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

See Also:

Financial Sector Reform and Strengthening

World Bank

October 2002 Progress Report on
the Bank-Fund Financial Sector Liaison Committee (FSLC)

Prepared by the Bank-Fund Financial Sector Liaison Committee

October 1, 2002

The Committee's recent activities
 Financial Sector Assessment Program
Other activities
The Committee's future work program
Conclusion

This is the fifth report on the activities of the Bank-Fund Financial Sector Liaison Committee (FSLC). 1 Established in September 1998, the Committee 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 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 Committee's focus is primarily one of oversight of the wide range of financial sector work on which collaboration between Bank and Fund staff takes place. The Committee seeks to ensure that such collaboration at the staff level between the two institutions continues to strengthen and helps to resolve any differences of view that may occur. In particular, the Committee works to broaden the policy discussions between Bank and Fund staff on financial sector issues, facilitate coordination of financial sector work in the two institutions (thereby improving the efficiency of the use of resources and the consistency of the advice offered), and ensure that the Bank and the Fund contribute to the various international efforts pertaining to reform of the financial sector in a coordinated way. The FSLC thus helps to integrate various financial sector tasks assigned to the two institutions into a coherent joint work program. It also facilitates coordination with the work programs of other institutions.

The Committee's recent activities

Key issues where the Committee has taken the lead or has been involved in the period since the last progress report include: further development and oversight of the Financial Sector Assessment Program (FSAP); coordination of a range of work related to financial sector standards and codes, including preparation of a series of papers for the Executive Directors of the Bank and the Fund and the public on the experience gained through the FSAP with the assessment of international standards and codes, strengthening the quality and consistency of financial sector standards assessments, and developing an approach for assessing observance of financial sector standards where financial policies (banking, insurance, securities, pension, and payments systems) are, at least to an important extent, the responsibility of a supranational agency; and the establishment of FIRST (the Financial Sector Reform and Strengthening Initiative), a new multi-donor program that will support capacity building and policy development projects in the financial sectors in developing countries.

Financial Sector Assessment Program

The FSAP, initiated in April 1999, remains a principal instrument for Bank-Fund collaboration in financial sector work. The FSAP provides information and a common analytical platform for the Bank's development work, the Fund's surveillance over financial sector issues, and the financial sector technical assistance activities of both institutions. 4 It thus helps to ensure coordination by the two institutions in a wide range of their financial sector work.

While the Committee typically 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 development and implementation. This has occupied a significant proportion of the Committee's time due to the program's ambitious country coverage, the substantial resource commitment that it represents for both the Fund and the Bank and the steady stream of countries requesting participation (around half of the membership has now participated in the program or agreed to do so). This work also calls for a high degree of coordination as a result of the program's links with: the Article IV process in the Fund; the 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. A detailed review of experience with the FSAP is forthcoming. This review will identify key lessons from experience and propose possible future modalities for the program.

Work in the recent period has focused on continuing to improve the quality and consistency of the FSAP as follows:
  • Coordination between Bank regions and Fund area departments has been enhanced to achieve convergence in the FSAP country selection process described in the previous report. Two rounds of country selection have been completed in the past year, based on the procedures and criteria for country selection that had been formulated by the FSLC and agreed by both Boards. The Committee found that its role in the process could be diminished in light of the strengthened, on-going communication between regional and area department staff. A table showing the status of country participation in the FSAP is attached.

  • A more comprehensive set of tools and information products has been created with the objective of improving the quality, uniformity and consistency of assessments of observance of financial sector standards. The Committee has overseen the development of guidance notes and templates for assessors and staff undertaking the assessments. These have been posted on the internal websites of the Bank and the Fund for the use by FSAP teams.

  • Increased opportunities have been created for the exchange of views among assessors, representatives from the standard-setting bodies and Bank and Fund staff responsible for the assessments of compliance with international financial sector standards. The Committee convened a meeting, in Paris in November, of banking supervisors, payment systems experts and security market regulators who have conducted assessments using standardized methodologies for assessing compliance with international standards and codes within the FSAP. These meetings gave Bank and Fund staff insight into ways to improve the assessment process while also providing feedback to the standard setters' representatives, who participated in the meetings, on specific principles that may require further elaboration. 5 The meetings, together with follow-up by staff on the managerial issues, are expected to help strengthen the quality and consistency of assessments and support the implementation of financial sector standards and codes more widely.

  • A second outreach meeting with representatives from countries that have participated in the FSAP provided a forum for discussing the experience gained through the program as well as methods for increasing the effectiveness of its substance and improving its procedures. For the meeting held in Washington at the end of January 2002, the agenda included issues on the developmental impact of the assessment and follow-up actions countries have planned as a result of the FSAP.
Financial sector standards and codes

While assessments of observance of financial sector standards play an integral role in the FSAP, Fund-Bank work on financial sector standards extends beyond the FSAP context. Standards assessments serve 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, this work also includes developing and refining financial sector standards and assessment methodologies, coordination of work on those standards which are integral to the FSAP with work on other standards through the Reports on Standards and Codes (ROSC) program, developing incentives to adopt such standards, and facilitating implementation through technical assistance.

The FSLC's role in encouraging collaboration has recently included increased attention to methodologies for assessing observance of a range of international financial sector standards and codes, and assessing supervisory cooperation and information exchange between supervisors in offshore financial centers and their counterparts in major countries. Since late 2001, the Committee has coordinated reviews of experience gained in the context of the FSAP with undertaking assessments of observance of International Association of Insurance Supervisors Insurance Core Principles, the Committee on Payment and Settlement Systems Core Principles for Systemically Important Payment Systems and the International Organization of Securities Commissions Objectives and Principles of Securities Regulation. 6 A similar review of experience with assessing observance with the Basel Core Principles for Effective Banking Supervision was undertaken in 2000 and an update of this review is forthcoming. These reviews have been presented to the relevant standard setting bodies as a means to foster continued improvements in the design of standards themselves and the related assessment methodologies.

Because assessment methodologies for financial sector standards are typically designed to be undertaken at the national level, it is not straightforward to assess standards in cases where supervision or implementation of financial policies is undertaken by a supranational agency. For example, monetary policy as well as banking and insurance supervision are the responsibility of supranational agencies in the West African Monetary Union. In these cases, it is necessary to assess the regulatory framework at the supranational level as well as the quality of implementation at the national level, which could in some cases vary by country. The FSLC has thus recently defined an approach to be used in assessing financial sector standards in these countries in the context of the FSAP.

Other activities

In carrying out its role of enhancing collaboration among the people who work in the financial sector, the FSLC-as a group or its members individually-have been involved with various activities and issues as follows:
  • Anti-money laundering and combating terrorist financing (AML/CFT). This summer, the two Boards decided to add conditionally the FATF recommendations to the list of areas and associated standards and codes useful to the institution's operational work and for which associated ROSCs are produced. Many AML/CFT assessments are being undertaken in the context of the FSAP or Offshore Financial Center (OFC) assessments. 7

  • The issue of how better to coordinate financial sector technical assistance has been discussed by the Committee since its inception. However, the importance of this matter has grown in light of the increasing requests for technical assistance to address the key recommendations given to countries under the FSAP. The demand for such technical assistance exceeds the resources of the two institutions. At the same time, a number of donors have an interest in financing technical assistance aimed at strengthening countries' financial systems. Therefore, the Committee supported the establishment of the Financial Sector Reform and Strengthening (FIRST) Initiative-an international initiative jointly undertaken by the Bank, the Fund and national development agencies. 8 The initiative aims at promoting robust and diverse financial sectors in developing countries. It is intended to complement and support other donor activities in strengthening national financial sectors through highly-targeted, responsive projects proposed to it directly by developing countries and their advisors. It is intended to build in particular on the recommendations contained in FSAP reports and ROSCs.

  • Bank insolvency and creditor rights systems. Given the importance of well developed laws and practices in this area to an efficient financial system, the Committee has continued to provide a forum to discuss the development of a set of principles and guidelines.
The Committee's future work program

The Committee will maintain its focus on improving the effectiveness and flexibility of the FSAP. This will be informed by the outcomes of the Boards' discussions in connection with the upcoming reviews of the FSAP and the work in the Bank and the Fund on standards and codes.
  • The experience accumulated through the FSAPs undertaken in a range of countries in different regions and at differing stages of development allows for the identification of issues that are more likely to arise in individual cases and aids supporting efforts to calibrate the program for different countries, thus making the program more effective and less resource intensive. In particular, the Committee has initiated a project aimed at better tailoring the FSAP to countries' circumstances. In the first instance, this work will focus on Africa as there are a number of countries in the region with some common issues that are about to participate in the program. Further, in these countries, the twin FSAP objectives of improved vulnerability surveillance and identification of development needs are inextricably linked. Improving financial sector stability in these countries will be closely dependent on addressing key development needs. Therefore, the FSAP teams in these countries will need to focus in particular on those vulnerability issues that hinder the development of financial infrastructure and services that could help accelerate growth and boost employment. Lessons learned in these cases will be useful to other developing countries.

  • The Committee will continue to streamline procedures and strive to achieve resource savings by being selective in the topic areas to be covered in individual cases. Of course, there are limits to such selectivity as the particular issues that arise in a country cannot be discerned a priori. As a result, there will always be a need for the FSAP to have a fairly broad scope to fulfill its diagnostic objective.

  • With initial assessments under the FSAP now completed or underway for around 60 countries, the Committee has begun to explore in detail the issue of how best to maintain and update the information base that has been generated, so as to support ongoing work by the Fund, the Bank and the assessed countries themselves.

  • From the outset of the program, a range of updating modalities of varying intensity, depending on circumstances in a country's financial system, has been envisaged. The Committee expects to formulate options to balance the scope and pace of FSAP with the scope and pace of updates, on-going surveillance in the Fund and other financial sector work in the Bank. In this regard, especially, the Committee will seek to facilitate collaboration among all regional, area department and financial sector staff.
The Committee will continue to strive for a more systematic and on-going exchange of information among staff in the Bank and the Fund, including on work programs in the financial sector, data and analysis available from external sources and contact lists of staff. It will continue to coordinate reviews of experience with assessing the observance of individual financial sector standards, both in the context of the FSAP and on a stand-alone basis. In line with its intentions to encourage and facilitate the discussion of policy issues arising from the assessments of countries' financial sectors, and to help reach convergence on policy and technical advice offered by the two institutions, the Committee will continue to sponsor joint seminars and working papers on particular issues that are of relevance to both institutions (e.g., public debt management, regulatory arbitrage, and deposit insurance).

In the coming period the Committee will focus particularly on further improving the coordination of financial sector technical assistance between the Bank and the Fund, as well as with other donors. In addition, the FSLC will encourage other joint activities outside its auspices.

Conclusion

Given mutual objectives and 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 at better prioritization and delineation of assignments 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.

FSAP Participation
as of end August 2002
(G-20 countries in bold italics)

Mission Work Completed
(50 countries)

Underway
(10 economies) 		Future participation confirmed
(32 countries)
Armenia Peru Argentina 1 Algeria
Barbados Philippines Bangladesh Azerbaijan

Brazil

Poland Hong Kong SAR Bolivia
Bulgaria Senegal

Japan

Chile
Cameroon Slovak Republic Korea ECCB:
Canada Slovenia Kyrgyz Republic    Antigua and Barbuda 2
Colombia South Africa Russia    Dominica 2
Costa Rica Sri Lanka Singapore    Grenada 2
Cote d'Ivoire Sweden United Kingdom    St Kitts and Nevis 2
Croatia Switzerland Uruguay 1    St Lucia 2
Czech Republic Tunisia      St Vincent and the     
Dominican Republic Uganda        Grenadines 2
Egypt Ukraine   Ecuador
El Salvador United Arab Emirates   Fiji
Estonia Yemen  

Germany

Finland Zambia   Honduras
Gabon     Jordan
Georgia     Kenya
Ghana     Kuwait
Guatemala     Macedonia, FYR
Hungary     Malta
Iceland     Mauritius

India

    Mozambique
Iran     Netherlands
Ireland     New Zealand
Israel     Norway
Kazakhstan     Oman 3
Latvia     Pakistan 3
Lebanon     Paraguay
Lithuania     Portugal
Luxembourg     Romania

Mexico

    Sudan
Morocco     Tanzania
Nigeria     Venezuela
1 Completion postponed due to financial sector problems.
2 ECCB member country. While some aspects of the assessments of ECCB members, such as monetary policy and banking supervision, will be common across countries as they are undertaken by a supranational authority, other aspects, such as securities, insurance and offshore activities are not. These latter aspects will be covered jurisdiction by jurisdiction in a coordinated manner but not contemporaneously. The assessment work on these countries will extend over both FY03 and FY04.
3 Postponed from FY02 due to security concerns.


1 See Progress Report on the Bank-Fund Financial Sector Liaison Committee (FSLC), SM/01/295 and R2001-0175 for the previous report.
2 See Review of Bank-Fund Collaboration in Strengthening Financial Systems, SM/98/224 and SecM98-732, paragraph 28. The 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 Global Partnership 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).
3 See, 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.
4 See 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.
5 The meetings findings have been captured in a report, "Technical Review: Strengthening the Assessment of Financial Sector Standards in the Financial Sector Assessment Program," May 2002. A series of notes with specific information on what to expect from the process of an assessment have prepared for potential assessors from cooperating official institutions and their country counterparts, and have been posted on the Bank's external website.
6 See Experience with the Insurance Core Principles Assessments under the Financial Sector Assessment Program (SM/01/266 and SecM2001-536), Financial Sector Assessment Program-Experience with the Assessment of Systemically Important Payment Systems (SM/02/124 and SecM2002-210) and Experience with the Assessments of the IOSCO Objectives and Principles of Securities Regulation under the Financial Sector Assessment Program (SM/02/121 and SecM2002-209).
7 See IMF Public Information Notice (PIN) No. 02/87, IMF Advances Efforts to Combat Money Laundering and Terrorist Finance, August 8, 2002.
8 Countries include the UK (Department for International Development-DFID), Canada (International Development Agency of Canada-CIDA), Switzerland (State Secretariat for Economic Affairs of Switzerland-SECO) and the Netherlands (Ministry of Foreign Affairs). Discussions are in progress with other donor institutions with the aim of expanding the scope of the initiative.