Countries in the IMF financial stability spotlight in 2022

The Financial Sector Assessment Program is a key pillar of IMF surveillance. It undertakes a deep-dive into potential systemic risks to financial stability, including by conducting “stress tests” to gauge the ability of financial institutions to withstand adverse shocks to the economy. FSAPs also evaluate the strength of supervisory and regulatory frameworks to mitigate risks, and the adequacy of crisis management tools and safety nets to handle threats that may materialize.

FSAPs can help make financial systems more resilient. In doing so, they consider country-specific features and tailor their analysis. The IMF assesses advanced economies itself and evaluates others jointly with the World Bank.

Many countries entered the pandemic with strong bank capital and supervisory frameworks. Nonetheless, as economies recover from the pandemic, uncertainties remain regarding the underlying state of banks and other intermediaries.

This year’s assessments address seven economies with systemically important financial sectors: Germany, United Kingdom, Mexico, Russia, Turkey and Ireland, which are reviewed every five years, and South Africa, which is assessed once every 10 years. The others, which requested the assessments themselves, are Colombia, Uruguay and the West African Economic and Monetary Union.

Colombia

The Colombian economy has a large and complex financial system dominated by conglomerates with significant presence in Central America. The FSAP will assess the soundness and resilience of banks to adverse economic shocks; perform interconnectedness and contagion analysis, corporate stress testing analysis, and explore transition risks arising from climate change. The assessment will also evaluate bank oversight, macroprudential policy, and safety-net arrangements. The World Bank will focus on the role of the state, competition in the financial sector, digital financial inclusion, insurance supervision, insolvency regimes and creditor rights.

Germany

Banks dominate the financial sector, which includes two globally systemic-lenders, a large insurer, and one of the largest global central counterparties. Europe’s largest economy enjoyed favorable economic conditions and strong buffers before the pandemic. The FSAP will assess the financial stability implications of structural vulnerabilities associated with low banking profitability and price misalignments in the real estate sector. It will analyze the risks of adverse economic shocks such as a global resurgence of Covid-19, inflationary pressures, and implications of any shift in market sentiment against some high-debt euro area countries. The FSAP will also assess the institutional framework for macroprudential policy and the strategy for setting policy tools; conduct targeted assessments of Germany’s banking and insurance regulation and supervision, financial crisis management arrangements, deposit insurance, and institutional protection schemes; and do a deep dive assessment of the systemic financial infrastructure. The FSAP will also profile climate transition risks, analyzing their impact on banks, and will cover regulatory aspects of financial technology.

Ireland

This financial system has grown significantly, especially since Brexit, with many international institutions increasing their presence. The market-based financial (MBF) sector, the largest component of the financial system, is now the second largest in Europe, behind Luxembourg. The authorities have strengthened the supervisory framework considerably since the 2016 FSAP. Cross-cutting themes include the post-Brexit landscape of the financial sector, climate change, and the gradual phasing out of extraordinary Covid-19 support. The FSAP will examine the effectiveness of supervision of banking, insurance, and MBF, conduct stress testing, assess the frameworks for macroprudential policy, and that of financial safety net and crisis management, and analyze interconnectedness of the MBF sector. The FSAP will also assess insolvency and creditor rights, given comparatively low collateral recovery rates in Ireland.

Mexico

Latin America’s second-largest economy is tightly integrated with global trade and finance. It benefits from large buffers in the banking system. The FSAP comes amid rising risks from continued pandemic disruptions and the possibility of a sharp tightening in global financial conditions or capital flow volatility. The assessment will examine the financial sector’s resilience, including to system-wide liquidity shocks, financial sector oversight and crisis management, and challenges and opportunities stemming from climate change, cyber security, and fintech.

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