In the wake of the global financial crisis, authorities worldwide, including those in Asia, are stepping up their efforts to assess the health of their financial sectors in close collaboration with the International Monetary Fund (IMF). In the past two years, the IMF conducted its first-ever Financial Sector Assessment Program (FSAP) reviews of China and Indonesia, jointly with the World Bank. FSAP updates have been completed for Bangladesh, Cambodia, and the Philippines, and assessments are either underway or will soon be launched in India, Japan, Malaysia, and Australia.
“This stepped-up activity is consistent with the increased leadership role that Asia is playing in multilateral bodies such as the IMF and the G-20,” said Min Zhu, the IMF’s Deputy Managing Director, during a High-Level Regional Symposium held in Shanghai December 9-10 and organized jointly by the Fund and the People’s Bank of China (PBC). Attending were central bankers and financial regulators and supervisors from the Asia Pacific region, as well as from other parts of the world, and representatives from the Asian Development Bank, the Financial Stability Board, and standard setting bodies.
“Rigorous implementation of international standards and codes is critical in reducing financial risk,” said PBC Governor Zhou Xiaochuan in his keynote address at the Symposium. “China has benefitted from strict adherence to international standards in the banking reform since 2003, particularly with respect to the injection, raising and maintenance of high-quality common equity capital.”
Participants shared their experiences in responding to the global financial crisis, the implementation of new international regulatory standards, systemic risk identification and monitoring, and the application of macro-prudential policy frameworks. They also discussed how these lessons could be best applied in the context of the independent assessments performed under the FSAP. Increased demand for FSAPs, including in emerging Asia, has underscored its role as an important underpinning of global financial stability.
“While Asia has navigated the crisis relatively unscathed so far, there is no room for complacency,” Mr. Zhu added. “FSAPs represent a unique opportunity to strengthen and reshape their financial sectors, based on the lessons from the current crisis.”
As well as sharing their experiences, participants in the Symposium provided feedback and suggestions on recent improvements to the FSAP. For example, the FSAP has become more flexible by taking into account more country-specific needs. It has also benefited from an improved analytical toolkit, covering a wider range of risks, cross-border spillovers, and interactions between the financial sector and the broader economy.
Discussions at the Symposium also focused on how the FSAP could be adjusted further to take into account the need for continuing post-FSAP engagement and higher frequency monitoring; consistency in quantitative risk analysis; more candid and open engagement; and whether assessments of standards compliance have become more burdensome.
“The FSAP has played a useful role as an independent review. It is tough but fair,” said Jose Vinals, Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department. “Not only has the program significantly strengthened the capacity and effectiveness of the IMF’s surveillance, but it has also greatly enhanced the authorities’ own efforts to monitor and manage financial stability.”
Referring to China’s particular experience, Mr. Zhou added: “China will further strengthen its financial stability, regulatory and supervisory framework and promote financial reform and development by incorporating the findings of the China FSAP as appropriate.”
The FSAP, established in 1999, is aimed at helping national authorities to identify financial sector vulnerabilities and design longer-term policies and reforms. As part of its analysis, the FSAP helps the authorities to assess the effectiveness of financial supervision against broadly accepted international standards; identify the source, probability, and potential impact of key risks to macro-financial stability; and assess the country’s ability to manage and resolve financial crises. As warranted, the assessment is followed up by technical assistance support in areas critical for preserving financial stability.
“The FSAP should continue to evolve, in response to the needs of member countries, including those in this region,” said Mr. Zhu. “Indeed, given the relative strength of financial stability in the region, future assessments of Asian members are likely to provide lessons and a source of best practices for others.”
In September 2010, the IMF made financial stability assessments under the Financial Sector Assessment Program a mandatory part of IMF surveillance every five years for 25 jurisdictions deemed systemically important based on the size of the financial sector and their global interconnectedness.