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p. 12 of 58 BACK | NEXT Purpose and Structure of the Toolkit Part One: Introduction and Overview I. The Financial Sector: An Overview II. International Financial Standards and Standard-Setting Organizations III. Implementation and Monitoring Part Two: Preconditions and Infrastructure for Financial Sector Development Part Three: Financial Regulation and Supervision Part Four: Regional Financial Integration Part Five: ADB's Intervention in the Financial Sector Bibliography Glossary and List of Abbreviations Acknowledgements

Financial Sector Legal and Regulatory Toolkit : Part One: Introduction and Overview

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III. Implementation and Monitoring

1. Implementation: A Domestic Process
2. The Standards and Codes Initiative
3. Other Initiatives

An important element of the system of international standards involves monitoring of their implementation around the world. Implementation is primarily a domestic process; however, monitoring takes place at the international level mainly through the IFIs, especially the IMF and World Bank. Specifically, the IMF works through its surveillance process, including its annual Article IV consultations. The IMF and the World Bank work together through Reports on the Observance of Standards and Codes (ROSCs) and Financial Sector Assessment Programs (FSAPs). The OECD and FATF also engage in monitoring, with the FATF playing quite an influential role in the area of anti-money laundering and countering terrorist financing. As a result of the global financial crisis, the G-20 has mandated a review of the monitoring of implementation of international standards, with changes expected to take place especially in the roles of the IMF and FSF.

In addition, there are a variety of regional, bilateral, and market monitoring processes. At a regional level, the regional development banks encourage implementation through their respective projects and reviews. In addition, regional economic associations may have a role, in some cases (such as the EU) a very important one. At the bilateral level, some countries (especially the United States) are keen to support the implementation of certain standards, (e.g., those of the FATF). Finally, at the market level, the rating agencies have shown some interest in monitoring of standards, though not as much as policy-makers had initially hoped.

Implementation: A Domestic Process

Implementation of international standards is largely a domestic process, but supported by technical assistance from a variety of sources, including international, regional, bilateral, and domestic.

There are a variety of incentives for implementation, including individual state interest, international interests, and market interests. Individual state interests include crisis prevention and support for economic growth through improved financial system efficiency and effectiveness. International interests include prevention and reduction of contagion and support for economic growth. Market interests, while potentially the strongest incentive, have yet to become focused.

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The Standards and Codes Initiative

The IFIs have a role in both implementation and monitoring. The key development in respect to both implementation and monitoring have been made through the efforts of the IMF and World Bank standards and codes initiatives.

The IMF and World Bank standards and codes initiatives operate through two interrelated initiatives:

1. Financial Sector Assessment Programs (FSAPs)
2. Reports on the Observance of Standards and Codes (ROSCs)

The IMF and World Bank ROSCs and FSAPs are perhaps among the most significant developments since the series of financial crises in the 1990s.

Financial Sector Assessment Program (FSAP)

The FSAP is a joint IMF and World Bank initiative introduced in May 1999 to promote sound financial systems in member economies. Work is coordinated through their joint Financial Sector Liaison Committee (FSLC).

In terms of structure, the FSAP includes several elements:

1. systematic analysis of financial soundness indicators (FSIs) and stress tests;
2. assessments of standards and codes; and
3. assessment of the broader financial stability framework, including systemic liquidity arrangements, governance and transparency, and financial safety nets and insolvency regimes.

FSAPs are usually conducted over two separate missions. Following completion, an FSAP team prepares an FSAP aide-memoire presenting their findings. IMF staff use the FSAP aide-memoire to prepare a Financial Sector Stability Assessment (FSSA); World Bank staff use the FSAP aide-memoire to prepare a Financial Sector Assessment (FSA). FSAs then may be issued as Reports on the Observance of Standards and Codes (ROSCs) with the permission of the relevant member.

FSAs for the majority of economies have been published with member consent.

Reports on the Observance of Standards and Codes (ROSCs)

ROSCs review the extent of observance of specific international standards and codes selected by the World Bank and IMF.

In terms of structure, ROSCs generally follow the following format:

1. description of the member's practice,
2. an assessment against all areas of the standard, and
3. prioritized recommendations.

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Other Initiatives

At present, other initiatives have been more limited than those of the IMF and World Bank. Regional initiatives supporting implementation and monitoring have involved IFIs, regional development banks, and regional economic arrangements. Bilateral initiatives addressing implementation and monitoring at present have come mainly via two paths: (i) the bilateral aid agencies; and (ii) bilateral monitoring by individual countries. It is hoped that market initiatives would provide a key incentive for economies to implement international standards and also an additional form of monitoring.

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Back D. G20 Summit Communique (April 2009)	Next Part Two: Preconditions and Infrastructure for Financial Sector Development