Financial Sector Assessment

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.

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Financial Sector Assessment

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