the financial sector assessment program: addressing the...

The Financial Sector Assessment Program:

Addressing the Needs of Emerging Markets

and Developing Economies (EMDEs)

Approved by Gloria M. Grandolini

Senior Director Finance and Markets Global Practice

August 27th, 2014

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Contents Page

Glossary ................................................................................................................................... iv

Abstract ......................................................................................................................................1

Acknowledgments......................................................................................................................2

Executive Summary ...................................................................................................................3

I. Strategic Context ....................................................................................................................5

II. Country Participation, Prioritization, and Publication ..........................................................7

III. Analytical Framework .......................................................................................................11

A. Main Findings from Historical FSAPs....................................................................11 B. Standards and Codes: Slow but Consistent Progress on Compliance .....................18

IV. Increased Complexity in Standards and Codes .................................................................21

V. Addressing the Needs of Emerging Markets and Developing Economies (EMDEs).........23 A. Development Modules ............................................................................................23

B. FSAP Follow-Up .....................................................................................................25

VI. Off-Site Monitoring as a Complement to Field Work .......................................................30

VII. Bank-Fund Cooperation ...................................................................................................33

VIII. The Views from the Authorities ......................................................................................36

IX. Costs and Resources ..........................................................................................................39

X. Proposals and Areas Seeking Guidance Going Forward ....................................................41

Appendix I: Country Participation in the FSAP ......................................................................45

Appendix II: FSB Key Standards for Sound Financial Systems .............................................45

Appendix III: Analysis of Compliance with International Standards ......................................48

Annex I: FSAP Content since 1999 a Text Mining Exercise

Annex II: Survey of Country Authorities, 2014

ii

Boxes

Box 1: FSAP / ROSC Analytical Framework and Review Process .......................................12 Box 2: East African Community (EAC) Development Module ..............................................24 Box 3: FIRST ...........................................................................................................................28

Box 4: Successful follow-up experiences in Latin America ....................................................29 Box 5: Albania FSAP...............................................................................................................30 Box 6: Off-Site Internal Monitoring Products .........................................................................32 Box 7: Role of the Financial Sector Liaison Committee (FSLC) ............................................35 Box 8: Summary of Key Messages from the 2009 Board FSAP Review ...............................41

Figures

Figure 1: Completed FSAPs by region ......................................................................................8

Figure 2: FSAP participation by Income Group, FY08-14 .......................................................8 Figure 3: FSAP participation by Income Group (Total) ............................................................8 Figure 4: Regulatory and Supervisory areas covered by FSAP Technical Notes....................11 Figure 5: Areas covered by Technical Notes, since the inception of the Program ..................12

Figure 6: Focus on Risks in ECA ........13

Figure 7: Focus on Risks in AFR ........13

Figure 8: Credit Risk........14

Figure 9: Systemic Risk ...........................................................................14 Figure 10: Liquidity Risk.14

Figure 11: Operational Risk .....................................................................................................14 Figure 12: The Nonbank Sector relative to the Banking Sector ..............................................15

Figure 13: Crisis Preparedness.................................................................................................15

Figure 14: Legal Protection .....................................................................................................16

Figure 15: Resources................................................................................................................16 Figure 16: FSAP Financial Inclusion Technical Notes by Focus and Region (2000 2013) .17 Figure 17: Recent Evolution of Detailed Assessment Reports under the FSAP .....................18

Figure 18: BCP (1999-2012) -- Average compliance over time..............................................19 Figure 19: IOSCO (2000-2011) Average compliance over time ..........................................20

Figure 20: IAIS 17 (2000-2003) and IAIS 28 (2003-20012): Compliance dispersion ............20 Figure 21: Most frequent noun phrases of a sample of lending/finance projects mentioning the

FSAPs ......................................................................................................................................26

Figure 22: Distribution of Responses to FSAP Survey........36

Figure 23: Institutions Represented .........................................................................................36 Figure 24: Adequacy of the FSAP Scope ................................................................................37 Figure 25: Progress of Implementation.........39

Figure 26: Reasons for partial implementation of FSAP recommendations ...........................39 Figure 27: BCP (1999 2012): Average compliance per core principle ................................49 Figure 28: IAIS (2000 2003): Average compliance per core principle ................................50 Figure 29: IAIS (2000 2003): Compliance dispersion ..........................................................50 Figure 30: IAIS (2003 2012): Average compliance per core principle ................................51

Figure 31: IAIS (2003 2012): Compliance dispersion ..........................................................52 Figure 32: IOSCO (2000 2011): Compliance per core principle ..........................................53
AppData/Local/Temp/Domino%20Web%20Access/FSAP%20Board%20Paper%202014%20V5_Aug%204_tracked.doc#_Toc394943271AppData/Local/Temp/Domino%20Web%20Access/FSAP%20Board%20Paper%202014%20V5_Aug%204_tracked.doc#_Toc394943272AppData/Local/Temp/Domino%20Web%20Access/FSAP%20Board%20Paper%202014%20V5_Aug%204_tracked.doc#_Toc394943273AppData/Local/Temp/Domino%20Web%20Access/FSAP%20Board%20Paper%202014%20V5_Aug%204_tracked.doc#_Toc394943274

iii

Tables

Table 1: Completed FSAPs by region .......................................................................................8 Table 2: Publication Trends .....................................................................................................10

Table 3: Average Number of Formal Standards Assessments Conducted During FSAP

Missions ...................................................................................................................................18 Table 4: Revisions of Standards and Codes .............................................................................21 Table 5: Stability and Development Modules .........................................................................23 Table 6: FSAP Technical Assistance and FIRST follow-up ...................................................27

Table 7: FSAP costs .................................................................................................................40 Table 8: Profile of Assessment Missions (FY0914 averages) ...............................................40 Table 9: Financial Standards Assessment Completed and Underway .....................................47 Table 10: BCP (1999 2012): Strongest and weakest observed compliance .........................49

Table 11: IAIS (2000 2003): Strongest and weakest observed compliance .........................51 Table 12: IAIS (2003 2012): Strongest and weakest observed compliance .........................52 Table 13: IOSCO (2000 2011): Strongest and weakest observed compliance .....................53

iv

GLOSSARY

ADM Accountability and Decision-Making

AM Aide-Memoire

BCP Basel Core Principles for Effective Banking Supervision

CAS Country Assistance Strategy

CMU Country Management Unit

CPF Country Partnership Framework

CPS Country Partnership Strategy

CSC Country Sector Coordinator

DAR Detailed Assessment Reports

DPL Development Policy Loan

EAC East African Community

EMDEs Emerging Markets and Developing Economies

F&M Finance and Markets

FIRST Financial Sector Reform and Strengthening Initiative

FMI Financial Market Infrastructure

FSA Financial Sector Assessment

FSAP Financial Sector Assessment Program

FSB Financial Stability Board

FSLC Financial Sector Liaison Committee

GFSW Global Financial Systems Watch

GP Global Practice

HIC High-income Country

IAIS

ICP

International Association of Insurance Supervisors

Insurance Core Principles

ICR Insolvency and Creditor Rights

IFI International Financial Institution

IOSCO International Organization of Securities Commissions

LIC Low-income Country

MIC Middle-income Country

P&PF Policy and Procedure Framework

RAS Reimbursable Advisory Services

ROSC Report on Standards and Codes

SA Standards Assessments

SCD Systematic Country Diagnostic

SFI State Financial Institution

SME Small and Medium Enterprise

SSB Standard Setting Body

TN Technical Note

VP Vice Presidency

WBG World Bank Group

1

ABSTRACT

The Financial Sector Assessment Program (FSAP) is already in its 16th

year of implementation

with more than 250 joint Bank-Fund assessments since its inception. A Board review is due in

2014, in line with the practice that a Board review takes place every five years. This FSAP

Review paper has been coordinated with the Fund FSAP Review paper through the joint

Bank-Fund Financial Sector Liaison Committee (FSLC). The Bank paper focuses on the

FSAP as a vehicle to address the needs of Emerging Markets and Developing Economies

(EMDEs), while the Fund paper focuses on the FSAP as a key pillar of financial sector

surveillance. The FSAP plays a pivotal role for the financial sector work at the Bank, which in

turn is an essential component for achieving the twin goals of reducing extreme poverty and

sharing prosperity. As the cornerstone of financial sector analysis work at the Bank, the FSAP

provides an analytical framework for operations and Technical Assistance (TA), and a vehicle

for policy dialogue. There is also strong demand from client countries for the Program, with

the key reason being to obtain independent assessments of the financial sector. The FSAP is

also a key tool for the Banks global engagements in the financial sector, notably the Financial

Stability Board (FSB) and Standard Setting Bodies (SSBs). The paper provides a brief

description of the strategic context in which the FSAP will be implemented going forward

under the new Global Practice, and the role of Finance & Markets. This FSAP review provides

the latest information on country participation, prioritization, and publication. Using an

innovative text mining methodology, an analysis of more than 1,200 existing documents has

been conducted to identify the main issues and trends across time and regions. The paper also

reviews the different context under which the standards and codes are being assessed,

including the addition of new standards and increased complexity of the standards.

Furthermore, the paper highlights how the needs of EMDEs have been addressed through joint

IMF-World Bank FSAPs and through the implementation of development modules; as well as

follow-up implementation. Results of a survey of authorities that had an FSAP in the last five

years are presented. The paper also discusses the evolution of costs and human resources in

the program. Finally, the paper presents some proposals going forward for discussion.

2

ACKNOWLEDGMENTS

This paper was prepared by a Bank team led by Mario Guadamillas and included Aquiles A.

Almansi, Yen Nian Mooi, Elena P. Mekhova, Rafael Pardo and Liudmila Uvarova (all

GFMDR). The paper has been cleared by Peer Stein and Sebastian-A Molineus (both

GFMDR). Discussions were held with and comments received from regional VP offices,

including Jan Walliser and Khaled F. Sherif (AFR); Antonella Bassani and Sally Burningham

(EAP); Anna Bjerde (ECA); Gerardo M. Corrochano and Manuela V. Ferro (LAC); Gerard A.

Byam (MNA); and Akihiko Nishio (SAR). Comments were also received from Ana Maria

Aviles (MD-CFO office), Seynabou Sakho (MD office), Hester Marie DeCasper (GPVP

office); John A. Roome and Idah Z. Pswarayi-Riddihough (GPSOS); and Jeffrey Lewis (Chief

Economist, GPSCE). Asli Demirguc-Kunt (DECRG) and Maria Soledad Martinez Peria

(DECFP); Vijay Srinivas Tata (LEGAP); and Jeff Chelsky (OPSRE) also provided helpful

comments.

The team received inputs and comments from a broad number of GFMDR colleagues,

including Lily L. Chu, Samuel Maimbo and Virginia Brandon; Consolate K. Rusagara, Hanh

Thi Bic Le and Jatin Dawar; Pierre-Laurent Chatain and Erik Feyen; Jean Denis Pesme;

Alison Harwood and Ana Fiorella Carvajal; Michel Noel and Craig W. Thorburn; Massimo

Cirasino and Maria Teresa Chimienti; Douglas Pearce, Luis Trevino, Bujana Perolli and Leyla

Castillo; Aurora Ferrari; Alfonso Garca Mora and Eva M. Gutierrez; Irina Astrakhan, Cedric

Mousset, and Yira Mascar; James Seward; Simon C. Bell and Gabriel G. Sensenbrenner; and

Henry K. Bagazonzya.

Finally, as mentioned in the abstract, the paper was coordinated with the IMF through FSLC,

and comments were received from Christopher Towe and Dimitri Demekas (both MCM).

3

EXECUTIVE SUMMARY

In an increasingly financially integrated world, new global risks have emerged with

important ramifications for financial development and stability in World Bank

Group (WBG) client countries going forward. Developing and promoting effective

regulatory, supervisory, and other financial sector norms and policies in WBG client

countries is therefore an important component of the Banks strategy. Through its global

engagements (e.g., the G20, FSB, and SSBs), the WBG is actively participating in defining

these policies and promoting the development of safe, efficient, and inclusive financial

systems.

The WBG is uniquely positioned to foster financial development. Financial

institutions, faced with the current environment, are forced to consider trade-offs between

using short-term and long-term instruments, as well as contemplate their presence in

domestic versus international markets. Increasingly, there is also a shift toward more

market-based financing solutions, as banks adjust their balance sheets and business

models. Efforts to build a sound development of market-based financing, together with a

more resilient banking system, will contribute to global financial stability as well as long-

term economic prosperity. These efforts will help towards achieving the WBGs twin

goals of reducing extreme poverty and sharing prosperity in a sustainable manner.

The FSAP plays a pivotal role in the WBGs work on the financial sector: i) it is the

cornerstone of financial sector analysis work at the WBG that provides a sound analytical

framework for operations and technical assistance (TA) in the sector; ii) it underpins the

engagement with country authorities and provides a vehicle for policy dialogue; iii) it is an

important vehicle for the WBG to present the perspectives of EMDEs in the global

engagements agenda. About 85 percent of the member countries have already participated

in the program or agreed to do so in the near future. For EMDEs, a chief reason for their

demand for FSAPs is the desire to obtain an independent assessment of the countrys

financial sector.

There has been significant progress since the last FSAP Board Review in 2009. The

quality and coverage adequacy of assessments have improved (according to a recent

survey of country authorities). The implementation of modular assessments has been very

successful. The FSAP has included new analytical tools (see Box 1), complemented by

off-site monitoring. The WBG has continued its efforts to support follow-up

implementation (e.g., through the FIRST Initiative programmatic window) and

implemented some cost-effective measures. Countries have also indicated a substantial

implementation of main recommendations.

Bank-Fund collaboration and coordination of FSAP-related activities remains the

4

key task for the Financial Sector Liaison Committee (FSLC) going forward.

Coordination is especially important when differences in Bank and Fund institutional

priorities arise. Moreover, there have been concerns on both sides that the new mandate by

the Fund for regular assessment of systemic jurisdictions may crowd out the ability for

the Program to deliver joint assessments in other jurisdictions. The FSLC should also

ensure that clearer delineation of institutional responsibilities for specific FSAP outputs

(e.g., technical notes and ROSCs) does not affect process effectiveness, and that the

jointness of the program is preserved.

In sum, there are some opportunities and challenges going forward: i) the need for

more effective response to demand from EMDEs; ii) the challenge of dealing with the

added complexity in the assessment of the standards and codes; iii) continuing to benefit

from the successful implementation of the modules, while keeping a collaborative

approach for the implementation of joint IMF-WB updates; iv) improving the Bank-Fund

collaboration through FSLC beyond FSAP coordination; v) the need to adapt internal

procedures to effectively implement the program and ensure follow up in the context of the

new Global Practices (GP) in the Bank. To this end, the FSAP is adapting its processes to

the new GP structure to ensure continuity of high quality and effective engagement with

countries. FSAP guidelines and procedures are being adapted in line with the

Accountability and Decision-Making (ADM) framework and consistent with the Policy

and Procedure Framework (P&PF).

In this context, this paper provides in depth background information, raises some

questions and presents several proposals for Board discussion and guidance:

Given the recent decrease in participation by low-income countries (LICs) due to

increased focus on countries with systemically important financial systems, to what

extent is a rebalancing of country prioritization needed?

Regarding standards and codes, to what extent are formal assessments the best

vehicle to support safe financial systems, or can more flexible approaches be

followed?

While the implementation of modules has been very successful, they should not be

used as a substitute (due to budget constraints) to full updates when the intended

scope is broad.

The FSLC has continued to coordinate FSAP-related activities productively;

however, there is room for broader financial sector work collaboration including

through enhanced knowledge sharing, technical assistance and policy development

coordination.

5

I. STRATEGIC CONTEXT

1. Financial sector development is an essential component for achieving the World

Bank Groups (WBG) twin goals of reducing extreme poverty and sharing prosperity in a

sustainable manner. The two goals emphasize the importance of economic growth, inclusion,

and sustainability including strong concerns for equity. As stated in the 2013 WBG Strategy,

Developing countries strong economic performance is shifting the worlds economic center

of gravity, the private sector is driving employment growth and transforming living standards,

private investment has become the dominant mode of capital transfer worldwide, and financing

for development is coming from more diverse sources. Higher levels of financial

development reduce the share of population living below the poverty line, as shown in

empirical research.1 Responsible financial systems also directly help the poor by protecting

incomes through the provision of savings and investment instruments, and minimizing risks

through insurance and pension systems. Financial sector development is also crucial in

supporting growth and promoting shared prosperity income inequality falls faster in countries

with better-developed financial intermediaries.2 Financing gaps are a developmental challenge

for many countries. Small and Medium Enterprises (SMEs) face a $2 trillion financing gap,

and 2.5 billion adults worldwide lack access to financial services. In the public sector, low-

income governments require 7-9 percent of GDPs worth of financing for infrastructure, with

$45 billion gap per annum in Africa, and $800 billion gap in Asia over the next ten years.3

2. Financial crises prevent countries from achieving the twin goals, as demonstrated

in the most recent episode, and highlight the importance of a well-regulated and

supervised financial sector. The most recent global financial crisis had pushed the incomes of

125 million people worldwide below the poverty line,4 with 22 million people losing their jobs

in 2008 alone.5 Developing and promoting effective regulatory, supervisory, and other

financial sector norms and policies in our client countries is therefore an important component

of the WBGs strategy. Definitions of clear, comprehensive and well-thought international

standards for both financial and nonbank financial institutions are essential for this. Through its

global engagements (e.g., the G20, FSB, and SSBs), the WBG is actively participating in

1 Beck, Demirg-Kunt, and Levine (2007); Honohan (2004), Claessens and Feyen (2007).

2 Beck, Demirg-Kunt, and Levine (2007).

3 Sources: World Bank Development Report 2012; the IIF, IMF, McKinsey Global Institute, 2012; World Bank

Enterprise Surveys 2013; World Bank, FPD Enterprise Surveys, 2013; Global Financial Development Report

2012.

4 World Development Report, 2013.

5 Eurostat, December 2013.

6

defining these standards and promoting the development of safe, efficient, and inclusive

financial systems.

3. In an increasingly financially integrated world, new global risks have emerged

with important ramifications for financial development and stability in WBG client

countries going forward. In the wake of the global financial crisis, EMDE ties to international

markets have surged.6 At the same time, the international financial system continues to

experience bouts of stress and volatility as it adjusts to the new global financial regulatory

architecture, the realignment of bank business models,7 and shifts toward more market-based

financing solutions. New or exacerbated existing fragilities in financial systems of WBG client

countries affect currencies and reserves, interfere with the local credit cycle, distort asset

prices, and impact incentives for structural reform. Moreover, these fragilities are compounded

by shallow local markets and a lack of strong institutions, supervisory and surveillance

capacity, technical experience, and macroprudential tools.

4. The WBG is building finance as a core line of business, with a full suite of

diagnostic, finance, technical assistance, and risk mitigation instruments. The WBG is

very actively engaged in the global engagements agenda (e.g., G20 and FSB) on the design and

implementation of financial sector regulatory reforms. The WBG is also uniquely positioned

to foster financial development in client countries by supporting efforts for more effective

regulation and supervision; financial integrity; the development of capital markets and nonbank

financial institutions; stronger financial infrastructure; and financial inclusion. A full suite of

instruments will enable the WBG to more effectively help client countries deal with the

numerous challenges in the financial sector. All these efforts to build a sound development of

market-based financing, together with a more resilient banking system, will contribute to

global financial stability as well as long-term economic prosperity.

5. The Financial Sector Assessment Program (FSAP) is widely recognized as an

important instrument for diagnosing potential vulnerabilities and analyzing development

priorities in the financial sector. It was jointly developed by the World Bank and IMF in

1999 in the aftermath of Asian financial crisis. Since its inception, the Program has gained a

reputation among the international community and participating countries as an important

diagnostic tool for the financial sectors of Bank-Fund member countries. The Program

6 Since 2009, EMDE external debt securities have doubled to $2.7 trillion, fund allocations to EMDEs quadrupled

to $1.7 trillion, and foreign participation in some local bond markets increased up to 26 percent of volume

outstanding. And although international banks retrenched abruptly during the crisis, their claims on EMDEs are

over $6.5 trillion and growing.

7 Financial institutions, faced with the current environment, are forced to consider trade-offs between using short-

term and long-term instruments, as well as contemplate their presence in domestic versus international markets.

7

contributes to: i) identify strengths, risks, vulnerabilities and development opportunities in

financial systems; ii) assess the impact of macro-economic environment on financial sector

performance, and vice-versa; and iii) identify links among sub-sectors of the financial system

to determine the potential for systemic crises.

6. The FSAP plays a pivotal role in the WBGs work on the financial sector:

i. It is the cornerstone of financial sector analysis work at the WBG that provides

a sound analytical framework for operations and TA in the sector. The FSAPs

comprehensive coverage, integrated approach to assessments, and deep treatment of

issues in the financial sector provides the analytical foundational basis for much of

the sectors operational and technical assistance work at the WBG.

ii. It underpins the engagement with country authorities and provides a vehicle

for policy dialogue. The close contact, cooperation, and discussions with the

authorities while conducting the assessments is often the precursor to deeper policy

dialogue that continues after the FSAP is completed. In some instances, the FSAP

provides the opening for new country engagements.

iii. The FSAP is an important vehicle for the WBG to present the perspectives of

EMDEs in the global engagements agenda. The Bank has been able to leverage

on the recognition of the FSAP as an important diagnostic instrument to actively

participate in international fora on changes to financial regulatory reform, e.g., the

G20, FSB, and the SSBs. For the Bank, having a seat at the global table enables it to

bring to the table perspectives on issues with implications for EMDEs. The Bank

has also been able to provide important feedback to standard-setters based on its

experience with the implementation of standards and codes.

II. COUNTRY PARTICIPATION, PRIORITIZATION, AND PUBLICATION

7. About 85 percent of the member countries have participated in the program or

agreed to do so in the near future. Since the inception of the Program, 254 FSAPs have taken

place, with participation from all the six regions of WBG client countries (see Appendix I). In

recent years, the regional distribution has been skewed towards the Eastern Europe & Central

Asia region due to the financial crisis. Table 1 and Figure 1 show the total number of FSAPs

by region.

8

Table 1: Completed FSAPs by region Figure 1: Completed FSAPs by region

AFR 50 32 16 2

EAP 17 12 2 3

ECA 60 28 25 7

LAC 45 23 21 1

MNA 32 16 12 4

SAR 8 4 3 1

non-Bank 42

254 115 79 18

Tota l Ini tia l

AssessmentUpdate Module

Source: WB FSAP Management Unit.

8. Relative participation of Low-Income Countries (LICs) compared to Middle-

Income Countries (MICs) and High-Income Countries (HICs) has been low, and

declining in recent years. This trend of declining participation from LICs is more pronounced

in recent years since the IMF mandated FSAPs for countries with systemically important

financial systems, beginning in 2010. For the years 2009 to 2014 cumulatively, 86 percent of

FSAPs has been in MICs/HICs while only 14 percent has been in LICs. LIC participation has

been declining, from around 23 percent in 2009 and 2010 to less than 10 percent in 2012 and

2013. In 2014, LIC participation has picked up slightly with 17 percent of all the FSAPs

undertaken being in the LIC countries.

Figure 2: FSAP participation by Income Group,

FY08-14

Figure 3: FSAP participation by Income Group

(Total)


9. Several criteria determine FSAP prioritization, the first one being the systemic

importance of a countrys financial system. FSAP prioritization memos are sent to Bank and

Fund Management twice a year prior to the Spring and Annual meetings, and inform

9

Management on the FSAP work program for the current and upcoming fiscal years.

Participation in the program is voluntary,8 but country requests are prioritized based on the

following criteria:9 (i) the systemic importance of the country; (ii) external sector weaknesses

or financial vulnerabilities; (iii) major reform programs that might benefit from a

comprehensive financial sector assessment; and (iv) features of the exchange rate and

monetary policy regime that make the financial system more vulnerable, such as inconsistency

with other macroeconomic policies. Maintaining a balance across regions and different levels

of financial sector development is also important, as is the time elapsed since the initial FSAP

or previous FSAP update (Section X discusses if a rebalancing of these prioritization criteria is

needed).

10. Country authorities have increasingly disclosed various parts of the final FSAP

reports to the public, especially Detailed Assessment Reports (DARs) more recently.10

Table 2 shows the evolution in the publication of the Financial Sector Assessments (FSAs),

DARs and Technical Notes (TNs). The variation in disclosure trends has been driven by

changes in the IMF and WBG access to information policies and international commitments, as

well as those established by the FSB.11 In addition, countries see FSAPs as a signal to the

international community. In a survey of country authorities, almost two-thirds of respondents

8 Except for 29 jurisdictions designated by the IMF as having systemically important financial systems. See IMF

Board paper on Mandatory Financial Stability Assessments under the Financial Sector Assessment Program:

Update November 15, 2013.

9 These criteria were defined based on Board discussions at the beginning of the program implementation. See for

example Financial Sector Assessment Program (FSAP) -- A Review: Lessons from the Pilot and Issues Going

Forward November 2000 that stated that FSAP should be targeted to systemically significant market economies.

However, some Directors noted that countries that are not systemically important in international markets should

also have the opportunity to participate in the program to help them strengthen and develop their financial

sectors, avoid costly financial crises and, where relevant, prepare the ground for market liberalization and

greater access to the international capital markets.

10 This trend is in line with the call for a more open publication policy by the 2009 FSAP Review: The reach and

impact of FSAP assessments can be enhanced by a more open publication policy. At present, the Aide-Mmoires

produced by FSAP teams are confidential documents, while Technical Notes, FSSAs, and FSAs may be published

with the consent of the authorities. There is merit in the status of keeping Aide-Mmoires unchanged: these

documents often contain market-sensitive information, data on individual institutions, or detailed assessments of

compliance with international standards.

11 To lead by example, as described in the FSB's Framework for Strengthening Adherence to International

Standards, FSB member jurisdictions have committed to: i) implementing international financial standards; ii)

undergoing an assessment under the IMF-World Bank FSAP every five years; iii) disclosing their degree of

adherence of international standards, notably by publishing the Detailed Assessments Reports (DARs) prepared

by the Bank and the Fund; and iv) undergoing periodic peer reviews using, among other evidence, reports

prepared as part of the FSAP. As some of the FSB initiatives go beyond its member jurisdictions this peer

pressure is also affecting many other countries.

10

indicated that communicating their countrys progress was a reason for disclosure of different

parts of the FSAP report. While higher publication rates of FSAP documents have brought

further transparency, increased peer pressure has also affected the candidness of the FSAP

dialogue with the authorities, especially regarding standards and codes assessments. Any

difference of views between country authorities and FSAP teams are ultimately resolved, if

needed, through FSLC.

Table 2: Publication Trends (Published documents as a percentage of issued documents)

FY 01 02 03 04 05 06 07 08 09 10 11 12 13 14

FSA 10% 24% 64% 36% 37% 28% 17% 32% 62% 39% 6% 13% 56% 40%

DARs 0% 0% 0% 2% 14% 32% 45% 7% 30% 8% 67% 78% 75% 44%

TNs 0% 0% 0% 4% 11% 16% 25% 0% 1% 12% 9% 10% 16% 15%

Source: WB Databases.

11. Most countries have opted to provide FSAP teams with information on a

confidential basis; without precluding the publication of final FSAP documents if they

opt for disclosure. Under the Banks Access to Information Policy, effective July 2010, the

Bank commits to make publicly available any information in its possession that is not on a "list

of exceptions". FSAP documents may not be made publicly available on the basis of two

specific exceptions: (i) the information contained in the FSAPs is deliberative,12 and (ii) FSAPs

include and are prepared using information provided by member countries or third parties in

confidence.13 Most countries that undertook the FSAP have opted to establish that the

information was provided in confidence, prior to the FSAP assessment. As such, the

analyses generated as a result of, or in response to that information, have been kept confidential

until authorities agree to disclosure.14

12

Exception related to Deliberative Information on the World Bank Policy on Access to Information.

13 Exception related to Information Provided by Member Countries or Third Parties in Confidence on the World

Bank Policy on Access to Information.

14 The FSAP Management Unit in coordination with LEGVP and OPCS informed regional Sector Managers and

FSAP Team Leaders through official internal memos about the Implications of new World Bank Access to

Information Policy for the FSAP and Detailed Assessments undertaken under the FSAP (May 2010) and Filing

of the FSAP documents and the World Bank Access to Information Policy (December 2012) on processes to be

followed that are consistent with the Access to Information Policy.

11

III. ANALYTICAL FRAMEWORK

A. Main Findings from Historical FSAPs

12. FSAPs offer a comprehensive assessment on the whole financial sector (with the

exception of modules) and analyze a broad range of issues. These relate to financial sector

regulation and supervision, markets, and infrastructure in the context of a given

macroeconomic environment. The main issues identified are communicated to the authorities

at the end of the work in the field. These are then complemented by in-depth analyses on

several technical standards through the Detailed Assessments Reports (DARs), and technical

areas are covered through the Technical Notes (for details, see Box 1).

13. The Technical Notes from the last few years have shown an increased focus on

cross-border and cross-sectoral issues, as well as financial inclusion. The inventory of

Technical Notes (1,045 as of June 2014, not including DARs) shows that topics are varied and

diverse, and as expected, depend on country circumstances. In the aftermath of the global

financial crisis, there has been increased coverage of crisis-related areas in recent years. Recent

FSAPs also tended to be less bank-centric, with increased attention going to the nonbanking

financial sector (see Figure 4). Another area that has gained increased focus in recent years is

access to finance, which has become the second most covered topic after banking (see Figure

5).

Figure 4: Regulatory and Supervisory areas covered by FSAP Technical Notes


12

Figure 5: Areas covered by Technical Notes, since the inception of the Program


Box 1: FSAP / ROSC Analytical Framework and Review Process

The FSAP / ROSC makes use of a collection of tools, skills, and expertise of analytical methods with different

objectives to evaluate the diversity of areas covered on its assessments. The timing, detail, scope and depth of

these tools vary depending on the sector, assessment type, and stage of the evaluation. The selection of tools

and expertise is defined at the scoping level, tailoring the needs of the financial sector in review.

Assessment of standards and detailed technical notes of selected issues have been widely used since the

beginning of the program. A set of questionnaires, guidance notes, principles, and methodologies have also

been a part of the toolkit from the onset. Most recently, the introduction of Risk Assessment Matrices, new

assessment frameworks (e.g., crisis preparedness, governance, macroprudential, resolution) and new Guidance

Notes (e.g., on financial sector standards assessments,15

and on Financial Inclusion), and a more widespread use

of off-site tools (see Section VI) have strengthened the analytical content of the reports.

The Banks FSAP management unit has also worked on inventories and principle-by-principle-grading tables to

increase the comparability and standardization of the quality of the assessments across countries.

Furthermore, to ensure quality, clarity and consistency, the Bank has implemented a review and clearance

process for all the different documents that comprise the FSAP Report which consists of: a post-mission review

meeting to discuss main findings and exchanges comments with other experts and internal stakeholders; a

document by document peer review; and a layered clearance process depending on the type of document.

15

The guidance notes on financial sector standards assessments were developed jointly with the IMF and

published in January 2013.

13

14. An analysis16 of the main issues and trends covered in EMDE FSAPs shows

evolving perceptions about key financial sector issues across regions, including risks (for

more details see Annex I). This exercise thus intends to identify and illustrate global and

regional trends in the content of the wealth of information delivered through Aide-Memoires

(AMs), Technical Notes and Detailed Assessment Reports in FSAPs. A primary focus of FSAP

AMs has been to identify financial sector risks.17 The attention to risks, measured as the

fraction of each AMs paragraphs discussing any types of risks, has varied considerably across

regions and over time. For example, attention given to risks in ECA has increased steadily

over time, particularly after the recent global financial crisis, while it varies more in AFR

(Figures 6 and 7).

Figure 6: Focus on Risks in ECA Figure 7: Focus on Risks in AFR


15. Bank credit risk has been consistently the most prominent among risk discussions,

while discussions on systemic risk temporarily increase after a crisis. Given the common

emphasis on banking sector issues in FSAPs, the attention on credit risks is expected.

Unsurprisingly, there was an increased focus on systemic risk immediately after crisis episodes

(e.g., the Asian Financial Crisis and the recent global financial crisis), and it smoothly declined

after. Figure 9 shows the weight given to systemic risk, as measured by the paragraphs

discussing systemic risks, as a fraction of all paragraphs on risks. As for liquidity risks, there

has been a fairly stable focus in general (Figure 10), but with a clear upward trend in ECA and

16

This analysis uses a text mining methodology on the Aide-Memoires, DARs and TNs delivered by FSAP

missions. Contrary to the usual close reading of individual documents, text mining consists in the distant

reading, with diverse text parsing and search algorithms, of an entire corpus. Using search algorithms with

natural language data requires, however, not only knowing what to search for precisely; it also requires a

comprehensive list of the different ways mission teams of diverse cultural or professional background might have

expressed identical, similar or related ideas.

17 Closer attention to risks in FSAPs includes, for example, new Risk Assessment Matrix (RAM), enhanced stress

testing, and spillover analyses developed by the IMF.

14

to some extent in LAC. Meanwhile, attention to operational risk has slowly but consistently

increased since the start of the Program (Figure 11).

Figure 8: Credit Risk Figure 9: Systemic Risk

Figure 10: Liquidity Risk Figure 11: Operational Risk


16. In recent years, there has been a marked increase in interest on the nonbank

sector. As shown in Figure 12, the fraction of Aide-Memoire paragraphs dedicated to the

discussion of the nonbank sector relative to the banking sector has increased. This is in line

with the higher number of TNs covering nonbank financial sector topics, including capital

markets, insurance, and pensions, among others. The greater focus on the nonbank sector

reflects an increased interest of country authorities in diversifying their financial sectors and

moving away from bank-centric financial systems.

15

Figure 12: The Nonbank Sector relative to the Banking Sector


17. There has also been increased interest on crisis preparedness. Figure 13 shows the

percentage of AMs which address crisis preparedness for selected regions.18 While nearly all

AMs have dealt with crisis preparedness since 2009, it is noteworthy that the increase in

interest has been observed since 2006. Strong interest has been observed in countries that have

recently experienced a crisis (e.g., in ECA) and countries with a history of financial crises

(LAC). Crisis preparedness issues included crisis simulations, systematic vulnerability

assessments, and macroprudential analysis.

Figure 13: Crisis Preparedness


18. The development of supervisory agencies, including the issues of resources and

legal protection, is a key component of FSAPs, usually drawing from accompanying

ROSCs. For example, Figure 14 illustrates the fraction of AMs delivered each year in ECA

and LCR that discuss the lack of adequate legal protection for supervisors. The issue of legal

protection has been raised in multiple recent FSAPs because assessors have observed that

current regulatory regimes did not provide enough protection to central bank and supervisory

18

The number of observations in the other regions are not sufficient to be statistically meaningful.

16

staff against lawsuits while discharging their duties in good faith. Insufficient legal protection

also compromises independence of the supervisory agencies. The lack of supervisory

resources was another issue that featured in AFR, EAP, and LCR FSAPs (Figure 15).

Countries were concerned about the inadequate resources in comparison with the

responsibilities, as well as lack of skills and capacity to carry out their duties. Supervisory

resources were often unable to keep up with the evolving complexity of the financial systems

and changing risks in relation to financial stability and integrity.

Figure 14: Legal Protection


Figure 15: Resources


19. Financial infrastructure topics have received constant attention throughout the

years, as demonstrated by the stable share of AM space over time. Payment systems issues

have received a constant focus as countries continue adapting and upgrading their payments

infrastructure following quick technological evolution. Large-value systems, and in particular

real-time gross settlement systems, have been at the core of financial infrastructure assessments

since the inception of the FSAP due to financial stability and monetary policy implications.

The interdependency between payment systems and securities settlement arrangements has

been largely recognized in financial infrastructure assessments, in that they consistently use

securities clearing and settlement concepts such as delivery-versus-payment. The recent

adoption of innovative payment schemes and channels that hold new potential in terms of

17

financial access (see following paragraph), and the emergence of nonbank payment service

providers shows the inclusion of new concepts in payment systems assessments, such as

electronic money and mobile payments. Credit reporting systems, another important pillar of

financial infrastructure, also show a stable trend which can be attributed to their indispensable

function as a tool for financial sector supervision, and an enabler of access to credit.

20. Seventy percent of countries which had an FSAP during 2000 2013 have

undertaken at least one financial inclusion focused assessment through TNs.19 From a

regional perspective, through the same period, the majority of countries have focused on access

to finance and SME finance, as well as financial infrastructure. Additionally, housing finance

and microfinance assessments have had a prominent role, in particular among the EAP, AFR,

and SAR regions (see Figure 16). While access to finance and SME finance are concepts that

have been used consistently over time in the context of development policies, additional related

concepts have gained more attention in recent years, including financial inclusion, mobile

payments, consumer protection, and financial literacy. For example, from the periods of 2000-

2006 to 2007-2013, the usage of concepts related to SME finance has increased by more than

200 percent, and the usage of financial inclusion as a term has grown over ten times. These

findings reflect an evolution in the development of innovative delivery channels and products,

such as electronic money and mobile payments. There has also been an increased focus on

financial consumer protection, consumer empowerment and financial literacy, especially

following the 2008-2009 global financial crisis.

Figure 16: FSAP Financial Inclusion Technical Notes by Focus and Region (2000 2013)

(% of countries that performed an FSAP by region)

Source: World Bank Group, Financial Sector Assessment Program Reports and technical notes for different

years.

19

FSAP technical notes related to financial inclusion are focused on access to finance and SME finance, financial

infrastructure, housing finance, microfinance, and/or credit unions development.

18

B. Standards and Codes: Slow but Consistent Progress on Compliance

21. The average number of assessments of standards and codes conducted under the

FSAP has been increasing in recent years, notably of the financial regulatory and

supervisory standards (see Table 3 and Figure 17). For instance, Table 3 shows that an

average of four formal assessments per FSAP were done for initial assessments and 2.3 for

updates in FY2014, compared to only 1 and 1.1 respectively in FY2010. The FSAP covers

standards in the areas of banking (BCP), insurance (IAIS), and securities (IOSCO) regulation

and supervision. Financial integrity (FATF) remains a mandatory component of all FSAPs and

FSAP updates, as most recently confirmed by the IMF Board (April 2014). FSAPs also cover

financial markets infrastructure (CPSS-IOSCO), and are closely coordinated with accounting

and auditing, corporate governance and insolvency and creditor rights (ICR) assessments, all in

the area of institutional and market infrastructure. Assessments in the deposit insurance (IADI)

and resolution regimes (FSB Key Attributes, which is in pilot phase) have recently been added.

Appendix II includes the FSB list of international standards considered key for sound financial

systems.

Table 3: Average Number of Formal Standards Assessments Conducted During FSAP Missions

FY09 FY10 FY11 FY12 FY13 FY14

Initial Assessments 0.7 1.0 3.0 1.8 2.0 4.0

Updates 1.5 1.1 1.3 2.0 1.8 2.3 Modules & SA ROSCs 1.5 1.1 1.3 2.0 1.4 2.3

Source: World Bank FSAP Databases

Note: Excludes ROSCs undertaken outside FSAP missions, notably AML/CFT.

Figure 17: Recent Evolution of Detailed Assessment Reports under the FSAP

(Financial Regulation and Supervision)


19

22. Compliance with international standards of regulation and supervision by

EMDEs20 has shown slow but consistent progress. This is not an unexpected result, given the

complex and long-term institutional reforms that are needed to improve regulatory and

supervisory frameworks. Figures 18, 19, and 20 show a time series of compliance with BCP,

IOSCO and IAIS standards. The compliance was calculated using rating scales for each of the

core principles, where all three sets have similar but not identical rating scales (for details, see

Appendix III). Figure 18 shows that in 2012, using country averages,21 countries assessed on

the BCP were 64 percent largely compliant (LC) and 36 percent materially noncompliant

(MNC), with an overall average rating of all countries at 3.1 out of a fully compliant 4.

Similarly, Figure 19 shows an increasing trend in compliance for IOSCO, with a 4.1 average

rating for all the countries assessed in 2013. For IAIS, given the smaller sample available and

the change of principles in 2003, the average compliance was calculated for the periods of

2000-2003 and 2003-2012 (Figure 20). Progress was also shown, though the sample is less

statistically representative than for BCP and IOSCO.

Figure 18: BCP (1999-2012) -- Average compliance over time

C: Compliant, LC: Largely Compliant; MNC: Materially Noncompliant; NC: Noncompliant.


20

This analysis excludes the advanced economies, which are assessed only by the Fund. The timeframe of

analysis is since the inception of the FSAP program in 1999 till the end of 2013.

21 Country averages are calculated as the simple average from all the principle ratings.

20

Figure 19: IOSCO (2000-2011) Average compliance over time

FI: Fully Implemented, BI: Broadly Implemented, PI: Partially Implemented, NI: Not Implemented.


Figure 20: IAIS 17 (2000-2003) and IAIS 28 (2003-20012): Compliance dispersion22

Y axis = number of countries

X axis = average compliance

Scale: 1: Not Observed, 2: Materially Not Observed, 3: Partially Observed, 4: Largely Observed, 5: Observed


23. The main areas identified as needing improvements are as follows: i) independence

and accountability of supervisors, that is affecting enforcement; ii) risks assessment and

management (operational, market, cross-border); iii) prudential standards; iv) group-wide

supervision; v) exposure to related parties; and vi) derivatives.

22

The separate charts reflect the change in the IAIS principles in 2003. There are also insufficient observations in

the IAIS database to make a calculation of an average rating meaningful.

21

IV. INCREASED COMPLEXITY IN STANDARDS AND CODES

24. The recent revision of standards and codes has added complexity to the

assessment process (see Table 4 for revisions). All the financial regulation and supervision

standards have been revised (BCP, IAIS, IOSCO) in the period preceding the last joint Bank-

Fund Board Reviews on the FSAP (September 2009) and the Standards and Codes Initiative

(February 2011).23 Several institutional and market infrastructure standards have also been

revised or added to. For example, the ICR standards were revised as of January 2011. The

AML/CFT Standard was revised in 2012. After the Standards and Codes Initiative Board

review in February 2011, deposit insurance and crisis resolution were the new areas added for

assessment under the FSAP. All these changes meant that the framework for conducting

standards assessments has significantly changed in the recent years.

Table 4: Revisions of Standards and Codes

Revised Standard Date of Board

submission

Main Revisions

IOSCO Principles December 2011 Enhancement of the role of securities regulators in

systemic risk and attraction of new entities into the

perimeter of regulation, such as hedge funds and credit

rating agencies.

IAIS Principles December 2011 Enhancement of risk-based solvency regime and

introduction of additional principles relating to macro-

surveillance and cross-border crisis management, as

well as greater recognition of proportionality in the

application of ICPs.

CPSS-IOSCO Principles

for FMIs

July 2012 Harmonization and strengthening of standards for

FMIs.

Basel Core Principles

(BCP)

December 2012 Strengthening of the requirements for supervisors, the

approaches to supervision, and supervisors

expectations of banks with a greater focus on risk-

based supervision and the capacity for early

intervention and timely supervisory actions.

FATF Recommendations Under preparation Revision of standard and assessment methodology and

new opportunities and challenges with focus on risks

and assessment of effectiveness.

23

See IMF-WB, 2011 Review of the Standards and Codes Initiative.

22

ICR February 201124

2014 changes under

preparation.

2011 changes enabled assessors to take into account

the growing complexity of enterprises, and special

regimes for the treatment of corporate groups in

insolvency.

In 2014, there is an intention to convene the WBG's

Global Task Force on Effective Insolvency &

Creditor/Debtor Regimes, to consider additional

proposed updates to reflect international guidance that

has been incorporated in the UNCITRAL Legislative

Guide on Insolvency Law and other relevant texts of

UNCITRAL and other international bodies. Areas to

be considered are: (i) an elaboration of directors'

obligations in the period prior to insolvency; and (ii) a

proposed elaboration of the Principles relating to

Security Interests and collateral registries to reflect the

recommendations of the UNCITRAL Legislative

Guide on Security Interests, and (iii) whether any

updates are necessary to either the Principles or to the

assessment methodology to reflect developments in

international standards on the treatment of financial

contracts in insolvency in certain contexts.

25. Numerous factors, including the revision of the standards and FSB commitments,

have significantly changed the environment of conducting assessments. FSB member

jurisdictions25 now have a commitment to undertake an FSAP every five years and publish

Detailed Assessment Reports (DARs) of standards and codes. The pressure to publish formal

assessments has created new challenges, as assessors are faced with more resistance towards

assessment results. Furthermore, there has been use of some principles of the BCP, ICP, and

IOSCO standards for the FSB Initiative for International Cooperation and Information

Exchange. In addition to revisions to the standards as mentioned above, new standards were

added to the list of key FSB standards, adding complexity to the assessment process. The FSB

and SSBs have also launched peer review processes for implementation monitoring, some of

them based in the framework provided by the standards. In this new context, the use of the

standards and codes assessments undertaken by the Bank and Fund has broadened beyond the

institutions regular engagement. Without an increase in the level of resources, the increased

complexity in the assessment process and the new environment have added a significant

burden on the assessors.

24

The Board was notified through a reference in the 2011 Standards and Codes Initiative Review paper.

25 Out of the 24 FSB member jurisdictions, the Bank participates in joint FSAP assessments for nine of them

(Argentina, Brazil, China, India, Indonesia, Mexico, Republic of Korea, Russian Federation and Turkey).

23

V. ADDRESSING THE NEEDS OF EMERGING MARKETS AND DEVELOPING ECONOMIES

(EMDES)

26. The FSAP has aimed to serve the needs of WBG client countries through a better

targeted focus and more timely follow-up. Greater focus on EMDEs was achieved through

the implementation of development modules, which also allowed for more timely follow-up

and thematic approaches.

A. Development Modules

27. The September 2009 joint Board Paper introduced the option for modular FSAP

assessments, focusing on stability or development issues. The option for modules

complements the pre-existing initial FSAP assessments and updates. These modules were

intended to provide quick, flexible, and targeted responses to clients needs for diagnostics and

to bridge the gap of five to seven years between full assessments. Notwithstanding the benefits

and successes of the modular system, full updates done jointly with the IMF are crucial and

important for the client countries. As the scope of modules is more restricted and less

comprehensive than a full assessment, the modular FSAP is only but a complement and not a

substitute for the full FSAP.

28. Since 2009, the Bank has led and completed 10 development modules including a

regional one (East African Community), with 3 requests for FY15. Meanwhile, the IMF

has undertaken 9 stability modules with WB participation (see Table 5).

Table 5: Stability and Development Modules

FY Completed Stability Modules Development Modules

FY2011

Trinidad and Tobago Djibouti

Mongolia

Jordan

Syria

FY2012

Russian Federation

Czech Republic

FY2013

Slovenia Latvia

Sri Lanka Mongolia

Hungary Thailand

Singapore Mauritius

FY2014

Kazakhstan

Belarus

East African Community

Lebanon

Jamaica (ongoing)


24

29. The implementation of the modular FSAPs was in response to the 2009 FSAP

Review, and its flexibility has presented several benefits:

i. Greater depth in the treatment of subject areas. Development modules are an

opportunity to perform a deep dive on specific topics that are of interest or concern

for the authorities. An example of this was Thailands development module in FY

2013, which focused on State Financial Institutions (SFIs). In this Development

Module, the team conducted full in-depth assessments on all the eight SFIs in the

country.

ii. Timely follow-up. The flexibility of the modules allowed the Bank to respond

more quickly to the country authorities. One such example was the Jordan

Development Module conducted in FY 2010, which focused on SME finance,

insolvency, and credit reporting. These topics were selected as authorities wanted a

more comprehensive coverage on financial inclusion than what the full FSAP was

able to include. The follow-up included an MSME finance loan and TA on a

regional MSME facility. The Development Module helped to inform a series of

already-ongoing DPLs with macroeconomic and financial and private sector

development issues.

iii. Regional and thematic approaches, including cross-border linkages between

countries. Modular FSAPs were able to enhance its analysis on cross-border

perspectives, recognizing the increasing interconnectedness of the global financial

system. Development modules are able to focus more squarely on cross-border

issues, for example on regional integration, cross-border capital flows and the

spillover impact from the global or regional environment. The East African

Community (EAC) development module FSAP is one such example addressing

cross-border themes (see Box 2).

Box 2: East African Community (EAC) Development Module

The EAC Development Module FSAP was conducted in FY2014. It focused on the aspect of regional

integration, in particular on cross-border banking, payment systems, capital markets, supervision and

crisis management. This thematic focus was born out of the recognition that there were common issues

arising from the separate FSAPs conducted in each of the EAC countries.

While it was useful to view the issues from a regional lens, follow-up was more challenging on this

particular FSAP because of the absence of a single regional authority on the financial sector to engage

with as a key counterpart. Furthermore, there was an imbalance in the financial sector sizes and

conditions across the countries in this modular FSAP, making implementation of recommendations across

the different countries more challenging.

25

B. FSAP Follow-Up

30. The FSAP is an important instrument for the WBG, as it provides for policy

dialogue and a framework for the delivery of financial support and technical assistance

(TA). The FSAP is a key diagnostic tool that informs and provides the analytical foundation

for much of the WBG operational work in the financial sector. It also provides a framework for

the delivery of financial sector TA and other follow-up work by the institution, other donors,

multilaterals, and the countries themselves.

31. The 2009 FSAP Review called for linking FSAPs assessments more efficiently to

Bank follow-up lending/finance support and technical assistance. The FSAP management

unit was called to actively facilitate the ongoing dialogue about technical assistance and

follow-up work between regional and specialized staff, the FSLC, FIRST Initiative and client

counterparts. In this respect, the FSLC would also play a larger role to bring stakeholders

together and make decisions. The FSAP management unit would liaise with Country Directors

and FPD sector managers and support them with background information and

recommendations to help in discussions of the Systematic Country Diagnostics (SCDs) and

Country Partnership Framework (CPF) (Section X discusses this further in the context of the

new country engagement framework). In addition, the unit would liaise closely with FIRST

Initiative to ramp up efforts to connect assessment recommendations with efforts to provide

follow-up technical assistance. The goal was to ensure a more continuous approach to

diagnosing vulnerabilities and weaknesses in countries financial sectors and getting the right

resources and tools lined up to help.

32. The FSAP is an important analytical underpinning for WBG lending/finance

projects related to the financial sector. A sample of 198 projects mentioning the FSAP26 was

analyzed through a computer search. The computer searched for common noun phrases

("matters discussed") in the associated 221 documents from the projects. Figure 21 shows the

most frequent noun phrases revealing commonality between the "matters discussed" in the 198

projects and the FSAPs. This analysis does not identify if the actions supported in those

projects are consistent with FSAP diagnostics or recommendations.27

26

The sample was selected among 673 lending/finance projects (1,145 documents) fully or partially attributed to

financial sector.

27 The FSAP Management Unit in coordination with IEG is undertaking further work to analyze to what extent

lending/finance projects mentioning the FSAP are consistent with respective FSAP diagnostics and

recommendations.

26

Figure 21: Most frequent noun phrases of a sample of lending/finance projects mentioning the FSAPs


33. Much of the FSAP follow-up TA has been undertaken by the Financial Sector

Reform and Strengthening Initiative (FIRST).28 FIRST is a trust fund created in 2002 with

a primary mandate of supporting countries to implement FSAP recommendations, with the

objective of promoting sounder and more inclusive financial systems (for more information,

see Box 3). Types of activities funded include, for example, the development of new laws and

regulations, the development of financial sector strategies, and assisting countries in

sequencing reforms as a follow-up to FSAPs or in line with the countries broader economic

development agenda. As shown in Table 6, since its inception, FIRST projects have

supplemented Bank budget-funded TA projects. There were 282 approved FIRST projects in

the period FY2009 to FY2014, with about 60 percent linked to FSAPs and ROSCs. Of these

linked projects, 84 percent were implemented by the Bank and the rest by the Fund.

28

Current donors are: DFID, GTZ, IMF, Luxembourg, Ministry of Foreign Affairs of the Netherlands, SECO, and

the World Bank. CIDA and SIDA exited in 2014.

27

Table 6: FSAP Technical Assistance and FIRST follow-up

FY FSAP Follow-Up

TA

# Projects1

Cost

(in $ 000)

FIRST

# Projects

Amount

Committed

($ million)

FY01 2 110

FY02 3 254

FY03 14 722

FY04 15 1,873

FY05 5 150

FY06 6 459

FY07 5 204

FY08 4 235 16 4.1

FY09 8 980 13 2.7

FY10 2 169 16 2.8

FY11 5 726 24 4.9

FY12 7 643 46 10.4

FY13 1 146 22 4.9

FY14 2 15 23 8.3

1 TA fully FSAP-related. It does not consider lending operations nor broader TA work with FSAP-

related components.

Source: WB Business Warehouse & FIRST Database.

28

34. Successful follow-up from FSAP recommendations depends on several factors:

i. The motivation for reform and the countrys capability to deliver it. The FSAP

and the ROSC programs have elements of both assessment and advisory work.

Successful implementation depends critically on the motivation and capacity of

country counterparts and on the political economy context. Motivation factors vary

widely, including (e.g., in EU accession countries) peer pressure. The desire and

pace of follow-up efforts also depend on whether there is sufficient political will

and whether there is resistance of vested interests intent on maintaining the status

quo.

ii. CMU engagement. There has been more integration of FSAP findings in Country

Assistance Strategies (CAS) / Country Partnership Strategies (CPSs)29 when country

29

Used in the previous country engagement model. The new country engagement model, effective July 1st, 2014,

is discussed in Section X.

FIRST's mission is to support growth and poverty reduction in low- and middle-income countries

through the promotion of stable, deep and diverse financial sectors.

FIRSTs specific objectives are to:

Fund technical assistance in the areas of financial sector regulation, supervision and

development in response to country demands, provide support to countries to strengthen their

financial systems and/or implement standards and codes in advance of Financial Sector

Assessment Programs (FSAPs) or Reports on Standards and Codes (ROSCs), and facilitate

prioritization and systematic follow-up of related recommendations.

Assist recipients in implementing prioritized action plans addressing financial sector

development and the sequencing of reforms (e.g., as a follow-up to FSAPs), and advise

clients, especially in low-income countries, on the implementation of financial sector

development programs.

Promote coordination in the delivery of financial sector technical assistance and capacity

building, drawing particularly on private sector expertise.

Support research on and the dissemination of best practices and useful tools related to

financial sector reform and development in low- and middle-income countries.

Work with international standard-setting bodies and other relevant partners to broaden the

base of providers supporting countries efforts to implement standards and codes in

accordance with FSAP and ROSC recommendations and strengthen their financial systems.

In its third phase since inception, FIRSTs business model has evolved to adapt to the changing needs

of the clients and the context post global financial crisis. Phase 3 includes a programmatic facility that

supports comprehensive multi-sector, multi-year country reforms programs, with more impactful

development outcomes.

Box 3: FIRST

29

sector coordinators (CSCs) from the financial sector are more integrated in country

management units (CMUs). In Latin America, the FSAP findings were

instrumental in informing the CPS of several countries (see Box 4 on Follow-up

Experiences in Latin America). On the other hand, in instances where the financial

sector is not fully reflected in some CASs or CPSs, this does not necessarily limit

the Banks capacity to provide assistance in the sector. Beyond financing support,

the availability of funding from CMUs for follow-ups plays a crucial role in

deepening the dialogue between the Bank and the authorities. The CMU is thus

critical in driving FSAP follow-up, ranging from assistance in the identification of

more specific sector reform priorities to fitting detailed FSAP recommendations

into existing Bank programs in the country. It also helps leverage other funds, such

as FIRST funds or from other donors.

iii. Coordination of FSAP team with follow-up implementation team. With the

right country conditions, sufficient political will and desire of the authorities,

follow-ups are more successful when FSAP teams provide sufficient input or hand-

over to other colleagues who will pick up the endeavor (see Box 5 on the Albania

FSAP).

In Latin America, examples of extensive follow-up after the FSAP have included both lending and nonlending

support. Some examples are:

1) Jamaica: The FSAP was concluded in May 2014. The authorities expressed their interest to

implement the recommendations, utilizing a lending operation as well as other complementary

nonlending instruments. The CMU has assigned the relevant budget for the operation, and a team is

now preparing an operation based on recommendations in the areas of financial inclusion and MSME

access to finance.

2) El Salvador: Initial follow-up was focused on technical assistance on stability-related issues, and

more recently it has been focused on developmental issues. These efforts are funded by FIRST.

Technical assistance has been on the areas of crisis simulation exercises, crisis preparedness,

insurance supervision, mobile payments, and regional capital market integration.

3) Colombia: Follow-up was designed using the programmatic approach and included technical

assistance on capital market development and oversight, financial sector strategy, oversight on

conglomerates, financial inclusion issues, and housing finance.

4) Mexico: After the FSAP, country authorities request technical assistance support on insurance

supervision, the annuities market, a program for risk-based supervision. Based on FSAP

recommendations, authorities also recently approved the Financial Reform Law, and the Bank is

helping in the implementation.

These follow-up efforts are mostly funded through Bank budget, FIRST, and in some cases, through other trust

funds and reimbursable advisory services (RAS).

Box 4: Successful follow-up experiences in Latin America

30

VI. OFF-SITE MONITORING AS A COMPLEMENT TO FIELD WORK

35. The 2009 FSAP Review called for an enhanced off-site monitoring30 and analysis

to improve the continuity of monitoring and policy dialogue. This off-site component is

very important given the long intervals between updates of full assessments, which is on

average every five to seven years. The World Bank has been working on developing different

internal instruments including a global financial indicator panel database (FinStats), the

Financial Systems Monitor, the Global Financial Systems Watch, and a Country Watch List

(See Box 6 for more detailed descriptions of the products).

36. In 2010, the World Bank developed a comprehensive global financial indicator

panel database (FinStats) covering both developmental and stability dimensions. This

database is updated semi-annually and covers banks, nonbank financial institutions, and

markets. Along with it, the World Bank also created the FinStats benchmark model, which

allows for more effective cross-country comparisons to facilitate monitoring. The database and

benchmark model have an extensive user base in the WBG and the IMF and has been used in

various FSAPs and other financial sector diagnostic work.31

30

See 2009 FSAP Review: Building up the off-site work would be a way to enhance the effectiveness of on-site

reviews and leverage the Banks contribution as regards its cross-country experience.

31 Including Barbados, Brazil, Chile, Cambodia, Djibouti, El Salvador, Ghana, India, Malawi, Mozambique,

Oman, Papua New Guinea, Rwanda, South Africa, Syria, Tanzania, Vietnam, and Zambia.

Box 5: Albania FSAP

The Albania FSAP update conducted in FY2013 was an example of well-thought out synergies with other

work on the country. Of the full set of recommendations identified in the FSAP, the team selected a focused

set of priority and key recommendations. A subset of these priority recommendations was channeled to be

prior actions of a Development Policy Loan (DPL).

Of the remaining priority recommendations not covered by the DPL, three areas were identified as needing a

longer time and requiring more capacity-building public debt management, insurance, and pensions.

Assistance for these three areas was covered through FIRST projects. The FSAP team was instrumental in

providing information useful for the preparation of project proposals for the FIRST applications.

Policy dialogue with the authorities had begun way ahead of the FSAP. The coverage and horizon of FSAP

recommendations were strategically thought out when informing the DPL and FIRST projects. This helped

to maximize synergies and efficiency in assisting the authorities to implement the FSAP recommendations.

31

37. The Financial Systems Monitor is a key product to monitor global financial

market trends relevant for EMDE financial sectors, and complements regional

monitoring efforts. In the wake of the global financial crisis, EMDEs have been confronted

with various major external financial market developments, including the overhaul of the

global regulatory framework, international funding market volatility, the massive deleveraging

of international banks and the realignment of their business models, and the spillover effects of

extraordinary monetary policy in developed markets. Such developments have had profound

consequences for the financial sectors of WBG client countries and require on-going

monitoring, particularly as EMDEs become more integrated with the global financial system.

To meet these monitoring needs, the World Bank launched the Financial Systems Monitor at

the height of the European sovereign debt crisis at the end of 2011. The Monitor is an in-depth

analytical report on key global financial sector developments and emerging financial sector

policy issues relevant for financial sectors in World Bank client countries, and complements

the monitoring efforts done in the regions.

38. The Global Financial Systems Watch (GFSW) complements the Monitor by

getting out analysis quickly as market-moving events unfold. The GFSW highlights the

impact that emerging trends in global financial markets could have on WBG clients or

operations. Both the Monitor and GFSW are products that have been helpful to FSAP teams,

especially those working on countries widely exposed to the external financial environment.

39. A Country Watch List was launched in 2011 for a restricted readership to provide

a quick snapshot on countries with a vulnerable financial sector. This readership

comprises FSAP task team leaders and senior staff, including senior management, country

directors and managers. The Watch List content is prepared by Bank regional financial sector

champions in consultation with various staff and is updated regularly. The list is not meant to

be a complete list of countries currently in crisis, nor is it meant to predict that countries

exhibiting even severe vulnerabilities will move to a full blown crisis.

32

FinStats is a readytouse financial indicator tool that allows users to benchmark and compare financial

sectors over time and relative to other countries. It was created to meet the primary data and benchmarking

needs of financial sector policy makers and analysts in support of FSAPs and other diagnostic work. It

provides:

an Excel-based dashboard application that allows users to compare different countries, as well as

generate graphs and tables;

a database of 42 financial indicators covering banking, debt markets, equity markets, nonbank financial

institutions, leasing and factoring, over a long time series; and

a benchmark indicator methodology that adjusts for structural factors to create country-specific

statistical benchmarks.

FinStats is widely used by both WBG and IMF staff for a broad range of financial sector diagnostic work

(e.g. FSAPs, DPLs, flagship reports, technical assistance) and has been downloaded over 1,700 times since

its creation in 2010.

The Financial Systems Monitor is a periodic report produced by the F&M Global Practice complemented

by monitoring efforts in the regions, which monitors, analyzes, and assesses developments in global and

regional financial systems relevant for financial sectors in client countries. It provides a summary of

important global financial market developments; information on the financial condition of key financial

institutions and systems; credit rating actions; and important changes in the regulatory framework affecting

the institutions and financial systems. It also provides a discussion on the policy implications of these

developments and key takeaways for policymakers and the Bank.

The Global Financial Systems Watch (GFSW) is a monthly analytical report produced by the F&M Global

Practice highlighting policy events, emerging developments and vulnerabilities in global financial markets

that impact WBG clients or operations. The GFSW complements the Financial Systems Monitoring work in

the F&M Global Practice as it tries to get market intelligence and policy developments out quickly to

colleagues as events unfold. The GFSW

provides an high-level summary overview of the key developments in global financial markets and

systems and important changes in the financial regulatory framework that would be of relevance for the

WBG and its clients; and

highlights issues, risks, vulnerabilities and potential pressures to keep staff and management informed.

The Financial Systems Monitor and the GFSW appear consistently as top downloads on the F&M Global

Practice intranet and have produced various positive spillover effects, including the strengthening of

regional monitoring efforts; cross-regional seminars and BBLs; WBG contributions to global engagements

(e.g., G20, FSB); briefs and speaking notes for Bank senior management; the Global Financial

Development Report, and policy and research papers.

The Country Watch List is meant for a restricted readership. It provides a quick snapshot of the financial

sector issues of countries that meet the following criteria:

financial sector vulnerabilities exist;

these vulnerabilities are perceived to be growing, looking out two to three years;

the Bank has an existing engagement and/or a potential role to play in the countries' financial sector.

Box 6: Off-Site Internal Monitoring Products

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VII. BANK-FUND COOPERATION

40. An important vehicle for coordinating Bank-Fund work in issues related to the

financial sector is the Financial Sector Liaison Committee (FSLC). The Committee is co-

chaired by senior representatives of the Bank and the Fund; on the Fund side, its members

include staff from the IMFs Monetary and Capital Markets Department (MCM) and the

Strategy, Poli

the financial sector assessment program: addressing the...

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