Category Financial Sector Assessment

Execution, Scope, and Coverage

The first question to consider in implementing a system-focused stress test is who crunches the numbers: the supervisory agency or central bank, or the institutions them­selves? Ideally, individual institutions should be as heavily involved in the process as possible—regardless of whether a top-down or bottom-up approach is used—because individual institutions will typically have the best access to data and knowledge of their own portfolios. For institutions with sophisticated risk management systems or significant international operations, most will have systems and stress-testing procedures in place as part of their internal risk monitoring processes...

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Key Objectives

The purpose of restructuring is to ensure the continuation of the bank’s business, in whole or in part, as an economic unit (“going concern”) on a financially sound basis. A country’s laws need to establish the objectives and basic principles to be followed by the authorities in restructuring a bank in the context of insolvency proceedings.

G.5.3 Basic Principles

Drawing on international experience and practices, certain principles for bank restructur­ing are outlined in the following paragraphs.

G.5.3.1 Limit Moral Hazard

In a sound and efficient financial system, only well-administered institutions should remain in business...

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Selected Organizational Issues

The FSAP Procedures Guide covers both assessments and updates. In addition, assessments (countries and economies that have not yet participated in the program) and reassessments (when the passage of time or the pace of the reform process in a country indicates that comprehensive updating of the initial FSAP assessment is desirable) are complemented by focused updates (including updating of stability and standards and codes assessments)...

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Summary of FSAP Experience25

Stress tests have been performed for every country participating in the FSAP. The tests are designed to provide a quantitative measure of the vulnerability of the financial system to different shocks and to complement the insights gathered from other components of the assessment. This analysis includes elements of the legal, institutional, regulatory, and supervisory framework; observance of key financial sector standards and codes; analysis of the financial system structure and key vulnerabilities; and empirical analysis of financial soundness indicators.

Data availability is a key factor in determining the approach and sophistication of stress tests performed as part of the FSAP...

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Issues of Funding

As populations mature, the relative size of pension liabilities and the related invest­ment risks have grown accordingly and have, in many instances, exceeded expectations. Consequently, greater attention is being called to managing and maintaining funding levels and to meeting payment obligations, which is reflected in greater emphasis on regulatory and supervisory structures.

H.2.3 Fiscal Management

If one considers the risks of politically motivated misallocation of funds and the fiscal implications of mismanagement, regulatory and supervisory attention must be given to publicly managed funds (see section H.3 below).

H.2.4 Financial Markets

The focus on ensuring the soundness of pension sectors also attests to their growing role in, and influence on, global financial markets...

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Asia Regional Information Center

The Asia Regional Information Center (ARIC Database) includes capital adequacy and nonperforming loan indicators for the financial sector plus the debt-to-equity and return on equity indicators for the corporate sector. The database covers the following:

• Years covered: 1997 onward, frequency—monthly, quarterly, annual, varies by indicator and country

• Countries covered: Bangladesh, Brunei Darussalam, India, Indonesia, Malaysia, Pakistan, Philippines, the Republic of Korea, Singapore, Sri Lanka, Thailand

C.3.5 IMF

IMF produces the following databases of particular interest for financial sector assessments: international financial statistics (IFS) and bonds, equities, and loans database (BEL).

Produced by the IMF, the IFS provides international statistics on macroeconomic indicators...

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