Review and Clearance of FSAP Documents

All FSAP documents are subject to rigorous internal review and clearance processes within the Bank and the Fund on the basis of guidance and procedures that are specific to each institution. The purposes of the review process are to ensure uniform and consistent treatment of countries in assessments and to exercise quality control on the scope and

content of policy analysis with the view toward ensuring that it draws on international good practices and on the available institutional experiences on key issues.

For FSAP documents for the Fund Board, the review process combines an internal expert review within the MFD with the review by Fund’s area departments and the Policy Development and Review Department. The FSAP documents for the World Bank Board are similarly subject to a peer review process. All other documents are subject to expert review that is organized differently within each institution to reflect the respective organi­zational structure. Often, input from selected experts from cooperating official institutions is sought to ensure effective quality control of standards assessments.

This review of country documents is complemented by periodic expert meetings to review cross-country experience with standards assessment process and periodic analysis of the results and lessons of FSAP assessments of different standards, as further explained in section A.4.

A.3 Selectivity and Tailoring of Assessments [28] [29]

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Box A.1. Assessing Observance of Financial Sector Standards
When There Are Supranational Authorities

 

The spirit of the standards assessment under FSAP is to evaluate the quality and resilience of supervi­sion in a country. Because supranational authorities, by definition, cover more than one country, such an approach cannot involve assessment of observance only from the perspective of the supranational author­ity. In each case, therefore, how supervision works in the country must be evaluated regardless of the institutional arrangement. This evaluation becomes all the more important if consideration is given to the fact that even when supranational arrangements exist, several aspects of implementation and enforce­ment remain with the individual countries.

Against this background, the following procedures should be adopted:

• The first FSAP undertaken within a grouping should commence a detailed assessment of the supranational authority, along with the imple­mentation aspects in the country concerned.

• Before the assessment, the mission should approach the supranational authority, outline the proposed strategy, and obtain its agreement to participate in the assessment. If the suprana­tional authority does not agree to participate, a detailed assessment of observation of that stan­dard cannot be undertaken.

• The detailed assessment of the relevant stan­dard should be included in the FSAP volume on “Detailed Assessment of Standards,” and a ROSC module relating to observance of that standard in that particular country should be produced.

• Subsequent FSAP assessments in other countries within the grouping should use the work already done in the earlier FSAP and should only review and update the assessment of the supranational authority. Each successive FSAP within the grouping will presumably require less involve-

 

ment of the supranational authority, although, in each case, the supranational authority should be contacted and kept informed. When mate­rial institutional, legal, or regulatory changes have taken place in the intervening period, a detailed reassessment may become necessary. In any case, the assessment will continue to be in the context of the country that is going through the FSAP.

• If for any reason the supranational authority does not wish to undergo a detailed assessment, the assessment outputs mentioned here will not be produced. There will, therefore, be no detailed assessment write-up in the FSAP “Detailed Assessment of Standards,” and no ROSC module will be prepared.

An overall assessment of the country-specific regulatory and supervisory issues in the relevant area would still be undertaken, using the relevant standard as a guide only. The qualitative evaluation would then be brought out in the main FSAP/FSSA/ FSA or in the form of an attachment wherever the issues are evaluated as being of significance and needing to be detailed.

For an assessment to qualify as applicable to the grouping as a whole, the following considerations are important:

• Assessors must make a judgment on compliance with relevant supervisory preconditions, as well as the supervisory and enforcement infrastruc­ture within all the members of the grouping.

• Assessors must take into account the size, structure, and risks of the relevant parts of the financial system within the grouping in which the regulated entities operate.

• Assessments must involve the supranational authority and all relevant national authorities.

 

• Although the choice of topics should reflect their macroeconomic significance or significance for real economic growth or poverty reduction, insofar as selected development and stability topics can be covered in other Bank-Fund operations (e. g., TA, Article IV) ahead of FSAP or in future FSAP updates, such coordina­tion of work over time can greatly facilitate the effectiveness and value of FSAP assessments.

 

• Standards such as corporate governance, accounting and auditing, and insolvency regime, which have a much broader application than in the financial sector, will not normally be covered in detail in an FSAP assessment.

• Following the recent Board guidance, anti-money-laundering and countering the financing of terrorism (AML-CFT) issues will be assessed in all countries partici­pating in the FSAP (and in offshore financial center [OFC] assessments). Given the large scope of those assessments—covering financial supervision, legal and institutional frameworks, and law enforcement and criminal justice system, which often require three or more assessors—those assessments are typically undertaken separately ahead of, or following, the main FSAP assessment work. Where feasible, such assessment could be undertaken by a financial action task force (FATF) style regional body.

• The selecting and tailoring of assessments and topics to country-specific circum­stances will also depend on the state of financial development and the specifics of financial structure. Features such as extent of dollarization, systemic importance, size (smallness) of the system, links to currency union, prevalence of institutional types, extent of offshore/cross-border banking, extent of financial stress, and so forth will clearly influence both the scope and content of FSAP assessments (see box 1.2 in chapter 1 for a discussion of tailoring assessments to the structural fea­tures of the countries). Also, assessments of countries in a currency union, sharing a supranational monetary or supervisory authority, pose special issues that call for adaptations in FSAP procedures (see box A.1).

A.4 Relationship to Standards and Codes Initiative—Role of Standards Assessments in FSAP [30] [31]

Core Principles for Systemically Important Payments Systems and the Committee on Payments and Settlements Systems and IOSCO’s Recommendations for Securities Settlements Systems**

• Anti-Money Laundering and Combating the Financing of Terrorism: Financial Action Task Force’s (FATF’s) 40+8 Recommendationsa

Financial Infrastructure Standards’1

• Corporate Governance: OECD’s Principles of Corporate Governance

• Accounting: International Accounting

Standards Board’s International Accounting Standards (IAS), currently called International Financial Reporting Standards (IFRS)

• Auditing: International Federation of

Accountants’ International Standards on Auditing

• Insolvency and Creditor Rights: World Bank’s Principles and Guidelines for Insolvency and Creditor Rights System and United Nations Commission on International Trade Law’s (UNCITRAL) Legislative Guide on Insolvency Law

Box A.2. List of Standards and Codes and Core Principles Useful for
Bank and Fund Operational Work and for Which ROSCs Are Produced

 

Transparency Standards

• Data Transparency: the Fund’s Special Data Dissemination Standard/General Data Dissemination System (SDDS/GDDS)

• Fiscal Transparency: the Fund’s Code of Good Practices on Fiscal Transparency

• Monetary and Financial Policy Transparency: the Fund’s Code of Good Practices on Transparency in Monetary and Financial Policies (usually assessed by the Fund and the Bank under the Joint Fund – Bank FSAP)a

Financial Sector and
Financial Integrity Standards15

• Banking Supervision: Basel Committee’s Core Principles for Effective Banking Supervision (BCP)a

• Securities: International Organization of

Securities Commissions’ (IOSCO) Objectives and Principles for Securities Regulation

• Insurance: International Association of Insurance Supervisor’s (IAIS) Insurance Supervisory Principlesa

• Payments and Settlement Systems: Committee on Payment and Settlement Systems’ (CPSS)

 

a. These standards are assessed mainly under the FSAP.

b. Sometimes the term financial integrity is used in a broad sense to cover both AML and CFT, as well as corporate gover­nance, transparency, accounting and insolvency regime, and the like. In this Handbook, integrity is used in a narrow sense of avoidance of financial crime, particularly money laundering, and financing of terrorism.

c. The payment and securities settlements standard covers supervisory elements, as well as design of payment settlement system, and may well be placed under financial infrastructure grouping.

d. These infrastructure standards are mainly assessed by the Bank.

 

(b) financial supervision and financial integrity standards, and (c) financial infrastructure standards.

ROSCs summarize the extent to which countries observe certain internationally rec­ognized standards and codes. ROSCs are typically summaries of the detailed principle-by­principle assessments undertaken on the basis of agreed methodology. ROSCs covering the financial sector and integrity and the monetary and financial policy transparency are usually prepared within the framework of the FSAP. Under the FSAP, detailed assess­ments of observance of relevant standards are undertaken jointly by Bank and Fund (Fund alone, with staff or expert participation from World Bank as needed, in countries that are not eligible to borrow from the World Bank), and detailed assessment reports (DARs) are given to the authorities. Summaries of those assessments (ROSCs) are included as part of the FSSAs that are presented to the IMF Board in the context of Fund surveillance,

 

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Box A.3. Assessing Offshore Financial Centers

 

In view of the large financial claims on OFCs and the potential vulnerabilities stemming from weak­nesses in the financial system of offshore centers, Fund initiated in June 2000 a program to assess—on a voluntary basis—44 jurisdictions known to have significant cross-border business or those with sepa­rate offshore financial legislation.3 The OFC program sought to assess the risks that OFCs could pose to the international financial system when one considers the weaknesses in prudential supervision and financial integrity concerns. The OFC program offers a set of uniform assessment options.

In addition to providing TA to conduct self-assess­ments by the jurisdictions themselves (module 1 assessments), the program offers stand-alone assess­ments by a team of specialized supervisors of juris­dictions’ compliance with supervisory and regula­tory standards (module 2 assessments). This program includes a review and assessment of AML-CFT practices. The third option (module 3 assessments)

 

is simply an FSAP for OFCs that are Fund members or a comprehensive vulnerability assessment includ­ing standards assessments for nonmembers. Such assessments are complemented by TA to improve compliance with standards. Given the OFC’s links to major “offshore” financial centers, where major banks and conglomerates maintain balance sheet and operational exposures in OFCs, the FSAP work in many countries has to pay particular attention to such exposures and to consider aspects of the super­visory process—consolidated supervision, supervisory cooperation, and information sharing—relevant to mitigating the associated risks. Among the 44 OFC jurisdictions, assessments have been completed or are ongoing in 33 jurisdictions, of which 8 were done as part of the FSAP. In addition, the FSAPs in countries with important bank representation in OFCs have examined closely the home country’s consolidated supervision and supervisory cooperation issues.

 

a. An OFC is a location where the bulk of financial activity is offshore on both sides of the balance sheet (i. e., the counter­parties of the majority of financial institutions’ liabilities and assets are nonresidents), where the transactions are initiated elsewhere, and where the majority of the institutions involved are controlled by nonresidents.

 

and they are issued as ROSCs. This procedure is designed to help set the standard assess­ments in a broader context of risks and vulnerabilities that affect the financial system, to assess the extent to which standards compliance contributes to mitigating the risks, and to formulate an overall stability assessment. Gaps in compliance with standards also provide an input into identifying development needs and desired structural reforms to strengthen institutions, markets, and infrastructure. For those reasons, standards assessments are an integral part of the FSAP.

Detailed assessments of financial sector standards are undertaken outside the FSAP only occasionally as part of technical cooperation and assistance programs. However, standard assessments are routinely undertaken as part of IMF’s Offshore Financial Centers Assessments Program (see box A.3). Such detailed assessments are designed to assist coun­tries in identifying areas of institutional reforms and related TA needs and are not issued as ROSCs that feed into surveillance. They are, however issued as detailed assessment reports (DARs) and can be published voluntarily by the authorities with the concurrence of Fund and Bank management. The DARs prepared under OFC’s program have been routinely published (see http://www. imf. org/external/np/ofca/ofca. asp). Several countries that serve as major international financial centers or that operate separate offshore finan­cial centers have chosen to be assessed under the FSAP (in those countries), instead of under the OFC program whose objectives are more narrowly focused on strengthening
and harmonizing supervision and regulation and on fostering cross-border cooperation among supervisors.

Standards for the financial system infrastructure are typically assessed on a stand-alone basis by the World Bank, and, when appropriate, one or more of those assessments may be conducted in the context of FSAP. When stand-alone assessments of infrastructure stan­dards are available, FSAP work will draw on them, but it will generally focus on financial sector aspects of corporate governance, accounting and auditing, and insolvency regime, as part of the assessment of preconditions for effective supervision.

Following the recent pilot program for conducting AML-CFT assessments, assessments of AML-CFT are considered a regular part of the Bank-Fund work and are included as part of all FSAP and OFC assessments. In addition to assessments done jointly by Bank and Fund (Fund alone in the case of OFCs and selected other countries), financial action task force (FATF) and FATF-style regional bodies (FSRBs) also conduct assessments that are based on the commonly agreed methodology; ROSCs are prepared on the basis of those outside assessments. Therefore, country assessments have required close collabora­tion and coordination with the FATF and FSRBs on assessment schedules.

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FSAP and the standards and codes initiative have reinforced each other to achieve the shared objectives. The experience with the assessment of standards under the FSAP has been periodically reviewed at a technical level, as well as at a broader policy context,

to strengthen the consistency of the assessment process and to inform standard setters on the lessons of assessment experience for both the content of the standards and for its assessment methodology. Box A.4 contains the list of technical and policy reviews of the standards assessment process conducted in the FSAP context. The policy reviews also served to inform the periodic Board reviews of the standards and codes initiative.

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