Thursday, January 30, 2020 / 5:15 PM / by IMFBlog / Header Image Credit: Gopixa/Istock By Getty Images
In 2020, the IMF plans to assess the stability of twelve financial systems. Seven assessments are of jurisdictions with systemically important financial sectors (Austria, Denmark, Hong Kong SAR, Italy, Korea, Norway, and the United States), for which it is mandatory to undergo financial stability assessments every five years. The other five assessments are Algeria, Latvia, Philippines, South Africa, and Trinidad and Tobago, which are being done at the request of those countries themselves. Assessments for advanced economies are done by the IMF alone, while those for other countries are typically carried out jointly with the World Bank.
The Financial Sector Assessment Program (FSAP) has just entered its 20th year. It is now a key pillar of IMF financial surveillance, helping to assess financial vulnerabilities and make financial systems more resilient. The IMF considers country-specific features of financial systems and tailors its analysis to the needs of each member participating in the program. In 2020, the IMF's Executive Board will review the FSAP, which is done periodically, and will cover topics such as analytical foundations, coverage of emerging risks, integration of the FSAP with other IMF surveillance, and country participation in the program.
FSAP assessments expected to conclude in 2020 include the following:
Denmark's financial system is relatively large reflecting a high degree of interconnectedness between financial institutions, households, and corporates. Key financial vulnerabilities arise from high household debt amid elevated housing valuations, particularly in urban areas. The assessment will analyze the resilience of banks and insurers to adverse macrofinancial shocks; evaluate the strength of the oversight of banks and insurance companies; undertake an assessment of the macroprudential and the crisis management frameworks; and assess the effectiveness of the anti-money laundering and counter-financing of terrorism regime, particularly in mitigating related cross-border risks.
Hong Kong SAR is a small and open economy, and a major international financial center. The FSAP will assess the financial sector's cross-sectoral and cross-border linkages, in view of extensive linkages to mainland China, stretched real estate valuations, and exposure to shifts in global market and domestic risk sentiment. The assessment will also have a special focus on the regulatory and supervisory frameworks for fintech developments in the financial sector, in addition to regular risk and regulatory assessments of banking, securities and insurance markets, as well as a review of crisis management arrangements and macroprudential frameworks. In addition, there will be a detailed assessment of payments and financial market infrastructures.
Korea's financial system operates within a trade dependent, open economy and has grown into one of the largest and most developed in Asia. The assessment will focus on the soundness and resilience of the financial system against the backdrop of rapid financial digitalization, international expansion, and adverse demographic shifts. The assessment will also evaluate the adequacy of oversight across banking, insurance, and investment fund sectors, and financial conglomerates; the macroprudential policy framework, given risks from highly indebted households and cross-border activities; and the crisis-management, safety-net, and resolution arrangements.
Latvia is a small open economy exposed to external shocks. Its financial sector is undergoing a major transformation motivated by a crackdown on money laundering activities, which exposed weaknesses in its non-resident banking segment. The financial sector is shrinking and has decreased as a percentage of total economic output since 2006. An immediate risk is that of being grey-listed by the Financial Action Task Force due to deficiencies in the anti-money laundering and counter-financing of terrorism framework. A challenge for the banking sector is to refocus its business model and customer base and become more efficient. Domestic vulnerabilities may also include issues related to bank asset valuation and insufficient provisions to cope with difficult collateral recovery. Because over 60 percent of its banking system is connected to Nordic institutions, Latvia would be affected by corrections in the real estate market in the region. The assessment would also examine the adequacy of the supervisory framework, with a focus on the recent progress on anti-money laundering and counter-financing of terrorism measures.
Norway's sizable banking system appears to be well-capitalized, liquid, and profitable, and the country has large fiscal buffers. At the same time, there are significant vulnerabilities from a protracted real estate boom, a related buildup of household debt, and bank's reliance on wholesale funding markets. The assessment will focus on the macroprudential policy framework; effectiveness of banking and insurance oversight; systemic liquidity management; financial safety nets; and stress tests of the banking sector, including an exploratory climate-change component.
Philippines: Banks dominate the financial system and have solid capital and liquidity buffers. They are closely interconnected with corporates with significant business and property loan exposures and mixed-conglomerate structure. The economy is prone to external shocks and natural disasters from climate change. The risk assessment will examine bank resilience against macrofinancial shocks and natural disasters and their interconnectedness with companies. The assessment will also evaluate bank oversight, macroprudential policy, and safety-net arrangements. The World Bank will investigate oversight and developmental issues of insurers, payment systems, and capital markets, as well as the link between climate change and the financial sector.
South Africa is home to Africa's largest financial sector, with large cross-border banking groups and a well-developed investment fund and insurance sector. The assessment-carried out jointly with the World Bank-will examine the strength of the financial sector in a difficult environment-with stagnant growth and deteriorating fiscal health (exacerbated by the government assistance to the failing state-owned energy utility). The importance of capital flows to the financial sector will underpin the "capital-flows-at-risk" analysis, as well as the assessment of systemic liquidity management and macroprudential policy. The assessment will also examine banking, insurance, securities markets; pension supervision; fintech; financial inclusion; climate risk; and capital markets development.
Trinidad and Tobago: While the financial system remained stable through the recent economic downturn, household debt and sovereign exposures increased. The assessment will look at the effectiveness of the supervision of banks and non-banks, including financial conglomerates, developing a macroprudential policy framework, and strengthening the financial crisis management and resolution framework. A key focus will be whether the regulatory framework is up to date with best international practice, given the growing complexity and regional importance of the financial system.
United States: The health of the U.S. financial sector is of global relevance given its size, role as an international funding source, and the position of U.S. dollar as a global reserve currency. Amidst the longest economic expansion in recorded history, and spurred by easy financial conditions, corporate leverage has reached historic highs while the buildup of vulnerabilities continues in nonbank financial companies that dominate credit intermediation. The assessment will examine the resilience of highly-indebted companies and the solvency of banks and insurers, as well as analyze how shocks could transmit through the complex interconnected financial sector. It will evaluate financial oversight for banks, securities markets, and insurers; risk management practices of the systemically important central counterparties; and the effectiveness of the crisis-management framework. It will examine systemic risk oversight and inter-agency coordination, as well as the intensity of supervision and implications of the ongoing regulatory tailoring.