A simplified assessment model for conducting the financial sector assessment program (FSAP): the case of the Republic of San Marino

Purpose The paper develops an assessment methodology to evaluate the compliance level of countries to the Basel Core Principles (CPs) for Effective Banking Supervision issued by the Bank for International Settlements (BIS) in accordance with the process adopted by the International Monetary Fund (IMF), the so-called “Financial Sector Assessment Program” (FSAP). This paper aims to provide the reader with a concrete example of how the proposed assessment methodology can be implemented in any country. The authors have initially applied the model to evaluate the Republic of San Marino (case study) to show how to publicly collect the required data and information. Then, it shows how the methodology allows for framing the collected data to return with an effective analysis that includes the key recommendations to become compliant with the CPs. In this regard, the methodology does not only appears to be critical to provide the reader with a detailed analysis of the quality and effectiveness of the local regulatory and supervisory regime, but it also intends to be a tremendously useful tool for all national supervisory. Authorities that are considering the opportunity to undergo the FSAP. Design/methodology/approach This paper develops a simplified methodology to support supervisory Authorities in assessing the soundness and effectiveness of banking supervisory regimes in accordance with the standards adopted by the IMF in performing the FSAP. Then, the paper implements the developed methodology to the case study of the Republic of San Marino, which details the efforts that San Marino’s banking system has put in place to become compliant with the Basel Committee’s CPs for effective banking supervision revised by the BIS in 2012. Findings The methodology developed in Section 4 appears to be effective in evaluating the soundness of the local banking sectors in compliance with the FSAP process. It points out strengths and weaknesses of a national banking industry, which simplifies the market analysis to the key players at the national and international levels. In fact, the methodology also allows to obtain a framework for analyzing opportunities and threats of national banking sectors. The assessment methodology provides a concrete way to obtain updated analysis of the level of the soundness of national banking sectors, as the IMF would require in performing the FSAP, which can take up to two years for a single country. Research limitations/implications Considering the case study, San Marino needs to further improve its legal framework to be successfully integrated into the European market considering that the Treaty on European Union (TEU) sets out the conditions – Art 49 – and principles – Art 6(1) – to which any country, wishing to become an EU member, must be conform. These criteria were established by the Copenhagen European Council in 1993 and strengthened by the Madrid European Council in 1995 and outline the ability of a candidate to assure political and economic stability (European Commission, 2019). Practical implications Interventions on some types of market risks – such as interest risk, country risk and transfer risk – appear to be urgent especially in the context of the next integration within the single market. In this regard, consolidated supervision (CP 12) and home–host relationships (CP 13) shall be prioritized. The analysis shows substantial improvements in the financial and legal architecture that indicate the need to apply for a new FSAP. Originality/value This is the first scientific paper that investigates the evolution of the financial system in San Marino. The Republic of San Marino is a small and independent country located in Italy, which has given up some of its most relevant assets, such as the banking secrecy (ex Art. 36 of Law 165 / 2005) and the presence of anonymous companies by endorsing several European directives due to the Monetary Convention with the European Union.