December 03, 2018

IMF published a report on the Financial System Stability Assessment (FSSA) for Jamaica. The report recommends prioritization of intensified oversight and group-wide risk-based supervision, especially for groups with systemic connections. Implementation of Basel’s Pillar I on minimum capital requirements and Pillar II on the supervisory review process should help build enough buffers at the individual and group levels. An effective macro-prudential framework should build on strong micro-prudential foundations of supervisory oversight and go hand-in-hand with heightened commitment to transparency and accountability.

The report highlights that the authorities have made good progress in implementing the 2006 Financial Sector Assessment Program (FSAP) recommendations. Although the financial sector has significantly expanded since the 2006 FSAP, the crisis management framework and risk-based supervision work have been lagging. The stress tests suggest broad resilience to solvency shocks, but the interconnectedness analysis points to high risk of contagion. Active cooperation and coordination with other supervisors in the region, particularly for those affecting systemic groups, should be strengthened and access to timely granular data, analyses, and monitoring is key. The FSSA report further highlights that Bank of Jamaica has made good progress in establishing a system for monitoring of systemic risk. Bank of Jamaica is also considering instruments to include in a “macro-prudential policy toolkit,” with a view to mitigate and contain systemic risks across time and structural dimensions, including those found within Basel III.

Further action is required in implementing prudential standards on a consolidated basis. Introduction of a broader comprehensive Pillar I approach that captures all risks, a thorough Pillar II methodology, a surcharge reflecting the systemic importance of deposit-taking institutions, and a minimum quantitative prudential liquidity standard would enhance the risk coverage of the prudential framework and complement efforts of the Bank of Jamaica to foster convergence with international standards. The forthcoming implementation of IFRS 9 raises new challenges. A better alignment with the international accounting standards is desirable. Moreover, defining a transition period, as intended by the Bank of Jamaica, would be prudent considering the complexities associated with the calculation of expected credit losses and the limitations on historical information that may be needed. Bank of Jamaica should, however, be transparent to the deposit-taking institutions about how it will use the current regulatory provisions regime in an IFRS 9 environment. Bank of Jamaica should also develop its technical capabilities and provide a clear set of definitions for non-performing exposures, forbearance, and restructured loans.

The report states that work is underway to modernize the resolution framework for financial institutions. To this end, a consultation paper was jointly published by the members of the Financial Regulatory Committee in February 2017. It is an ambitious initiative that will require substantial resources and close cooperation by all safety net regulators to implement its provisions. The authorities have not prepared formal contingency plans for dealing with a systemic crisis such as was experienced in the mid-1990s. A systemic crisis contingency planning and simulation exercise agenda should be pursued as part of normal business practice in due course. Also, the draft 2014 Emergency Liquidity Facility Policy should be reviewed and finalized.

The FSSA report also highlights that there has been significant progress in the area of insurance supervision. IFRS 17, the adoption of which is being planned by 2021, should be introduced in combination with a modernized risk-based solvency regime, allowing for consistency between valuation and capital adequacy and supporting consistency of the prudential framework. Meanwhile, binding regulations for asset-liability management should be introduced and the regular stress testing framework should be extended to general insurers. 

 

Related Link: FSSA Report

Keywords: Americas, Jamaica, Banking, Insurance, Securities, FSSA, FSAP, Basel III, Stress Testing, IFRS 9, IFRS 17, Macro-prudential Policy, Resolution Framework, Bank of Jamaica, IMF