Category Financial Sector Assessment

Regulation and Supervision of Private Funds

Private pension plans are schemes administered by an employer, a pension entity, or a pri­vate sector provider. They may either complement or substitute for social security systems and may include plans for public sector workers (Yermo 2002, p. 3). The regulation and supervision of privately run pension funds is equally as important as that of public plans and increasingly so as more countries move toward a mix of public and privately run plans. In addition, governments have moved toward contracting out the investment arm of their pension programs to private fund management companies.

Privately managed or independent funds rely heavily on professional asset manage­ment...

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Commercial Databases Providing Aggregate Financial Sector Data

The CEIC Data Company Ltd. produces the CEIC Asia Database. This database provides, in addition to economic data, aggregate balance sheets by banking groups (e. g., all banks, commercial banks, and, in some cases, foreign banks and state-owned banks). For some countries, a limited number of FSIs are available, mainly bank lending and asset quality indicators. However, for some countries, available are bank capital adequacy indicators and, in some cases, a limited number of structural and insurance indicators (e. g., number of banks, some insurance data). For some countries, individual bank balance sheets are provided. In addition, the database has information on financial markets (e. g., stock mar­ket capitalization, indices, turnover ratios) and, for some countries, on real estate prices...

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Key Institutional Aspects of the Bank Insolvency Regime

A set of key features of the broader legal and institutional environment for bank regula­tion and contract enforcement will affect the effectiveness of any bank insolvency regime. Many of those features are included as part of BCPs, and others may be viewed as part of the preconditions for effective supervision and robust bank exit policies. The features include the following:

• A clear legal framework for banking supervision, including operational autonomy of banking authorities, and specific decision making powers and procedures (part of BCP 1)

• Well-defined property and contractual rights (part of preconditions of BCP)

• Effective enforcement procedures (for expeditions and effective collection of claims and enforcement of security interests)

• Integrity and transparency of offi...

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Top-Down Approach

Conducting a “top-down” approach to stress testing provides a useful check on the results on the basis of individual balance-sheet information (the bottom-up approach). Furthermore, financial institutions in some countries may not have the capacity to esti­mate the effect of a given set of shocks on their portfolio. In this case, the agency coor­dinating the stress-testing exercise could adopt a “top-down” approach and could apply adjustment parameters that are based on systemwide estimates. For example, a regression model of loan loss rates for the entire banking system could be used to estimate the effect of a macroadjustment scenario on the credit quality of an institution. Examples of this approach include the following:

• Fr0yland and Larsen (2002) modeled losses for Norwegi...

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Bank Restructuring and Cases with Actual or Potential Systemic Implications

Although legislation should require the authorities to observe the principles whenever they deal with an insolvent bank, the law should also provide flexibility to the banking authorities to handle exceptional cases, such as bank failures with systemic implications that may cause disruptions or even the collapse of the payment and settlement systems, may trigger bank runs, or may cause other widespread disruptions in the financial system. If the authorities deem that the failure of a bank has serious systemic implications, they will need to use a restructuring technique that minimizes any systemic risks, even if some of the above principles cannot be fully observed.13

To prevent bank failures without systemic consequences from being treated as cases of a systemic nature, the law should est...

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Organization and Team Design for Stability Assessments

The issues are broadly similar to the case of development assessment discussed earlier. Exercising selectivity in the standards and sectors to be assessed in detail should be based on both the size of the sector and its likely systemic effect over the medium term. Often, even if the overall size of a sector (e. g., securities markets) is not significant, its linkages to key institutions, as well as its critical role in overall financial sector reform, may warrant a detailed assessment of the sector from a developmental perspective and may require a close attention to volatility and liquidity of the markets. The concern is to ensure medi­um-term stability in the course of financial market development, even though the size of the sector does not pose a threat to short-term stability.

Once a...

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