Report of the Committee on Financial Sector Assessment (CFSA) 2009

REPORT FRAMEWORK

The financial assessment process is based on three, mutually reinforcing pillars: Pillar I (Financial stability assessment and stress testing), Pillar II (issues relating to the institutional and legal infrastructure) and Pillar III (assessment of financial standards and codes).

What tests are performed as part of this financial sector assessment? One such test assesses how the country’s financial institutions would handle shocks. This is done through “stress tests” that show whether the individual institutions and the banking system would remain solvent in the face of interest rate risks or changes in credit quality. The assessment also looks at indicators—called “financial soundness indicators” –such as capital adequacy, asset quality and profitability ratios, that signal the risks and vulnerabilities in the system.

The second pillar looks at the development issues of financial sector in particular focusing upon the legal, liquidity, governance and payment infrastructure to assess the strength and adequacy of financial infrastructure.

The third analytical component looks at the observance of internationally accepted standards, such as the Basel Core Principles for Effective Banking Supervision, the IOSCO Objectives and Principles of Securities Regulation and the IAIS Insurance Supervisory Principles, the IMF codes of Good Practices for Transparency in Monetary and Financial Policies and Fiscal Policies, etc. This allows the regulatory authorities and the government to compare the country’s regulatory, supervisory and other practices against best practices else where.

To conduct the independent and impartial assessment, four independent Advisory Panels were appointed. The reports put forward by these Advisory Panels, inter alia identified gaps in adherence to international standards and codes and suggested possible policy actions. These advisory panel reports were also peer reviewed by reputed international experts in the field. These independent reviews have further ensured an objective and impartial assessment.

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