The IMF and financial sector reform

4 December 2007 | Inside the institutions

While the World Bank has done a lot of work on financial sector reform (see Inside, Update 57), the IMF is also a key actor. Since facing criticism over its understanding of financial markets in the wake of the Asian financial crisis, the IMF has significantly increased its capacity for analysis of the financial sector. It focuses on both assessing the impacts of global and domestic financial markets on economies and on best practices in financial sector supervision.

While the Fund has increased its capacity to analyse private financial markets and the financial sector, this analysis has generally been poorly integrated into the IMF’s bilateral programmes and other global surveillance. To mainstream financial sector analysis, in 2006 the international capital markets (ICM) department, which handled international issues, was merged with the monetary and financial systems department (MFD), which used to work more closely with central banks and national financial supervisors.

The new department, monetary and capital markets (MCM), now employs approximately 250 people in Washington, with an additional 30 people employed as experts in different member countries. These country staff are usually donor-financed resident experts in low-income countries. MCM is the largest functional department at the Fund.

The MCM department is tasked with three things: providing technical assistance (TA) to IMF members, doing stand-alone analysis of global financial markets, and assisting with bilateral analysis of the financial sector of specific countries including as part of the joint Bank-Fund Financial Sector Assessment Programme (FSAP).

Technical assistance and capacity building account for almost half of the work of the MCM department. MCM provides more TA than any other department at the Fund, accounting for more than 26 per cent of IMF TA in fiscal year 2007, at more than 117 person-years. The Fund could not provide a breakdown of this assistance by region or country type. Because the IMF’s budget for TA is relatively small compared to some other agencies, it sometimes works jointly with the World Bank and donor-funded experts. Examples of MCM’s technical assistance activities in FY2007 include supporting Nigeria’s financial sector reform programme and helping the Philippines’ central bank strengthen its ability to identify the risks associated with complex domestic conglomerates.

In terms of global financial sector analysis, part of what the Fund calls “multilateral surveillance”, the IMF’s main output is the biannual Global Financial Stability Report (GFSR). The GFSR “assesses global financial market developments with a view to identifying systemic vulnerabilities.” It contains analysis of what the Fund considers to be the most important topics at the time and draws policy implications from the analysis. The smallest area of MCM work is analysis of individual country financial sectors. Most of this work is done through the FSAP. However, bilateral work is expected to grow over time as the IMF plans to incorporate more financial sector analysis into its regular economic oversight of individual countries done through annual Article IV reports or lending programme reviews.

IMF advice and analysis “does not rely on a particular strategy document but focuses on ongoing research and other analytical work that help identify financial sector vulnerabilities and gauge the resilience of its member countries’ financial systems to potential shocks.” Operational guidance notes, documents written by IMF management to interpret board decisions on Fund policy for IMF staff, are not publicly available in relation to the financial sector.

IMF work is largely driven by the set of standards and codes that the IMF considers best practice in the areas of transparency in monetary and financial policies, banking supervision, securities, insurance, payment systems, and anti-money laundering and combating the financing of terrorism. Assessment of adherence to these global codes is done through an FSAP. IMF TA seeks to help countries meet these codes as quickly as possible regardless of the level of the country’s development, though not by sacrificing the quality of implementation.

Complementary to the FSAP, the IMF statistics department led the effort to develop a set of financial soundness indicators (FSIs), inaugurated in 2001. FSIs are “indicators of the current financial health and soundness of the financial institutions in a country, and of their corporate and household counterparts”, for example a bank’s level of nonperforming loans compared to total gross loans or a corporation’s return on equity. The individual institution level indicators are summed up to create aggregate indicators for the whole economy. There are two sets of FSIs, core and encouraged, which cover banks as well as the corporate sector and non-bank financial institutions. The FSIs are designed to be comparable across countries to make it easier to assess whether a financial system is meeting the global norms.

Selected areas of MCM work

Central banking and financial market development Financial sector supervision and crisis management
Financial sector policy and strategy
Money and debt market development
Interbank markets
Securities and derivatives market regulation and development
Islamic Banking
Forex regulations and capital controls
Sequencing capital account liberalisation
Accounting and financial reporting standards
Financial sector supervision and regulation
Cross sector supervisory issues
Governance and Management of financial supervisory authorities
Stability assessment methodology
Risk assessment and stress testing
Problem bank resolution and restructuring
Supervision and regulation of offshore financial institutions
Governance of financial institutions and markets