Organization and Team Design for Stability Assessments
The issues are broadly similar to the case of development assessment discussed earlier. Exercising selectivity in the standards and sectors to be assessed in detail should be based on both the size of the sector and its likely systemic effect over the medium term. Often, even if the overall size of a sector (e. g., securities markets) is not significant, its linkages to key institutions, as well as its critical role in overall financial sector reform, may warrant a detailed assessment of the sector from a developmental perspective and may require a close attention to volatility and liquidity of the markets. The concern is to ensure medium-term stability in the course of financial market development, even though the size of the sector does not pose a threat to short-term stability.
Once a set of supervisory standards for detailed assessment has been chosen, some of the preconditions for effective supervision may be covered as part of detailed assessments
of infrastructure standards either by other specialists or by the sectoral assessors themselves, who should look into key elements of the infrastructure affecting the effectiveness of supervision and risks management. For example, instead of conducting detailed assessment of financial policy transparency, the sectoral expert could be asked to cover transparency practices of regulatory authorities dealing with that sector at a high level of aggregation. If, however, a decision were made to conduct a detailed assessment of monetary and financial policy (MFP) transparency, a separate staff member or expert should be assigned to work with the sectoral supervision experts to put together the detailed MFP transparency assessment.
It will normally be advisable to include in the team a financial economist—or a financial policy specialist with some quantitative background—to conduct macroprudential analysis and stress testing. It is important that sectoral supervision experts work closely with the economist in this exercise so that the risk profile is used to guide the depth of supervisory standards assessment and so that information from standards assessment helps to shape the design of macroprudential analysis.
For example, in systems with significant exposure to a specific risk factor (e. g., crossborder lending or borrowing that produces vulnerability to external shocks), the supervisory guidance on sovereign risk management and foreign exchange exposure management should be examined in depth. Similarly, when compliance with a particular supervisory core principle (e. g., connected lending) is weak, macroprudential analysis should pay particular attention to the level and distribution of loans to single customers and to “insider” loans and their evolution over time. Such close coordination of vulnerability assessment with standards assessment is critical to deriving a proper overall stability assessment.
