Update on the Imf's Work on Financial Soundness Indicators

STD/NAES/FA(2003)5

Update on the IMF's work on Financial Soundness Indicators

IMF Statistics Department

At the meeting of the OECD’s Working Party on Financial Statistics in October 2002, Mr. Heath updated the Working Party on the IMF’s work on Financial Soundness Indicators (FSI). This note updates the work since that time. There have been three main developments.

Draft Compilation Guide on Financial Soundness Indicators (Guide)

In March 2003, the IMF posted the draft Guide on its external website for a four month comment period. This period has now ended and IMF staff are preparing a revised draft Guide to be presented to an expert meeting on FSIs to be held at the end of October 2003. The draft is available at http://www.imf.org/external/np/sta/fsi/eng/guide/index.htm.

IMF Executive Board discussion on FSIs

In June 2003, the IMF Executive Board discussed progress on the work program for FSIs. IMF staff presented a paper (and background paper) on both the statistical and analytical work being undertaken and the way ahead. The paper is available at http://www.imf.org/external/np/sta/fsi/eng/2003/051403.htm.

Executive Directors welcomed the IMF’s on-going work on developing FSIs and the broad support provided by member countries, international organizations, and other standard-setting bodies in this exercise. They broadly endorsed the Guide’s conceptual framework. While fostering greater comparability remains an important medium term objective, Directors noted that FSIs inevitably differ from country to country due to differences in accounting and bank supervision rules and varying levels of financial sector development.

Directors welcomed the regional outreach seminars on FSIs (see below) and encouraged continued proactive consultations and outreach with experts from other international organizations, standard-setting bodies, and IMF member countries. They supported the idea of IMF staff conducting a coordinated compilation exercise for around 60 countries after finalization of the Guide. Also, they asked that consideration be given to the establishment of an IMF internet gateway in the medium term to provide a single entry point for accessing FSIs for all countries. Views differed on the merits of including FSIs in the SDDS.

Regional Outreach Seminars

To promote awareness of the FSI work in the IMF and to have an opportunity to listen to the views of country experts, IMF staff has begun a series of regional seminars on FSIs. The first seminars were conducted in Vienna, Austria and Frankfurt, Germany in April 2003 for European countries. Further seminars are planned for Brazil in October 2003, Tunisia in November 2003, United Arab Emirates in April 2004, and Singapore in July 2004.

Way ahead

Looking ahead, as mentioned above, FSI experts are meeting at end October 2003 in Washington D.C. to discuss the revised version of the draft Guide. Earlier that same week also in Washington D.C. the IMF and BIS are jointly hosting a conference on Real Estate Indicators and Financial Stability.

The plan is to finalize the Guide in early 2004 before commencing the coordinated compilation exercise.

ANNEX 1

Compilation Guide on Financial Soundness Indicators

Draft, March 2003

Contents

Chapter1 Introduction

Background

Some key aspects of the Guide

Structure of the Guide

Terminology

PART I: CONCEPTUAL FRAMEWORK

Chapter 2 Overview of the Financial System

Introduction

What is a financial system?

Financial corporations

Nonfinancial corporations

Households

General government

Nonprofit institutions serving households

Public sector

Financial markets

Payment system

Real estate markets

Chapter 3 Accounting Principles for Financial Soundness Indicators

Introduction

Definition of flows and positions

Time of recognition of flows and positions

Valuation

Residence

Domestic and foreign currencies, unit of account, and exchange rate conversion

Maturity

Chapter 4 Accounting Framework and Sectoral Financial Statements

Introduction

Accounting framework

Sectoral financial statements

Chapter 5 Aggregation and Consolidation of Data

Introduction

Defining terms

The aggregate residence-based approach

The consolidated-based approach

Applying consolidated group reporting to the needs of FSI data

Specific issues arising from the consolidated approach

Compiling consolidated sector-level data

Text Annex: Detailed specification of sector-level adjustments required

PART II: SPECIFICATION OF FINANCIAL SOUNDNESS INDICATORS

Chapter 6 Specification of Financial Soundness Indicators for Deposit-Takers

Introduction

Structural indicators

Financial Soundness Indicators

Chapter 7 Specification of Financial Soundness Indicators for Other Sectors

Introduction

Calculation of Financial Soundness Indicators

Other financial corporations

Non financial corporations

Households

Chapter 8 Financial Markets

Introduction

Interest rates

Security Markets

Text Annex: Structural indicators for financial markets

Chapter 9 Real Estate Price Indices

Introduction

Measuring real estate prices

Structural indicators of real estate markets

Constructing real estate price indices

PART III: COMPILATION OF FINANCIAL SOUNDNESS INDICATORS

Chapter 10 Compilation of FSI data: Strategic and Managerial Issues

Introduction

Strategic issues

Managerial issues

Chapter 11 Compilation of FSI data: Practical Issues

Introduction

Basic data sources

Other data requirements

Availability of data

Breaks in series

PART IV: DISSEMINATION AND DATA ANALYSIS

Chapter 12 Dissemination of FSI ratios and related data

Introduction

Dissemination practices

A framework for disseminating FSIs

Chapter 13 Peer Group and Descriptive Statistics

Introduction

Peer group analysis

Descriptive statistics

Appendices

I. Survey on the Use, Compilation, and Dissemination of Macroprudential Indicators

II. Summary of guidance for each Financial Soundness Indicator

III. Reconciliation between the Guide's methodology and national and commercial accounting

IV. Numerical examples

V. Glossary of terms for financial corporations

Bibliography

ANNEX 2

Financial Soundness Indicators

Prepared by the Staff of the Monetary and Financial Systems and Statistics Departments

May 14, 2003

Contents

Executive Summary

List of Acronyms and Abbreviations

Introduction
Review of the Work Program on FSIs Endorsed by the IMF Board
Development of an FSI Compilation Guide
Analytic Work Using the FSIs
Compilation Guide
Consultations on the Guide
Major Themes of the Guide
Completion of the Guide
Lessons on the Compilation and Use of FSIs
Survey of Data Availability and of Staff Reports
Experiences Using FSIs in FSAPs
Using FSIs within A Framework for Financial Stability Analysis
Framework for Financial Stability Analysis
Analysis of Linkages Among FSIs
Taking Account of Macro-Financial Linkages
The Core and Encouraged Sets of FSIs
Using Stress Testing to Support the Analysis of FSIs
Contribution of Standards Assessments to the Analysis of FSIs
Role of Information on the Financial Infrastructure
Encouraging Compilation and Dissemination of FSIs
Compilation
Dissemination
Proposals for Strengthening Surveillance Using FSIs-Next Steps
Analytic Work Developing FSIs
Integrating FSIs into Fund Surveillance
Priorities and Resource Requirements
Issues for Discussion

Text Tables

Financial Soundness Indicators: Core and Encouraged Sets
Reporting of FSIs on FSAPs, 1999-2003
Market Risk Stress Tests and FSIs on Sensitivity to Market Risk
Essential FSIs for the Life Insurance Sector
BCPs Containing Information Relevant to the Interpretation of FSIs
Financial Soundness Indicators: Proposed Revision to Core and Encouraged Sets

Figures

Analytic Framework for Financial Stability
Plot of NPLs to Loans Ratio and the Corporate Leverage Ratio

Boxes

The Consultative Process on the Guide
Modeling the Effect of Corporate Leverage on Asset Quality
Insurance FSIs
Using Interbank Stress Testing to Assess Systemic Risk