The International Monetary Fund (IMF) will further tighten and make its oversight of financial sectors worldwide more flexible. More attention will be paid to risks surrounding digitalisation, artificial intelligence, cryptocurrencies, cyber threats, climate change and the growing interconnectedness between banks and other financial institutions.
The IMF Executive Board completed a periodic review of the Financial Sector Assessment Program (FSAP) on September 3. The outcomes were announced on September 21.
Through the FSAP, the IMF examines the stability and resilience of the financial systems of member states. In emerging economies and developing countries, these assessments are generally conducted jointly with the World Bank. Since the programme was introduced in 1999, 416 assessments have been carried out in 161 member states, according to the IMF, covering virtually all financial assets worldwide.
According to the IMF, the international financial landscape is changing rapidly. Banks are increasingly connected with non-bank financial institutions and providers of financial infrastructure. At the same time, high public debt, geopolitical uncertainty, digitalisation and the rapid development of artificial intelligence are creating new risks.
Crypto-assets, including stablecoins, cyberattacks and climate-related financial risks will therefore also be given a more prominent place within supervision.
More oversight of key risks
The IMF therefore wants to make the FSAP more risk-focused and modular. This means that it will be determined more sharply in advance which components of a financial system pose the greatest risk and must therefore be examined more extensively.
The assessments will remain focused on three main areas: analysis of financial risks, policies through which financial stability is monitored, and the capacity of authorities to manage and resolve financial crises.
According to the Executive Board, there must be more scope to adapt the assessment to a country’s specific situation. At the same time, several directors warned that attention to new risks must not come at the expense of the traditional analysis of the stability of banks and other important financial institutions.
It must also be prevented that developing countries and emerging economies in particular are examined less extensively. The IMF therefore wants to develop clear criteria for determining which topics are given priority.
Stronger link with IMF country assessments
According to the IMF, recommendations from FSAP assessments must also be better integrated into the regular so-called Article IV consultations. During these annual assessments, the IMF evaluates, among other things, the economy, public finances and financial stability of member states.
Recommendations must also be made more concrete, better prioritised and feasible. Countries must be able to receive more time to implement reforms where necessary, when their institutional or financial capacity is limited.
The IMF also wants to make more analytical methods and technical guidelines public. The use of the digital iFSAP database, which collects published FSAP documents, will also be further expanded.
Criteria for systemically important financial sectors adjusted
Another important part of the reform concerns the way in which the IMF determines which countries or jurisdictions have a so-called Systemically Important Financial Sector, or SIFS.
Countries with a financial system of major international importance must periodically undergo a mandatory financial stability assessment.
In selecting them, the IMF wants to take greater account of, among other things, important financial market infrastructures, cross-border financial relationships and available data. In addition to fixed criteria, the professional judgement of IMF staff will also play a greater role.
Directors emphasise that this judgement must be evidence-based, applied in the same manner to all countries and regularly assessed by the Executive Board.
At the same time, the IMF wants to create scope for more voluntary FSAP assessments, so that countries not on the mandatory list can also be regularly reviewed extensively.
IMF wants to use artificial intelligence itself
Notably, the IMF not only wants to devote more attention to risks arising from artificial intelligence, but also wants to use AI more often itself to make supervision more efficient.
The Executive Board supports greater use of AI within the FSAP, but sets conditions. There must be clear safeguards for the review of analyses, accountability, data protection and confidentiality.
According to the IMF, the reforms are necessary to keep the Financial Sector Assessment Program effective in a financial system that is changing ever more rapidly. The organisation aims to identify new risks earlier, while maintaining the quality and reliability of financial supervision.
