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Risk Assessment And Oversight The FSAP Experience

Delve into the evolving complexities of financial risk assessment and oversight, exploring the implications for Basel II and the global oversight architecture. Learn about the challenges and crucial findings from the FSAP experience and its impact on financial stability.

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Risk Assessment And Oversight The FSAP Experience

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  1. Risk Assessment And Oversight The FSAP Experience David Marston Monetary and Financial Systems Department International Monetary Fund

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

  3. Financial intermediation continues to evolve— new complexities. Part I

  4. New dimensions • Capital Movements • Cross border activity • Conglomerates • Risk transfer

  5. Free flow of Capital Article VIII Acceptance, 1945–2004 Source: IMF, Annual Reports on Exchange Arrangements and Exchange Restrictions

  6. With increased cross border activity

  7. Often conducted via conglomerates Source: De Nicoló et al. (2003a), original data from Worldscope.

  8. Risks are increasingly managed off-balance sheet/ offshore

  9. While still concentrated in G-7, growing in all regions

  10. 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

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

  12. Risk Assessment Architecture Part II

  13. Stake holders have responded to the increased complexities • Standard setters—a host of initiatives • Basel II • BCP revision • Solvency II • Insurance Core principles • Insurance Cornerstones • IOSCO Core Principles • FATF 40 + • IASB—fair value etc

  14. Stakeholders • National Authorities—catching up • Increased number of Unified Supervisory agencies • Capacity building—early warning systems; consolidated supervision; stress testing • Cross border information sharing—MOUs • Increased participation in international standard setting.

  15. 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

  16. 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.

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

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

  19. Part III FSAPs—what have we found regarding Risks and Oversight arrangements?

  20. FSAP results-old issues/new dimensions • Credit Risk= 95% • Governance= 67% • Supervisory Resources=50% • Conglomerates= 30%

  21. 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.

  22. 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 conglomerates—Now more than consolidated supervision; safety net complications arise vis-à-vis branches versus subsidiaries; TBT fail; TBT supervise issues

  23. 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

  24. Main Findings – Banking (BCP Assessments)

  25. Main Findings – Insurance (ICP Assessments)

  26. Main Findings – Securities (IOSCO CP Assessments)

  27. Part IV—Basel II implications Supervisory challenges remain vis-à-vis existing risks A strong supervisory process and framework is vital to Basel II readiness

  28. Basel II Requirements

  29. Relevant CP’s 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

  30. Issues going forward • Interest in Basel II is an opportunity to strengthen supervisory frameworks and risk management. • Prioritization—strengthening Pillar II is critical • Effective collaboration—home/host;understanding national discretion; learning from each other

  31. Thank you

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