IMF to examine financial systems

The International Monetary Fund (IMF) yesterday announced that it will assess a range of financial systems this year, ranging from large ones such as China and Japan to small ones such as Guyana.

The IMF said the Financial Sector Assessment Programme is its principal tool for assessing countries’ financial stability and identifies weaknesses in a country’s financial system that could threaten its stability, as well as strengths that make the system resilient. The country stability assessments are tailored to analyse issues of particular interest or concern in each country.

In 2017, 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

Highlights for countries under review in 2017 include:

China

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.

Indonesia

Financial conglomerates play a dominant role in the financial system and the economy, and account for 70 per cent 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.

Japan

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.

Luxembourg

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.

Saudi Arabia

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.

Spain

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.

Zambia

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.

During the year, the IMF will assess the economies of Bahrain, Bulgaria, China, Guyana, India, Indonesia, Japan, Luxembourg, Netherlands, New Zealand, Saudi Arabia, Spain, Turkey and Zambia jointly with the World Bank.

In 2016, the IMF concluded assessments of the financial sectors in Belarus, Finland, Germany, Ireland, Lebanon, Madagascar, Mauritius, Mexico, Montenegro, Russia, Sweden and the United Kingdom.