the financial sector assessment program: addressing the...
TRANSCRIPT
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The Financial Sector Assessment Program:
Addressing the Needs of Emerging Markets
and Developing Economies (EMDEs)
Approved by Gloria M. Grandolini
Senior Director Finance and Markets Global Practice
August 27th, 2014
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Contents Page
Glossary ................................................................................................................................... iv
Abstract ......................................................................................................................................1
Acknowledgments......................................................................................................................2
Executive Summary ...................................................................................................................3
I. Strategic Context ....................................................................................................................5
II. Country Participation, Prioritization, and Publication ..........................................................7
III. Analytical Framework .......................................................................................................11
A. Main Findings from Historical FSAPs....................................................................11 B. Standards and Codes: Slow but Consistent Progress on Compliance .....................18
IV. Increased Complexity in Standards and Codes .................................................................21
V. Addressing the Needs of Emerging Markets and Developing Economies (EMDEs).........23 A. Development Modules ............................................................................................23
B. FSAP Follow-Up .....................................................................................................25
VI. Off-Site Monitoring as a Complement to Field Work .......................................................30
VII. Bank-Fund Cooperation ...................................................................................................33
VIII. The Views from the Authorities ......................................................................................36
IX. Costs and Resources ..........................................................................................................39
X. Proposals and Areas Seeking Guidance Going Forward ....................................................41
Appendix I: Country Participation in the FSAP ......................................................................45
Appendix II: FSB Key Standards for Sound Financial Systems .............................................45
Appendix III: Analysis of Compliance with International Standards ......................................48
Annex I: FSAP Content since 1999 a Text Mining Exercise
Annex II: Survey of Country Authorities, 2014
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Boxes
Box 1: FSAP / ROSC Analytical Framework and Review Process .......................................12 Box 2: East African Community (EAC) Development Module ..............................................24 Box 3: FIRST ...........................................................................................................................28
Box 4: Successful follow-up experiences in Latin America ....................................................29 Box 5: Albania FSAP...............................................................................................................30 Box 6: Off-Site Internal Monitoring Products .........................................................................32 Box 7: Role of the Financial Sector Liaison Committee (FSLC) ............................................35 Box 8: Summary of Key Messages from the 2009 Board FSAP Review ...............................41
Figures
Figure 1: Completed FSAPs by region ......................................................................................8
Figure 2: FSAP participation by Income Group, FY08-14 .......................................................8 Figure 3: FSAP participation by Income Group (Total) ............................................................8 Figure 4: Regulatory and Supervisory areas covered by FSAP Technical Notes....................11 Figure 5: Areas covered by Technical Notes, since the inception of the Program ..................12
Figure 6: Focus on Risks in ECA ........13
Figure 7: Focus on Risks in AFR ........13
Figure 8: Credit Risk........14
Figure 9: Systemic Risk ...........................................................................14 Figure 10: Liquidity Risk.14
Figure 11: Operational Risk .....................................................................................................14 Figure 12: The Nonbank Sector relative to the Banking Sector ..............................................15
Figure 13: Crisis Preparedness.................................................................................................15
Figure 14: Legal Protection .....................................................................................................16
Figure 15: Resources................................................................................................................16 Figure 16: FSAP Financial Inclusion Technical Notes by Focus and Region (2000 2013) .17 Figure 17: Recent Evolution of Detailed Assessment Reports under the FSAP .....................18
Figure 18: BCP (1999-2012) -- Average compliance over time..............................................19 Figure 19: IOSCO (2000-2011) Average compliance over time ..........................................20
Figure 20: IAIS 17 (2000-2003) and IAIS 28 (2003-20012): Compliance dispersion ............20 Figure 21: Most frequent noun phrases of a sample of lending/finance projects mentioning the
FSAPs ......................................................................................................................................26
Figure 22: Distribution of Responses to FSAP Survey........36
Figure 23: Institutions Represented .........................................................................................36 Figure 24: Adequacy of the FSAP Scope ................................................................................37 Figure 25: Progress of Implementation.........39
Figure 26: Reasons for partial implementation of FSAP recommendations ...........................39 Figure 27: BCP (1999 2012): Average compliance per core principle ................................49 Figure 28: IAIS (2000 2003): Average compliance per core principle ................................50 Figure 29: IAIS (2000 2003): Compliance dispersion ..........................................................50 Figure 30: IAIS (2003 2012): Average compliance per core principle ................................51
Figure 31: IAIS (2003 2012): Compliance dispersion ..........................................................52 Figure 32: IOSCO (2000 2011): Compliance per core principle ..........................................53
AppData/Local/Temp/Domino%20Web%20Access/FSAP%20Board%20Paper%202014%20V5_Aug%204_tracked.doc#_Toc394943271AppData/Local/Temp/Domino%20Web%20Access/FSAP%20Board%20Paper%202014%20V5_Aug%204_tracked.doc#_Toc394943272AppData/Local/Temp/Domino%20Web%20Access/FSAP%20Board%20Paper%202014%20V5_Aug%204_tracked.doc#_Toc394943273AppData/Local/Temp/Domino%20Web%20Access/FSAP%20Board%20Paper%202014%20V5_Aug%204_tracked.doc#_Toc394943274 -
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Tables
Table 1: Completed FSAPs by region .......................................................................................8 Table 2: Publication Trends .....................................................................................................10
Table 3: Average Number of Formal Standards Assessments Conducted During FSAP
Missions ...................................................................................................................................18 Table 4: Revisions of Standards and Codes .............................................................................21 Table 5: Stability and Development Modules .........................................................................23 Table 6: FSAP Technical Assistance and FIRST follow-up ...................................................27
Table 7: FSAP costs .................................................................................................................40 Table 8: Profile of Assessment Missions (FY0914 averages) ...............................................40 Table 9: Financial Standards Assessment Completed and Underway .....................................47 Table 10: BCP (1999 2012): Strongest and weakest observed compliance .........................49
Table 11: IAIS (2000 2003): Strongest and weakest observed compliance .........................51 Table 12: IAIS (2003 2012): Strongest and weakest observed compliance .........................52 Table 13: IOSCO (2000 2011): Strongest and weakest observed compliance .....................53
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GLOSSARY
ADM Accountability and Decision-Making
AM Aide-Memoire
BCP Basel Core Principles for Effective Banking Supervision
CAS Country Assistance Strategy
CMU Country Management Unit
CPF Country Partnership Framework
CPS Country Partnership Strategy
CSC Country Sector Coordinator
DAR Detailed Assessment Reports
DPL Development Policy Loan
EAC East African Community
EMDEs Emerging Markets and Developing Economies
F&M Finance and Markets
FIRST Financial Sector Reform and Strengthening Initiative
FMI Financial Market Infrastructure
FSA Financial Sector Assessment
FSAP Financial Sector Assessment Program
FSB Financial Stability Board
FSLC Financial Sector Liaison Committee
GFSW Global Financial Systems Watch
GP Global Practice
HIC High-income Country
IAIS
ICP
International Association of Insurance Supervisors
Insurance Core Principles
ICR Insolvency and Creditor Rights
IFI International Financial Institution
IOSCO International Organization of Securities Commissions
LIC Low-income Country
MIC Middle-income Country
P&PF Policy and Procedure Framework
RAS Reimbursable Advisory Services
ROSC Report on Standards and Codes
SA Standards Assessments
SCD Systematic Country Diagnostic
SFI State Financial Institution
SME Small and Medium Enterprise
SSB Standard Setting Body
TN Technical Note
VP Vice Presidency
WBG World Bank Group
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ABSTRACT
The Financial Sector Assessment Program (FSAP) is already in its 16th
year of implementation
with more than 250 joint Bank-Fund assessments since its inception. A Board review is due in
2014, in line with the practice that a Board review takes place every five years. This FSAP
Review paper has been coordinated with the Fund FSAP Review paper through the joint
Bank-Fund Financial Sector Liaison Committee (FSLC). The Bank paper focuses on the
FSAP as a vehicle to address the needs of Emerging Markets and Developing Economies
(EMDEs), while the Fund paper focuses on the FSAP as a key pillar of financial sector
surveillance. The FSAP plays a pivotal role for the financial sector work at the Bank, which in
turn is an essential component for achieving the twin goals of reducing extreme poverty and
sharing prosperity. As the cornerstone of financial sector analysis work at the Bank, the FSAP
provides an analytical framework for operations and Technical Assistance (TA), and a vehicle
for policy dialogue. There is also strong demand from client countries for the Program, with
the key reason being to obtain independent assessments of the financial sector. The FSAP is
also a key tool for the Banks global engagements in the financial sector, notably the Financial
Stability Board (FSB) and Standard Setting Bodies (SSBs). The paper provides a brief
description of the strategic context in which the FSAP will be implemented going forward
under the new Global Practice, and the role of Finance & Markets. This FSAP review provides
the latest information on country participation, prioritization, and publication. Using an
innovative text mining methodology, an analysis of more than 1,200 existing documents has
been conducted to identify the main issues and trends across time and regions. The paper also
reviews the different context under which the standards and codes are being assessed,
including the addition of new standards and increased complexity of the standards.
Furthermore, the paper highlights how the needs of EMDEs have been addressed through joint
IMF-World Bank FSAPs and through the implementation of development modules; as well as
follow-up implementation. Results of a survey of authorities that had an FSAP in the last five
years are presented. The paper also discusses the evolution of costs and human resources in
the program. Finally, the paper presents some proposals going forward for discussion.
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ACKNOWLEDGMENTS
This paper was prepared by a Bank team led by Mario Guadamillas and included Aquiles A.
Almansi, Yen Nian Mooi, Elena P. Mekhova, Rafael Pardo and Liudmila Uvarova (all
GFMDR). The paper has been cleared by Peer Stein and Sebastian-A Molineus (both
GFMDR). Discussions were held with and comments received from regional VP offices,
including Jan Walliser and Khaled F. Sherif (AFR); Antonella Bassani and Sally Burningham
(EAP); Anna Bjerde (ECA); Gerardo M. Corrochano and Manuela V. Ferro (LAC); Gerard A.
Byam (MNA); and Akihiko Nishio (SAR). Comments were also received from Ana Maria
Aviles (MD-CFO office), Seynabou Sakho (MD office), Hester Marie DeCasper (GPVP
office); John A. Roome and Idah Z. Pswarayi-Riddihough (GPSOS); and Jeffrey Lewis (Chief
Economist, GPSCE). Asli Demirguc-Kunt (DECRG) and Maria Soledad Martinez Peria
(DECFP); Vijay Srinivas Tata (LEGAP); and Jeff Chelsky (OPSRE) also provided helpful
comments.
The team received inputs and comments from a broad number of GFMDR colleagues,
including Lily L. Chu, Samuel Maimbo and Virginia Brandon; Consolate K. Rusagara, Hanh
Thi Bic Le and Jatin Dawar; Pierre-Laurent Chatain and Erik Feyen; Jean Denis Pesme;
Alison Harwood and Ana Fiorella Carvajal; Michel Noel and Craig W. Thorburn; Massimo
Cirasino and Maria Teresa Chimienti; Douglas Pearce, Luis Trevino, Bujana Perolli and Leyla
Castillo; Aurora Ferrari; Alfonso Garca Mora and Eva M. Gutierrez; Irina Astrakhan, Cedric
Mousset, and Yira Mascar; James Seward; Simon C. Bell and Gabriel G. Sensenbrenner; and
Henry K. Bagazonzya.
Finally, as mentioned in the abstract, the paper was coordinated with the IMF through FSLC,
and comments were received from Christopher Towe and Dimitri Demekas (both MCM).
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EXECUTIVE SUMMARY
In an increasingly financially integrated world, new global risks have emerged with
important ramifications for financial development and stability in World Bank
Group (WBG) client countries going forward. Developing and promoting effective
regulatory, supervisory, and other financial sector norms and policies in WBG client
countries is therefore an important component of the Banks strategy. Through its global
engagements (e.g., the G20, FSB, and SSBs), the WBG is actively participating in defining
these policies and promoting the development of safe, efficient, and inclusive financial
systems.
The WBG is uniquely positioned to foster financial development. Financial
institutions, faced with the current environment, are forced to consider trade-offs between
using short-term and long-term instruments, as well as contemplate their presence in
domestic versus international markets. Increasingly, there is also a shift toward more
market-based financing solutions, as banks adjust their balance sheets and business
models. Efforts to build a sound development of market-based financing, together with a
more resilient banking system, will contribute to global financial stability as well as long-
term economic prosperity. These efforts will help towards achieving the WBGs twin
goals of reducing extreme poverty and sharing prosperity in a sustainable manner.
The FSAP plays a pivotal role in the WBGs work on the financial sector: i) it is the
cornerstone of financial sector analysis work at the WBG that provides a sound analytical
framework for operations and technical assistance (TA) in the sector; ii) it underpins the
engagement with country authorities and provides a vehicle for policy dialogue; iii) it is an
important vehicle for the WBG to present the perspectives of EMDEs in the global
engagements agenda. About 85 percent of the member countries have already participated
in the program or agreed to do so in the near future. For EMDEs, a chief reason for their
demand for FSAPs is the desire to obtain an independent assessment of the countrys
financial sector.
There has been significant progress since the last FSAP Board Review in 2009. The
quality and coverage adequacy of assessments have improved (according to a recent
survey of country authorities). The implementation of modular assessments has been very
successful. The FSAP has included new analytical tools (see Box 1), complemented by
off-site monitoring. The WBG has continued its efforts to support follow-up
implementation (e.g., through the FIRST Initiative programmatic window) and
implemented some cost-effective measures. Countries have also indicated a substantial
implementation of main recommendations.
Bank-Fund collaboration and coordination of FSAP-related activities remains the
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key task for the Financial Sector Liaison Committee (FSLC) going forward.
Coordination is especially important when differences in Bank and Fund institutional
priorities arise. Moreover, there have been concerns on both sides that the new mandate by
the Fund for regular assessment of systemic jurisdictions may crowd out the ability for
the Program to deliver joint assessments in other jurisdictions. The FSLC should also
ensure that clearer delineation of institutional responsibilities for specific FSAP outputs
(e.g., technical notes and ROSCs) does not affect process effectiveness, and that the
jointness of the program is preserved.
In sum, there are some opportunities and challenges going forward: i) the need for
more effective response to demand from EMDEs; ii) the challenge of dealing with the
added complexity in the assessment of the standards and codes; iii) continuing to benefit
from the successful implementation of the modules, while keeping a collaborative
approach for the implementation of joint IMF-WB updates; iv) improving the Bank-Fund
collaboration through FSLC beyond FSAP coordination; v) the need to adapt internal
procedures to effectively implement the program and ensure follow up in the context of the
new Global Practices (GP) in the Bank. To this end, the FSAP is adapting its processes to
the new GP structure to ensure continuity of high quality and effective engagement with
countries. FSAP guidelines and procedures are being adapted in line with the
Accountability and Decision-Making (ADM) framework and consistent with the Policy
and Procedure Framework (P&PF).
In this context, this paper provides in depth background information, raises some
questions and presents several proposals for Board discussion and guidance:
Given the recent decrease in participation by low-income countries (LICs) due to
increased focus on countries with systemically important financial systems, to what
extent is a rebalancing of country prioritization needed?
Regarding standards and codes, to what extent are formal assessments the best
vehicle to support safe financial systems, or can more flexible approaches be
followed?
While the implementation of modules has been very successful, they should not be
used as a substitute (due to budget constraints) to full updates when the intended
scope is broad.
The FSLC has continued to coordinate FSAP-related activities productively;
however, there is room for broader financial sector work collaboration including
through enhanced knowledge sharing, technical assistance and policy development
coordination.
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I. STRATEGIC CONTEXT
1. Financial sector development is an essential component for achieving the World
Bank Groups (WBG) twin goals of reducing extreme poverty and sharing prosperity in a
sustainable manner. The two goals emphasize the importance of economic growth, inclusion,
and sustainability including strong concerns for equity. As stated in the 2013 WBG Strategy,
Developing countries strong economic performance is shifting the worlds economic center
of gravity, the private sector is driving employment growth and transforming living standards,
private investment has become the dominant mode of capital transfer worldwide, and financing
for development is coming from more diverse sources. Higher levels of financial
development reduce the share of population living below the poverty line, as shown in
empirical research.1 Responsible financial systems also directly help the poor by protecting
incomes through the provision of savings and investment instruments, and minimizing risks
through insurance and pension systems. Financial sector development is also crucial in
supporting growth and promoting shared prosperity income inequality falls faster in countries
with better-developed financial intermediaries.2 Financing gaps are a developmental challenge
for many countries. Small and Medium Enterprises (SMEs) face a $2 trillion financing gap,
and 2.5 billion adults worldwide lack access to financial services. In the public sector, low-
income governments require 7-9 percent of GDPs worth of financing for infrastructure, with
$45 billion gap per annum in Africa, and $800 billion gap in Asia over the next ten years.3
2. Financial crises prevent countries from achieving the twin goals, as demonstrated
in the most recent episode, and highlight the importance of a well-regulated and
supervised financial sector. The most recent global financial crisis had pushed the incomes of
125 million people worldwide below the poverty line,4 with 22 million people losing their jobs
in 2008 alone.5 Developing and promoting effective regulatory, supervisory, and other
financial sector norms and policies in our client countries is therefore an important component
of the WBGs strategy. Definitions of clear, comprehensive and well-thought international
standards for both financial and nonbank financial institutions are essential for this. Through its
global engagements (e.g., the G20, FSB, and SSBs), the WBG is actively participating in
1 Beck, Demirg-Kunt, and Levine (2007); Honohan (2004), Claessens and Feyen (2007).
2 Beck, Demirg-Kunt, and Levine (2007).
3 Sources: World Bank Development Report 2012; the IIF, IMF, McKinsey Global Institute, 2012; World Bank
Enterprise Surveys 2013; World Bank, FPD Enterprise Surveys, 2013; Global Financial Development Report
2012.
4 World Development Report, 2013.
5 Eurostat, December 2013.
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defining these standards and promoting the development of safe, efficient, and inclusive
financial systems.
3. In an increasingly financially integrated world, new global risks have emerged
with important ramifications for financial development and stability in WBG client
countries going forward. In the wake of the global financial crisis, EMDE ties to international
markets have surged.6 At the same time, the international financial system continues to
experience bouts of stress and volatility as it adjusts to the new global financial regulatory
architecture, the realignment of bank business models,7 and shifts toward more market-based
financing solutions. New or exacerbated existing fragilities in financial systems of WBG client
countries affect currencies and reserves, interfere with the local credit cycle, distort asset
prices, and impact incentives for structural reform. Moreover, these fragilities are compounded
by shallow local markets and a lack of strong institutions, supervisory and surveillance
capacity, technical experience, and macroprudential tools.
4. The WBG is building finance as a core line of business, with a full suite of
diagnostic, finance, technical assistance, and risk mitigation instruments. The WBG is
very actively engaged in the global engagements agenda (e.g., G20 and FSB) on the design and
implementation of financial sector regulatory reforms. The WBG is also uniquely positioned
to foster financial development in client countries by supporting efforts for more effective
regulation and supervision; financial integrity; the development of capital markets and nonbank
financial institutions; stronger financial infrastructure; and financial inclusion. A full suite of
instruments will enable the WBG to more effectively help client countries deal with the
numerous challenges in the financial sector. All these efforts to build a sound development of
market-based financing, together with a more resilient banking system, will contribute to
global financial stability as well as long-term economic prosperity.
5. The Financial Sector Assessment Program (FSAP) is widely recognized as an
important instrument for diagnosing potential vulnerabilities and analyzing development
priorities in the financial sector. It was jointly developed by the World Bank and IMF in
1999 in the aftermath of Asian financial crisis. Since its inception, the Program has gained a
reputation among the international community and participating countries as an important
diagnostic tool for the financial sectors of Bank-Fund member countries. The Program
6 Since 2009, EMDE external debt securities have doubled to $2.7 trillion, fund allocations to EMDEs quadrupled
to $1.7 trillion, and foreign participation in some local bond markets increased up to 26 percent of volume
outstanding. And although international banks retrenched abruptly during the crisis, their claims on EMDEs are
over $6.5 trillion and growing.
7 Financial institutions, faced with the current environment, are forced to consider trade-offs between using short-
term and long-term instruments, as well as contemplate their presence in domestic versus international markets.
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contributes to: i) identify strengths, risks, vulnerabilities and development opportunities in
financial systems; ii) assess the impact of macro-economic environment on financial sector
performance, and vice-versa; and iii) identify links among sub-sectors of the financial system
to determine the potential for systemic crises.
6. The FSAP plays a pivotal role in the WBGs work on the financial sector:
i. It is the cornerstone of financial sector analysis work at the WBG that provides
a sound analytical framework for operations and TA in the sector. The FSAPs
comprehensive coverage, integrated approach to assessments, and deep treatment of
issues in the financial sector provides the analytical foundational basis for much of
the sectors operational and technical assistance work at the WBG.
ii. It underpins the engagement with country authorities and provides a vehicle
for policy dialogue. The close contact, cooperation, and discussions with the
authorities while conducting the assessments is often the precursor to deeper policy
dialogue that continues after the FSAP is completed. In some instances, the FSAP
provides the opening for new country engagements.
iii. The FSAP is an important vehicle for the WBG to present the perspectives of
EMDEs in the global engagements agenda. The Bank has been able to leverage
on the recognition of the FSAP as an important diagnostic instrument to actively
participate in international fora on changes to financial regulatory reform, e.g., the
G20, FSB, and the SSBs. For the Bank, having a seat at the global table enables it to
bring to the table perspectives on issues with implications for EMDEs. The Bank
has also been able to provide important feedback to standard-setters based on its
experience with the implementation of standards and codes.
II. COUNTRY PARTICIPATION, PRIORITIZATION, AND PUBLICATION
7. About 85 percent of the member countries have participated in the program or
agreed to do so in the near future. Since the inception of the Program, 254 FSAPs have taken
place, with participation from all the six regions of WBG client countries (see Appendix I). In
recent years, the regional distribution has been skewed towards the Eastern Europe & Central
Asia region due to the financial crisis. Table 1 and Figure 1 show the total number of FSAPs
by region.
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Table 1: Completed FSAPs by region Figure 1: Completed FSAPs by region
AFR 50 32 16 2
EAP 17 12 2 3
ECA 60 28 25 7
LAC 45 23 21 1
MNA 32 16 12 4
SAR 8 4 3 1
non-Bank 42
254 115 79 18
Tota l Ini tia l
AssessmentUpdate Module
Source: WB FSAP Management Unit.
8. Relative participation of Low-Income Countries (LICs) compared to Middle-
Income Countries (MICs) and High-Income Countries (HICs) has been low, and
declining in recent years. This trend of declining participation from LICs is more pronounced
in recent years since the IMF mandated FSAPs for countries with systemically important
financial systems, beginning in 2010. For the years 2009 to 2014 cumulatively, 86 percent of
FSAPs has been in MICs/HICs while only 14 percent has been in LICs. LIC participation has
been declining, from around 23 percent in 2009 and 2010 to less than 10 percent in 2012 and
2013. In 2014, LIC participation has picked up slightly with 17 percent of all the FSAPs
undertaken being in the LIC countries.
Figure 2: FSAP participation by Income Group,
FY08-14
Figure 3: FSAP participation by Income Group
(Total)
Source: WB FSAP Management Unit.
9. Several criteria determine FSAP prioritization, the first one being the systemic
importance of a countrys financial system. FSAP prioritization memos are sent to Bank and
Fund Management twice a year prior to the Spring and Annual meetings, and inform
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Management on the FSAP work program for the current and upcoming fiscal years.
Participation in the program is voluntary,8 but country requests are prioritized based on the
following criteria:9 (i) the systemic importance of the country; (ii) external sector weaknesses
or financial vulnerabilities; (iii) major reform programs that might benefit from a
comprehensive financial sector assessment; and (iv) features of the exchange rate and
monetary policy regime that make the financial system more vulnerable, such as inconsistency
with other macroeconomic policies. Maintaining a balance across regions and different levels
of financial sector development is also important, as is the time elapsed since the initial FSAP
or previous FSAP update (Section X discusses if a rebalancing of these prioritization criteria is
needed).
10. Country authorities have increasingly disclosed various parts of the final FSAP
reports to the public, especially Detailed Assessment Reports (DARs) more recently.10
Table 2 shows the evolution in the publication of the Financial Sector Assessments (FSAs),
DARs and Technical Notes (TNs). The variation in disclosure trends has been driven by
changes in the IMF and WBG access to information policies and international commitments, as
well as those established by the FSB.11 In addition, countries see FSAPs as a signal to the
international community. In a survey of country authorities, almost two-thirds of respondents
8 Except for 29 jurisdictions designated by the IMF as having systemically important financial systems. See IMF
Board paper on Mandatory Financial Stability Assessments under the Financial Sector Assessment Program:
Update November 15, 2013.
9 These criteria were defined based on Board discussions at the beginning of the program implementation. See for
example Financial Sector Assessment Program (FSAP) -- A Review: Lessons from the Pilot and Issues Going
Forward November 2000 that stated that FSAP should be targeted to systemically significant market economies.
However, some Directors noted that countries that are not systemically important in international markets should
also have the opportunity to participate in the program to help them strengthen and develop their financial
sectors, avoid costly financial crises and, where relevant, prepare the ground for market liberalization and
greater access to the international capital markets.
10 This trend is in line with the call for a more open publication policy by the 2009 FSAP Review: The reach and
impact of FSAP assessments can be enhanced by a more open publication policy. At present, the Aide-Mmoires
produced by FSAP teams are confidential documents, while Technical Notes, FSSAs, and FSAs may be published
with the consent of the authorities. There is merit in the status of keeping Aide-Mmoires unchanged: these
documents often contain market-sensitive information, data on individual institutions, or detailed assessments of
compliance with international standards.
11 To lead by example, as described in the FSB's Framework for Strengthening Adherence to International
Standards, FSB member jurisdictions have committed to: i) implementing international financial standards; ii)
undergoing an assessment under the IMF-World Bank FSAP every five years; iii) disclosing their degree of
adherence of international standards, notably by publishing the Detailed Assessments Reports (DARs) prepared
by the Bank and the Fund; and iv) undergoing periodic peer reviews using, among other evidence, reports
prepared as part of the FSAP. As some of the FSB initiatives go beyond its member jurisdictions this peer
pressure is also affecting many other countries.
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indicated that communicating their countrys progress was a reason for disclosure of different
parts of the FSAP report. While higher publication rates of FSAP documents have brought
further transparency, increased peer pressure has also affected the candidness of the FSAP
dialogue with the authorities, especially regarding standards and codes assessments. Any
difference of views between country authorities and FSAP teams are ultimately resolved, if
needed, through FSLC.
Table 2: Publication Trends (Published documents as a percentage of issued documents)
FY 01 02 03 04 05 06 07 08 09 10 11 12 13 14
FSA 10% 24% 64% 36% 37% 28% 17% 32% 62% 39% 6% 13% 56% 40%
DARs 0% 0% 0% 2% 14% 32% 45% 7% 30% 8% 67% 78% 75% 44%
TNs 0% 0% 0% 4% 11% 16% 25% 0% 1% 12% 9% 10% 16% 15%
Source: WB Databases.
11. Most countries have opted to provide FSAP teams with information on a
confidential basis; without precluding the publication of final FSAP documents if they
opt for disclosure. Under the Banks Access to Information Policy, effective July 2010, the
Bank commits to make publicly available any information in its possession that is not on a "list
of exceptions". FSAP documents may not be made publicly available on the basis of two
specific exceptions: (i) the information contained in the FSAPs is deliberative,12 and (ii) FSAPs
include and are prepared using information provided by member countries or third parties in
confidence.13 Most countries that undertook the FSAP have opted to establish that the
information was provided in confidence, prior to the FSAP assessment. As such, the
analyses generated as a result of, or in response to that information, have been kept confidential
until authorities agree to disclosure.14
12
Exception related to Deliberative Information on the World Bank Policy on Access to Information.
13 Exception related to Information Provided by Member Countries or Third Parties in Confidence on the World
Bank Policy on Access to Information.
14 The FSAP Management Unit in coordination with LEGVP and OPCS informed regional Sector Managers and
FSAP Team Leaders through official internal memos about the Implications of new World Bank Access to
Information Policy for the FSAP and Detailed Assessments undertaken under the FSAP (May 2010) and Filing
of the FSAP documents and the World Bank Access to Information Policy (December 2012) on processes to be
followed that are consistent with the Access to Information Policy.
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III. ANALYTICAL FRAMEWORK
A. Main Findings from Historical FSAPs
12. FSAPs offer a comprehensive assessment on the whole financial sector (with the
exception of modules) and analyze a broad range of issues. These relate to financial sector
regulation and supervision, markets, and infrastructure in the context of a given
macroeconomic environment. The main issues identified are communicated to the authorities
at the end of the work in the field. These are then complemented by in-depth analyses on
several technical standards through the Detailed Assessments Reports (DARs), and technical
areas are covered through the Technical Notes (for details, see Box 1).
13. The Technical Notes from the last few years have shown an increased focus on
cross-border and cross-sectoral issues, as well as financial inclusion. The inventory of
Technical Notes (1,045 as of June 2014, not including DARs) shows that topics are varied and
diverse, and as expected, depend on country circumstances. In the aftermath of the global
financial crisis, there has been increased coverage of crisis-related areas in recent years. Recent
FSAPs also tended to be less bank-centric, with increased attention going to the nonbanking
financial sector (see Figure 4). Another area that has gained increased focus in recent years is
access to finance, which has become the second most covered topic after banking (see Figure
5).
Figure 4: Regulatory and Supervisory areas covered by FSAP Technical Notes
Source: WB FSAP Management Unit.
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12
Figure 5: Areas covered by Technical Notes, since the inception of the Program
Source: WB FSAP Management Unit.
Box 1: FSAP / ROSC Analytical Framework and Review Process
The FSAP / ROSC makes use of a collection of tools, skills, and expertise of analytical methods with different
objectives to evaluate the diversity of areas covered on its assessments. The timing, detail, scope and depth of
these tools vary depending on the sector, assessment type, and stage of the evaluation. The selection of tools
and expertise is defined at the scoping level, tailoring the needs of the financial sector in review.
Assessment of standards and detailed technical notes of selected issues have been widely used since the
beginning of the program. A set of questionnaires, guidance notes, principles, and methodologies have also
been a part of the toolkit from the onset. Most recently, the introduction of Risk Assessment Matrices, new
assessment frameworks (e.g., crisis preparedness, governance, macroprudential, resolution) and new Guidance
Notes (e.g., on financial sector standards assessments,15
and on Financial Inclusion), and a more widespread use
of off-site tools (see Section VI) have strengthened the analytical content of the reports.
The Banks FSAP management unit has also worked on inventories and principle-by-principle-grading tables to
increase the comparability and standardization of the quality of the assessments across countries.
Furthermore, to ensure quality, clarity and consistency, the Bank has implemented a review and clearance
process for all the different documents that comprise the FSAP Report which consists of: a post-mission review
meeting to discuss main findings and exchanges comments with other experts and internal stakeholders; a
document by document peer review; and a layered clearance process depending on the type of document.
15
The guidance notes on financial sector standards assessments were developed jointly with the IMF and
published in January 2013.
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13
14. An analysis16 of the main issues and trends covered in EMDE FSAPs shows
evolving perceptions about key financial sector issues across regions, including risks (for
more details see Annex I). This exercise thus intends to identify and illustrate global and
regional trends in the content of the wealth of information delivered through Aide-Memoires
(AMs), Technical Notes and Detailed Assessment Reports in FSAPs. A primary focus of FSAP
AMs has been to identify financial sector risks.17 The attention to risks, measured as the
fraction of each AMs paragraphs discussing any types of risks, has varied considerably across
regions and over time. For example, attention given to risks in ECA has increased steadily
over time, particularly after the recent global financial crisis, while it varies more in AFR
(Figures 6 and 7).
Figure 6: Focus on Risks in ECA Figure 7: Focus on Risks in AFR
Source: WB FSAP Management Unit.
15. Bank credit risk has been consistently the most prominent among risk discussions,
while discussions on systemic risk temporarily increase after a crisis. Given the common
emphasis on banking sector issues in FSAPs, the attention on credit risks is expected.
Unsurprisingly, there was an increased focus on systemic risk immediately after crisis episodes
(e.g., the Asian Financial Crisis and the recent global financial crisis), and it smoothly declined
after. Figure 9 shows the weight given to systemic risk, as measured by the paragraphs
discussing systemic risks, as a fraction of all paragraphs on risks. As for liquidity risks, there
has been a fairly stable focus in general (Figure 10), but with a clear upward trend in ECA and
16
This analysis uses a text mining methodology on the Aide-Memoires, DARs and TNs delivered by FSAP
missions. Contrary to the usual close reading of individual documents, text mining consists in the distant
reading, with diverse text parsing and search algorithms, of an entire corpus. Using search algorithms with
natural language data requires, however, not only knowing what to search for precisely; it also requires a
comprehensive list of the different ways mission teams of diverse cultural or professional background might have
expressed identical, similar or related ideas.
17 Closer attention to risks in FSAPs includes, for example, new Risk Assessment Matrix (RAM), enhanced stress
testing, and spillover analyses developed by the IMF.
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14
to some extent in LAC. Meanwhile, attention to operational risk has slowly but consistently
increased since the start of the Program (Figure 11).
Figure 8: Credit Risk Figure 9: Systemic Risk
Figure 10: Liquidity Risk Figure 11: Operational Risk
Source: WB FSAP Management Unit.
16. In recent years, there has been a marked increase in interest on the nonbank
sector. As shown in Figure 12, the fraction of Aide-Memoire paragraphs dedicated to the
discussion of the nonbank sector relative to the banking sector has increased. This is in line
with the higher number of TNs covering nonbank financial sector topics, including capital
markets, insurance, and pensions, among others. The greater focus on the nonbank sector
reflects an increased interest of country authorities in diversifying their financial sectors and
moving away from bank-centric financial systems.
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15
Figure 12: The Nonbank Sector relative to the Banking Sector
Source: WB FSAP Management Unit.
17. There has also been increased interest on crisis preparedness. Figure 13 shows the
percentage of AMs which address crisis preparedness for selected regions.18 While nearly all
AMs have dealt with crisis preparedness since 2009, it is noteworthy that the increase in
interest has been observed since 2006. Strong interest has been observed in countries that have
recently experienced a crisis (e.g., in ECA) and countries with a history of financial crises
(LAC). Crisis preparedness issues included crisis simulations, systematic vulnerability
assessments, and macroprudential analysis.
Figure 13: Crisis Preparedness
Source: WB FSAP Management Unit.
18. The development of supervisory agencies, including the issues of resources and
legal protection, is a key component of FSAPs, usually drawing from accompanying
ROSCs. For example, Figure 14 illustrates the fraction of AMs delivered each year in ECA
and LCR that discuss the lack of adequate legal protection for supervisors. The issue of legal
protection has been raised in multiple recent FSAPs because assessors have observed that
current regulatory regimes did not provide enough protection to central bank and supervisory
18
The number of observations in the other regions are not sufficient to be statistically meaningful.
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16
staff against lawsuits while discharging their duties in good faith. Insufficient legal protection
also compromises independence of the supervisory agencies. The lack of supervisory
resources was another issue that featured in AFR, EAP, and LCR FSAPs (Figure 15).
Countries were concerned about the inadequate resources in comparison with the
responsibilities, as well as lack of skills and capacity to carry out their duties. Supervisory
resources were often unable to keep up with the evolving complexity of the financial systems
and changing risks in relation to financial stability and integrity.
Figure 14: Legal Protection
Source: WB FSAP Management Unit.
Figure 15: Resources
Source: WB FSAP Management Unit.
19. Financial infrastructure topics have received constant attention throughout the
years, as demonstrated by the stable share of AM space over time. Payment systems issues
have received a constant focus as countries continue adapting and upgrading their payments
infrastructure following quick technological evolution. Large-value systems, and in particular
real-time gross settlement systems, have been at the core of financial infrastructure assessments
since the inception of the FSAP due to financial stability and monetary policy implications.
The interdependency between payment systems and securities settlement arrangements has
been largely recognized in financial infrastructure assessments, in that they consistently use
securities clearing and settlement concepts such as delivery-versus-payment. The recent
adoption of innovative payment schemes and channels that hold new potential in terms of
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17
financial access (see following paragraph), and the emergence of nonbank payment service
providers shows the inclusion of new concepts in payment systems assessments, such as
electronic money and mobile payments. Credit reporting systems, another important pillar of
financial infrastructure, also show a stable trend which can be attributed to their indispensable
function as a tool for financial sector supervision, and an enabler of access to credit.
20. Seventy percent of countries which had an FSAP during 2000 2013 have
undertaken at least one financial inclusion focused assessment through TNs.19 From a
regional perspective, through the same period, the majority of countries have focused on access
to finance and SME finance, as well as financial infrastructure. Additionally, housing finance
and microfinance assessments have had a prominent role, in particular among the EAP, AFR,
and SAR regions (see Figure 16). While access to finance and SME finance are concepts that
have been used consistently over time in the context of development policies, additional related
concepts have gained more attention in recent years, including financial inclusion, mobile
payments, consumer protection, and financial literacy. For example, from the periods of 2000-
2006 to 2007-2013, the usage of concepts related to SME finance has increased by more than
200 percent, and the usage of financial inclusion as a term has grown over ten times. These
findings reflect an evolution in the development of innovative delivery channels and products,
such as electronic money and mobile payments. There has also been an increased focus on
financial consumer protection, consumer empowerment and financial literacy, especially
following the 2008-2009 global financial crisis.
Figure 16: FSAP Financial Inclusion Technical Notes by Focus and Region (2000 2013)
(% of countries that performed an FSAP by region)
Source: World Bank Group, Financial Sector Assessment Program Reports and technical notes for different
years.
19
FSAP technical notes related to financial inclusion are focused on access to finance and SME finance, financial
infrastructure, housing finance, microfinance, and/or credit unions development.
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18
B. Standards and Codes: Slow but Consistent Progress on Compliance
21. The average number of assessments of standards and codes conducted under the
FSAP has been increasing in recent years, notably of the financial regulatory and
supervisory standards (see Table 3 and Figure 17). For instance, Table 3 shows that an
average of four formal assessments per FSAP were done for initial assessments and 2.3 for
updates in FY2014, compared to only 1 and 1.1 respectively in FY2010. The FSAP covers
standards in the areas of banking (BCP), insurance (IAIS), and securities (IOSCO) regulation
and supervision. Financial integrity (FATF) remains a mandatory component of all FSAPs and
FSAP updates, as most recently confirmed by the IMF Board (April 2014). FSAPs also cover
financial markets infrastructure (CPSS-IOSCO), and are closely coordinated with accounting
and auditing, corporate governance and insolvency and creditor rights (ICR) assessments, all in
the area of institutional and market infrastructure. Assessments in the deposit insurance (IADI)
and resolution regimes (FSB Key Attributes, which is in pilot phase) have recently been added.
Appendix II includes the FSB list of international standards considered key for sound financial
systems.
Table 3: Average Number of Formal Standards Assessments Conducted During FSAP Missions
FY09 FY10 FY11 FY12 FY13 FY14
Initial Assessments 0.7 1.0 3.0 1.8 2.0 4.0
Updates 1.5 1.1 1.3 2.0 1.8 2.3 Modules & SA ROSCs 1.5 1.1 1.3 2.0 1.4 2.3
Source: World Bank FSAP Databases
Note: Excludes ROSCs undertaken outside FSAP missions, notably AML/CFT.
Figure 17: Recent Evolution of Detailed Assessment Reports under the FSAP
(Financial Regulation and Supervision)
Source: WB FSAP Management Unit.
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19
22. Compliance with international standards of regulation and supervision by
EMDEs20 has shown slow but consistent progress. This is not an unexpected result, given the
complex and long-term institutional reforms that are needed to improve regulatory and
supervisory frameworks. Figures 18, 19, and 20 show a time series of compliance with BCP,
IOSCO and IAIS standards. The compliance was calculated using rating scales for each of the
core principles, where all three sets have similar but not identical rating scales (for details, see
Appendix III). Figure 18 shows that in 2012, using country averages,21 countries assessed on
the BCP were 64 percent largely compliant (LC) and 36 percent materially noncompliant
(MNC), with an overall average rating of all countries at 3.1 out of a fully compliant 4.
Similarly, Figure 19 shows an increasing trend in compliance for IOSCO, with a 4.1 average
rating for all the countries assessed in 2013. For IAIS, given the smaller sample available and
the change of principles in 2003, the average compliance was calculated for the periods of
2000-2003 and 2003-2012 (Figure 20). Progress was also shown, though the sample is less
statistically representative than for BCP and IOSCO.
Figure 18: BCP (1999-2012) -- Average compliance over time
C: Compliant, LC: Largely Compliant; MNC: Materially Noncompliant; NC: Noncompliant.
Source: WB FSAP Management Unit.
20
This analysis excludes the advanced economies, which are assessed only by the Fund. The timeframe of
analysis is since the inception of the FSAP program in 1999 till the end of 2013.
21 Country averages are calculated as the simple average from all the principle ratings.
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20
Figure 19: IOSCO (2000-2011) Average compliance over time
FI: Fully Implemented, BI: Broadly Implemented, PI: Partially Implemented, NI: Not Implemented.
Source: WB FSAP Management Unit.
Figure 20: IAIS 17 (2000-2003) and IAIS 28 (2003-20012): Compliance dispersion22
Y axis = number of countries
X axis = average compliance
Scale: 1: Not Observed, 2: Materially Not Observed, 3: Partially Observed, 4: Largely Observed, 5: Observed
Source: WB FSAP Management Unit.
23. The main areas identified as needing improvements are as follows: i) independence
and accountability of supervisors, that is affecting enforcement; ii) risks assessment and
management (operational, market, cross-border); iii) prudential standards; iv) group-wide
supervision; v) exposure to related parties; and vi) derivatives.
22
The separate charts reflect the change in the IAIS principles in 2003. There are also insufficient observations in
the IAIS database to make a calculation of an average rating meaningful.
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21
IV. INCREASED COMPLEXITY IN STANDARDS AND CODES
24. The recent revision of standards and codes has added complexity to the
assessment process (see Table 4 for revisions). All the financial regulation and supervision
standards have been revised (BCP, IAIS, IOSCO) in the period preceding the last joint Bank-
Fund Board Reviews on the FSAP (September 2009) and the Standards and Codes Initiative
(February 2011).23 Several institutional and market infrastructure standards have also been
revised or added to. For example, the ICR standards were revised as of January 2011. The
AML/CFT Standard was revised in 2012. After the Standards and Codes Initiative Board
review in February 2011, deposit insurance and crisis resolution were the new areas added for
assessment under the FSAP. All these changes meant that the framework for conducting
standards assessments has significantly changed in the recent years.
Table 4: Revisions of Standards and Codes
Revised Standard Date of Board
submission
Main Revisions
IOSCO Principles December 2011 Enhancement of the role of securities regulators in
systemic risk and attraction of new entities into the
perimeter of regulation, such as hedge funds and credit
rating agencies.
IAIS Principles December 2011 Enhancement of risk-based solvency regime and
introduction of additional principles relating to macro-
surveillance and cross-border crisis management, as
well as greater recognition of proportionality in the
application of ICPs.
CPSS-IOSCO Principles
for FMIs
July 2012 Harmonization and strengthening of standards for
FMIs.
Basel Core Principles
(BCP)
December 2012 Strengthening of the requirements for supervisors, the
approaches to supervision, and supervisors
expectations of banks with a greater focus on risk-
based supervision and the capacity for early
intervention and timely supervisory actions.
FATF Recommendations Under preparation Revision of standard and assessment methodology and
new opportunities and challenges with focus on risks
and assessment of effectiveness.
23
See IMF-WB, 2011 Review of the Standards and Codes Initiative.
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22
ICR February 201124
2014 changes under
preparation.
2011 changes enabled assessors to take into account
the growing complexity of enterprises, and special
regimes for the treatment of corporate groups in
insolvency.
In 2014, there is an intention to convene the WBG's
Global Task Force on Effective Insolvency &
Creditor/Debtor Regimes, to consider additional
proposed updates to reflect international guidance that
has been incorporated in the UNCITRAL Legislative
Guide on Insolvency Law and other relevant texts of
UNCITRAL and other international bodies. Areas to
be considered are: (i) an elaboration of directors'
obligations in the period prior to insolvency; and (ii) a
proposed elaboration of the Principles relating to
Security Interests and collateral registries to reflect the
recommendations of the UNCITRAL Legislative
Guide on Security Interests, and (iii) whether any
updates are necessary to either the Principles or to the
assessment methodology to reflect developments in
international standards on the treatment of financial
contracts in insolvency in certain contexts.
25. Numerous factors, including the revision of the standards and FSB commitments,
have significantly changed the environment of conducting assessments. FSB member
jurisdictions25 now have a commitment to undertake an FSAP every five years and publish
Detailed Assessment Reports (DARs) of standards and codes. The pressure to publish formal
assessments has created new challenges, as assessors are faced with more resistance towards
assessment results. Furthermore, there has been use of some principles of the BCP, ICP, and
IOSCO standards for the FSB Initiative for International Cooperation and Information
Exchange. In addition to revisions to the standards as mentioned above, new standards were
added to the list of key FSB standards, adding complexity to the assessment process. The FSB
and SSBs have also launched peer review processes for implementation monitoring, some of
them based in the framework provided by the standards. In this new context, the use of the
standards and codes assessments undertaken by the Bank and Fund has broadened beyond the
institutions regular engagement. Without an increase in the level of resources, the increased
complexity in the assessment process and the new environment have added a significant
burden on the assessors.
24
The Board was notified through a reference in the 2011 Standards and Codes Initiative Review paper.
25 Out of the 24 FSB member jurisdictions, the Bank participates in joint FSAP assessments for nine of them
(Argentina, Brazil, China, India, Indonesia, Mexico, Republic of Korea, Russian Federation and Turkey).
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23
V. ADDRESSING THE NEEDS OF EMERGING MARKETS AND DEVELOPING ECONOMIES
(EMDES)
26. The FSAP has aimed to serve the needs of WBG client countries through a better
targeted focus and more timely follow-up. Greater focus on EMDEs was achieved through
the implementation of development modules, which also allowed for more timely follow-up
and thematic approaches.
A. Development Modules
27. The September 2009 joint Board Paper introduced the option for modular FSAP
assessments, focusing on stability or development issues. The option for modules
complements the pre-existing initial FSAP assessments and updates. These modules were
intended to provide quick, flexible, and targeted responses to clients needs for diagnostics and
to bridge the gap of five to seven years between full assessments. Notwithstanding the benefits
and successes of the modular system, full updates done jointly with the IMF are crucial and
important for the client countries. As the scope of modules is more restricted and less
comprehensive than a full assessment, the modular FSAP is only but a complement and not a
substitute for the full FSAP.
28. Since 2009, the Bank has led and completed 10 development modules including a
regional one (East African Community), with 3 requests for FY15. Meanwhile, the IMF
has undertaken 9 stability modules with WB participation (see Table 5).
Table 5: Stability and Development Modules
FY Completed Stability Modules Development Modules
FY2011
Trinidad and Tobago Djibouti
Mongolia
Jordan
Syria
FY2012
Russian Federation
Czech Republic
FY2013
Slovenia Latvia
Sri Lanka Mongolia
Hungary Thailand
Singapore Mauritius
FY2014
Kazakhstan
Belarus
East African Community
Lebanon
Jamaica (ongoing)
Source: WB FSAP Management Unit.
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24
29. The implementation of the modular FSAPs was in response to the 2009 FSAP
Review, and its flexibility has presented several benefits:
i. Greater depth in the treatment of subject areas. Development modules are an
opportunity to perform a deep dive on specific topics that are of interest or concern
for the authorities. An example of this was Thailands development module in FY
2013, which focused on State Financial Institutions (SFIs). In this Development
Module, the team conducted full in-depth assessments on all the eight SFIs in the
country.
ii. Timely follow-up. The flexibility of the modules allowed the Bank to respond
more quickly to the country authorities. One such example was the Jordan
Development Module conducted in FY 2010, which focused on SME finance,
insolvency, and credit reporting. These topics were selected as authorities wanted a
more comprehensive coverage on financial inclusion than what the full FSAP was
able to include. The follow-up included an MSME finance loan and TA on a
regional MSME facility. The Development Module helped to inform a series of
already-ongoing DPLs with macroeconomic and financial and private sector
development issues.
iii. Regional and thematic approaches, including cross-border linkages between
countries. Modular FSAPs were able to enhance its analysis on cross-border
perspectives, recognizing the increasing interconnectedness of the global financial
system. Development modules are able to focus more squarely on cross-border
issues, for example on regional integration, cross-border capital flows and the
spillover impact from the global or regional environment. The East African
Community (EAC) development module FSAP is one such example addressing
cross-border themes (see Box 2).
Box 2: East African Community (EAC) Development Module
The EAC Development Module FSAP was conducted in FY2014. It focused on the aspect of regional
integration, in particular on cross-border banking, payment systems, capital markets, supervision and
crisis management. This thematic focus was born out of the recognition that there were common issues
arising from the separate FSAPs conducted in each of the EAC countries.
While it was useful to view the issues from a regional lens, follow-up was more challenging on this
particular FSAP because of the absence of a single regional authority on the financial sector to engage
with as a key counterpart. Furthermore, there was an imbalance in the financial sector sizes and
conditions across the countries in this modular FSAP, making implementation of recommendations across
the different countries more challenging.
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B. FSAP Follow-Up
30. The FSAP is an important instrument for the WBG, as it provides for policy
dialogue and a framework for the delivery of financial support and technical assistance
(TA). The FSAP is a key diagnostic tool that informs and provides the analytical foundation
for much of the WBG operational work in the financial sector. It also provides a framework for
the delivery of financial sector TA and other follow-up work by the institution, other donors,
multilaterals, and the countries themselves.
31. The 2009 FSAP Review called for linking FSAPs assessments more efficiently to
Bank follow-up lending/finance support and technical assistance. The FSAP management
unit was called to actively facilitate the ongoing dialogue about technical assistance and
follow-up work between regional and specialized staff, the FSLC, FIRST Initiative and client
counterparts. In this respect, the FSLC would also play a larger role to bring stakeholders
together and make decisions. The FSAP management unit would liaise with Country Directors
and FPD sector managers and support them with background information and
recommendations to help in discussions of the Systematic Country Diagnostics (SCDs) and
Country Partnership Framework (CPF) (Section X discusses this further in the context of the
new country engagement framework). In addition, the unit would liaise closely with FIRST
Initiative to ramp up efforts to connect assessment recommendations with efforts to provide
follow-up technical assistance. The goal was to ensure a more continuous approach to
diagnosing vulnerabilities and weaknesses in countries financial sectors and getting the right
resources and tools lined up to help.
32. The FSAP is an important analytical underpinning for WBG lending/finance
projects related to the financial sector. A sample of 198 projects mentioning the FSAP26 was
analyzed through a computer search. The computer searched for common noun phrases
("matters discussed") in the associated 221 documents from the projects. Figure 21 shows the
most frequent noun phrases revealing commonality between the "matters discussed" in the 198
projects and the FSAPs. This analysis does not identify if the actions supported in those
projects are consistent with FSAP diagnostics or recommendations.27
26
The sample was selected among 673 lending/finance projects (1,145 documents) fully or partially attributed to
financial sector.
27 The FSAP Management Unit in coordination with IEG is undertaking further work to analyze to what extent
lending/finance projects mentioning the FSAP are consistent with respective FSAP diagnostics and
recommendations.
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26
Figure 21: Most frequent noun phrases of a sample of lending/finance projects mentioning the FSAPs
Source: WB FSAP Management Unit.
33. Much of the FSAP follow-up TA has been undertaken by the Financial Sector
Reform and Strengthening Initiative (FIRST).28 FIRST is a trust fund created in 2002 with
a primary mandate of supporting countries to implement FSAP recommendations, with the
objective of promoting sounder and more inclusive financial systems (for more information,
see Box 3). Types of activities funded include, for example, the development of new laws and
regulations, the development of financial sector strategies, and assisting countries in
sequencing reforms as a follow-up to FSAPs or in line with the countries broader economic
development agenda. As shown in Table 6, since its inception, FIRST projects have
supplemented Bank budget-funded TA projects. There were 282 approved FIRST projects in
the period FY2009 to FY2014, with about 60 percent linked to FSAPs and ROSCs. Of these
linked projects, 84 percent were implemented by the Bank and the rest by the Fund.
28
Current donors are: DFID, GTZ, IMF, Luxembourg, Ministry of Foreign Affairs of the Netherlands, SECO, and
the World Bank. CIDA and SIDA exited in 2014.
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27
Table 6: FSAP Technical Assistance and FIRST follow-up
FY FSAP Follow-Up
TA
# Projects1
Cost
(in $ 000)
FIRST
# Projects
Amount
Committed
($ million)
FY01 2 110
FY02 3 254
FY03 14 722
FY04 15 1,873
FY05 5 150
FY06 6 459
FY07 5 204
FY08 4 235 16 4.1
FY09 8 980 13 2.7
FY10 2 169 16 2.8
FY11 5 726 24 4.9
FY12 7 643 46 10.4
FY13 1 146 22 4.9
FY14 2 15 23 8.3
1 TA fully FSAP-related. It does not consider lending operations nor broader TA work with FSAP-
related components.
Source: WB Business Warehouse & FIRST Database.
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28
34. Successful follow-up from FSAP recommendations depends on several factors:
i. The motivation for reform and the countrys capability to deliver it. The FSAP
and the ROSC programs have elements of both assessment and advisory work.
Successful implementation depends critically on the motivation and capacity of
country counterparts and on the political economy context. Motivation factors vary
widely, including (e.g., in EU accession countries) peer pressure. The desire and
pace of follow-up efforts also depend on whether there is sufficient political will
and whether there is resistance of vested interests intent on maintaining the status
quo.
ii. CMU engagement. There has been more integration of FSAP findings in Country
Assistance Strategies (CAS) / Country Partnership Strategies (CPSs)29 when country
29
Used in the previous country engagement model. The new country engagement model, effective July 1st, 2014,
is discussed in Section X.
FIRST's mission is to support growth and poverty reduction in low- and middle-income countries
through the promotion of stable, deep and diverse financial sectors.
FIRSTs specific objectives are to:
Fund technical assistance in the areas of financial sector regulation, supervision and
development in response to country demands, provide support to countries to strengthen their
financial systems and/or implement standards and codes in advance of Financial Sector
Assessment Programs (FSAPs) or Reports on Standards and Codes (ROSCs), and facilitate
prioritization and systematic follow-up of related recommendations.
Assist recipients in implementing prioritized action plans addressing financial sector
development and the sequencing of reforms (e.g., as a follow-up to FSAPs), and advise
clients, especially in low-income countries, on the implementation of financial sector
development programs.
Promote coordination in the delivery of financial sector technical assistance and capacity
building, drawing particularly on private sector expertise.
Support research on and the dissemination of best practices and useful tools related to
financial sector reform and development in low- and middle-income countries.
Work with international standard-setting bodies and other relevant partners to broaden the
base of providers supporting countries efforts to implement standards and codes in
accordance with FSAP and ROSC recommendations and strengthen their financial systems.
In its third phase since inception, FIRSTs business model has evolved to adapt to the changing needs
of the clients and the context post global financial crisis. Phase 3 includes a programmatic facility that
supports comprehensive multi-sector, multi-year country reforms programs, with more impactful
development outcomes.
Box 3: FIRST
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29
sector coordinators (CSCs) from the financial sector are more integrated in country
management units (CMUs). In Latin America, the FSAP findings were
instrumental in informing the CPS of several countries (see Box 4 on Follow-up
Experiences in Latin America). On the other hand, in instances where the financial
sector is not fully reflected in some CASs or CPSs, this does not necessarily limit
the Banks capacity to provide assistance in the sector. Beyond financing support,
the availability of funding from CMUs for follow-ups plays a crucial role in
deepening the dialogue between the Bank and the authorities. The CMU is thus
critical in driving FSAP follow-up, ranging from assistance in the identification of
more specific sector reform priorities to fitting detailed FSAP recommendations
into existing Bank programs in the country. It also helps leverage other funds, such
as FIRST funds or from other donors.
iii. Coordination of FSAP team with follow-up implementation team. With the
right country conditions, sufficient political will and desire of the authorities,
follow-ups are more successful when FSAP teams provide sufficient input or hand-
over to other colleagues who will pick up the endeavor (see Box 5 on the Albania
FSAP).
In Latin America, examples of extensive follow-up after the FSAP have included both lending and nonlending
support. Some examples are:
1) Jamaica: The FSAP was concluded in May 2014. The authorities expressed their interest to
implement the recommendations, utilizing a lending operation as well as other complementary
nonlending instruments. The CMU has assigned the relevant budget for the operation, and a team is
now preparing an operation based on recommendations in the areas of financial inclusion and MSME
access to finance.
2) El Salvador: Initial follow-up was focused on technical assistance on stability-related issues, and
more recently it has been focused on developmental issues. These efforts are funded by FIRST.
Technical assistance has been on the areas of crisis simulation exercises, crisis preparedness,
insurance supervision, mobile payments, and regional capital market integration.
3) Colombia: Follow-up was designed using the programmatic approach and included technical
assistance on capital market development and oversight, financial sector strategy, oversight on
conglomerates, financial inclusion issues, and housing finance.
4) Mexico: After the FSAP, country authorities request technical assistance support on insurance
supervision, the annuities market, a program for risk-based supervision. Based on FSAP
recommendations, authorities also recently approved the Financial Reform Law, and the Bank is
helping in the implementation.
These follow-up efforts are mostly funded through Bank budget, FIRST, and in some cases, through other trust
funds and reimbursable advisory services (RAS).
Box 4: Successful follow-up experiences in Latin America
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VI. OFF-SITE MONITORING AS A COMPLEMENT TO FIELD WORK
35. The 2009 FSAP Review called for an enhanced off-site monitoring30 and analysis
to improve the continuity of monitoring and policy dialogue. This off-site component is
very important given the long intervals between updates of full assessments, which is on
average every five to seven years. The World Bank has been working on developing different
internal instruments including a global financial indicator panel database (FinStats), the
Financial Systems Monitor, the Global Financial Systems Watch, and a Country Watch List
(See Box 6 for more detailed descriptions of the products).
36. In 2010, the World Bank developed a comprehensive global financial indicator
panel database (FinStats) covering both developmental and stability dimensions. This
database is updated semi-annually and covers banks, nonbank financial institutions, and
markets. Along with it, the World Bank also created the FinStats benchmark model, which
allows for more effective cross-country comparisons to facilitate monitoring. The database and
benchmark model have an extensive user base in the WBG and the IMF and has been used in
various FSAPs and other financial sector diagnostic work.31
30
See 2009 FSAP Review: Building up the off-site work would be a way to enhance the effectiveness of on-site
reviews and leverage the Banks contribution as regards its cross-country experience.
31 Including Barbados, Brazil, Chile, Cambodia, Djibouti, El Salvador, Ghana, India, Malawi, Mozambique,
Oman, Papua New Guinea, Rwanda, South Africa, Syria, Tanzania, Vietnam, and Zambia.
Box 5: Albania FSAP
The Albania FSAP update conducted in FY2013 was an example of well-thought out synergies with other
work on the country. Of the full set of recommendations identified in the FSAP, the team selected a focused
set of priority and key recommendations. A subset of these priority recommendations was channeled to be
prior actions of a Development Policy Loan (DPL).
Of the remaining priority recommendations not covered by the DPL, three areas were identified as needing a
longer time and requiring more capacity-building public debt management, insurance, and pensions.
Assistance for these three areas was covered through FIRST projects. The FSAP team was instrumental in
providing information useful for the preparation of project proposals for the FIRST applications.
Policy dialogue with the authorities had begun way ahead of the FSAP. The coverage and horizon of FSAP
recommendations were strategically thought out when informing the DPL and FIRST projects. This helped
to maximize synergies and efficiency in assisting the authorities to implement the FSAP recommendations.
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37. The Financial Systems Monitor is a key product to monitor global financial
market trends relevant for EMDE financial sectors, and complements regional
monitoring efforts. In the wake of the global financial crisis, EMDEs have been confronted
with various major external financial market developments, including the overhaul of the
global regulatory framework, international funding market volatility, the massive deleveraging
of international banks and the realignment of their business models, and the spillover effects of
extraordinary monetary policy in developed markets. Such developments have had profound
consequences for the financial sectors of WBG client countries and require on-going
monitoring, particularly as EMDEs become more integrated with the global financial system.
To meet these monitoring needs, the World Bank launched the Financial Systems Monitor at
the height of the European sovereign debt crisis at the end of 2011. The Monitor is an in-depth
analytical report on key global financial sector developments and emerging financial sector
policy issues relevant for financial sectors in World Bank client countries, and complements
the monitoring efforts done in the regions.
38. The Global Financial Systems Watch (GFSW) complements the Monitor by
getting out analysis quickly as market-moving events unfold. The GFSW highlights the
impact that emerging trends in global financial markets could have on WBG clients or
operations. Both the Monitor and GFSW are products that have been helpful to FSAP teams,
especially those working on countries widely exposed to the external financial environment.
39. A Country Watch List was launched in 2011 for a restricted readership to provide
a quick snapshot on countries with a vulnerable financial sector. This readership
comprises FSAP task team leaders and senior staff, including senior management, country
directors and managers. The Watch List content is prepared by Bank regional financial sector
champions in consultation with various staff and is updated regularly. The list is not meant to
be a complete list of countries currently in crisis, nor is it meant to predict that countries
exhibiting even severe vulnerabilities will move to a full blown crisis.
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FinStats is a readytouse financial indicator tool that allows users to benchmark and compare financial
sectors over time and relative to other countries. It was created to meet the primary data and benchmarking
needs of financial sector policy makers and analysts in support of FSAPs and other diagnostic work. It
provides:
an Excel-based dashboard application that allows users to compare different countries, as well as
generate graphs and tables;
a database of 42 financial indicators covering banking, debt markets, equity markets, nonbank financial
institutions, leasing and factoring, over a long time series; and
a benchmark indicator methodology that adjusts for structural factors to create country-specific
statistical benchmarks.
FinStats is widely used by both WBG and IMF staff for a broad range of financial sector diagnostic work
(e.g. FSAPs, DPLs, flagship reports, technical assistance) and has been downloaded over 1,700 times since
its creation in 2010.
The Financial Systems Monitor is a periodic report produced by the F&M Global Practice complemented
by monitoring efforts in the regions, which monitors, analyzes, and assesses developments in global and
regional financial systems relevant for financial sectors in client countries. It provides a summary of
important global financial market developments; information on the financial condition of key financial
institutions and systems; credit rating actions; and important changes in the regulatory framework affecting
the institutions and financial systems. It also provides a discussion on the policy implications of these
developments and key takeaways for policymakers and the Bank.
The Global Financial Systems Watch (GFSW) is a monthly analytical report produced by the F&M Global
Practice highlighting policy events, emerging developments and vulnerabilities in global financial markets
that impact WBG clients or operations. The GFSW complements the Financial Systems Monitoring work in
the F&M Global Practice as it tries to get market intelligence and policy developments out quickly to
colleagues as events unfold. The GFSW
provides an high-level summary overview of the key developments in global financial markets and
systems and important changes in the financial regulatory framework that would be of relevance for the
WBG and its clients; and
highlights issues, risks, vulnerabilities and potential pressures to keep staff and management informed.
The Financial Systems Monitor and the GFSW appear consistently as top downloads on the F&M Global
Practice intranet and have produced various positive spillover effects, including the strengthening of
regional monitoring efforts; cross-regional seminars and BBLs; WBG contributions to global engagements
(e.g., G20, FSB); briefs and speaking notes for Bank senior management; the Global Financial
Development Report, and policy and research papers.
The Country Watch List is meant for a restricted readership. It provides a quick snapshot of the financial
sector issues of countries that meet the following criteria:
financial sector vulnerabilities exist;
these vulnerabilities are perceived to be growing, looking out two to three years;
the Bank has an existing engagement and/or a potential role to play in the countries' financial sector.
Box 6: Off-Site Internal Monitoring Products
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VII. BANK-FUND COOPERATION
40. An important vehicle for coordinating Bank-Fund work in issues related to the
financial sector is the Financial Sector Liaison Committee (FSLC). The Committee is co-
chaired by senior representatives of the Bank and the Fund; on the Fund side, its members
include staff from the IMFs Monetary and Capital Markets Department (MCM) and the
Strategy, Poli