The IMF will assess a range of financial systems in 2017: large ones such as China and Japan, medium-sized ones like Luxembourg, Spain, and Turkey, and small ones such as Guyana and Zambia.
The Financial Sector Assessment Program remains the IMF’s principal tool for assessing countries’ financial stability. It identifies weaknesses in a country’s financial system that could threaten its stability, as well as strengths that make the system resilient. The IMF tailors country stability assessments to analyze issues of particular interest or concern in each country.
In 2017, IMF teams of experts will focus on systemic risks, the health of banks, and contagion and spillover risks. For each economy, the IMF will make policy recommendations about how to:
- Strengthen the monitoring of risks to the financial system as a whole
- Improve financial oversight and the macroprudential framework for financial system safety, and
- Prepare for stressful financial conditions
Some highlights for countries under review in 2017 include:
Since the global financial crisis, China’s growth has relied increasingly on credit, especially in the corporate sector, including state-owned enterprises, and in recent months also on mortgage lending. Tensions between sustaining growth and the need to contain indebtedness, together with certain financial sector innovations, have led to increased financial sector complexity and the risk of gaps in supervision. The IMF will examine these issues from a systemic point of view.
Financial conglomerates play a dominant role in the financial system and the economy, and account for 70 percent of the assets of financial institutions. The IMF will look closely at the oversight of financial conglomerates, and seek to identify areas for improvement in the newly implemented integrated supervisory framework, and the recently adopted law on crisis management and resolution.
Since the 2012 assessment, the profitability of financial institutions’ domestic operations has weakened. This has prompted large banks and insurers to expand overseas in a search for higher yields, and smaller banks to increase their exposure to real estate and small and medium-sized enterprises. Against this background, the IMF will assess vulnerabilities associated with the international expansion of banks and insurers, as well as longer-term prospects for the financial sector in the context of demographic changes and low growth.
Home to a key international central securities depository, Luxembourg has the world’s second largest investment fund industry, and the profitability of its banking industry is tied to the general health of these funds. To address some of the systemic vulnerabilities, the IMF will use stress tests and spillover analysis to assess the ability of Luxembourg’s financial institutions to absorb liquidity and/or solvency shocks.
An extended period of low oil prices is affecting the Saudi economy. Although the bank-dominated financial sector has so far been resilient, this episode is an opportunity to complete the financial reform agenda and make improvements in the functioning of the interbank market that would also help banks diversify their funding sources over the longer term. These are the key issues the IMF will explore with officials.
The assessment will look at progress and improvements made since the crisis. It will tackle banks’ ability to adjust to low profits due to their business models, and their ability to manage the post-crisis recovery. The IMF will also examine the emerging needs of the institutional framework, and apply enhanced methods to capture cross-border financial shocks, and account for the linkages between the economy and the financial system as a whole.
Against a backdrop of declining economic growth due to sharply lower copper prices and an unsustainable fiscal deficit, the IMF will focus on how to maintain financial stability, including the adequacy of supervisory resources. It will also examine the adherence to international norms of the legal and regulatory framework for financial sector oversight.
Economies whose financial stability the IMF will assess during 2017:
- New Zealand
- Saudi Arabia*
*These economies will be assessed jointly with the World Bank.