IMF completes FSAP review to sharpen financial sector risk surveillance

Highlights

On September 3, the IMF Executive Board completed its periodic FSAP review, adapting the program for tighter financial interconnections, digitalization, and emerging risks.
Directors endorsed a risk-based, modular FSAP approach with stronger diagnostics and expanded focus on nonbank institutions, AI, crypto assets, cyber threats, and climate risks.
Reforms include closer integration with Article IV surveillance, methodology updates for identifying systemically important sectors, and expanded use of AI with safeguards for efficiency and data protection.

Reforms target emerging financial risks

As reported by the International Monetary Fund, its Executive Board completed the periodic review of the Financial Sector Assessment Program on September 3, assessing how the framework should adapt to a financial system shaped by tighter interconnections, digitalization and new sources of instability.

The FSAP provides in-depth reviews of financial sectors and feeds into Fund surveillance. In emerging market and developing economies, assessments are usually conducted jointly with the World Bank, while in advanced economies they are carried out by the IMF alone. Since the program began in 1999, 416 assessments have been completed across 161 Fund members, covering nearly all global financial assets.

The latest review builds on earlier changes, including the 2010 decision requiring jurisdictions with systemically important financial sectors to undergo financial stability assessments as part of Fund surveillance. The IMF says later reviews expanded the list of such jurisdictions, strengthened links with Article IV surveillance, promoted more flexible use of international standards and improved tools for assessing systemic risk. Following the 2021 review, the program also widened coverage of emerging risks and introduced a two-tier schedule for mandatory assessments.

Executive Directors back a more risk-based and modular approach, with stronger initial diagnostics to set the scope of reviews across risk analysis, policy frameworks and crisis management capacity. They also support greater emphasis on systemwide and emerging risks, including those tied to nonbank financial institutions, financial market infrastructures, artificial intelligence, crypto assets, cyber threats and climate risks, while cautioning against weakening core financial stability analysis.

Surveillance impact and assessment coverage

Directors also support measures to strengthen the program's traction by integrating findings more closely with Article IV surveillance and capacity development. They favor recommendations that are more clearly prioritized, sequenced and actionable, with implementation timelines tailored to country conditions, and they welcome wider publication of analytical methods, technical manuals and materials through the iFSAP database.

Most Directors endorse revisions to the methodology used to identify jurisdictions with systemically important financial sectors, saying a more agile approach should align coverage more closely with evolving risks. They note that staff judgment, including on systemically important financial market infrastructures and cross-border data gaps, can help address methodological limits, but they stress that such judgment must remain evidence-based, evenhanded and subject to periodic Board review.

The review also seeks to rebalance resources between mandatory and voluntary assessments so the IMF can preserve the program's global reach while responding faster to new threats. Directors broadly support that objective and say the reforms help keep the FSAP fit for purpose, while also backing greater use of AI to improve efficiency under safeguards for validation, accountability, data protection and confidentiality.

In our earlier article on AI adoption and oversight in financial institutions, we examined how the technology is becoming a more visible factor in firms’ future performance and risk management. We noted that institutions with stronger AI strategies, governance frameworks and deeper operational integration tend to be better positioned for productivity gains and improved controls, while uneven readiness across the sector could increasingly differentiate credit quality over time.

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