Chapter 1:Fimancial Sector Assessments:Overall Framework and Executive Summary e in govemance,and in the broader ment designed to strengthen the contribution of the finan cial sector to economic grow wth and poverty reduction.Thi 1 type of assessment involves both quantitative analysis of financial structure and qualita- tive assessments of a range of institutional and financial policy factors affecting the struc- ture and performance of the sector. The analysis will typically consider many of the factors already covered under financial stability analysis,notably,the qualitative tures.However,the analysis will go beyond stability issues andf efficiency of financial intermediation from a user perspective.Chapter 4 motivates and outlines the tools used in the quantitative benchmarking of financial structure and illus- trates how developments in various dimensions of financial sector structure-efficiency. can be analyzed.The chapteralso provides an overview of analysis can combined with ormation from the qualitative assessments of legal and institutional infrastructure as well as from supervisory regimes to formulate an overall development assessment and identify policies to enhance financial development. Key steps in an integrated analysis and assessment of stability and development can summa ized as follo 1.Assess conditions in the n -financial sector by analyzing financial soundness indica tors for those sectors and financial structure and access indicators 2.Assess macroeconomic,sectoral and tax-subsidy policies affecting financial stability and development by analyzing macroeconomic forecasts,early warning indicators,finan cial market indicators,and tax and sectoral policy.This type of information typi cally would he drau m fro m othe such as local and mal official sou as well as data vendors and would help to form a view on the likelih bod of sho to the financial system from the broader economic environment and the way this environment affects financial sector structure and functioning 3.Assess financial system risks and vulnerabilities (a)by analyzing FSIs for banks,insur- ance companies,the securities market,and key non-bank financial institutions ,and erational risk we as availability of capital,earnings,and liquid assets that can be used to absor risk);(b)by monitoring market-based indicators;and (c)by conducting stress tests. The analysis in this step will draw on plausible shocks and linkages identified in steps I and 2 above. 4.Assess financial sector y conducting quantitative benchmarking and a ndicarod the data on acces (survey-based data.if avalble).The above analysis will take into account macroeconomic and sectoral conditions affecting financial development and access,drawing on analysis in steps I and 2 above. 5.Assess legal and institutional frameworks and operational effectiveness of financial poli- cies,both financial supervisic nd fin e including institution and market development policies(Pillars II and Ill).This qulitative assessment feeds into step3 to design policies to foster overall financial stability.This qualita- 7 Chapter 1: Financial Sector Assessments: Overall Framework and Executive Summary 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 regulation, in governance, and in the broader policy environment designed to strengthen the contribution of the financial sector to economic growth and poverty reduction. This type of assessment involves both quantitative analysis of financial structure and qualita￾tive assessments of a range of institutional and financial policy factors affecting the struc￾ture and performance of the sector. The analysis will typically consider many of the factors already covered under financial stability analysis, notably, the qualitative assessments of key legal and institutional fea￾tures. However, the analysis will go beyond stability issues and focus on the breadth and efficiency of financial intermediation from a user perspective. Chapter 4 motivates and outlines the tools used in the quantitative benchmarking of financial structure and illus￾trates how developments in various dimensions of financial sector structure—efficiency, access, scope, and so forth––can be analyzed. The chapter also provides an overview of how those kinds of quantitative analysis can be combined with information from the qualitative assessments of legal and institutional infrastructure as well as from supervisory regimes to formulate an overall development assessment and identify policies to enhance financial development. Key steps in an integrated analysis and assessment of stability and development can be summarized as follows: 1. Assess conditions in the non-financial sector by analyzing financial soundness indica￾tors for those sectors and financial structure and access indicators. 2. Assess macroeconomic, sectoral and tax-subsidy policies affecting financial stability and development by analyzing macroeconomic forecasts, early warning indicators, finan￾cial market indicators, and tax and sectoral policy. This type of information typi￾cally would be drawn from other sources such as local and external official sources as well as data vendors and would help to form a view on the likelihood of shocks to the financial system from the broader economic environment and the way this environment affects financial sector structure and functioning. 3. Assess financial system risks and vulnerabilities (a) by analyzing FSIs for banks, insur￾ance companies, the securities market, and key non-bank financial institutions (such as exposures to credit risk, market risk, liquidity risk, and operational risk as well as availability of capital, earnings, and liquid assets that can be used to absorb risk); (b) by monitoring market-based indicators; and (c) by conducting stress tests. The analysis in this step will draw on plausible shocks and linkages identified in steps 1 and 2 above. 4. Assess financial sector structure and development needs, including its scope, competitive￾ness, and access, by conducting quantitative benchmarking and analyzing structural indicators and the data on access (survey-based data, if available). The above analysis will take into account macroeconomic and sectoral conditions affecting financial development and access, drawing on analysis in steps 1 and 2 above. 5. Assess legal and institutional frameworks and operational effectiveness of financial poli￾cies, both financial supervision and financial infrastructure, including institutional and market development policies (Pillars II and III). This qualitative assessment feeds into step 3 to design policies to foster overall financial stability. This qualita-