Tuesday, September 28, 2010

India Part of the IMF’s Surveillance for the World’s Top 25 Financial Sectors

According to the IMF Executive Board the recent crisis has made clear the need for mandatory and regular assessments of financial stability for countries with large and interconnected financial systems. Economies with financial sectors that have the greatest impact on global financial stability are now required to undergo in-depth reviews of their financial health by the International Monetary Fund every five years. All of the IMF’s 187 member countries are already required to undergo an annual economic health check-up, known as an Article IV consultation. In addition, Financial Sector Assessment Program (FSAP) offers the opportunity to all member countries to undergo, on a voluntary basis, a comprehensive financial sector assessment. The financial stability component of the voluntary FSAP will now be a mandatory part of the IMF’s surveillance for the world’s top 25 financial sectors. Under the Fund’s existing legal framework, it is open to the Fund to require members with systemically important financial sectors to engage in regular mandatory financial stability assessments under Article IV while not requiring such assessments of other members. The mandatory financial stability assessments will comprise three elements: 1) An evaluation of the source, probability, and potential impact of the main risks to macro-financial stability in the near term, based on an analysis of the structure and soundness of the financial system and its interlinkages with the rest of the economy; 2) An assessment of each countries’ financial stability policy framework, involving an evaluation of the effectiveness of financial sector supervision against international standards; and 3) An assessment of the authorities’ capacity to manage and resolve a financial crisis should the risks materialize, looking at the country’s liquidity management framework, financial safety nets, crisis preparedness and crisis resolution frameworks.

For defining systemic importance for this exercise a conceptual framework was developed by the IMF, BIS, and FSB. This framework approaches systemic importance from both a domestic and a global point of view. It identifies the following three key concepts: (i) size, i.e., the volume of financial services provided by an individual financial institution or market; (ii) interconnectedness, i.e., the extent of linkages with other financial institutions or markets; and (iii) substitutability, i.e., the extent to which other institutions or markets can provide the same services in the event of the failure of part of the system. The methodology for identifying jurisdictions with systemically important financial sectors is a three-stage process that uses available financial data for the entire Fund membership. The results identify 25 jurisdictions with the most systemically important financial sectors, which cover almost 90 percent of the global financial system and represent almost 80 percent of global economic output. At present the countries, in order of ranking, are: United Kingdom, Germany, United States, France, Japan, Italy, Netherlands, Spain, Canada, Switzerland, China, Belgium, Australia, India, Ireland, Hong Kong, Brazil, Russian Federation, Korea, Austria, Luxembourg, Sweden, Singapore, Turkey and Mexico.

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