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Financial Sector Assessment Program
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| An IEG Evaluation |
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 | Financial crisis often lead to sharply worse conditions in a country; and financial sector development is linked to poverty reduction and improved growth. IEG found that the FSAP is a good-quality diagnostic tool and that the program’s objectives of financial sector stability and development are essential and relevant to the Bank’s and IMF’s missions. |
The Financial Sector Assessment Program (FSAP) is a major initiative, undertaken jointly by the WB and the IMF, in response to the financial crises of the late 1990s. The FSAP was set up in May 1999, initially as a 12-country pilot exercise consisting of diagnostic studies designed to facilitate early detection of financial sector vulnerabilities and identification of financial sector development needs, as well as support an improved and coordinated dialogue among the national authorities, the Bank, and the IMF.
As of October 2005, more than 109 country assessments and 18 updates have been completed or are ongoing, and the program has involved a significant deployment of resources at the Bank.
The FSAP is predicated on the assumption that the objectives of financial sector stability and development are essential and relevant to the Bank's and IMF's missions. Reviews of economic data and literature have confirmed that financial sector crises often lead to sharply increased poverty and reduced growth, and that there is a link between financial sector development and poverty reduction and improved growth. Hence, this evaluation confirms that the program's objectives are relevant to the Bank's mission. |
| Findings and Recommendations |
Findings
The evaluation found that the FSAP is a good-quality diagnostic tool. Joint Bank and IMF cooperation has allowed an integrated approach toward identifying financial sector vulnerabilities and development needs, and has expanded the depth and quality of the skills base. The assessments, however, fall short in prioritizing recommendations and integrating the findings and recommendations of the assessments into overall country programs. The report also looks at the following aspects of the FSAP:
- Quality. The overall diagnostics were generally good, but the quality and appropriateness of coverage of specific sectors was uneven.
- Prioritization of recommendations was weak, which adversely affected the impact of the overall program.
- Teams. The quality of teams was rated quite highly; 93 percent of country authorities responding to a survey on the FSAP expressed satisfaction with the team's skills.
- Candor. The candor of the reports was generally satisfactory, although there have been some instances where the government or management has pressured staff to soften the written messages, or where the staff has chosen to convey key messages through presentations and discussions, rather than through written reports.
- Informing the Executive Board. The current practice of informing the Executive Board of the Bank. Financial Sector Assessments (FSAs) are delivered long after mission work is completed. In addition, because FSAs are summaries of the full assessments, sometimes the full context and nuances of the report have been inadequately conveyed.
- Impact. In the client countries, authorities praised the FSAPs for expanding their knowledge of financial sector vulnerabilities and improving technical abilities. The authorities also found the assessments useful for providing an "independent evaluation" of the system, and for contributing to the policy dialogue within the country.
- Impact within the Bank. IEG found that only 42 percent of the assessments had a significant impact on the Bank's country programs or dialogue, as manifested by important changes or strengthening.
- Impact on the IMF. One impact of the program has been an improvement in IMF surveillance through significantly deeper understanding of the financial sector in specific countries, improved articulation of policy recommendations and discussions with authorities, and help in supporting policy and institutional changes in the countries.
- Partners. The FSAP has not had as strong an impact on other donors' and institutions' programs.
- Country selection. The voluntary nature of the program limits the program's overall effectiveness in identifying systemic risks. However, there is a strong consensus among authorities and staff that the voluntary nature of the program should be maintained.
- Efficiency. Bank resources could be more efficiently used if more time were spent on appropriate country selection and better tailoring of coverage.
MORE >Recommendations - Sharpening country selection and the scope of assessment,
- Integrating the FSAP into a full reform program,
- Informing the Executive Board much sooner, and
- Sharing and disseminating the knowledge gained.Â
MORE >[return to top] |
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Select Countries with Financial Crisis: Changes in Poverty Rates and GDP | | Â Â | Â Poverty rates | Â | | Countries | Crisis year | Precrisis | Postcrisis | Real change in GDP
(%, year following crisis) | Mexico | 1995 | 23.32
(1994) | 28.60
(1996) | -6.2 | Indonesia | 1998 | 25.7
(1996) | 37.0
(1999) | -15.4 | Korea, Rep. of | 1998 | 11.4
(1997) | 23.2
(1998) | -10.6 | Thailand | 1998 | 12.5
(1996) | 15.7
(1999) | -13.7 | Malaysia | 1998 | .04
(1997) | 0.11
(2000) | -12.7 | Argentina | 2002 | 37
(2001) | 58
(2002) | -10.9 |
Source: Argentina data are from the World Bank 2003a. For other countries, "crisis year" is the peak crisis year, as determined in Caprio and Klingebiel 2003; Poverty rates are from World Bank 2000a, annex 1 and "Mexico: Country Assistance Strategy (late 1990s), and use the poverty levels as defined in those papers. GDP growth numbers are from Claessens, Kingebiel, and Laeven 2001. Different intervals are used for pre- and postcrisis poverty rates since data are not available for each year.
| Summary of Results of Detailed Reviews | | Criteria | Â Mean score
(on a scale of 1-4) | Percentage of ratings indicating
some problems (i.e., ratings of 3 or 4) | Coverage of overall financial sector | 2.38 |  26 | Balance of development and stability issues | 2.02 |  16 | Banking | 1.76 | 7 | Insurance | 1.73 | 29 | Capital Markets | 1.78 | 19 | Assest Management/Pensions | 2.29 | 58 | Market Infrastructure | 1.98 | 31 | Clarity and candor of findings | 2.16 | 16 | Importance and consequence well explained | 2.25 | 26 | Clarity of recommendations | 1.93 | 11 | Useability of recommendations | 2.08 | 21 | Prioritization of recommendations | 2.62 | 53 |
Source: IEG evaluations. "1" is the highest rating, "4" is the lowest rating. See endnote 1 for more detailed information on the ratings. | Â Reasons for Noncandid FSAP Recommendations 
Source: IEG/IEO survey, question 8, includes multiple responses from mission leaders.
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