Risk%20Assessment%20And%20Oversight%20%20%20%20%20%20The%20FSAP%20Experience

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Risk Assessment And Oversight The FSAP
Experience

• David Marston
• Monetary and Financial Systems Department
  International Monetary Fund

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Contents

• Part I
• Financial sector evolving.
• Part II
• Evolving risk assessment architecture
• Part III
• FSAPs what have we found?
• Implications for Basel II

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Part I

• Financial intermediation continues to evolve
• new complexities.

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New dimensions

• Capital Movements
• Cross border activity
• Conglomerates
• Risk transfer

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Free flow of Capital
Article VIII Acceptance, 19452004
Source IMF, Annual Reports on Exchange
Arrangements and Exchange Restrictions
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With increased cross border activity
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Often conducted via conglomerates
1995 1995 1995 2000 2000 2000
Size Average Asset Size (bn US) Conglomerates () Conglomerates () Average Asset Size (bn US) Conglomerates () Conglomerates ()
Size Average Asset Size (bn US) Number Assets Average Asset Size (bn US) Number Assets
Top 500 41.8 72.1 646.3 59.6 80.1
Top 250 310.79 69.2 80.7 657.7 72.2 83.6
Top 100 340.37 85.0 86.8 699.0 89.0 91.7
Top 50 379.72 88.0 89.4 769.5 92.0 94.2
Source De Nicoló et al. (2003a), original data
from Worldscope.
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Risks are increasingly managed off-balance sheet/
offshore
















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While still concentrated in G-7, growing in all
regions
Distribution of OTC derivatives Market Activity Distribution of OTC derivatives Market Activity Distribution of OTC derivatives Market Activity Distribution of OTC derivatives Market Activity Distribution of OTC derivatives Market Activity
    Apr-98 Apr-01 Apr-05
G7 G7 1247 1389 2398
Other Regions Other Regions      
  Latin America 4 8 9
  Middle East 2 3 4
  Asia Pacific 187 191 287
  Africa 6 8 11
  Europe 239 264 378
Total Total 1685 1863 3087
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Other structural issues exist

• Dollarization/ euroization is increasing
  especially in Central America and Central and
  Eastern European countries.
• State Banks still a feature of the landscape

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Percent of Bank Assets Government Owned
Source Barth and Nolle (2003)
O Comptroller of the Currency Administrator of
National Banks
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Part II

• Risk Assessment Architecture

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Stake holders have responded to the increased
complexities

• Standard settersa host of initiatives
• Basel II
• BCP revision
• Solvency II
• Insurance Core principles
• Insurance Cornerstones
• IOSCO Core Principles
• FATF 40
• IASBfair value etc

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Stakeholders

• National Authoritiescatching up
• Increased number of Unified Supervisory agencies
• Capacity buildingearly warning systems
  consolidated supervision stress testing
• Cross border information sharingMOUs
• Increased participation in international
  standard setting.

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IFIs have also responded

• Asian Crises of 10 years ago was defining period.
• FSAP introduced in 1998 and has become the main
  instrument of Fund financial sector surveillance

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What is an FSAP?

• A comprehensive diagnostic framework aimed at
• Identifying financial system strengths,
  vulnerabilities and risks.
• Assessing observance and implementation of
  relevant international standards
• Analyzing overall Financial Stability
• Helping identify appropriate policy responses.

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Country Participation

• 120 countries - 81 complete, 19 under way and 20
  planned
• 14 updates requested, 10 initiated

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IFIs in the Global Oversight Architecture
FATF
OECD
IOSCO
BCBS
IMF/WB
FSAP
IAIS
IMF MEMBERS
IASB
IFAC
CPSS
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Part III

• FSAPswhat have we found regarding Risks and
  Oversight arrangements?

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FSAP results-old issues/new dimensions

• Credit Risk 95
• Governance 67
• Supervisory Resources50
• Conglomerates 30

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• Credit Risk
• In 95 of FSAPs credit risk remains the primary
  source of vulnerability direct FX risk is
  minimal though, interest rate risks important in
  some countries
• The nuance to credit risk is that unhedged credit
  risk is a major solvency issues especially
  significantly dollarized/euroized countries.

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FSAP results

• Governance
• Nuance to Governance now related to problems
  associated with corporate governance in SOEs.
• Conglomerates
• Conglomerate issues 30 percent of FSAPs called
  for increased supervisory attention to
  cross-ownership and conglomeratesNow more than
  consolidated supervision safety net
  complications arise vis-à-vis branches versus
  subsidiaries TBT fail TBT supervise issues

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• Supervisory resources
• Independence and accountability of supervisors
• Supervisory data and reporting systems especially
  for effective consolidated supervision and to
  assess risk management practice in banks
• Adequacy of AML/CFT frameworks

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Main Findings Banking (BCP Assessments)
Market Risk
Liquidity, Interest Rate and Operational Risk
Country Risk
Consolidated Supervision
Anti-Money Laundering
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Main Findings Insurance (ICP Assessments)
Corporate Governance
Derivatives and OBS
Internal Controls
Market Conduct
Investment/Risk Mgmt Strategy
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Main Findings Securities (IOSCO CP Assessments)
Independence of Regulators
Enforcement Mandate
Resources and Capacity
Secondary Markets Operation Rules
Bankruptcy Procedures for Intermediaries
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Part IVBasel II implications

• Supervisory challenges remain vis-à-vis
  existing risks
• A strong supervisory process and framework is
  vital to Basel II readiness

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Basel II Requirements
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Relevant CPs for Basel II

• observance
• Advanced Developing Transition
• Capital adequacy 95 55 74
• Assets evaluation and provisions 84 58 79
• Country risk 84 24 32
• Market risk 95 31 42
• Other risks 95 36 47
• Consolidated Supervision 95 27 16
• Information requirements 99
  67 73
• Formal supervisory powers 89 53 64
• AVERAGE 92 44 54

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Issues going forward

• Interest in Basel II is an opportunity to
  strengthen supervisory frameworks and risk
  management.
• Prioritizationstrengthening Pillar II is
  critical
• Effective collaborationhome/hostunderstanding
  national discretion learning from each other

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• Thank you