This paper reviews quantitative tools of financial stability assessments under the Financial Sector Assessment Program (FSAP). A key focus of FSAPs is on methodologies to gauge risks on a system-wide level and propose mitigating measures. Therefore, the paper concentrates on the main elements of the FSAP’s macroprudential stress testing framework:(i) the interaction among solvency, liquidity, and contagion risks in the banking sector, (ii) the assessment of the health of nonbank financial institutions (NBFIs), their interactions with banks and their impact on financial markets, (iii) the assessment of the health of nonfinancial sectors and their links to the financial sector, and (iv) macroprudential policy analysis. The paper also reviews recent improvements in microprudential bank solvency stress testing—an important foundation for the macroprudential stress testing framework—and discusses new tools for emerging risks (climate change, fintech, and cyber).

This background paper reviews the development of the scope of financial stability assessments under the FSAP since the 2014 FSAP Review. The paper summarizes past experiences of such adaptation and observed trends with respect to the coverage of specific topics and then discusses possible directions to adjust the scope of future FSAPs over the next five years given the likely changes in the financial stability landscape. The paper also discusses collaboration with the World Bank as it pertains to the scope of financial stability assessments. It does not examine issues such as analytical approaches, participation, and resources, which are covered elsewhere in the FSAP Review.

A key criterion for judging the success of the Financial Sector Assessment Program (FSAP) is the extent to which the program has enhanced the IMF’s engagement with policymakers and influenced country policies. This reflects the fact that achieving one of the program’s key objectives—reducing the frequency and severity of financial crises—rests on its ability to encourage policy action by country authorities, either directly or through other bilateral and multilateral activities. The “traction” of FSAPs thus reflects the degree to which the program is seen as useful by the authorities and the effect it has in shaping the domestic policy agenda. And the impact that the FSAP may have on wider domestic and international audiences.

The Financial Sector Assessment Program (FSAP) Provides In-Depth Assessments Of Financial Sectors. FSAPs Are Usually Conducted Jointly With The World Bank In Emerging Market And Developing Economies And By The Fund Alone In Advanced Economies. Fsaps Provide Valuable Analysis And Policy Recommendations For Surveillance And Capacity Development. Since The Program’s Inception, 157 Fund Members Have Undergone Individual Or Regional Fsaps. In Recent Years, The Fund Has Been Conducting 12–14 Fsaps Per Year At A Cost Of About 3 Percent Of The Fund’s Direct Spending.

Developing a systemic liquidity stress testing tool is challenging due to data constraints and hard-to-model behavioral factors. There has yet to be a uniformly accepted model partly because the nature of systemic liquidity risks differs significantly across countries. This paper offers a simple Excel-based tool to assess the high-level impact of aggregate liquidity stress on the whole economy and gauge its spillover across banks, non-bank financial institutions (NBFIs), and non-financial economic sectors. It primarily uses the balance sheet approach (BSA) data—a sector-aggregate matrix of financial exposure by counterpart—that have become increasingly available for various economies with all income levels. The results can identify systemically important financial linkages to be analyzed further and help calibrate macroprudential measures and a liquidity support framework. When liquidity stress stems from capital outflows, the tool can enrich policy discussion based on integrated policy framework (IPF) and international reserve adequacy perspectives.

The coverage of risks has become more systematic since the Global Financial Crisis (GFC): staff reports now regularly identify major risks and provide an assessment of their likelihood and economic impact, summarized in Risk Assessment Matrices (RAM). But still limited attention is paid to the range of possible outcomes. Also, risk identification is useful only so much as to inform policy design to preemptively respond to relevant risks and/or better prepare for them. In this regard, policy recommendations in surveillance could be richer in considering various risk management approaches. To this end, progress is needed on two dimensions: • Increasing emphasis on the range of potential outcomes to improve policy design. • Encouraging more proactive policy advice on how to manage risks. Efforts should continue to leverage internal and external resources to support risk analysis and advice in surveillance.

Since the 2012 FSAP, Panama has significantly strengthened its institutional framework and instruments for macroprudential policy-making. Among other reforms, to strengthen the transparency of and accountability for macroprudential policy, the Superintendency of Banks of Panama (SBP) and the Financial Coordination Council (CCF) have made significant progress in implementing several of the recent high-priority IMF technical assistance (TA) recommendations. These include establishing a dedicated Macroprudential Policy Committee (CPMP), updating the SBP’s decision making process for macroprudential policy issues, drafting a macroprudential policy strategy document, improving public communication via the Financial Stability Report (FSR), and addressing data gaps. The CCF also made notable advancements in establishing its own Committee on Macroprudential Policy, developing member entities’ capacity on macroprudential policy, and gathering data.

Zambia faces a severe drought that has significantly impacted agriculture and electricity generation and affected a substantial share of the population, leading the President to declare it a national disaster emergency and plan a revision of the 2024 Budget. Despite these challenges, the government remains focused on supporting macroeconomic stability, restoring fiscal and debt sustainability, and addressing humanitarian needs. The government continues to work with its external creditors to restructure its debt in line with program parameters. While mobilizing external financing, exchange rate flexibility will help manage balance-of-payment pressures. Enhancing regulatory frameworks and financial oversight is crucial for financial stability and inclusion, with efforts to improve governance and advance structural reforms continuing to enhance growth.

After a number of critical setbacks and delays in the 16 months since program approval, the authorities have taken important corrective actions to address shocks to program objectives. Early tension around the authorities’ commitment to uphold the independence of the National Bank of Ukraine required a pause to assess policy continuity and to determine possible corrective actions. A prior action for this review and new commitments by the authorities provide a way forward in protecting a key policy pillar under the program. Similarly, adverse Constitutional Court rulings challenged the anticorruption framework in fundamental ways that required restoring its effectiveness before the review could proceed. In a push to make progress on delayed structural benchmarks, the authorities have recently met seven of the nine structural benchmarks set at the time of the program request.

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