The large numbers and high financial and social costs of the financial crises in many countries in the 1980s and 1990s convinced decision-makers that concerted measures had to be taken on an international level. Through the increasingly global character of the financial system, problems in one country tended to spill over to other countries exacerbating the problems and the costs. The measures taken included setting global norms and standards and increasing the surveillance of financial systems. Agreements were reached on various means of identifying and reducing vulnerabilities in financial systems. International standard-setting bodies such as the Basel Committee, the IOSCO , the CPSS and the IAIS were requested to establish frameworks of sound regulatory practices in their respective fields. These so called core principles are now broadly accepted as minimum standards, to be applied by all countries. But good standards are not enough. We must also ensure that they are applied in an environment of adequate preconditions, such as the rule of law and property rights, fair and competent accounting and auditing, and arrangements for predictable and fair resolution of the problem of failing institutions. There must also exist an adequate institutional framework, e.g. for an efficient division of roles and responsibilities between different public and private institutions. A crucial part of the financial institutional framework, whose importance is sometimes neglected, is the payment system and its infrastructure. A country’s financial system is also susceptible to the vagaries of economic and political developments.
For instance, while a fixed-exchange rate regime in certain circumstances tends to support financial stability in a country (or group of countries – to refer to the European context) there might be situations in which such a system could have the opposite effect. To underpin financial stability, economic developments should be sustainable, transparent and predictable. This also applies to political decisions, which affect the financial system directly or indirectly. Completing the circle and reverting to my first observations on the increased global linkages, most countries’ financial systems are influenced by developments outside the domestic economy. Linkages come through different channels: macro economic events having international repercussions, for instance through international markets, or “micro events” such as via banks’ cross-border affiliates. BIS Review 52/2006  1  The FSAP – an attempt to tie together the loose ends Given the various pieces needed to shape and maintain a stable and efficient financial system we need a bird’s-eye view to see that they are all in place and that they do not counteract one another. The approach should also identify weak spots from which the financial system potentially might be destabilised. This need for a bird’s-eye view resulted in the creation of the FSAP. The FSAP is intended to cover the pieces I just mentioned – standards, preconditions and institutional setting and the interplay of these factors in the context of the domestic economy.