Academic journal article The Reserve Bank of New Zealand Bulletin

Financial Sector Assessment Programme

Academic journal article The Reserve Bank of New Zealand Bulletin

Financial Sector Assessment Programme

Article excerpt

New Zealand is scheduled to undergo an assessment by the International Monetary Fund (IMF) later this year under the Financial Sector Assessment Programme (FSAP). The FSAP is a relatively new surveillance and assessment programme developed and jointly managed by the International Monetary Fund and World Bank. It is designed to assess the potential vulnerabilities in a country's financial system and to evaluate the adequacy of financial sector regulation and supervision, using international standards and codes as benchmarks, as well as a number of other analytical tools. There is an expectation that all IMF member countries will undergo an FSAP assessment periodically. New Zealand has volunteered to be assessed this year.

This article explains the FSAP and discusses the key elements within it. Later this year and in 2004, the Bulletin will include articles that draw from our experience of the FSAP and the work being undertaken by the Reserve Bank and other government agencies in preparation for it. Indeed, the article on the New Zealand payment system in this issue of the Bulletin is one of these, and makes considerable reference to FSAP-related work in the area of the payment system.

1 Introduction

Later this year, New Zealand's financial system will be assessed by a team of external assessors led by the International Monetary Fund (IMF). (1) This will be conducted under an IMF/World Bank surveillance programme -- the Financial Sector Assessment Programme (FSAP). It will involve a comprehensive evaluation of the New Zealand financial system, including an assessment of how resilient the financial system is to economic shocks and the nature of financial sector regulation and supervision.

This article explains the objectives and structure of the FSAP and what it is likely to involve for New Zealand. Later in the year and next year, the Bulletin will contain articles that refer to, and draw from, various aspects of the FSAP evaluation of New Zealand. This article therefore lays the groundwork for those future articles and represents another step that the Bank is taking to place greater emphasis on, and give more prominence to, financial stability issues.

2 What is the FSAP?

The FSAP is a relatively new surveillance programme developed and led jointly by the IMF and World Bank. It was initiated in 1999 in the aftermath of the Asian Crisis as a mechanism to assess countries' financial systems, focusing particularly on the adequacy of their regulatory frameworks for promoting financial stability and assessing potential sources of vulnerability in their financial systems. In the latter respect, the FSAP seeks to assess how vulnerable a country's financial system might be to economic shocks, such as a major fall in the exchange rate, a large increase in interest rates, or a sharp and prolonged contraction in the economy.

The FSAP was developed in recognition that there are important and multi-faceted connections between a country's financial system and its economy. An unstable financial system can pose a major threat to economic stability. Equally, economic shocks can trigger or deepen a financial crisis. Moreover, as financial systems and economies of different countries are becoming increasingly interconnected, there is a growing risk that instability in one financial system may trigger or exacerbate instability in another. Ultimately, it is hoped that the FSAP, in combination with international standards and codes and a range of other international financial reforms, will encourage the development of more robust financial systems and reduce the risk of future financial instability and contagion.

Although the FSAP is not currently a mandatory programme for countries that are members of the IMF, there is a clear expectation that every member country will undergo an ESAP assessment approximately every five to seven years. In the period since its inception in 1999, more than 60 countries have undergone or are currently undergoing FSAP assessments (see box 1). …

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