Learning more from financial sector assessments
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The IMF-World Bank Financial Sector Assessment Program is designed to ferret out weaknesses in countries' financial systems and spur remedial actions. But has it been effective? And is the IMF making the most of its findings? The IMF's Independent Evaluation Office (IEO) recently reviewed this voluntary program and found the overall quality of the assessments high. But the report's chief author, David Goldsbrough, says the IMF needs to make better use of the messages that emerge from these assessments.
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In 1999, the IMF and the World Bank established the joint Financial Sector Assessment Program (FSAP) to strengthen their monitoring of countries' financial systems and enable them to provide better policy advice. To date, close to half of IMF members (85 countries) have completed or are close to completing an assessment. However, a significant number of countries of systemic importance or with potential financial sector weaknesses have not yet agreed to participate in the program or in updates after initial assessments have become outdated. The IMF's Independent Evaluation Office (IEO) recently reviewed the experience of the program, focusing on the role of the IMF. The IEO's David Goldsbrough, who headed the study, spoke to Elisa Diehl of the IMF Survey about the findings.
IMF SURVEY: The IEO found that the FSAP, overall, has improved the Fund's ability to conduct financial sector surveillance.
But it also found that the assessments have not been "mainstreamed" into the Fund's regular surveillance.What does that mean, and how can the problem be corrected?
GOLDSBROUGH: It means that the assessments have identified the problems that need correcting and that the FSAP reports to the IMF's Executive Board have captured these issues without too much loss of candor. But the Fund has tended not to absorb and use the reports' messages as much as it could. An Executive Board Article IV discussion is meant to serve as a strong peer review of countries' policies. Financial sector issues, unless a red flag is raised-and typically there isn't a major red flag-tend to play second fiddle.
Many FSAP mission leaders told us they could have said a lot more at the Board discussion if they'd been asked questions. All the information is in the report, but it has tended not to be picked up unless the Fund's Article IV report-its annual review of a country's economy-has given it prominence.
Also, if there were differences of views between the FSAP team and the area department team about FSAP findings, the area department's views prevailed. It's a question of internal incentives. If the country authorities are not convinced there's a problem and don't own the message coming out of the FSAP, the natural inclination is for area department staff to give the authorities the benefit of the doubt.
That may downplay the vulnerabilities too much. These are expensive exercises, and the Fund should make sure that the messages are fully absorbed.
IMF SURVEY: How should the IMF's financial sector surveillance work be distributed between financial sector assessments, including updates, and its Article IV reports?
GOLDSBROUGH: A financial sector assessment looks at everything in an...
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