities of the Bank and the Fund. The Committee plans to consider such follow-up issues in the coming period. In further support of the FSAP, the Committee will also investigate whether relevant procedures are followed appropriately. The Committee will be undertaking a survey of how well the procedures laid out in the FSAP Confidentiality Protocol are being followed, on the basis of a questionnaire prepared by the Legal Departments of the Bank and the Fund. The Protocol was created to guide staff and to give comfort to national authorities, some of whom had expressed concerns about passing strictly confidential information on individual financial institutions to FSAP mission members. The Committee expects that such a review will add to the effectiveness of the Protocol and the FSAP process generally. The results of this FSAP-related work will be reported in the next review of experience with the FSAP, which is due to be considered by both Boards in mid-2002. The Committee will continue to coordinate reviews of experience with assessing observance of individual financial sector standards, both in the context of the FSAP and on a stand-alone basis. The Committee will also strive for a systematic and on-going exchange of information among staff in the Bank and the Fund on work programs in the financial sector, document publication schedules, data and analysis available from external sources and contact lists of staff. Finally, the Committee will seek to facilitate collaboration among all regional, area department and financial sector staff. The recent creation of the International Capital Markets Department (ICM) in the Fund is one development that is likely to result in increased collaboration with the Bank on financial sector issues and the Committee will stand ready to foster this collaboration as needed. The Committee will also continue to distribute the minutes of its meetings and canvas staff on topics for seminars and other meetings intended for all staff working on financial sector issues. Conclusion Given their mutual objectives and their individual resource constraints, there are clear benefits from improving the existing coordination and cooperation in the financial sector work of the Bank and the Fund. The FSLC considers that efforts over the last year have been constructive and successful. The Committee intends to continue to promote closer coordination of financial sector work in the coming period. The next report on the Committee's activities will be provided in one year. ATTACHMENT Table. Status of Participation in FSAP (As at August 2001) Completed9 (21 countries) Underway (14 countries) Armenia Kazakhstan Argentina Cameroon Lebanon Croatia Canada Peru Dominican Republic Colombia Poland Finland Czech Republic Slovenia Gabon El Salvador South Africa Georgia Estonia Yemen Israel Ghana Latvia Guatemala Lithuania Hungary Mexico India Senegal Iceland Tunisia Iran Uganda Ireland United Arab Emirates Future participation confirmed (25 economies plus the East Caribbean Central Bank area) Barbados, Brazil, Bulgaria, Costa Rica, ECCB Area, Egypt, Germany, Hong Kong SAR, Japan, Korea, Luxembourg, Malta, Morocco, New Zealand, Oman, Pakistan, Philippines, Portugal, Singapore, Slovakia, Sri Lanka, Sweden, Switzerland, United Kingdom, Uruguay, Zambia 1See Progress Report on the Bank-Fund Financial Sector Liaison Committee (FSLC), SM/99/89 and SecM1999-248, SM/99/226 and SecM1999-639, and SM/00/70 and SecM2000-170. 2The FSLC has six members, three senior staff from the Bank and three from the Fund. Each member also has an alternate. The Committee is co-chaired by V. Sundararajan from the Fund's Monetary and Exchange Affairs Department (MAE) and Larry Promisel of the Bank's Financial Sector Strategy and Policy Group. The other members include representatives of the Fund's MAE and Policy Development and Review (PDR) Departments, and the Bank's Poverty Reduction and Economic Management Department (PREM) and the Financial Sector Vice-Presidency (FSEVP). 3See, for example, Strengthening the International Financial System and the Multilateral Development Banks-Report of G-7 Finance Ministers and Central Bank Governors, July 7, 2001, Rome, Italy, paragraphs 6, 17, 27 and 42. 4See Financial Sector Assessment Program-A Review-Lessons from the Pilot and Issues Going Forward (SM/00/263 in the Fund and R2000-216 in the Bank). A general description of the FSAP was provided to the Boards of the Bank and the Fund in May 1999 (SecM1999-371 and SM/99/116, respectively); a report on early progress with the Program was discussed by the two Boards in September/October 1999 (SecM1999-639 in the Bank, and SM/99/226 and SM/99/226 Supplement 1, in the Fund); and a report on further progress with the FSAP, Financial Sector Assessment Program (FSAP)-Lessons From the Pilot Exercise and Next Steps (SecM2000-130 and SM/00/54, respectively) was discussed by the two Boards in the Spring of 2000. 5The financial sector standards that are the focus of this work are a subset of the eleven international standards that the Executive Boards of the Bank and the Fund have recognized as relevant to the operational work of the two institutions and for which, as a result, Reports on Standards and Codes (ROSC) modules are prepared. 6The methodology is described in the Fund's paper Anti-Money Laundering-Enhanced Contribution in the Fund (SM/01/258). 7Enhancing Contributions to Combating Money Laundering-Policy Paper (SM/01/103 and SecM2001-228) and Financial System Abuse, Financial Crime and Money Laundering- Background Paper (SM/01/46). 8See Offshore Financial Centers (OFCs): Note for the Executive Board (SM/01/205). 9When all FSAP visits have taken place and a final FSAP report has been transmitted to the authorities.