The Financial Sector Assessment Program (FSAP)
March 15, 2013
The recent global crisis has shown that the health of a country's
financial sector has far reaching implications for its economy as well
as for other economies. The Financial Sector Assessment Program (FSAP),
established in 1999, is a comprehensive and in-depth analysis of a
country's financial sector. FSAP assessments are the joint
responsibility of the IMF and World Bank in developing and emerging
market countries and of the Fund alone in advanced economies, and
include two major components: a financial stability assessment, which is
the responsibility of the Fund and, in developing and emerging market
countries, a financial development assessment, the responsibility of the
World Bank. To date, more than three-quarters of the member countries
have undergone assessments.
Assess financial stability and development
The focus of FSAP assessments is twofold: to gauge the stability of the
financial sector and to assess its potential contribution to growth and
- To assess the stability of the financial sector,
FSAP teams examine the soundness of the banking and other financial
sectors; conduct stress tests; rate the quality of bank, insurance, and
financial market supervision against accepted international standards;
and evaluate the ability of supervisors, policymakers, and financial
safety nets to respond effectively in case of systemic stress. While
FSAPs do not evaluate the health of individual financial institutions
and cannot predict or prevent financial crises, they identify the main
vulnerabilities that could trigger one.
- To assess the development aspects of the financial sector,
FSAPs examine the quality of the legal framework and of financial
infrastructure, such as the payments and settlements system; identify
obstacles to the competitiveness and efficiency of the sector; and
examine its contribution to economic growth and development. Issues
related to access to banking services and the development of domestic
capital markets are particularly important in low-income countries.
Most systemically important countries have participated in the program.
Lessons from the global financial crisis: a revamped FSAP
The financial crisis underscored many of the FSAP’s strengths. In
countries that had undergone assessments relatively close to the onset of
the crisis, FSAP assessments were generally successful in pinpointing the
main sources of risk. As the crisis unfolded, FSAP teams were quick to adapt
the scope of their assessments to focus on critical issues, such as crisis
management, liquidity support arrangements, and cross-border contagion, and
their recommendations generally helped mitigate some of the consequences of
The crisis also illustrated the weaknesses of the program. Its voluntary
nature meant that countries that might have benefited from an in-depth
examination of their financial sectors had not undergone an FSAP, or their
assessments were dated. Even where the assessments were relatively recent,
they did not always identify all sources of risk: for example, liquidity
risks, sovereign risks, and cross-border or cross-market linkages were
underappreciated. And where risks were accurately identified, the warnings
were not always loud and clear.
In light of these lessons, in September 2009,
the IMF and World Bank revamped the program, to include the following
- More candid and transparent assessments. The
introduction of a Risk Assessment Matrix, developed by the IMF
based on an approach pioneered by the Bank of England and others, is
designed to make the analysis of stability assessments in the context of
the FSAP more systematic, candid, and transparent.
- Improved analytical toolkit. New assessment
methodologies are being developed by the Fund to better identify
linkages between the broader economy and the financial sector; and cover
a greater variety of sources of risk. Also, more emphasis is being put
on cross-country links, spillover effects, and coordination
- More flexible modular assessments, tailored to country needs.
Instead of “one-size-fits-all” assessments, there is now the flexibility
to conduct financial stability or development assessments in separate
modules, conducted by the IMF or the World Bank, respectively.
- Better targeting of standards assessments.
Risk-based assessments of the standards that apply to the regulation and
supervision of banks, securities markets, and insurance have been
introduced to better target the assessments of these standards.
Integration of FSAP into IMF surveillance
FSAP findings provide valuable input to the IMF’s broader surveillance of
countries’ economies, known as Article IV consultations. The recent crisis
has demonstrated the need for an even more seamless integration of these two
strands of the Fund’s work.
An important step was taken in the context of the broader debate on
modernizing the Fund’s surveillance. In April 2010, the IMF’s Executive
agreed to consider making stability assessments under the FSAP a
mandatory part of bilateral surveillance. In September 2010, this agreement
took on concrete shape, when the IMF made it mandatory for 25 jurisdictions
with systemically important financial sectors to undergo financial stability
assessments under the FSAP every 5 years. The list of jurisdictions for
these mandatory assessments is based on the size and interconnectedness of
their financial sectors, and will be reviewed periodically to make sure it
reflects developments in the global financial system--the next review will
take place in 2013.
A list of upcoming FSAPs is published on the IMF website.
This landmark decision moved the IMF’s financial sector surveillance
towards a more risk-based approach by focusing surveillance resources on
members with systemically important financial sectors. The decision did not
affect the other components of the FSAP. Standards assessments would
continue to be undertaken as part of FSAP assessments for all jurisdictions
on a voluntary basis. The World Bank’s developmental assessments would also
continue to be made available to developing and emerging market countries on
a voluntary basis, as at present. These could either be performed in joint
IMF-World Bank missions or as modular assessments described above.