Category Financial Sector Assessment

Interpretation and Publication

Experience in conducting stress tests suggests they are a useful tool for identifying the latent risk exposures and the likely significance of losses in a systematic and intuitive manner. Stress tests can be particularly useful when they are conducted on a regular basis, thereby providing information about changes in the risk profile of the system over time. Although stress test results are useful to evaluate effects of large movements (tail events) in key variables, care should be taken not to portray them as providing a precise measure of the magnitude of losses. Stress tests can indicate how much could be lost but not how much is likely to be lost.

Interpretation of stress tests needs to take into account their limitations...

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Publicly Assisted Bank Restructuring

More recently, there has been broad international convergence on the principle that the discretionary, open-ended application of public funds to keep afloat insolvent banks and to make good their losses is unjustifiable. This practice transfers commercial losses to the taxpayer, validates bad bank management, and prevents the operation of the financial sector under conditions of market discipline and undistorted competition.

Generally, in situations of individual bank failure, no public funds should be used in the bank’s restructuring or liquidation, except in relation to payments under state-guar­anteed deposit insurance schemes...

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Follow-Up Issues—FSAP Updates, On-Going Surveillance, and TA

Although comprehensive FSAP assessments and reassessments can take place once in 8 to 9 years, additional tools are used to monitor the financial sector on a more continuous basis, to update FSAP findings in a more selective way, and to provide needed TA. In the Fund, efforts have been under way to develop and promote compilation of financial soundness indicators. Monitoring those indicators on a regular basis—along with other information, particularly market-based indicators—can be used as input in ongoing finan­cial sector surveillance.

In many cases, FSAP updates have been used to focus on key development and stabil­ity issues and to update the assessments of one or two selected standards to update the ROSCs...

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Importance of Institutional Structure

The institutional structure of supervisory agencies is not simply an administrative matter; it is important to meet the objectives of financial supervision for several reasons. The
objectives of financial supervision are to promote efficiency and competition,2 to main­tain market confidence, to protect depositors or consumers (as appropriate), and to foster systemic stability. Supervisory capacity and the supervisory process itself are the critical elements in attaining those goals...

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The Regulation of Investment Regimes7

The means by which investment regimes, and thus asset allocation, related to public and private pensions are regulated will vary across and within countries (e. g., each individual U. S. state has its own investment regime). Regulatory (and tax) constraints on invest­ment behavior and national funding rules significantly influence pension fund strategies. For example, in the case of Chile,8 the pension sector is regulated by a highly complex investment regime, with limits by instruments, instrument characteristics, issuers, and issuer types. By comparison, the investment regime for pension funds in OECD countries is considered relatively much simpler.

OECD countries are typically classified in two groups, adhering to either the prudent man rule or the quantitative restrictions regime...

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Countries covered: primarily countries with active capital markets Ratings Agencies

Moody’s Investors Services publishes financial statements and selected FSIs for the rated banks in each country in a banking statistical supplement. Each supplement contains 5 years of annual bank-level data. For some countries, banking system aggregates are also available. Moody’s also rates the financial strength of each bank, using bank performance and other country-specific indicators. The data coverage is as follows:

• Years covered: each statistical supplement covers 5 years of annual data

• Countries covered: rated banks in developed and emerging market countries, annual frequency; data timeliness varies depending on when the supplement was published and has up to 1 year of lag

Fitch Research publishes selected financial information for the top five to six banks in developed...

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