IMF Broadens Financial Surveillance
In September 2010, in response to the global crisis, the IMF’s Executive Board agreed the world’s top 25 financial sectors would undergo a mandatory financial check-up every five years. To date, 24 out of the 25 countries or jurisdictions have undergone or will soon undergo their assessments.
Last December, the IMF Board reviewed the methodology that determines whether a country’s financial sector is systemically important. In light of the experience since the crisis, it agreed to place even more emphasis on the connections between financial sectors and institutions, expand the coverage of cross-border linkages to cover not only banking but also equity and debt exposures, and capture the potential for pure price contagion. Based on these revamped criteria, the IMF added the four countries to the original 25.
“The experience of the global financial crisis and the government debt crisis in Europe has shown that events in relatively small countries that are highly connected to others can have significant spillovers,” said Dimitri Demekas, an assistant director in the IMF’s Monetary and Capital Markets Department, which manages the Financial Sector Assessment Program. “Their impact on the global financial system often far exceeds the size of their financial sector or their economy.”
Of the four new additions to the list, Finland and Poland had financial reviews in 2010 and 2013 respectively. Denmark’s review will take place in 2014 and IMF experts plan to visit Norway in 2015.
Spotting trouble on the horizon
Since 1999 the IMF has monitored countries’ financial sectors on a voluntary basis through the Financial Sector Assessment Program. In developing and emerging market countries, the World Bank participates in these assessments, focusing on long-term financial development issues.
In the context of these financial sector assessments, the IMF examines three key components in all countries:
• the soundness of banks and other financial institutions, including stress tests;
• the quality of financial market oversight in banking and, if appropriate, insurance and securities; and
• the ability of supervisors, policymakers, and financial safety nets to respond effectively in case of a crisis.
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