In the early days many did not like the stress tests, but this has changed and today stress tests are an established part of the toolbox. While nobody could argue that FSAP assessments will identify all weaknesses, I have observed that in most of the assessments shortcomings and vulnerabilities show up quite clearly. While on this theme, I would also like to express my strong disagreement with the view expressed by some that “country circumstances are highly different so it is fully legitimate that they have very different legal and institutional underpinnings”. While I am not opposed to different approaches, as long as they do the job, my impression after having visited or analysed the majority of the IMF’s 184 member countries is that the circumstances are usually not all that different. My conclusion is that the necessary prerequisites for financial stability are much the same in all countries and this includes sound fiscal balances as well as macro economic structures and developments. Frankly, the talk about “special circumstances” could often be seen as an excuse for not being prepared to apply necessary but unpopular measures. In this, we Europeans are not better than anybody else. This brings me to another added value of the FSAP – the fact that the assessment is conducted by somebody outside your own country, such as the IMF or the World Bank.
In the area of Islamic banking, the requirement to manage the risks becomes more important because of the unique peculiarities in the contracts. Basel II has, to a certain extent, incorporated some aspects in the identification of risks, in particular the credit, market and operational risks that can be assimilated by the Islamic banks in terms of its product offering. However, further refinement will have to be done by the Islamic financial specialists to assess the appropriateness of the capital definition in particular as outlined by the Basel committee. One of the considerations that need to be addressed in assessing the risks associated with the Islamic bank is with regard to the capital charge on its investment accounts. Basel II does not address this unique feature in its framework. Assets that are funded by monies in the investment account may not require the capital charge for the purpose of capital adequacy measurement except in the case of misconduct and negligence. Similarly, if the Islamic banking institutions were to be more engaged in the profit-sharing arrangement in its balance-sheets, it will require the Islamic bank to have a more rigorous risk management assessment and monitoring mechanism. This is an area that is being addressed by the Islamic Financial Services Board in the drafting of the standard on the overall risk management framework for the Islamic financial community that takes into account this unique requirement of Islamic banking. While risk mitigation is desirable in Islamic finance, further improvements need to be made to the existing risk management framework.