Though the FSAP is intended to help increase the effectiveness of efforts to promote the soundness of financial systems, it plays an important role of providing an independent assessment of that soundness. This role is being emphasised by many countries, including India, at the G-20 forum — especially after the regulatory failures in the US in the current financial crisis.

This consideration is part of the history of FSAP. Prior to the East Asian crisis, global financial markets believed a lot of what East Asian governments were saying about their domestic financial systems. The governments steadily put out reports claiming that their financial systems were sound. Then came the crisis and the reality turned out to be very different.

Global financial firms reacted in an extreme fashion. They went from trusting almost anything in East Asia to trusting nothing in East Asia. Prior to the crisis, global financial firms believed the government’s propaganda, and money kept pouring into East Asia. When the crisis broke out, global financial firms disbelieved everything that these governments said and just took money out. This contributed to the severity of the crisis.

In response to these events, the World Bank and the IMF jointly came up with a proposal on how developing countries could better engage with the global financial system. Under an FSAP, a team of well-respected international experts would write a report about the strengths and weaknesses of the financial system of a country. This would be an independent review and not propaganda: it would not be like speeches given by civil servants or reports released by central banks.

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