August 3, 2017

On July 17, 2017, the Executive Board of the International Monetary Fund (IMF) considered a joint IMF-World Bank staff paper on the standards and codes (S&C) initiative in line with the initiative’s requirement for periodic reviews.

The S&C initiative was launched in the wake of the emerging market crises of the 1990s as part of efforts to strengthen the international financial architecture and is aimed at improving economic and financial resilience by assisting countries in strengthening their economic institutions and informing World Bank and IMF work. The initiative comprises 12 policy areas covering transparency of data and policy making; financial sector regulation and supervision; and, institutional and market infrastructure. S&C outputs for member countries are prepared and published at the request of the member country and include Detailed Assessment Reports (DARs), Reports on the Observance of Standards and Codes (ROSCs), Technical Notes, as well as newer outputs such as Fiscal Transparency Evaluations (FTEs).

The four prior reviews of the S&C initiative (2001, 2003, 2005, 2011) focused on improving its operational effectiveness, especially with regard to Bank and Fund work. The initiative has been found to have success identifying vulnerabilities and establishing priorities, although it has been acknowledged that compliance with S&C is only one building block for ensuring macro financial stability and preventing crises. Prior reviews have recognized that S&C outputs need to strike a balance between clarity and transparency on the one hand, and focus on reform efforts and country ownership on the other. Across reviews, there have been persistent calls for better linkages with Fund surveillance and capacity development. The 2011 review concluded that integration of ROSCs into Fund surveillance remained mixed, but integration with Bank and Fund financial assistance appeared stronger. It also noted the progress made in integrating ROSCs with technical assistance, although this, too, was cited as an area where further efforts could be made.

This review builds on recent evidence that the initiative continues to be well appreciated by member countries. At the same time, the recent surveys in some individual policy areas reaffirm that there is scope to better adapt the initiative to the policy needs of member countries and to guide capacity development efforts and support Fund surveillance and Bank operational work.

Since the inception of the initiative, most countries have received S&C outputs. As of end-December 2016, 1,676 S&C outputs have been produced for 177 countries through direct or regional engagement, representing 94 percent of the Fund’s membership. S&C work over 2012-16 reflected a shift toward the 29 jurisdictions with systemically important financial sectors (S29). Transparency S&C work has been more limited in recent years, reflecting the anticipated revisions of the Monetary and Financial Policy Transparency Code, changes in the data standards, and the revamping of the Fiscal Transparency Code.

Executive Board Assessment [1]

Executive Directors welcomed the 2017 review of the standards an codes (S&C) initiative. They agreed that the initiative continues to make a substantial contribution to promoting international financial stability and there are no major gaps in its overall architecture. Directors noted that while implementation of the recommendations of the 2011 S&C review has been mixed with uneven coverage across certain policy areas and member countries, several policy areas have demonstrated considerable dynamism in S&C work.

Directors appreciated the Review’s updates on the developments in the underlying S&C and individual policy areas led by the Fund and the World Bank and agreed that these provide member countries helpful tools to strengthen their policy frameworks. They generally concurred that the Fiscal Transparency Code provides a good way forward, including its outcome-focused, modular, and graduated approach, to increase the relevance of Fund-set transparency S&C.

Directors endorsed the proposed strategic approach to devolve operational reviews and responsibilities to individual policy areas, including leveraging progress made so far, while ensuring strategic oversight at the level of the overall initiative. In this context, structured consideration of good practices and reporting should help sustain momentum between S&C reviews and ensure alignment of S&C work with member needs and the Fund’s strategic priorities. A number of Directors pointed to the need to consider the resource implications of individual policy area decisions for effective strategic oversight. A few Directors noted that a more decentralized approach could lead to fragmentation of the framework.

Directors welcomed the progress that has been made in establishing a standard for crisis resolution and operationalization of its assessment methodology, including through close collaboration between the Financial Stability Board as the standard setter and the Fund and the Bank. They endorsed the Key Attributes of Effective Resolution Regimes for Financial Institutions as they apply to the banking sector and the related assessment methodology, which will underpin work in the Crisis Resolution and Deposit Insurance policy area.

Directors looked forward to the forthcoming Fund-led policy area reviews. They emphasized that these area reviews should consider the scope for improvements based on identified best practices drawn from across the policy areas, and should include an assessment of how new elements could improve linkages to surveillance and capacity development. Given recent trends in coverage in certain policy areas, particularly for emerging markets and low-income and developing countries, and resource intensity of assessments, Directors looked forward to discussions of these issues in the context of the forthcoming policy area reviews. They also agreed that increased collaboration across policy areas and close engagement with external Standard Setting Bodies and member countries should support the vitality of the initiative. A number of Directors looked forward to the forthcoming Board paper on Islamic banking.

Directors recognized that progress toward the key objective of strengthening the link between S&C work and Fund surveillance should take into account that surveillance can guide priorities for S&C assessments as much as assessments should feed into surveillance. In this context, they noted that a direct operational link to surveillance may be less important if S&C work continues to increase its orientation around risks and outcomes, thereby aligning with surveillance in another, more fundamental way. Directors agreed that facilitating cross-fertilization of innovation across policy areas, as appropriate, could further promote alignment with surveillance as well as capacity development efforts.

Directors generally supported the staged revision of the Monetary and Financial Policy Transparency (MFPT). They took note that the process will start with an early update to ensure that the monetary part of the code can serve as a diagnostic tool in capacity development by providing benchmarks of good practices for members at different stages of development. This should be followed by timely subsequent consideration of, if and how an updated financial part of the MFPT could be a helpful supplementary tool to support diagnostic financial sector work. A few Directors underscored that the revision should focus narrowly on gaps and complementing the transparency elements in the financial standards, and seek to avoid an overly complex structure that is too resource-intensive.

In the area of data policy, Directors noted its key role in promoting transparency and saw merit in the value of revisions to support effective economic decision-making, with the outcome of pilot exercises and refinement of the module to be taken up in the tenth review of the Fund’s data standards. A few Directors emphasized the need for further testing and undertaking cost-benefit assessments before implementing data policy recommendations.

Noting the importance of increasing traction of S&C work with policy-makers and market participants, some Directors recommended that the results of some assessments be presented in a non-technical manner for ease of understanding. Directors agreed that the next review of the S&C initiative should be undertaken in due course, following experience gained with operationalizing the recommendations of the current review.