IMF has issued a list of countries that are proven most stable economies in 2022.
The IMF’s Financial Sector Assessment Program is a critical component of its monitoring. It looks into possible systemic threats to financial stability, such as performing “stress tests” to examine financial institutions’ ability to absorb negative economic shocks. The efficiency of supervisory and regulatory frameworks in minimizing risks, as well as the sufficiency of crisis management tools and safety nets in coping with possible threats, are all assessed in FSAPs.
Financial system resilience can be aided by FSAPs. They adjust their analysis to take into account country-specific characteristics. The IMF evaluates industrialized economies and works with the World Bank to evaluate others.
Many countries had solid bank capital and supervisory structures when the pandemic hit. Nonetheless, as economies recover from the pandemic, questions about the condition of banks and other financial intermediaries linger.
The assessments this year focus on seven economies with systemically important financial sectors: Ireland, United Kingdom, Mexico, Russia, Turkey, and Ireland, which are examined every five years, and South Africa, which is reviewed every ten years. Colombia, Uruguay, and the West African Economic and Monetary Union are the other countries that have requested reviews.
The following FSAPs are set to end this year:
With numerous multinational organizations boosting their presence, this financial system has grown tremendously, particularly since Brexit. The major component of the financial system, the market-based financial (MBF) sector, is now the second largest in Europe, behind Luxembourg. Since the 2016 FSAP, the authorities have significantly tightened the supervisory structure. The financial sector’s post-Brexit picture, climate change, and the eventual phase-out of unprecedented COVID-19 support are all cross-cutting concerns. The FSAP will assess the effectiveness of banking, insurance, and MBF supervision, conduct stress testing, evaluate macro prudential policy frameworks, as well as financial safety net and crisis management frameworks, and investigate the MBF sector’s interconnection. Given Ireland’s low collateral recovery rates, the FSAP will also review insolvency and creditor rights.
The FSAP, as well as the results of the Article IV consultations, were discussed with national authorities in December. It recognized the need for quick policy responses at the start of the epidemic to restore market liquidity and keep financial stability. Since the 2008 Global Financial Crisis, the soundness of UK banks and insurers has improved, and they are well positioned to tackle near-term difficulties. The Financial Stability Assessment Program (FSAP) rated the financial stability framework as resilient and identified areas for further improvement. Many of these are worldwide in scope and necessitate international collaboration, such as the bridging of data gaps in the nonbank financial institutions sector. The FSAP emphasized the UK’s leadership in addressing future threats such as climate and cyber resilience, as well as the significance of maintaining financial stability objectives as the top priority.
Colombia’s economy is controlled by corporations with a substantial presence in Central America, and it has a vast and complicated banking sector. The FSAP will examine banks’ soundness and resilience to adverse economic shocks, as well as interconnection and contagion analysis, corporate stress testing analysis, and climate change transition risks. Bank monitoring, macro prudential policies, and safety-net arrangements will all be evaluated as part of the evaluation. The World Bank will concentrate on the government’s involvement, financial sector competitiveness, digital financial inclusion, insurance oversight, bankruptcy regimes, and creditor rights.
Germany’s financial sector is dominated by German banks, which include two worldwide systemic lenders, a significant insurer, and one of the world’s largest central counterparties. Prior to the epidemic, Europe’s greatest economy enjoyed favourable economic conditions and strong buffers. The financial stability implications of structural vulnerabilities associated with low banking profitability and pricing misalignments in the real estate industry will be assessed by the FSAP. It will assess the risks of negative economic shocks such as a global return of COVID-19, inflationary pressures, and the ramifications of any shift in market opinion toward any high-debt euro area nations. The FSAP will also perform focused assessments of Germany’s banking and insurance regulation and supervision, financial crisis management measures, deposit insurance, and institutional protection programs, as well as a deep dive examination of the systemic financial infrastructure. In addition, the FSAP will examine climate transition risks and their implications for banks, as well as regulatory issues of financial technology.
The second-largest economy in Latin America is intimately linked to global trade and finance. It benefits from the financial system’s substantial buffers. The FSAP comes as persistent pandemic disruptions, as well as the likelihood of a rapid tightening in global financial conditions or capital flow instability, pose increasing threats. The study will look at the financial industry’s resilience to system-wide liquidity shocks, financial sector oversight and crisis management, as well as climate change, cyber security, and fintech challenges and opportunities.
Uruguay has a small, open economy with a strongly dollarized financial system and a large presence of state-owned enterprises. The system has survived the pandemic thanks in part to the authorities’ significant policy support. The evaluation will focus on the financial system’s ability to withstand a pandemic comeback and a likely rise in global borrowing prices. It will assess the efficacy of bank supervision (in collaboration with the World Bank), the macroprudential policy framework, including dollarization measures, crisis-management mechanisms, and financial integrity. The World Bank will also pay attention to the role of the government and the prospects for further strengthening capital markets.
The Russian financial sector is dominated by banks, which are mostly state-owned and centralized. Increased economic sanctions, reliance on emissions-intensive exports, rapid credit expansion in riskier retail segments, and dominant banks developing non-core operations are all potential threats. The FSAP will look at how far macroprudential policy tools have progressed, as well as banking regulation and supervision, securities monitoring, and crisis management and resolution procedures. Bank solvency and liquidity stress tests, as well as the impact of various climate policy scenarios on the economy and banks, will be part of the systemic risk assessment.
Big cross-border banking firms, as well as a well-developed investment fund and insurance sector, make up Africa’s largest financial sector. The assessment will look at financial strength in the context of slowing economic growth and huge budget deficits, which are compounded by state-owned firms’ bad financial circumstances and the ongoing pandemic. Banking, insurance, and securities markets will be examined, as well as pension and cyber risk supervision, crisis management and resolution, fintech, financial inclusion, climate risk, and capital market development.
Turkey’s financial system, which is dominated by banks, has risen quickly in recent years. In the face of a tough macroeconomic environment, the FSAP will look into systemic vulnerabilities. It will look at the financial and corporate sectors’ resilience to shocks, as well as the interconnections between banks, corporations, and governments. The strength of banks supervision and regulation, the macroprudential framework, systemic liquidity management, the crisis management framework, and cyber threats will all be evaluated as well.