## EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS (cr18347)

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### Macroeconomic and macrofinancial setting
- Macroeconomic environment has improved, reflecting the authorities’ efforts, supported by an IMF arrangement.
- Past high fiscal deficits, public enterprise borrowing, and financial sector bailouts led to:
  - rapid government debt accumulation,
  - crowding out of private credit,
  - increased financial dollarization,
  - stifled economic growth.
- Fiscal discipline has reduced public debt to about 100 percent of GDP.
- Falling interest rates on government debt are leading to a search for yield.
- Entrenched structural obstacles constrain growth: high crime, bureaucratic processes, insufficient labor force skills, poor access to finance, and exposure to weather shocks.

### Progress on reform and supervisory framework
- Good progress implementing 2006 FSAP recommendations in securities dealers’ activities, BoJ powers, payment systems, and the centralized securities depository.
- Lagging areas: crisis management framework and risk‑based supervision.
- Key legislative/institutional advances: Insolvency Act in 2014, Bank of Jamaica Act (BoJA) in 2015, Banking Services Act (BSA) in 2014, operationalization of the Financial System Stability Committee (FSSC) in 2016, and production of the Financial Stability Report (FSR).
- Fund TA has supported efforts to enhance financial sector resilience.

### Financial sector structure and dynamics
- Rapid expansion and complexity:
  - Financial sector assets tripled over the past decade.
  - Number of institutions has grown eight-fold.
  - Total assets now amount to about 180 percent of GDP.
- Nonbank financial institutions play a key role in intermediation.
- Conglomerate groups span banking, insurance, pensions fund management, CIF management, and securities dealers, often across multiple jurisdictions.
- Commercial banks:
  - Appear well capitalized and profitable.
  - Business model: large retail deposit funding, some wholesale funding, excess reserves at the BoJ, sovereign long-term securities, conservative lending.
  - Loan-to-deposit ratio at about 70 percent in 2017.
  - Non-interest income accounts for almost a third of total revenue.
- Nonbank sector:
  - Gross assets were over 100 percent of GDP in 2017.
  - Private pension funds growing fast.
  - Insurance sector highly concentrated: four life insurers hold 99 percent market share.
  - Securities dealers manage an asset portfolio of 33 percent of GDP and operate significant retail rolling investment schemes (“retail repos”)—1–2 month repurchase agreements to households or nonfinancial corporates, backed by long‑maturity government bonds (significant maturity mismatch).
  - CIFs and pooled funds have been growing on average 30 percent in the last two years.
- Secured money market is small; primary market for government securities exists; secondary bond and FX markets are being developed.
- Authorities have an ambitious financial inclusion agenda; financial inclusion policies should consider financial stability risks.

### Risks and vulnerabilities
- Main system risks:
  - Exposure to natural disasters.
  - Tightening global financial conditions.
  - Possible reversal of fiscal discipline driven by reform fatigue.
- Channels and consequences:
  - Reform delays could erode confidence and fuel FX outflows.
  - Tightening global conditions could reduce foreign inflows including remittances, dampen growth, and raise NPLs.
  - A natural disaster could cause protracted negative growth and large losses for banks and other financial institutions.
- Interconnectedness and conglomerate risk:
  - Large, complex, and highly interconnected groups increase contagion risk via concentrated ownership, related party and large group exposures, and off-balance sheet positions.
  - Common exposures to sizable public debt holdings mean financial stability is closely tied to public finances and debt market dynamics.

### Stress testing and resilience
- Stress tests suggest broad resilience to solvency shocks, but interconnectedness analysis points to high contagion risk.
- Under an adverse scenario of temporary economic recession, banks would be able to recover due to high profits and large buffers.
- A natural disaster shock could require large recapitalization needs of 3.3 percent of GDP.
- Insurance companies would be able to recover relatively fast with a global repricing of the risk premium due to high profitability.
- At the group level, large intra- and inter-group direct exposures pose contagion risk.

### Priority policy recommendations and actions (high level)
- Intensify oversight and group-wide risk-based supervision, especially for systemically connected groups.
  - Implement Basel’s Pillar I and Pillar II to build buffers at individual and group level and reduce regulatory arbitrage.
  - Strengthen cooperation and coordination with other supervisors in the region for cross‑border groups.
  - Improve access to timely granular data, analyses, and monitoring.
- Build an effective macroprudential framework anchored on strong microprudential foundations and enhanced transparency and accountability.
- Reinforce resilience of securities dealers, deepen capital markets, and broaden instruments to manage credit, liquidity, and market risks.
- Expand skilled supervisory resources immediately:
  - All supervisory agencies need to expand capacity to meet current mandates and new demands.
  - Advances toward adoption of international standards by 2020/21 will pose challenges requiring further inter-agency coordination.
  - Strengthen supervisory databases for monitoring complex group-based risks and for financial stability analysis.
- Advance crisis management, recovery planning, and resolution:
  - Continue work on the Special Resolution Regime (SRR) and the broader crisis management framework.
  - Clarify responsibilities in the new resolution framework, define systemically important institutions, and determine funding arrangements.
  - Sequence recovery planning, resolution plans, and resolvability assessments; prepare system-wide contingency planning for systemic crises.

### Selected timing highlights (table excerpts)
- 1 Increase supervisory resources (All) — I
- 2 Enhance data collection and technical skills for risk-based supervision (All) — I
- 3 Strengthen the IT platform for supervisory data sharing and regulatory collaboration (All) — I/NT
- 4 Provide greater delegation to the BoJ to enact legally enforceable rules (Government) — I
- 5 Fully deploy and implement risk-based supervision (BoJ, FSC) — I
- 6 Fully deploy and implement risk-based AML/CFT supervision for DTIs and Cambios (BoJ) — NT
- 7 Implement consolidated supervision and intensify cross-agency cooperation (BoJ, FSC) — I
- 8 Implement Basel III capital adequacy and liquidity requirements at solo and group levels (BoJ) — NT
- 10 Complete retail repo reforms through staged introduction of the mismatch ratio (FSC) — I/NT
- 14 Enact binding regulations for asset-liability management and introduce regular stress tests for general insurers (Government, FSC) — MT
- 15 Introduce a risk-based solvency regime, ideally at adoption of IFRS 17 (Government, FSC) — NT
- 16 Develop a toolkit for macroprudential policy (BoJ) — MT
- 18 Introduce a special resolution regime aligned with international best practice (Government) — NT
- 19 Finalize an MoU between BoJ and JDIC to allow JDIC to better prepare for possible resolution action (BoJ, JDIC) — I
- 21 Develop guidance for FIs on recovery plans and begin a pilot with the most significant institutions (BoJ, FSC, JDIC) — I
- 23 Adopt a strategy for capital markets deepening, including developing the short end of the yield curve for benchmarking (Government) — NT

(I = within one year; NT = 1–3 years; MT = 3–5 years)

*Executive Summary and Key Recommendations — IMF Financial Sector Assessment for Jamaica (selected content).*

---

### Interconnectedness assessment — methods and main findings
- Data and methods:
  - (i) direct exposures.
  - (ii) indirect exposures via balance sheet similarities and hierarchical clustering.
  - (iii) large-value payment system liquidity (Appendix V).
- Direct exposure network:
  - Highly interconnected with concentrated dependence on foreign funding.
  - Foreign institutions link to about 33 percent of participants in the network.
  - High-intensity links vis-à-vis a few systemically important DTIs; failure to roll over borrowing from abroad would significantly impact the domestic exposure network.
- Indirect common exposures:
  - Balance sheet correlations are substantial among financial institutions in the same segment.
  - Strongest correlation in the DTIs segment (about 0.9 on average).
  - DTIs balance sheets account for about 62 percent of assets and 64 percent of liabilities of the financial system.
- Large-value payment system:
  - Over 80 percent of the large payments system network is accounted for by 18 financial institutions.
  - Four institutions (DTIs in particular) account for about half of the transactions.
  - Failure of any of these four to participate could extensively affect liquidity and operations in the real sector.

### Recommended capacity and data enhancements (interconnectedness)
- Adopt mechanisms to measure and understand financial stability risks from the large-value payments system.
- Use RTGS data to supplement low-frequency supervisory data.
- Develop tools to measure/manage risks from DTIs’ and non-DTIs’ common exposures (e.g., sovereign exposures).
- Expand and enhance datasets and models to measure direct and indirect exposures periodically.
- Monitor how events involving major global participants affect domestic solvency and liquidity.

---

### Deposit-Taking Institutions (DTIs) — resilience and stress-test results
- Baseline/adverse scenarios and capital impacts:
  - Under the adverse scenario with GDP growth declining to 0 percent, banking sector aggregate CAR would remain above the regulatory minima (about 13 percent) despite a sharp increase in NPL ratios and lower profitability.
  - Some banks’ CARs would fall below the 10 percent CAR regulatory minimum. Restoring it across all banks would require 0.7 percent of GDP.
  - Under the severely adverse scenario the system aggregate CAR would fall to 5.1 percent. The required recapitalization injection would amount to about 3.3 percent of GDP.
- Sensitivity analyses and vulnerabilities:
  - Counterparty risk: if each bank’s top three borrowers default with zero recovery, system aggregate CAR would decrease to 0.7 percent one period ahead, with a recapitalization need of 4.8 percent of GDP.
  - Interest rate risk: a 300-basis point interest rate shock would reduce the systemwide CAR by 4.4 percentage points.
- Asset-class concentration:
  - Banks’ holdings of sovereign government bonds and personal loans are significant.
  - Some banks have large loan concentrations in tourism, financial services, manufacturing, construction, and trade driving NPL growth.
- Exchange rate shocks:
  - Large exchange rate shocks have negligible effects due to relatively covered FX positions and significant financial dollarization.
  - Significant rise in FX NPLs from currency movements would require increasing provisioning.
- Liquidity and central bank buffers:
  - Banks hold large liquid assets in JM$ and FX at the BoJ.
  - BoJ’s liquid asset ratio requirement is 26 percent in respect to domestic currency liabilities and 29 percent for FX liabilities.
  - In the adverse scenario, over a five-day horizon, most banks would withstand a proportional withdrawal run for at least 2 consecutive days; after 4 consecutive days, most DTIs would need access to liquidity balances at the BoJ and potentially to BoJ liquidity facilities.
  - Highly liquid banks would initially benefit from a “flight to safety” and reputation effects, delaying initial liquidity squeeze impact.

- Scenario footnotes preserved:
  - Adverse scenario: Cumulative three-year growth would be 5 percentage points lower than the baseline. Important reforms would stall and confidence in the reform program would begin to erode. Investors would begin demanding higher yields from the government. Demand for FX would ramp up, and the currency would begin to depreciate by up to 15 percent per year. Inflation volatility would increase materially and repeated breaches of the central bank inflation target band would prompt interest rates increases of up to 300 basis points.
  - Severely adverse scenario: Real GDP growth would drop by 1-2 percentage points in the first year (i.e. almost 3 percentage points lower than the baseline) and be permanently lower by 2 percentage points thereafter. Interest rates would spike by 600 basis points, led by a flight to safety. The exchange rate would depreciate significantly.

---

### Non-Bank Financial Institutions — Insurance, Pensions, Securities Dealers

### Insurance sector
- Life insurers:
  - Hold 59 percent of their assets in Jamaican sovereign debt.
  - Average return on equity during 2012–17 was 26 percent.
  - Sector profitability is declining albeit from rather high levels.
- Non-life insurers:
  - Exposed to tail risks from natural catastrophes; for property insurance retention levels are low and more than 90 percent of the business is ceded to reinsurers abroad.
  - Potential FX mismatches: few insurers offer products denominated in or linked to foreign currencies, but many hold non-JM$ investments, mainly in US$, exposing them to JM$ appreciation.
- Stress tests:
  - All insurers stayed above regulatory minimum thresholds of 150 and 250 percent for life and non-life insurers, respectively, under the modelled repricing of global risk premia.
  - Under the major hurricane adverse scenario (adverse scenario 2): median pre-stress solvency ratio of 261 percent falls to 231 percent; most companies stay profitable and expected to recover relatively quickly.

### Pension funds
- Appear relatively well-funded on current estimates.
- Sustainability driven by high rates of member exit and long vesting rules leading to employer contributions remaining in plans when a member exits.
- No typical requirement to increase pensions each year by price inflation.
- Risks: many members may receive inadequate pensions due to early withdrawals and inadequate funding; concerns over the level of income provided by the National Insurance System.

### Securities dealers
- Top-down stress tests (e.g., equity prices dropping 20 percent, domestic interest rates changing by 3 percent) indicate the majority of the industry is sufficiently capitalized though some brokers would fail.
- Legal and operational risks in the “retail repo” model have declined with reforms (master repurchase agreement; underlying securities held on trust).
- A JM$1M minimum subscription threshold reduced aggregate repo holdings by 12 percent between end-2014 and 2017, but repos remain a very high proportion of dealers’ liabilities.
- Near-term priorities:
  - Implement the retail repo mismatch ratio to minimize maturity mismatch risk.
  - FSC should collect and analyse data on securities dealers’ OTC transactions.
- Medium-term development steps:
  - Trade reporting or secondary trading platform to aid price discovery.
  - Risk-based supervision framework and fixed timeline for implementation.
  - Develop liquid markets and enhance dealers’ liquidity management.
  - Review foreign exchange requirements and risk weightings for corporate debt and equity instruments.
  - If repurchase agreements are used to offer short-term fixed interest products backed by long-term corporate debt to non-accredited investors, apply trust, master repurchase agreement, and mismatch ratio infrastructure.

---

### Oversight framework — macroprudential and microprudential

### Macroprudential policy framework
- FSSC established by amendment to the BoJA; tasked with producing regular financial stability assessments and providing recommendations to the BoJ. Final responsibility for actions resides with the BoJ.
- BoJ has made progress in monitoring systemic risk but important information gaps remain.
- BoJ is considering instruments for a “macroprudential policy toolkit”, including Basel III elements.
- BoJ should develop a communication strategy to convey stability assessments, link them to policy action, and manage public expectations.

### Microprudential supervision and group-wide oversight
- BoJ empowered under the BSA to supervise financial groups with a DTI but does not yet impose prudential standards on a consolidated basis.
- Preparatory work: license Financial Holding Companies (FHCs); impose consolidated prudential standards (solvency, liquidity, large exposures, related parties); collect group-wide prudential data; establish fit-and-proper standards for parent companies; strengthen internal control and risk management regulations.
- Consolidated risk-based supervision is critical; initial steps applied to one DTI and should be extended to FHCs and all DTIs.
- Success depends on (i) adequate skills and resources in all regulatory agencies, and (ii) time to adjust resources and practices beyond solo-institution approach.
- Coordination among supervisors needs strengthening: timely granular data sharing, regular technical collaboration, consistency of regulations, and cooperation between BoJ and FSC through joint rule-making and intensified oversight (including joint onsite inspections).
- Cross-border supervision should be intensified with more MoUs signed between domestic and foreign supervisors.

### Banking supervision progress and limitations
- BSA (June 2014) improved supervisory architecture and transferred critical functions to the Governor of the BoJ.
- BoJ can license DTIs and FHCs, conduct ongoing supervision, and undertake corrective action.
- Limitation: BoJ’s inability to issue binding prudential regulations; standards of sound practices lack force of law.
- Recommendation: Empower the BoJ to legally enact legally enforceable prudential rules.
- BoJ should intensify oversight by adopting a more intrusive approach to DTIs’ risk management, corporate governance, and internal control; shorten timelines for recommendations and perform thorough follow-up on remediation progress.

---

### Capital and liquidity framework; related exposures; provisioning; insurance/pension supervision

### Capital and liquidity
- Several elements are prudent (minimum ratio, Tier I composition), but capital calculation still reflects Basel I analytical methodology.
- Current methodology focuses exclusively on credit and FX risks and excludes other market and operational risks relevant on a consolidated basis.
- Recommendations:
  - Introduce a broader Pillar I approach capturing all risks.
  - Develop a thorough Pillar II methodology.
  - Introduce a surcharge reflecting systemic importance of DTIs.
  - Introduce a minimum quantitative prudential liquidity standard.

### Related party and large exposures
- Related party and large exposures are well defined and controlled through statutory requirements.
- Current large exposure limits in the BSA are 40 percent of the bank’s capital base; international standards are 25 percent.
- BoJ and FSC consulting on bringing the regime closer to international standards.
- Further action: implement prudential standards on a consolidated basis.

### Loan loss provisioning and accounting alignment
- Loan loss provisions calculated using a conservative rules-based BoJ approach (automatic triggers for loan classification, minimum provisioning percentages).
- Upcoming IFRS 9 implementation raises challenges.
- Recommendations:
  - Better alignment with international accounting standards.
  - Define a transition period considering complexities of expected credit losses and data limitations.
  - BoJ should be transparent to DTIs about how it will use current regulatory provisions in an IFRS 9 environment.
  - BoJ should develop technical capabilities and provide clear definitions (non-performing exposures, forbearance, restructured loans).

### Insurance supervision
- Progress: better surveillance, inspection and enforcement powers, reporting, corporate governance framework, and dialogue with the Insurance Association.
- Weaknesses: aspects of FSC independence need attention; supervisory approach remains compliance-based and should become risk‑based and forward‑looking; life insurance liabilities and solvency regime need modernization; shortage of skilled staff.
- Recommendations:
  - Adopt IFRS 17 (planned for 2021) together with a modernized risk-based solvency regime.
  - Introduce binding regulations for asset-liability management in the interim.
  - Extend regular stress testing to general insurers.
  - Establish consolidated supervision for cross-sectoral groups.

### Pension supervision and investment regulation
- Regulatory framework relatively comprehensive but FSC capacity is limited to regulate 399 active pension plans, 27 licensed pension administrators, and 28 licensed investment managers.
- Investment regulation constraints (2006 regulations):
  - FX investment quantitative limits set at 20 percent of total portfolio; BoJ intervened to reduce to 5 percent for pension investments except via CISs (CIS limit 25 percent).
  - Permitted foreign investment locations constrained to U.S.A., Canada, and U.K.
- Recommendations for phased liberalization:
  - Gradually broaden FX investment opportunities to enhance diversification and returns, aligned with strengthened risk management, regulatory capacity, and capital market deepening.
  - Widen foreign investment locations to add OECD countries and emerging/frontier markets via multi-country index funds.
  - Gradual increase in FX investment limits, preceded by institution-by-institution assessments and accompanied by supervisory capacity enhancements.
  - Avoid perceptions of regulatory forbearance; apply appropriate sanctioning.
  - Sector consolidation would strengthen capacity and alleviate small fund size, expertise, and governance challenges.
- Supervisory tools:
  - FSC should finalize stress testing methodology and integrate it into its risk-based methodology.
  - FSC should finalize guidelines for risk management aligned with new investment regulation and stress testing.

---

### Securities supervision, credit unions, AML/CFT, and crisis readiness

### Securities supervision and market conduct
- Strategic focus: BoJ and FSC should prioritize risk-based consolidated supervision and market conduct.
- Enforcement: FSC enforcement needs to be stepped up; reliance on public complaints is reactive.
- Near-term regulatory priorities for securities dealers:
  - Complete retail repo reforms through staged introduction of the mismatch ratio.
  - Introduce revised large exposure regime.
  - Introduce formal arrangements for group-wide supervision of conglomerates including securities dealers.
- Medium-term: once pre-conditions met and sovereign debt issues reduce, dealers should intermediate in corporate debt and equity (JM$ then US$).
- Pre-conditions: risk-based supervision framework, FSC collects OTC trading data, trade reporting mechanism for price discovery/systemic risk monitoring.
- Fintech/cryptocurrencies: embryonic; authorities should develop guidance and address infrastructure gaps before new digital asset trading platforms.

### Cooperative and credit union supervision
- Transition plan: credit unions are being brought under BoJ supervision; sequencing and clear communication strategy required.
- Preconditions for access to deposit insurance:
  - BoJ must assess licensing criteria and conduct rigorous asset quality review of all credit unions (Annex II).
  - Agreement needed on incorporating current credit union stabilization fund into deposit insurance fund.

### Financial integrity (AML/CFT)
- 2015 MER against 2012 FATF standard found important shortcomings in technical compliance and effectiveness.
- Progress since 2015: 2014 BSA strengthened supervisory powers; International Trusts and Corporate Services Act adopted; amendments to Companies Acts on beneficial ownership; proposed amendments to Terrorism Prevention Act and Proceeds of Crimes Act expected; comprehensive NRA with World Bank assistance expected to be completed in 2019.
- Authorities establishing risk-based AML/CFT supervision of DTIs and cambios with IMF TA.
- Remaining priorities: strengthen preventive measures, enable consolidated supervision of conglomerates, ensure legal entity transparency, and support efforts to fight organized crime.
- Correspondent banking relationships have stabilized but fragilities remain for money services businesses and micro-finance entities.

### Crisis readiness, management, and resolution
- Current arrangements:
  - MOFPS is resolution authority for DTIs under the BSA.
  - FSC lacks significant resolution powers for entities it supervises.
  - DTIs and insurance companies are excluded from the 2014 Insolvency Act unless regulator consents.
- BoJ powers:
  - Enforcement powers for entities licensed under the BSA including appointing a temporary manager and revoking a license.
  - BoJ may recommend to MOFPS a vesting order under Section 114 of the BSA.
- Reform underway:
  - Consultation paper (FRC) published February 2017; proposal submitted to Cabinet July 2017; October approval given to draft SRR legislation; proposal to be submitted to Parliament in 2019.
- Proposed new framework:
  - Hybrid approach: SRR for all DTIs and certain other systemically important FIs (administrative resolution mechanism) and a Modified Insolvency Framework for other nonviable/insolvent FIs.
  - Anticipated application to credit unions once under BoJ supervision.
- Independence of resolution authority:
  - BoJ’s RA will be operationally separate from its regulatory/supervisory functions; RA may appoint entities (e.g., to secure financing and hold/deal with shares).

---

### Resolution framework: roles and outstanding design issues (paragraphs 66–69)
- Proposed roles:
  - BoJ as resolution authority for DTIs/FHCs and any non-DTI deemed systemically important; FSC to continue powers for non-DTIs that are insolvent or being wound up.
  - Framework allows appointment of a Resolution Administrator (RAdmin) which could be JDIC or FSC.
- Outstanding design issues:
  - Specific responsibilities of authorities will be clear only once the regime is drafted, adopted, and operationalized.
  - Detailed standards needed: classify systemic/non-systemic institutions; applicable priority scheme for claims under the SRR; rules for establishing a bridge institution.
- Recovery planning:
  - Recovery planning is not underway; BoJ should develop guidance for FIs, including financial groups.
- JDIC funding and deposit insurance:
  - JDIC reserves about 5.5 percent of insured deposits.
  - No formal arrangements for dedicated back-up funding; JDIC access to funds as resolution administrator unclear and being addressed in SRR drafting.
- Contingency planning:
  - No formal contingency plans or systemic simulation exercises have been undertaken; draft 2014 Emergency Liquidity Facility Policy should be reviewed and finalized.

---

### Credit intermediation and market development
- Credit-to-GDP ratio relatively low; credit not effectively intermediated.
- Jamaica’s peers typically have credit-to-GDP ratios of 40–60 percent.
- Formal credit environment supports access for consumers and corporates, but not MSMEs.
- Bank lending to consumers expanding, primarily secured with motor vehicles; unsecured lending typically to prime customers or public servants.
- MSME lending largely via unregulated MFIs and credit unions.
- Credit reporting system exists but underutilized due to informational gaps.
- Effectiveness of secured transactions law can be enhanced alongside communication on Insolvency Act opportunities.
- Rapid growth of lending by unregulated institutions suggests need to strengthen monitoring.

### Market development and TA
- 2015 World Bank FSAP Development Module recommendations: movable asset-based financing (factoring, leasing, venture capital).
- IMF TA provided recommendations on primary dealer system, sovereign debt market benchmarks, and secondary market development.

---

### Insurance stress-testing framework (Appendix IV) — scenarios, assumptions, and baseline projections

### Insurance stress test design
- Bottom-up exercise; reference date December 31, 2017.
- Scope: highest level of consolidation of insurance activities (excluding banking and non-insurance activities).
- Three scenarios: Baseline; Adverse scenario 1 (global repricing of risk premia); Adverse scenario 2 (domestic natural catastrophe causing short/severe recession and market price corrections).
- Hurdle rates: life insurers coverage 150 percent; general insurers coverage 250 percent.

### Jamaica baseline macro projections (Real GDP growth)
- 2017: 1.7 percent
- 2018: 2.3 percent
- 2019: 2.7 percent
- 2020: 2.8 percent
- 2021: 2.8 percent
- 2022: 2.8 percent

### Jamaica baseline inflation (change in consumer prices)
- 2017: 3.4 percent
- 2018: 5.2 percent
- 2019: 5.5 percent
- 2020: 5.5 percent
- 2021: 5.5 percent
- 2022: 5.4 percent

### Jamaica baseline unemployment rate
- 2017: 12.2 percent
- 2018: 11.6 percent
- 2019: 11.0 percent
- 2020: 10.5 percent
- 2021: 10.0 percent
- 2022: 9.5 percent

### Insurance sector scenario shocks (selected)
- Risk-free interest rates (parallel shift): Jamaica Adverse scenario 1: -100bp; Adverse scenario 2: -150bp.
- Sovereign bond spreads: Jamaica Adverse scenario 1: +300bp; Adverse scenario 2: +450bp.
- Corporate bond spreads (Jamaica): AAA Adverse scenario 1: +30bp; Adverse scenario 2: +40bp; BBB Adverse scenario 1: +190bp; Adverse scenario 2: +270bp; BB or lower Adverse scenario 1: +300bp; Adverse scenario 2: +400bp.
- Currencies (Change of JMD): Adverse scenario 1: -10 percent; Adverse scenario 2: -15 percent.
- Equity (Jamaica): Adverse scenario 1: -27 percent; Adverse scenario 2: -35 percent.
- Real Estate (Jamaica): Adverse scenario 1: -15 percent; Adverse scenario 2: -20 percent.
- Adverse scenario 1 business/lapse assumptions: New business year 1 decline life -10 percent; lapse rates in life year 1 increase by 10 percent.
- Adverse scenario 2 business/lapse assumptions: New business year 1 decline life -30 percent and general -10 percent; lapse rates in life year 1 increase by 25 percent.
- All market shocks assumed instantaneous at the beginning of the first year and asset prices not assumed to recover after the shock.

---

### Network analysis (Appendix V) — RTGS and market-data approaches
- Interconnectedness inferred from RTGS payments among 26 participants during 2017; three categories contribute about 95 percent of all payments:
  - Transfers in JDM: 45.01 percent
  - Intraday repos with the central bank: 31.53 percent
  - Long-term repos: 18.56 percent
- Visualization: circular-layout graphs with arrow width/color representing payment contribution; node diameter representing participant importance as sender.
- Interconnectedness also inferred from stock market data using asset graphs (threshold ±0.3) and minimal spanning tree methodologies.

---

### FSAP Risk Assessment Matrix — selected risks and scenario metrics
- Risk #1: Domestic shock — Delays in implementing economic and structural reforms
  - Relative Likelihood: High
  - Expected Impact: High
  - Transmission: real GDP growth declining by 0.5 percentage point in the first year and hover at zero for following two fiscal years; cumulative three-year growth falling by 5 percentage points against the baseline.
  - Effects: increased spreads, JM$ depreciation, increased credit risk, increased DTIs’ NPLs and capital sensitivity, higher sovereign yields, fiscal pressures, reduced foreign borrowing, refinancing risks to DTIs, liquidity effects, second-round effects on growth and FX reserves, additional dollarization pressures.
- Risk #2: External financial shock — Tighter global financial conditions
  - Relative Likelihood: Medium/High
  - Expected Impact: High
  - Transmission: negative impact on tourism, remittances and FDI; FX reserves, credit spreads, JM$ weakening; increase in NPLs; liquidity concentration in two banks exacerbates stress.
- Risk #3: External natural shock — Natural disasters and epidemics
  - Relative Likelihood: Medium
  - Expected Impact: High
  - Context: Jamaica experienced about 40 disasters between 1950-2017, averaging about a disaster a year; 60 percent hurricanes and storms; about a quarter floods, droughts, and epidemics.
  - Severely adverse stress testing scenario metrics:
    - Material physical damage of 2-3 percentage of GDP.
    - Real GDP growth dropping by 1-2 percentage points in the first year and by 2 percentage points thereafter.
    - Primary balance reverting to a deficit of around 0.1 percent of GDP.
    - Debt reverting towards an upward trend.
    - Interest rates spike by 600 basis points.
    - Exchange rate depreciates by about 60 percent.
    - Aggregate banking system NPLs increase three-fold.
    - Liquidity shortages requiring immediate central bank assistance.

---

### Implementation of previous FSAP recommendations (Appendix II) — status highlights
- 1 Reduce the public debt (MOFPS): Implementation Status: Ongoing. Responsibility Framework Legislation in 2010 led to reduction to about 100 percent of GDP; FY2014/15 Enhanced Fiscal Rules target debt ratio of 60 percent of GDP by FY 2025/26.
- 2 Raise margin requirements on securities dealers’ repos (FSC): Implementation Status: Done. Retail repo transaction structure operational August 2015; margins for retail repos range between 5-15 percent depending on asset type. Current margin rules include qualifying issuers minimum 5 percent and other allowable assets minimum 15 percent.
- 3 Strengthen monitoring of housing and equities prices (BoJ): Implementation Status: Ongoing. NHT data used to produce quarterly housing price index since 2016.
- 4 Enhance analysis of insurance risk concentration and reinsurance coverage (FSC): Implementation Status: Ongoing. General insurers file reinsurance treaties annually; Reinsurance Risk Management Plans required.
- 5 Develop and test crisis management plans: NFCM Plan approved 2015; elements not yet tested/simulated; SRR drafting instructions prepared; legislative framework to be tabled in 2019.
- 6 Strengthen coordination and close legal gaps for consolidated supervision (BoJ/FSC/JDIC/MOFPS): Implementation Status: In process. Omnibus Banking Bill (BSA) passed 2014; BoJ to license FHCs; further legislative measures and consultation ongoing.
- 7 Give supervisory agencies more resources and budgetary flexibility (BoJ/FSC): Implementation Status: Pending. Resource constraints remain significant; FISD experiences high attrition.
- 8 Further codify legal and operational independence of supervisory agencies: BSA passed 2014 supports BoJ operational independence but Board retains members appointed by MoF; no action taken regarding FSC independence.

---

### Financial inclusion / MSME finance / simplified documentation (Section 18)
- NFIS launched 29 March 2017; National Financial Inclusion Council inaugural meeting 29 March 2017.
- Recommendations for MSME finance include factoring, leasing, and venture capital development; pilots and feasibility work underway.
- BoJ action items for MSME KYC and SIPPA collateral provisioning:
  - (a) Proposals for graded KYC/CDD requirements provided May 2017 (merged with AML/CFT work-stream).
  - (b) BoJ published consultation paper on Problem Asset Management and Provisioning Requirements on 28 February 2018.
- Prudential requirements: BoJ approved reduction in capital requirements for development banks; recommended 20 percent risk-weight for loans covered by credit guarantees (uncovered portions 100 percent risk-weighted) limited to loans in Jamaican currency.
- Reduced risk-weighting approval effective for three years, after which BoJ will reassess continued application.

---

*Source: cr18347 - IMF Financial Sector Assessment Program materials (selected content).*

### EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS  ______________________________________ 5

### EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS

### Macroeconomic and macrofinancial setting
- Macroeconomic environment has improved, reflecting the authorities’ efforts, supported by an IMF arrangement.
- Previously, years of high fiscal deficits, public enterprise borrowing, and financial sector bailouts led to:
  - rapid government debt accumulation,
  - crowding out of private credit,
  - increased financial dollarization,
  - stifled economic growth.
- Fiscal discipline has reduced public debt to about 100 percent of GDP.
- Falling interest rates on government debt are leading to a search for yield.
- Entrenched structural obstacles continue to constrain growth: high crime, bureaucratic processes, insufficient labor force skills, poor access to finance, and exposure to weather shocks.

### Progress on reform and supervisory framework
- Good progress implementing the 2006 FSAP recommendations in several areas: securities dealers’ activities, BoJ powers, payment systems, and the centralized securities depository.
- Lagging areas: crisis management framework and risk‑based supervision.
- Key legislative and institutional advances: Insolvency Act in 2014, Bank of Jamaica Act (BoJA) in 2015, Banking Services Act (BSA) in 2014, operationalization of the Financial System Stability Committee (FSSC) in 2016, and production of the Financial Stability Report (FSR).
- Fund TA has supported efforts to enhance financial sector resilience.

### Financial sector structure and dynamics
- Rapid expansion and complexity:
  - The financial sector has tripled in assets over the past decade.
  - The number of institutions has grown eight-fold.
  - Total assets now amount to about 180 percent of GDP.
- Nonbank financial institutions play a key role in intermediation.
- Conglomerate groups span banking, insurance, pensions fund management, CIF management, and securities dealers, often operating in multiple jurisdictions.
- Commercial banks:
  - Appear well capitalized and profitable.
  - Business model: large retail deposit funding, some wholesale funding, excess reserves at the BoJ, sovereign long-term securities, conservative lending.
  - Loan-to-deposit ratio at about 70 percent in 2017.
  - Non-interest income accounts for almost a third of total revenue.
- Nonbank sector:
  - Gross assets were over 100 percent of GDP in 2017 (insurers, pension funds, securities dealers, asset managers, collective investment schemes).
  - Private pension funds have been growing fast.
  - Insurance sector highly concentrated: four life insurances hold 99 percent market share.
  - Securities dealers manage an asset portfolio of 33 percent of GDP and have significant retail rolling investment schemes (“retail repos”)—1–2 month repurchase agreements to households or nonfinancial corporates, backed by long-maturity government bonds (significant maturity mismatch).
  - CIFs and pooled funds have been growing on average 30 percent in the last two years.
- Secured money market is small; primary market for government securities exists, rolling investment contracts market is deep, secondary bond market and FX market are being developed.
- Authorities have an ambitious financial inclusion agenda (World Bank FSAP Development Module, 2015)—financial inclusion policies should consider financial stability risks.

### Risks and vulnerabilities
- Main system risks:
  - Exposure to natural disasters.
  - Tightening global financial conditions.
  - Possible reversal of fiscal discipline driven by reform fatigue.
- Channels and consequences:
  - Delays in reforms could erode confidence and fuel FX outflows.
  - Tightening global conditions could reduce foreign inflows including remittances, dampen growth, and raise NPLs.
  - A natural disaster could cause protracted negative growth and large losses for banks and other financial institutions.
- Interconnectedness and conglomerate risk:
  - Large, complex, and highly interconnected groups increase contagion risk via concentrated ownership, related party and large group exposures, and off-balance sheet positions.
  - Common exposures to sizable public debt holdings mean financial stability is closely tied to public finances and debt market dynamics.

### Stress testing and resilience
- Stress tests suggest broad resilience to solvency shocks, but interconnectedness analysis points to high contagion risk.
- Under an adverse scenario of temporary economic recession, banks would be able to recover due to high profits and large buffers.
- A natural disaster shock could require large recapitalization needs of 3.3 percent of GDP.
- Insurance companies would be able to recover relatively fast with a global repricing of the risk premium due to high profitability.
- At the group level, large intra- and inter-group direct exposures pose contagion risk.

### Priority policy recommendations and actions (high level)
- Intensify oversight and group-wide risk-based supervision, especially for systemically connected groups.
  - Implement Basel’s Pillar I (minimum capital requirements) and Pillar II (supervisory review process) to build buffers at individual and group level and reduce regulatory arbitrage.
  - Strengthen active cooperation and coordination with other supervisors in the region, particularly for groups with cross‑border operations.
  - Improve access to timely granular data, analyses, and monitoring.
- Build an effective macroprudential framework that rests on strong microprudential foundations and enhanced transparency and accountability.
- Reinforce resilience of securities dealers, deepen capital markets, and broaden instruments to manage credit, liquidity, and market risks.
- Expand skilled supervisory resources immediately:
  - All supervisory agencies need to expand capacity to meet current mandates and new demands.
  - Advances toward adoption of international standards by 2020/21 will pose challenges requiring further inter-agency coordination.
  - Strengthen supervisory databases for monitoring complex group-based risks and for financial stability analysis.
- Advance crisis management, recovery planning, and resolution:
  - Continue work on the Special Resolution Regime (SRR) for Financial Institutions and the broader crisis management framework.
  - Clarify responsibilities in the new resolution framework, define systemically important institutions, and determine funding arrangements.
  - Sequence work on recovery planning, resolution plans, and resolvability assessments; prepare system-wide contingency planning for systemic crises.

### Table of main recommendations (selected highlights with timing)
- 1 Increase supervisory resources (All) — I
- 2 Enhance data collection and technical skills for risk-based supervision (All) — I
- 3 Strengthen the IT platform for supervisory data sharing and regulatory collaboration (All) — I/NT
- 4 Provide greater delegation to the BoJ to enact legally enforceable rules (Government) — I
- 5 Fully deploy and implement risk-based supervision (BoJ, FSC) — I
- 6 Fully deploy and implement risk-based AML/CFT supervision for DTIs and Cambios (BoJ) — NT
- 7 Implement consolidated supervision and intensify cross-agency cooperation (BoJ, FSC) — I
- 8 Implement Basel III capital adequacy and liquidity requirements at solo and group levels (BoJ) — NT
- 10 Complete retail repo reforms through staged introduction of the mismatch ratio (FSC) — I/NT
- 14 Enact binding regulations for asset-liability management and introduce regular stress tests for general insurers (Government, FSC) — MT
- 15 Introduce a risk-based solvency regime, ideally at adoption of IFRS 17 (Government, FSC) — NT
- 16 Develop a toolkit for macroprudential policy (BoJ) — MT
- 18 Introduce a special resolution regime aligned with international best practice (Government) — NT
- 19 Finalize an MoU between BoJ and JDIC to allow JDIC to better prepare for possible resolution action (BoJ, JDIC) — I
- 21 Develop guidance for FIs on recovery plans and begin a pilot with the most significant institutions (BoJ, FSC, JDIC) — I
- 23 Adopt a strategy for capital markets deepening, including developing the short end of the yield curve for benchmarking (Government) — NT

I (immediate) = within one year; NT (near term) = 1–3 years; MT (medium term) = 3–5 years.

*Executive Summary and Key Recommendations — IMF Financial Sector Assessment for Jamaica (selected content).*

### 11.      The interconnectedness assessment found important links in the repo market and the

### 11.      The interconnectedness assessment found important links in the repo market and the

### Interconnectedness assessment — methods and main findings
- Analysis used data on:
  - (i) direct exposures.
  - (ii) indirect exposures via financial institutions’ balance sheet similarities and hierarchical clustering.
  - (iii) large-value payment system liquidity. (Appendix V)
- Direct exposure network:
  - Showed a highly interconnected financial system with concentrated dependence on foreign funding (Table 5).
  - Foreign institutions play a central lender role, with links to about 33 percent of the participants in the network.
  - Links are high intensity vis-à-vis a few systemically important DTIs.
  - Failure to roll over borrowing from abroad would significantly impact the domestic exposure network.
- Indirect common exposures:
  - Balance sheet correlations are substantial among financial institutions pertaining to the same financial segment.
  - The strongest correlation is in the DTIs segment (about 0.9 on average).
  - DTIs balance sheets account for about 62 percent of assets and 64 percent of liabilities of the financial system.
- Large-value payment system:
  - Over 80 percent of the large payments system network is accounted for by 18 financial institutions.
  - Four institutions (DTIs in particular) account for about half of the transactions.
  - If any of these four institutions were to fail to participate, liquidity and asset exchanges among financial institutions and operations in the real sector could be extensively affected.

### Interconnectedness — recommended capacity and data enhancements
- Authorities should further strengthen resources and skills devoted to assessing risks from interconnectedness; existing data limits a full assessment on cross-exposures.
- Suggested actions:
  - (i) Adopt mechanisms to comprehensively measure and understand financial stability risks associated to the large-value payments system.
  - (ii) Take advantage of the informational content of real-time gross settlement (RTGS) data for supplementing traditional analysis based on low-frequency data reported by financial institutions.
  - (iii) Develop tools to comprehensively measure, understand, and manage risks that arise from DTIs’ and non-DTIs’ common exposures (e.g., sovereign exposures) amid different idiosyncratic and systemic shocks.
  - (iv) Expand and enhance existing datasets and models that allow periodic measurement and analysis of direct and indirect exposures in the financial system.
  - (v) Measure and monitor the extent to which events involving major global participants in the exposure network may impact the solvency and liquidity of financial institutions.

### B. Deposit-Taking Institutions — resilience and stress-test results
- Baseline/adverse scenarios and capital impacts:
  - Under the adverse scenario with GDP growth declining to 0 percent, the banking sector’s aggregate capital adequacy ratio (CAR) would remain above the regulatory minima (about 13 percent) despite a sharp increase in NPL ratios and lower profitability.
  - Some banks’ CARs would fall below the 10 percent CAR regulatory minimum. Restoring it across all banks would require 0.7 percent of GDP.
  - Under the severely adverse scenario the system aggregate CAR would fall to 5.1 percent. The required recapitalization injection would amount to about 3.3 percent of GDP.
- Sensitivity analyses and vulnerabilities:
  - Counterparty risk: Assuming each bank’s top three borrowers default with zero recovery, the system’s aggregate CAR would decrease to 0.7 percent one period ahead, with a recapitalization need of 4.8 percent of GDP.
  - Interest rate risk: A 300-basis point interest rate shock would reduce the systemwide CAR by 4.4 percentage points.
- Asset-class concentration:
  - Banks’ holdings of sovereign government bonds and of personal loans are significant.
  - For some banks, concentration risk is large due to loan book concentration in tourism and financial services; for others, large exposures to manufacturing, construction, and trade drive NPL growth.
- Exchange rate shocks:
  - Large exchange rate shocks considered have negligible effects due to relatively covered positions between FX assets and liabilities and significant financial dollarization.
  - A significant rise in FX non-performing loans associated with currency movements would require increasing provisioning.
- Liquidity and central bank buffers:
  - Banks hold large liquid assets both in JM$ and FX, at the BoJ.
  - BoJ’s liquid asset ratio requirement is 26 percent in respect to domestic currency liabilities and 29 percent for FX liabilities.
  - In the adverse scenario, over a five-day horizon, most banks would be able to withstand a proportional withdrawal run on banks’ liabilities for at least 2 consecutive days.
  - After 4 consecutive days, most DTIs would need access to their liquidity balances at the BoJ and potentially to the BoJ’s liquidity facilities.
  - Highly liquid banks would likely initially benefit from a “flight to safety” and reputation effects, delaying initial liquidity squeeze impact.

- Scenario footnotes preserved:
  - Adverse scenario: Cumulative three-year growth would be 5 percentage points lower than the baseline. Important reforms would stall and confidence in the reform program would begin to erode. Investors would begin demanding higher yields from the government. Demand for FX would ramp up, and the currency would begin to depreciate by up to 15 percent per year. Inflation volatility would increase materially and repeated breaches of the central bank inflation target band would prompt interest rates increases of up to 300 basis points.
  - Severely adverse scenario: Real GDP growth would drop by 1-2 percentage points in the first year (i.e. almost 3 percentage points lower than the baseline) and be permanently lower by 2 percentage points thereafter. Interest rates would spike by 600 basis points, led by a flight to safety. The exchange rate would depreciate significantly.

### C. Non-Bank Financial Institutions — Insurance, Pensions, Securities Dealers
- Insurance sector:
  - Life insurers:
    - Face challenges of declining interest rates on domestic sovereign bonds.
    - Hold 59 percent of their assets in Jamaican sovereign debt.
    - Average return on equity during 2012–17 was 26 percent.
    - Sector profitability is declining albeit from rather high levels.
  - Non-life insurers:
    - Exposed to tail risks from natural catastrophes (hurricanes and earthquakes).
    - For property insurance, retention levels are low and more than 90 percent of the business is ceded to reinsurers abroad.
    - Both life and non-life sectors face potential FX mismatches: few insurers offer products denominated in or linked to foreign currencies, but many hold non-JM$ investments, mainly in US$, exposing them to JM$ appreciation.
  - Stress tests:
    - All insurers stayed above regulatory minimum thresholds of 150 and 250 percent for life and non-life insurers, respectively, under the modelled repricing of global risk premia. The impact of the modelled sovereign shock is likely to be underestimated under the current solvency regime.
    - General insurers under the major hurricane adverse scenario (adverse scenario 2): median pre-stress solvency ratio of 261 percent falls to 231 percent, with large dispersion across companies; most companies stay profitable and are expected to recover rather quickly after such an event.
- Pension funds:
  - Appear to have a relatively sound funding model; typically well-funded on current estimates.
  - Good sustainability is driven by high rates of member exit and long vesting rules which lead to employer contributions being left in the plan when a member exits.
  - No requirement typically to increase pensions each year by even price inflation.
  - However, many pension fund members risk receiving inadequate pensions due to early withdrawals and inadequate funding; concerns exist over the level of income provided by the National Insurance System.
- Securities dealers:
  - Top-down stress tests (e.g., equity prices dropping 20 percent, domestic interest rates changing by 3 percent) suggest the significant majority of the industry is sufficiently capitalized to withstand adverse shocks, though some brokers would fail.
  - Legal and operational risks in the “retail repo” business model have declined with reforms (master repurchase agreement; underlying securities held on trust).
  - A JM$1M minimum subscription threshold reduced aggregate repo holdings by 12 percent between end-2014 and 2017, but repos remain a very high proportion of dealers’ liabilities.
  - Near-term priorities (immediate 1 year and near term 1–2 years):
    - Implement the retail repo mismatch ratio to minimize maturity mismatch risk.
    - FSC should collect and analyse data on securities dealers’ over-the-counter (OTC) transactions.
  - Medium-term development steps for securities dealers expanding into corporate debt/equity:
    - A viable trade reporting or (preferably) secondary trading platform to aid price discovery.
    - A risk-based supervision framework and a fixed timeline for implementation.
    - Focus on developing liquid markets and ensuring dealers enhance liquidity management.
    - Implementation of effective group-wide supervision by the BoJ and FSC.
    - Review existing foreign exchange requirements to determine whether they impede development of hedging products against the US$ for Jamaican corporates.
    - Review existing risk weightings for corporate debt and equity instruments.
    - If repurchase agreements are used to offer short term fixed interest products backed by long-term corporate debt securities to non-accredited investors, apply the same trust, standard master repurchase agreement, and mismatch ratio infrastructure.

### Oversight framework — macroprudential and microprudential
- Macroprudential policy framework:
  - A high level inter-agency FSSC has been established by way of an amendment to the BoJA; the FSSC is tasked with producing regular financial stability assessments and providing recommendations to the BoJ on potential macroprudential policy actions. Final responsibility for actions resides with the BoJ.
  - BoJ has made good progress in establishing a system for monitoring systemic risk but important information gaps remain.
  - BoJ is considering instruments to include in a “macroprudential policy toolkit”, including those found within Basel III.
  - BoJ should develop a communication strategy to convey stability assessments, link them to policy action, and manage public expectations.
- Microprudential supervision and group-wide oversight:
  - BoJ is fully empowered under the BSA to supervise financial groups with a DTI but does not yet impose prudential standards on a consolidated basis.
  - Preparatory work is underway to license Financial Holding Companies (FHCs), impose prudential standards on a consolidated basis (solvency, liquidity, large exposures, and related parties), collect prudential data on a group-wide basis, establish and enforce fit-and-proper standards for owners and senior management of parent companies, and strengthen regulations on internal control and risk management.
  - Consolidated risk-based supervision is a critical priority; initial risk-based supervision steps have been applied to one DTI and should be extended to FHCs and all DTIs.
  - Success will hinge on (i) availability of adequate skills and resources in all regulatory agencies, and (ii) time needed to adjust resources and practices beyond the solo institution approach.
  - Coordination among supervisors needs strengthening: timely and enhanced granular data sharing mechanisms, regular technical collaboration, consistency of regulations (including interpretations), and cooperation between the BoJ and FSC through joint rule-makings and intensified oversight (including joint onsite inspections).
  - Cross-border supervision should be intensified with more MoUs signed between domestic and foreign supervisors.
- Banking supervision progress and remaining limitations:
  - BSA passed in June 2014 substantially improved the supervisory architecture and transferred critical functions from the MoFPS to the Governor of the BoJ.
  - Current legal framework gives the BoJ powers to license DTIs and FHC, conduct ongoing supervision and undertake timely corrective action.
  - BoJ’s inability to issue binding prudential regulations constitutes a limitation; standards of sound practices introduced over the years lack the force of law.
  - Recommendation: The BoJ should be empowered to legally enact legally enforceable prudential rules.
  - The BoJ needs to intensify oversight by adopting a more intrusive approach to DTIs’ risk management processes, corporate governance, and internal control; shorten timelines for providing recommendations and perform thorough follow-up on remediation progress.

*Source: cr18347 - 11.      The interconnectedness assessment found important links in the repo market and the*

### 40.      Capital and liquidity requirements are no longer aligned with international widely

### cr18347 - 40.      Capital and liquidity requirements are no longer aligned with international widely

### Capital and liquidity framework
- Several elements of the framework are prudent (minimum level of the ratio, composition of Tier I), but the calculation of capital requirements still reflects the analytical methodology of the Basel I framework.
- Current methodology focuses exclusively on credit and FX risks and leaves aside other market and operational risks that are likely to be significant under a consolidated basis approach.
- Recommendations:
  - Introduce a broader comprehensive Pillar I approach capturing all risks.
  - Develop a thorough Pillar II methodology.
  - Introduce a surcharge reflecting the systemic importance of DTIs.
  - Introduce a minimum quantitative prudential liquidity standard.
  - These measures would enhance risk coverage and complement BoJ’s efforts to foster convergence with international standards.

### Related party and large exposures
- Strengths:
  - Related party and large exposures are well defined and controlled through statutory requirements.
  - The BSA provides a comprehensive and transparent definition of exposure, and counterparties to capping credit risk concentration and limiting exposure to related parties.
- Weaknesses and gaps:
  - Large exposure limits need to be changed to meet current and prospective international standards.
  - International standards for large exposure to a group of connected accounts are stricter (25 percent rather than 40 percent of capital base).
- Progress:
  - The BoJ in cooperation with the FSC is consulting on proposals to bring the regime in line with international standards.
- Further action required:
  - Implement prudential standards on a consolidated basis.

### Loan loss provisioning and accounting alignment
- Current practice:
  - Loan loss provisions are calculated using a conservative rules-based approach imposed by the BoJ (i.e., automatic triggers for loan classification, minimum provisioning percentages for each category).
- Transition risks:
  - The forthcoming implementation of IFRS 9 raises new challenges.
- Recommendations:
  - Better alignment with international accounting standards is desirable.
  - Define a transition period, as intended by the BoJ, considering the complexities of calculating expected credit losses and limitations on historical information.
  - BoJ should be transparent to the DTIs about how it will use the current regulatory provisions regime in an IFRS 9 environment.
  - BoJ should develop its technical capabilities and provide a clear set of definitions (non-performing exposures, forbearance, and restructured loans).

### Insurance supervision — progress and remaining weaknesses
- Strengths:
  - Significant progress in insurance supervision: surveillance, inspection and enforcement powers, information sharing and cooperation powers, comprehensive supervisory reporting, strong corporate governance framework (e.g., fit and proper), and regular dialogue with the Insurance Association of Jamaica.
- Weaknesses:
  - Aspects of FSC’s independence from the government need attention (balanced against accountability).
  - Need for formal mechanisms to support group-wide risk assessment and supervision.
  - Supervisory approach is rather compliance-based and should move towards risk-based and forward-looking assessments.
  - Need to modernize life insurance liabilities and solvency regime.
  - Shortage of skilled staff is a major challenge.
- Recommendations:
  - Adopt IFRS 17 (planned for 2021) in combination with a modernized risk-based solvency regime to ensure consistency between valuation and capital adequacy.
  - Introduce binding regulations for asset-liability management in the interim.
  - Extend regular stress testing framework to general insurers.
  - Establish consolidated supervision, including for cross-sectoral groups.

### Pension supervision and investment regulation
- Current state:
  - Regulatory framework is relatively comprehensive, but gaps in resources, enforcement, and coverage remain.
  - FSC capacity is limited to regulate and supervise 399 active pension plans, 27 licensed pension administrators, and 28 licensed investment managers.
  - Persistent breaches (e.g., self-investment in sponsor) indicate inadequate supervisory focus.
- Investment regulation constraints (Box 3 summary):
  - Permitted locations of foreign assets currently constrained to the U.S.A., Canada, and the U.K.
  - Total foreign asset allocation limits.
  - Domestic asset allocation limits (need to allow new investment categories).
  - Two additional restrictions on concentration limits and related party limits broadly follow international best practice.
- Financial-stability perspective and phased liberalization recommendations:
  - Gradually broaden FX investment opportunities to enhance diversification and returns, aligned with strengthened risk management, regulatory capacity and cooperation, and capital market deepening.
  - Widen foreign investment locations to add OECD countries and exposures to emerging markets and frontier markets through well-known multi-country index funds.
  - Gradual increase in the FX investment limits, consistent with enhanced data collection, enforcement capacity, risk management frameworks, and cooperation among supervisors.
  - Changes to investment limits for nonbank institutions, including insurance and pension funds, should be designed to avoid regulatory arbitrage and be accompanied by supervisory capacity enhancements.
  - Precede liberalization by full institution-by-institution assessments of FX and JM$ exposures, ensuring micro- and macroprudential regulations and spillover assessments are in place.
  - Avoid perceptions of regulatory forbearance; apply appropriate sanctioning by the relevant authority.
  - Data suggest funds have been exceeding the regulatory limit for some time and a gradual raising of the limit (to, say, 10 percent) would entail a relatively minor impact on aggregate FX placements given any impact would have been already absorbed in the balance of payments.
  - Improve capacity to monitor and enforce current regulatory limits.
- Sector consolidation:
  - Consolidation of the pension sector would strengthen capacity and alleviate challenges related to small fund sizes, gaps in expertise, and governance.
- Supervisory tools:
  - FSC should finalize the newly developed stress testing methodology and integrate it into its risk-based methodology.
  - FSC should finalize guidelines for risk management with enhancements implicit in the new investment regulation and stress testing methodology.

### Securities supervision and market conduct
- Strategic focus:
  - BoJ and FSC should focus on risk-based consolidated supervision and market conduct.
  - Implementation plans drafted; long-term TA project about to commence.
  - Finalize manuals for risk-based supervision and intensify training of staff on RBS to be proactive and able to defend judgments.
  - Strengthen horizontal market analysis (business models, peer groups, identify outliers, market dynamics).
- Enforcement:
  - FSC enforcement needs to be stepped up; current reliance on public complaints is reactive and complaint numbers are relatively low.
  - Enforcement is often directed to prudential rather than conduct issues; should proactively target emerging risks.
  - Transparency and communication are important to build public and industry confidence.
- Near-term regulatory priorities for securities dealers:
  - (i) Continue and complete the retail repo reforms through staged introduction of the mismatch ratio—the proposed liquidity-based ratio should be used as a monitoring tool while the impact of the mismatch ratio on liquidity works through the system.
  - (ii) Introduce the revised large exposure regime to improve resilience against contagion.
  - (iii) Introduce formal arrangements for group-wide supervision of conglomerates which include securities dealers, both within the FSC and between the BoJ and FSC.
- Medium-term:
  - Once pre-conditions are met and sovereign debt issues reduce, securities dealers should intermediate in a wider range of instruments, in particular corporate debt and equity instruments, commencing with JM$ and then US$.
- Pre-conditions before medium-term expansion:
  - (i) Development of the risk-based supervision framework and firm timeframe for introduction.
  - (ii) FSC collects data on securities dealers’ OTC trading as part of normal data collection.
  - (iii) A trade reporting mechanism is put in place to assist price discovery and systemic risk monitoring.
- Fintech, crowd funding, and cryptocurrencies:
  - Currently at an embryonic level; authorities should develop guidance to the industry.
  - FSC examining regulatory changes required.
  - Before considering new digital asset trading platforms for crypto assets trading, address gaps in current infrastructure including secondary trading infrastructure and reporting platform of sovereign bonds, and assess risks and benefits given resource scarcity.

### Cooperative and credit union supervision
- Transition plan:
  - Authorities are bringing credit unions under BoJ supervision; bank licensing process should be carefully sequenced and managed with a clear communication strategy.
- Preconditions for access to deposit insurance scheme:
  - BoJ must assess licensing criteria for each institution and conduct a rigorous asset quality review of all credit unions to diagnose potential capital needs (Annex II).
  - Agreement needed on incorporating the current credit union stabilization fund into the deposit insurance fund.

### Financial integrity (AML/CFT)
- 2015 assessment:
  - Jamaica was assessed against the 2012 FATF standard in 2015; the mutual assessment report (MER) concluded Jamaica had taken many steps since 2005 but important shortcomings remained in technical compliance and effectiveness.
  - MER identified deficiencies in understanding of ML/CFT risks, terrorism financing framework, preventive measures framework, transparency and beneficial ownership, and supervisory activities.
- Progress since 2015:
  - 2014 BSA entered into force strengthening supervisory powers.
  - International Trusts and Corporate Services Act adopted.
  - Amendments related to transparency of beneficial ownership brought to the Companies Acts.
  - Proposed amendments to the Terrorism Prevention Act and the Proceeds of Crimes Act expected to further strengthen legal framework.
  - Building on the 2016 ML/CFT National Risk Assessment (NRA), authorities are carrying out a comprehensive NRA with World Bank assistance expected to be completed in 2019.
  - Authorities are establishing a risk-based approach to AML/CFT supervision of DTIs and cambios with IMF technical assistance.
- Remaining priorities:
  - Sustain efforts to address pending FATF shortcomings: strengthen AML/CFT preventive measures obligations and ensure enforceability, enable consolidated supervision of financial conglomerates, ensure transparency of legal entities, and support efforts to fight organized crime.
- Correspondent banking relationships (CBRs):
  - Pressure on CBRs have stabilized, albeit with remaining fragilities for money services businesses and micro-finance entities.
  - Domestic banks face restrictions with respect to handling cash and clearing of checks, affecting service to cash-intensive businesses.
  - Growth in remittances and foreign direct investments has not been impacted.
  - Authorities have engaged foreign regulators and are implementing recommendations from the 2015 MER.

### Crisis readiness, management, and resolution
- Current institutional arrangements:
  - MOFPS is the resolution authority for DTIs under the BSA.
  - FSC lacks significant resolution powers (beyond initiating winding up under the Companies Act) for entities it supervises.
  - DTIs and insurance companies are specifically excluded from the 2014 Insolvency Act unless regulator gives written consent.
- BoJ powers:
  - BoJ has enforcement powers for entities licensed under the BSA (DTIs and FHCs) including power to appoint a temporary manager and to revoke a license.
  - BoJ may recommend to MOFPS that it make an order vesting a licensee’s shares and subordinated debt in the Accountant General under Section 114 of the BSA (a vesting order).
  - BSA specifies effects of such an order and provides MOFPS power to carry out transactions to sell to or merge the licensee with a buyer; certain time limits apply after which MOFPS must apply to court for winding up.
- Reform underway:
  - Work is underway to modernize the resolution framework for financial institutions.
  - A consultation paper was jointly published by members of the Financial Regulatory Committee (FRC) in February 2017.
  - After public comment, a proposal was submitted to Cabinet in July 2017 and in October approval was given for drafting instructions to prepare legislation to establish a Special Resolution Regime (SRR) for FIs.
  - The proposal is to be submitted to Parliament in 2019.
- Proposed new framework:
  - Hybrid approach with two parts:
    - Special Resolution Regime (SRR) applying to all DTIs and certain other FIs deemed systemically important; SRR will be an administrative resolution mechanism.
    - Modified Insolvency Framework applying to other nonviable/insolvent FIs and any residual portions of an entity subject to the SRR.
  - Anticipation that any new resolution regime will also apply to credit unions once they come under BoJ supervision.
- Independence of resolution authority:
  - BoJ’s function as resolution authority (RA) will be operationally separate from its regulatory and supervisory functions under the BoJA and the BSA.
  - The RA will have power to appoint one or more entities to assist in performance of its functions with specified legal capacities and competencies (e.g., secure financing and hold and deal with shares of FIs and other companies).

*Source: cr18347 - 40.      Capital and liquidity requirements are no longer aligned with international widely (IMF PDF chapter).*

### 66.      The specific responsibilities in the new resolution framework are not yet finalized.

### 66.      The specific responsibilities in the new resolution framework are not yet finalized.

### Resolution framework: roles and outstanding design issues
- The proposed new framework establishes BoJ as the resolution authority for DTIs/FHCs and any non-DTI deemed systemically important; the FSC will continue to have powers to deal with non-DTIs that are either insolvent, facing imminent insolvency, or is being wound up.
- The new framework will also allow for the appointment of a Resolution Administrator (RAdmin) which could be the JDIC or the FSC.
- The specific responsibilities of the various authorities will only become clear once the new resolution regime is drafted, adopted, and operationalized.

### Sequencing and detailed standards needed
- The resolution framework reforms need to be properly sequenced.
- Detailed standards to classify systemic/non-systemic institutions, the applicable priority scheme for claims under the SRR and how a bridge institution would be established and under what rules need to be adopted.

### Recovery planning and guidance
- Recovery planning is not underway and BoJ should develop guidance for financial institutions to assist them in preparing such plans, including for financial groups.

### JDIC funding and deposit insurance
- JDIC’s access to funds for its operations as a resolution administrator is not clear; this is being addressed at the SRR drafting stage.
- There is a deposit insurance fund (i.e., a pay box) with reserves at about 5.5 percent of insured deposits.
- There are no formal arrangements in place for a dedicated back-up funding system.

### Contingency planning and systemic crisis preparedness (paragraph 67)
- The authorities have not prepared formal contingency plans for dealing with a systemic crisis such as was experienced in the mid-1990s.
- No systemic simulation exercises to assess the authorities’ ability to deal with a systemic crisis have been undertaken.
- A systemic crisis contingency planning and simulation exercise agenda should be pursued as part of normal business practice in due course.
- The draft 2014 Emergency Liquidity Facility Policy should be reviewed and finalized; it has not yet been used.

### Creditor infrastructure and credit intermediation (paragraphs 68–69)
- The credit-to-GDP ratio is relatively low and credit to the economy is not effectively intermediated (Figure 9a).
- Though credit has recently recovered to its trend level, the credit-to-GDP ratio is still low compared to Jamaica’s peers in the Caribbean and many other emerging markets, which are typically in the range of 40–60 percent.
- Overall, the formal credit environment in Jamaica appears to support access to credit for consumers and corporates, but not micro, small and medium enterprises (MSMEs).
- Bank lending to consumers is expanding (Figure 9b), primarily secured with traditional types of collateral, such as motor vehicles.
- Unsecured lending is typically issued to prime customers known to the financial institution or to public servants.
- Most lending to the MSME sector is taking place via still unregulated micro-finance institutions (MFIs) and credit unions, which lend to medium sized corporates, also not fully regulated.
- The credit reporting system built recently should facilitate creditor risk management, but financial institutions are not fully utilizing it, partly because of informational gaps.
- The effectiveness of the secured transactions law can be enhanced together with an effective communication and public awareness strategy on the opportunities opened by the Insolvency Act and related insolvency regime to the industry.
- Given the rapid growth of lending by unregulated financial institutions, strengthening the monitoring of such entities would be important.

### Market development and technical assistance (paragraph 70)
- The 2015 World Bank FSAP Development Module covered capital markets deepening.
- One of the key recommendation included the development of movable asset-based financing instruments (e.g., factoring, leasing, and venture capital).
- More recently IMF TA provided detailed recommendations on the primary dealer system, strengthening sovereign debt markets benchmarks, and developing the secondary market.

### Box 1. The World Bank FSAP Development Module, 2015 — key findings and recommendations
- Credit to the private sector by DTIs remains limited, despite a high proportion of formally banked households.
- The lack of access to credit and equity constrain MSMEs’ operations and growth, and ultimately their contribution to the economy.
- Authorities have taken significant initiatives to improve the legal and regulatory environment and financial infrastructure, including:
  - establishment of credit bureaus,
  - modernization of the secured transactions legal framework and establishment of the movable collateral registry,
  - improvements to the insolvency and creditor rights framework that would facilitate corporate rehabilitations.
- To further strengthen the framework, key findings and recommendations include:
  - (i) enhance the credit reporting oversight and financial consumer protection framework, and adopt measures to encourage credit bureaus to compete in services and not in data;
  - (ii) enhance the regulations of the movable collateral registry; and
  - (iii) develop regulations for the insolvency law along with training of judges and insolvency administrators.
- Alternative sources of SME finance beyond credit lines or personal loans, such as factoring, leasing, and venture capital are limited.
- Specific instruments to facilitate access to finance for low income households and agriculture finance, should be designed, including micro-insurance and regular saving products.
- High interest rates and low penetration of credit can be explained by high credit risk owing to information asymmetries, as well as limited competition in the banking sector.
- Financial institutions have not been able to accurately assess borrowers’ level of indebtedness and repayment capacity and credit activity has been low and highly concentrated in existing customers.
- Policies that encourage competition in the banking sector should be considered, including promoting enhanced transparency and consumer disclosure that would enable consumers to compare products and quality of service amongst financial institutions, strengthening dispute resolution mechanisms, and expanding financial literacy.
- Additional recommendations included enhancing housing policy strategy, retail payments innovation and consumer protection:
  - (i) a comprehensive national housing policy strategy be developed,
  - (ii) policy reforms that encourage innovations in retail payments be a priority and the current regulatory framework reviewed to encourage competition amongst bank and nonbank providers; and
  - (iii) the financial inclusion agenda also requires a comprehensive strategy on consumer protection regulation and supervision.

*Source: cr18347 - 66.      The specific responsibilities in the new resolution framework are not yet finalized.*

### Box 2. Insurance and Pension Funds FX Investment Limit Regulation

### Box 2. Insurance and Pension Funds FX Investment Limit Regulation

### Investment regulation structure and vehicle types
- The 2006 investment regulations impose quantitative limits at the level of asset classes, related parties, individuals and foreign exchange (FX) exposure with some differences depending on the vehicle through which the assets are invested.
- Plan assets can be invested:
  - directly,
  - through a “segregated fund” where an investment manager has the mandate for one fund only, or
  - through pooled funds (Type I pooled fund, Type II pooled fund).
- Type I pooled fund:
  - can only manage assets of pension plans.
  - are bound by exactly the same rules as pension plans in terms of asset allocation limits—except that Type I plans are exempt from the concentration limits (5 percent) and related party limit (10 percent).
  - These features were subject to confusion among several market participants and in previous reviews of the pension system.
- Type II pooled funds:
  - include open-ended investment funds, mutual funds, collective investment schemes (CIS), unit trust, and any investment fund, other than a Type I Pooled Fund.
  - are subject to the concentration and related party limits.
- Deposit Administration Contracts (DACs):
  - run by insurers but following the 2006 regulations,
  - are also exempt from the concentration and related party limits like Type I funds,
  - are supervised by the insurance teams and subject by the BoJ 5 percent ceiling on foreign investments.
- Footnote text preserved verbatim:
  - “The investment of pension plan assets DACs is subject to the investment regulations. Similar to Type I pooled funds, DACs are exempt from the general concentration and related party limits (regulations 17 and 34).”

### FX investment quantitative limits and country eligibility
- Quantitative limits on FX investments in the 2006 regulations were set at 20 percent of the total portfolio.
- The Bank of Jamaica (BoJ) intervened to reduce the exposure to 5 percent for all pension investments except via CISs, with a limit of 25 percent for CISs.
- For CISs the BoJ has relaxed the original 5 percent FX restriction and can now have FX investments up to 25 percent.
- The foreign exchange regulations also specify that only investments in the U.S., Canada and the U.K. are permitted.

### BoJ 2015 Discussion Paper position and concerns about liberalization
- The BoJ issued a Discussion Paper in 2015 showing support for:
  - removing restrictions on pension plans (so they could invest 20 percent of assets in foreign securities as originally envisaged), and
  - removing restrictions on insurance companies in the medium term (3 years).
- The Paper noted a range of concerns about liberalizing, including:
  - the impact on “system stability” due to the impact on FX reserves,
  - increasing yields on Government of Jamaica (GoJ) securities if demand from pension funds or insurance companies were to plummet,
  - the impact of any volatility in the bond market on plans to reform the retail repo market.
- The Paper noted that liberalization for pension plans and insurance companies would have to follow that for CIS for whom the BoJ had liberalized the 5 percent restriction on FX holdings to 25 percent.

### Regulatory arbitrage and BoJ clarifications
- The Paper highlighted potential for regulatory arbitrage:
  - permission given to one investment manager to offer exposure to foreign currency returns more than 5 percent or even 20 percent of total assets in the pool because pension plan investors were using Jamaican dollars to buy Jamaican dollar denominated units and receiving Jamaican dollar returns and hence were not judged by the BoJ to be breaching its 5 percent ceiling.
- The BoJ only gave this clarification to one investment manager—leaving the others subject by the 5 percent limit until they either receive a similar clarificatory letter from the BoJ, or the 5 percent limit is increased.

*Box 2. Insurance and Pension Funds FX Investment Limit Regulation — cr18347*

### Annex I. Report on Observance of Standards and Codes: Basel

### Annex I. Report on Observance of Standards and Codes: Basel — Core Principles

### Introduction and scope
- Assessment completed as part of the Financial Sector Assessment Program (FSAP) undertaken by the International Monetary Fund (IMF) in 2018 at the request of the Jamaican authorities.
- Focus: implementation of the Basel Core Principles for Effective Banking Supervision (BCP) in Jamaica as of completion of the assessment.
- Scope limitation: focused on regulation and supervision by the Bank of Jamaica (BoJ) of Deposits-Taking Institutions (DTIs); did not cover the state of the banking sector or crisis management framework (addressed elsewhere in the FSAP).

### Information and methodology used for assessment
- Assessment performed against the BCBS standard issued in 2012; compared to prior BCP assessment in 2006 the standard and methodology were significantly revised.
- Compliance assessed and rated against essential criteria (EC) and additional criteria (AC); EC are the elements for full compliance with a Core Principle.
- Assessment was qualitative and required evidence of effective application of relevant laws and regulations.
- Assessment team: Richard Gresser and Luc Riedweg.
- The BoJ provided self-assessments, comprehensive questionnaires, supervisory documents, staff access, and facilitated meetings with the Minister of Finance, the banking industry, and other counterparts.

### Preconditions for effective banking supervision
- Macroeconomic context:
  - Primary surplus exceeding 7 percent of GDP since 2013/14.
  - Real GDP growth has averaged 0.9 percent in the last four years.
  - High employment levels and well-anchored inflation noted.
- Institutional developments:
  - Financial System Stability Committee (FSSC) established by amendment to the BoJ Act; tasked with regular financial stability assessments and recommendations to the BoJ.
  - BoJ is tasked with operationalizing a macroprudential policy framework; information gaps remain for an early warning system and instruments for a “macroprudential policy toolkit” are being sought.
- Crisis management and resolution:
  - Current framework insufficient for resolution of complex financial conglomerates and does not establish a single resolution authority for such institutions.
  - Authorities proposed a two-part solution: an administrative resolution framework for all DTIs and a modified insolvency framework for other financial institutions with the BoJ acting as resolution authority.
  - Drafting instructions for the administrative resolution framework have been prepared; both proposals are to be submitted for adoption by Parliament in early 2019.
  - Significant work required to have an operational system for financial institution resolution within the proposed timeline.
- Deposit insurance and contingency planning:
  - Jamaica Deposit Insurance Corporation (JDIC) broadly conforms to international best practices.
  - No contingency planning for a systemic crisis has been completed; a crisis simulation exercise is planned for 2019 under the Financial Regulatory Committee (FRC).
- Disclosure and accounting:
  - DTIs are required to disclose financial statements consistent with IFRS and IFRS 7.

### Main findings — responsibility, objectives, powers, independence, accountability (CPs 1–2)
- Legal and institutional framework:
  - Banking Services Act (BSA) passed in June 2014 substantially improved supervisory architecture, transferring critical supervisory functions from the MoFPS to the Governor of the BoJ.
  - Clear allocation of responsibilities between BoJ and the Financial Services Committee (FSC).
  - BSA provides BoJ powers to authorize DTIs and FHCs, conduct ongoing supervision, and undertake timely corrective action.
- Limitation:
  - BoJ’s inability to issue binding regulations is a constraint: Regulations and Supervisory Rules require consultation with the MoFPS and affirmative resolution from Parliament.
  - Standards of sound practices (SSP) and guidance notes provide important guidance but do not have force of law and breaches cannot directly lead to enforcement action.

### Main findings — resourcing and conflicts of interest
- Supervisory resources:
  - Supervisory resources are stretched and insufficient for the range and nature of tasks required for effective supervision.
  - BoJ has not quantified impact of risk-based supervision or mapped required skills.
- Conflicts of interest and post-employment restrictions:
  - Legislation does not include express prohibitions against members of the Supervisory Committee and senior supervisory staff from holding positions in supervised entities for a determined period after they demit office.

### Main findings — ownership, licensing, and structure (CPs 4–7)
- Permissible activities, licensing, transfers of ownership, mergers and acquisitions are appropriately defined and controlled.
- BoJ has adequate basis and well-established supervisory practices to approve or reject major acquisitions or investments and to evaluate investors’ financial capacity, management strength, suitability, and business plan viability.

### Main findings — methods of ongoing supervision (CPs 8–10)
- Supervisory practices and tools:
  - BoJ uses a reasonable range of techniques and has broad information-gathering powers; monitoring includes macroeconomic and sector-wide developments.
  - Offsite assessment lacks sufficient analytical depth and does not sufficiently compare banks with peer groups or sector benchmarks.
  - Assessment of individual DTIs’ risk profiles via offsite supervision has been limited; frequency of on-site examinations is relatively low.
- Move toward risk-based supervision:
  - BoJ has initiated implementation of a risk-based supervision methodology; the methodology is well-designed.
  - Currently only one DTI is supervised under the new methodology; early results look promising with thorough offsite risk analysis and improved on-site focus on governance, risk profile and risk management.
- Implementation needs:
  - Successful implementation requires adequate staffing, revised examiner guidance on credit risk, governance and internal control, and refocus on core supervisory functions.
  - As BoJ matures with risk-based supervision, reconsideration of ex ante approval of all new products and comprehensive fit-and-proper evaluations for all DTI officers, managers and key employees is suggested.

### Main findings — corrective and sanctioning powers (CP 11)
- Powers and application:
  - BoJ has a broad range of corrective measures under the BSA but evidence of effective application of these new powers is somewhat limited.
  - BoJ tends to seek agreement from DTIs on action plans and apply gradual responses rather than immediate coercive measures.
- Weaknesses in process:
  - The process of providing recommendations based on on-site examinations is lengthy, weakening effectiveness.
  - Remediation progress is insufficiently monitored and documented.
- Supervisory escalation and follow-up:
  - Need for tools and processes to ensure proactive, timely supervisory concern addressing, formal escalation, and adequate follow-up.

### Main findings — cooperation, consolidated and cross-border supervision (CPs 3, 12–13)
- Consolidated supervision:
  - BoJ empowered under the BSA to supervise financial groups but does not yet impose prudential standards on a consolidated basis; preparatory work is underway.
  - Further actions needed: understand group structure and risk management, review parent and affiliated companies’ activities, implement licensing of FHCs, impose consolidated prudential standards (solvency, liquidity, large exposures, related parties), collect group-wide prudential data, establish/enforce fit-and-proper standards for owners and senior management of parent companies, and strengthen internal control and risk management regulations on a consolidated basis.
- Cooperation among regulators:
  - Memoranda of Understanding (MoUs) exist for domestic and many foreign supervisors; FRC established; BoJ participates in colleges of supervisors.
  - Long tradition of information sharing among Caribbean regulators.
  - Insufficient evidence of effective cooperation with the FSC: aggregate system-wide information is exchanged but no joint inspections and limited attempts to assess intra-group transaction risks.

### Main findings — corporate governance (CP 14)
- Supervisory approach:
  - BoJ uses on-site inspections to assess corporate governance and Board oversight.
  - Governance is included in on-site scope, but BoJ provided insufficient evidence of actions taken to address weaknesses identified in Board oversight and committee structures.
  - Limited number of formal meetings with executive and non-executive Board members to discuss strategy, risk appetite, risk policies, risk profile and oversight of senior management.

### Main findings — prudential requirements, regulatory framework, accounting and disclosure (CPs 15–28)
- Capital requirements:
  - Capital requirements remain aligned with Basel I analytical methodology, focusing exclusively on credit risk and foreign exchange risk and excluding other market risks and operational risk relevant on a consolidated basis.
  - BoJ has general power to increase capital adequacy ratio requirements but has not elaborated a comprehensive Pillar II methodology to determine capital surcharges reflecting risk profile.
  - In practice BoJ applies a crude approach requiring the two largest DTIs to maintain minimum capital at least 2.5 percent above the general 10 percent requirement.
  - Authorities encouraged to increase transparency around drivers for capital surcharge decisions reflecting systemic importance.
- Loan loss provisioning:
  - Loan loss provisions calculated using a conservative rules-based approach imposed by the BoJ.
  - Minimum provisioning percentages imposed for exposures classified under a draft regulation considered binding by DTIs and legal auditors.
  - Provisions calculated under regulatory requirements that exceed accounting standards are transferred from retained earnings to a non-distributable loan loss reserve, yielding prudent NPLs coverage ratios (higher than 100 percent).
- IFRS 9 implementation:
  - Forthcoming implementation of IFRS 9 raises challenges; BoJ would like a period of experience with IFRS 9 and contemplates a transition period.
  - Unclear whether BoJ intends to keep existing provisioning regime as a backstop or benchmark in an IFRS 9 environment and how it will operationalize a regulatory floor.
  - Clarification needed on technical capabilities to assess DTIs’ expected credit loss methods, legal powers to require valuation changes, and conduct of impact studies.

*Source: Annex I. Report on Observance of Standards and Codes: Basel (cr18347).*

### 27.      While related party and large exposures are well defined and controlled, large

### 27.      While related party and large exposures are well defined and controlled, large

### Related-party and large exposure framework
- The BSA provides a comprehensive and transparent definition of exposures and counterparties for capping concentration risk and limiting exposure to related parties.
- Current large exposure limits in the BSA are 40 percent of the bank’s capital base, while international standards are stricter at 25 percent.
- The BoJ, in cooperation with the FSC, is consulting on proposals to bring the regime more in line with international standards.
- Limits on single counterparty and counterparty groups of 20 percent and 40 percent of the bank’s capital base are in place and enforceable (Table 1, CP19).
- While limits and credit risk management practices are intended to apply on a consolidated basis at the FHC, there is neither consolidated reporting nor evidence of a supervisory view on a group-wide basis.

### Liquidity risk and prudential liquidity requirements
- Qualitative guidance on liquidity risk management has been issued, but there are no quantitative minimum prudential liquidity requirements.
- The existing qualitative guidance needs updating and a binding standard that incorporates the BoJ’s work on sound liquidity contingency plans should be established.
- The current liquid asset requirements imposed on banks are not prudential in nature.
- The Standard of Sound Business Practices for Liquidity Management is dated and deficient relative to current international standards, including stress testing of liquidity and contingency planning (Table 1, CP24).

### Market risk and group-wide supervision
- Market risks other than foreign exchange and banking book interest rate risk are inherent in groups comprising securities dealers under a regulated FHC.
- Adopting group-wide supervision will require the BoJ to expand capital requirements and expectations for market risk management to address marked-to-market price and valuation risks likely residing in securities dealers.
- Currently market risk of DTIs is limited to foreign exchange risk and the market risk of available-for-sale securities because the BSA prohibits DTIs from engaging in proprietary trading or managing/investing funds on behalf of customers. Once consolidated supervision is implemented, market risk and position risk for securities dealers must be incorporated at the FHC level (Table 1, CP22).

### Operational risk, internal control, and supervisory approach
- The supervisory approach to operational risk management is fragmented and incomplete.
- A comprehensive approach would require consolidating BoJ operational risk expectations into a single enforceable standard and supporting industry collection of operational risk loss data.
- There is no law, regulation, or specific guidance note on operational risk; BoJ efforts address IT security, vendor/outsourcing management, and Business Continuity/Contingency Planning but lack a systematic supervisory framework of key risk indicators (Table 1, CP25).
- The BoJ has issued a fairly comprehensive framework for internal control and audit, though multiple guidelines affect readability and separation of duties provisions are not sufficiently specific; few findings on internal control/internal audit have emerged from on-site inspections (Table 1, CP26).

### Accounting, disclosure, and external audit
- Accounting and disclosure frameworks in Jamaica help facilitate market discipline and could be better leveraged by the BoJ.
- The BSA mandates audited financial statements in accordance with internationally recognized accounting standards and gives the BoJ powers to remove external auditors, require expanded or special audits, and require auditors to report material transactions or conditions.
- Given reliance on external auditors for valuation testing of hard-to-value assets and their risk-based scoping, external auditors are a valuable supervisory input that argues for regular engagement beyond ad hoc contact (Table 1, CP27).
- The BoJ intends to observe a period of experience with IFRS 9 to ensure provisions remain prudent, but it is not clear how the current regulatory provisioning regime will be operationalized as a backstop or benchmark in an IFRS 9 environment (Table 1, CP18).

### Capital adequacy and credit risk
- Several elements of the capital adequacy framework are prudent (minimum ratio, Tier 1 composition), but capital requirements are not aligned with widely observed international regulations.
- The capital calculation still reflects Basel I analytical methodology, focusing on credit risk and foreign exchange risk while excluding other market risks and operational risk that are likely significant on a consolidated basis (Table 1, CP16).
- The BoJ has the general power to increase capital adequacy ratio requirements but has not elaborated a comprehensive, transparent approach to determine capital surcharges via a Pillar 2 approach and/or systemic importance.
- In practice, the BoJ applies a crude approach requiring the largest DTIs to maintain minimum capital at least 2.5 percent above the general 10 percent requirement.
- Credit risk is the most significant risk in the banking sector; the regulatory framework is detailed and comprehensive, but no comprehensive on-site credit risk review has been conducted since 2013, and the last credit file review was in 2013. The BoJ did not provide sufficient evidence of actions taken to address identified weaknesses (Table 1, CP17).

### AML/CFT and abuse of financial services
- Efforts to strengthen legal and supervisory AML/CFT frameworks should continue; applicable Guidance notes do not have the force of law.
- The BoJ has made considerable strides in combatting abuse of financial services and is working towards establishing a well-structured risk-based AML/CFT supervision program that sets measurable targets for banks to cure identified compliance deficiencies (paragraph 32).

### Summary of supervisory and institutional findings (selected Core Principles)
- CP1: Allocation of supervisory responsibilities is clear; BoJ cannot issue binding regulations, so Standards of Sound Practices (SSP) serve as guidance but are not legally enforceable.
- CP2: BoJ has full discretion to take supervisory actions but lacks full implementation of legal requirements for transparency/accountability and has insufficient supervisory resources.
- CP3: MoUs and information-sharing instruments exist domestically and with foreign supervisors; exchange with FSC is ad hoc rather than regular; no comprehensive formal mechanism for resolution cooperation except liquidation.
- CP6: Licensees must notify Supervisor of acquisitions of 5 percent or more of issued share capital; change in ownership requires Supervisory Committee approval.
- CP8–CP9: BoJ is transitioning toward Risk Based Supervision; forward-looking assessments and frequency/intrusiveness of on- and off-site supervision were limited until recently; remedial actions and follow-up have been weak.
- CP10: Information collected on weekly, monthly, quarterly, and annual basis for licensees on a stand-alone basis; consolidated prudential data is not required (Table 1, CP10 and CP12).
- CP12: Legal framework for consolidated supervision is detailed but methodology for consolidated supervision has not been operationalized; BoJ does not impose consolidated prudential standards or require consolidated prudential reporting.
- CP14–CP15: Corporate governance oversight is included in on-site inspections but BoJ provided limited evidence of action on weaknesses; risk management supervision lacks formal guidance on Internal Capital Adequacy Assessments, stress testing, and requirement for a Chief Risk Officer at systemically important DTIs.

*Source: IMF staff assessment as presented in the supplied content.*

### 28. Disclosure and transparency

### cr18347 - 28. Disclosure and transparency

### Disclosure and transparency (Section 28)
- BSA-mandated disclosure of financial statements in accordance with international accounting and disclosure standards promulgated by the ICAJ work in tandem with Jamaican Stock Exchange requirements for listed companies.
- Bank data published on the BoJ’s web site complements the financial condition snapshot of licensees.
- Result: complete coverage of BoJ regulated DTIs with useful financial information to assist investors in enforcing market discipline.

### Abuse of financial services (Section 29)
- The BoJ has advanced work to combat abuse of financial services, including ongoing efforts to establish an effective risk-based AML/CFT supervision regime for DTIs and Cambios.

### Summary of Recommendations (Table 2) — supervisory and regulatory priorities by Principle
- Principle 1
  - Provide greater delegation to the BoJ to reduce delay and improve proactivity and flexibility in enacting legally enforceable prudential rules.
  - Include relevant Standards of Sound Practices (governance, credit risk management, internal control and audit) in the binding set of rules.
  - Legislation needed to update and clarify the BoJ’s supervisory mandate.
- Principle 2
  - Require public disclosure in legislation of reasons for relieving the governor or deputy-governor.
  - Operationalize measures in the BSA intended to enhance accountability.
  - Develop a formally documented delegation guide for supervisory decisions and procedures for offsite and onsite supervisions.
  - Increase resources; initiate a thorough evaluation of staffing and capacity building in context of risk-based supervision.
- Principle 3
  - Intensify domestic information exchange to understand intragroup transaction risks in large financial conglomerates.
  - Consider legal amendments to protect information exchanged through cooperation arrangements by prohibiting disclosure to third parties.
  - As recovery and resolution framework is developed, establish effective cooperation mechanisms between BoJ, Minister of Finance and other regulators; further efforts for cross-border cooperation in bank resolution.
- Principle 7
  - Include criteria for assessing proposed acquisitions and investments in regulation; power to impose prudential conditions on acquisitions should be in legislation.
  - Conduct more intrusive due diligence to ensure acquirers have adequate managerial and organizational resources.
- Principle 8
  - Fully deploy the risk-based methodology.
  - Empower BoJ to require changes to business strategies, managerial, operational and ownership structures when bank-specific barriers to orderly resolution are identified.
- Principle 9
  - Increase frequency of onsite inspections.
  - Develop risk-focused examination manuals with detailed objectives and controls.
  - Implement mechanisms to increase contact with licensees’ Boards, non-executive Board members and senior managers.
  - Develop early warning indicators and consider horizontal reviews on key sector risks.
  - Reconsider supervisory priorities including approval of new products and fit and proper evaluations.
- Principle 10
  - Expand supervisory reporting to include consolidated information sufficient for chosen approach to consolidation; at minimum monitor on a consolidated basis: capital adequacy, credit exposures, market risk exposures, large exposures, operational risk loss events and liquidity.
  - Collaborate with competent authorities for collection of information from securities dealers (SDs) and consider sharing BoJ IT platform.
- Principle 11
  - Shorten supervisory review turnaround time from initiation to final report.
  - Perform thorough follow up on implementation of supervisory recommendations.
  - Use proactive, preventative and earlier corrective actions to address governance and risk management issues.
- Principle 12
  - Better understand structure and risk management of banks, banking groups and wider groups; review main activities of parent and affiliated companies.
  - Implement licensing process for financial holding companies.
  - Impose prudential standards on a consolidated basis (solvency, liquidity, large exposures, related parties).
  - Routinely collect prudential data on consolidated basis.
  - Establish and enforce fit-and-proper standards for owners and senior management of parent companies.
  - Strengthen regulations on internal control and risk management and make consolidated compliance compulsory.
  - Develop policy for conducting onsite visits in host jurisdictions.
  - Intensify cooperation with the FSC through joint inspections, staff exchanges, and regular information exchange.
  - Include focus on Jamaican DTI/FHC oversight of foreign operations in Financial Institution Supervisory Department internal policies.
- Principle 13
  - Develop a cross-border crisis cooperation plan, including a formal communication strategy and establish resolution colleges.
- Principle 14
  - Include governance and fit-and-proper requirements in binding rules to enable more intrusive corporate governance oversight and stronger enforcement.
  - Regulation should state remunerations (including bonuses) must be aligned with prudent risk-taking and set a minimum number of board members with relevant banking experience who are not officers.
  - Regular coverage of corporate governance; consider horizontal reviews by offsite examiners and more intrusive onsite assessments.
  - Amend legal framework to grant BoJ power to change DTIs’ Board composition subject to appropriate constraints.
- Principle 15
  - Develop and implement Guidelines/Standards for an internal capital adequacy program (ICAP) at DTIs specifying a CRO function responsible for ICAP and firm-wide stress testing.
  - Adopt a more risk-based approach to new product approval and assess internal new product approval processes onsite regularly.
- Principle 16
  - Risk-weights should better differentiate risks and capture all significant risks via a broader comprehensive Pillar 1 approach and a new Pillar 2 surcharge.
  - Specify calculation of Tier 1 and Tier 2 on a consolidated basis and how risk-weighted assets will be determined group-wide.
  - Increase transparency around main drivers of decisions determining capital surcharges reflecting systemic importance.
  - Ensure banks develop a forward-looking approach to managing capital.
- Principle 17
  - Require DTIs to monitor all risk factors that may lead to borrower default, including unhedged foreign exchange risk.
  - Revise examiner guidance on credit risk processes with detailed inspection objectives and checks.
  - Clearly define supervisory expectations for DTIs’ credit risk modeling and stress testing.
- Principle 18
  - Be transparent about use of current regulatory provisions in an IFRS 9 environment.
  - Implement regulation transposing BCBS guidelines on prudential treatment of problem assets with clear definitions (non-performing exposures, forbearance measures) and sound valuation principles.
  - Precede changes to loan loss provisions rules with a careful quantitative impact study.
  - Give BoJ explicit powers to require changes in risk classification and/or additional provisions when appropriate.
  - Revise loan review methodology so the supervisor understands banks’ internal risk management policies.
  - Develop technical capabilities to assess DTIs’ expected credit losses calculation methods.
- Principle 19
  - Consider adopting treatment of interbank exposures from updated Basel standard for large exposures coming into force in 2019, or a local adaptation providing a higher limit rather than an exemption for short-term bank exposures.
- Principle 21
  - Supplement off-site monitoring with periodic horizontal focused reviews including country and transfer risk information to confirm immateriality.
- Principle 22
  - Implement a consolidated supervision framework for market risk that includes:
    - Capital requirements for debt specific and general market risk, and for traded equity risk.
    - Standard of Sound Business Practice for Market risk incorporating Standards for foreign exchange and securities portfolios.
    - Requirements for licensees to conduct stress testing including for market risk.
- Principle 23
  - Implement a binding regulation on management of interest rate risk in the banking book, including requirements for DTIs to conduct stress testing to measure vulnerability to adverse interest rate movements.
- Principle 24
  - Update qualitative standards for liquidity risk management to explicitly include liquidity stress testing and internal policies for asset encumbrance consistent with Basel standards as appropriate to local conditions.
  - Consider merits of a minimum quantitative prudential liquidity standard, taking into account interactions with existing central bank requirements for minimum liquid assets that are not available in times of stress.
- Principle 25
  - Develop an Operational Risk Management Guideline/SSP based on Basel Committee’s Principles for the Sound Management of Operational Risk (June 2011).
  - Develop standards for collection and reporting of operational risk loss events by DTIs.
- Principle 27
  - Enforce, enhance and rationalize supervisory requirements on internal controls; consider consolidating all requirements on internal control in one binding regulation.
  - Increase frequency of off-site assessment of internal audit and internal control; consider horizontal review where resource constrained.
  - Adopt a more intrusive approach to internal control and audit and incorporate a robust program for examining internal audit and internal control into on-site functions.
- Principle 28
  - Establish regular contact with external auditors of DTIs for matters of common interest (planned audit focus areas, upcoming accounting standard changes, valuation of hard to value assets).
- Principle 29
  - Incorporate AML/CFT Guidance Note provisions that currently lack force of law into binding regulation.
  - Include review of correspondent banking relationships in review of a licensee’s AML/CFT policies.

### Deposit Insurance — Core Principles (Annex II)
- Core Principle 1: Public Policy Objectives
  - Amend the DIA to clarify JDIC may fund payment of insured deposits but may not offer loans, guarantees or advances to policyholders in excess of such amounts. (Medium Term)
- Core Principle 3: Governance
  - The Chief Executive Officer should have a fixed term of office. (Medium Term)
- Core Principle 4: Relationships With Other Safety-Net Participants
  - Establish a formal Service Level Agreement between JDIC and BoJ for necessary information sharing to prepare JDIC to meet its mission. (Short Term)
- Core Principle 5: Cross-Border Issues
  - JDIC should enter into agreements with relevant deposit insurers for foreign banks operating as subsidiaries in Jamaica to allow information sharing about failing or failed institutions in the home country. (Medium Term)
- Core Principle 6: Deposit Insurer’s Role in Contingency Planning and Crisis Management
  - Conduct system-wide contingency planning and simulation exercises including JDIC and roles of all safety-net players. (Medium Term)
- Core Principle 9: Sources and Uses of Funds
  - Limit JDIC contributions from its deposit insurance fund to the amount needed to compensate insured depositors in a liquidation scenario.
  - Finalize agreement with BoJ and MOF to allow access to funding in case of need; such agreement could provide for access to BoJ funding with government backing.
  - JDIC should enter into a repo agreement with BoJ to access liquidity funding if needed.
  - Identify funding for additional JDIC roles (liquidator or administrator for non-DTIs) and seed funding for deposit insurance at credit unions. (Medium Term)
- Core Principle 14: Failure Resolution
  - Revise the resolution regime taking account of detailed recommendations in the Assessment to align JDIC operations with international practices. (Short Term)
- Core Principle 15: Reimbursing Depositors
  - Law provides JDIC up to 90 days to reimburse depositors; JDIC internal procedures require preparedness to reimburse within 14 days; currently operating with an interim payment system.
  - Complete adoption of an automated payment system to reimburse depositors within 7 days and work with BoJ to implement a rule requiring policyholders adopt required recordkeeping practices. (Medium Term)
- Core Principle 16: Recoveries
  - JDIC should receive a higher priority in the hierarchy of claims in a winding up than an unsecured creditor to improve recoveries of payments and costs. (Medium Term)
- Timing definitions:
  - Short Term: 6-12 months
  - Medium Term: 1-2 years

### FSAP Risk Assessment Matrix — Key risks, likelihoods, expected impacts and scenario metrics (Appendix I)
- Risk #1: Domestic shock — Delays in implementing economic and structural reforms agenda
  - Relative Likelihood: High
  - Expected Impact: High
  - Transmission: slowdown in reform momentum could trigger real GDP growth declining by 0.5 percentage point in the first year, and hover at zero for the following two fiscal years, with cumulative three-year growth falling by 5 percentage points against the baseline.
  - Effects: increased spreads, JM$ depreciation, increased credit risk (especially in credit unions and microfinance), increased DTIs’ NPLs and capital sensitivity, higher sovereign bond yields, fiscal pressures, reduced foreign borrowing, refinancing risks to DTIs, liquidity effects, second-round effects on growth and FX reserves, additional dollarization pressures.
- Risk #2: External financial shock — Tighter global financial conditions
  - Relative Likelihood: Medium/High
  - Expected Impact: High
  - Transmission: negative impact on tourism, remittances and FDI; FX reserves, credit spreads, JM$ weakening; increase in NPLs; liquidity concentration in two banks exacerbates stress; tightened lending terms from abroad; accelerated dollarization and off-shore activity; second-round effects include investors demanding higher government yields and reversal of crowding out progress.
- Risk #3: External natural shock — Natural disasters and epidemics
  - Relative Likelihood: Medium
  - Expected Impact: High
  - Context: Jamaica has experienced about 40 disasters between 1950-2017, averaging about a disaster a year; 60 percent hurricanes and storms; about a quarter floods, droughts, and epidemics.
  - Severely adverse stress testing scenario metrics:
    - Material physical damage of 2-3 percentage of GDP.
    - Real GDP growth dropping by 1-2 percentage points in the first year and by 2 percentage points thereafter.
    - Primary balance reverting to a deficit of around 0.1 percent of GDP.
    - Debt reverting towards an upward trend.
    - Interest rates spike by 600 basis points.
    - Exchange rate depreciates by about 60 percent.
    - Aggregate banking system NPLs increase three-fold.
    - Liquidity shortages requiring immediate central bank assistance.

*Source: cr18347 - 28. Disclosure and transparency*

### Appendix II. Implementation of Previous FSAP

### Appendix II. Implementation of Previous FSAP

### Stability Module — Maintaining financial stability and enhancing supervision
- 1. Reduce the public debt. (MOFPS)
  - Implementation Status: Ongoing.
  - Measures taken: Implementation of Responsibility Framework Legislation in 2010 led to a reduction in the FY2015/16 public debt ratio to about a 100 percent of GDP. Under the FY2014/15 Enhanced Fiscal Rules the debt ratio should drop to of 60 percent of GDP by FY 2025/26.

- 2. Raise margin requirements on securities dealers’ repos in GoJ securities to at least 10 percent this year. (FSC)
  - Implementation Status: Done.
  - Measures taken:
    - New framework with JCSD Trustee Services Limited functioning as trustee and registrar to hold securities underlying retail repos in trust for retail repo investors.
    - New retail repo transaction structure operational in August 2015; included new margin requirement based on type of underlying assets.
    - Margins for retail repos range between 5-15 percent depending on asset type.
  - Current Margin Requirements for Retail Repo:
    - (i) Minimum initial and maintenance margin for ‘qualifying issuers’ shall be 5 percent: (i) the GOJ, inclusive of central government, statutory bodies, companies owned or controlled by the GOJ and agencies of the GOJ; (ii) the BoJ; and (iii) Governments and Government Agencies of the US, Canada, and the U.K.
    - (ii) For all other allowable assets, the minimum initial and maintenance margin requirements shall be 15 percent as long as the issue is: (i) a locally issued JM$ denominated immobilized corporate bond; an Investment grade sovereign foreign security (excluding U.S., Canada and U.K.); or Investment grade corporate foreign.

- 3. Strengthen monitoring and analysis of housing and equities prices. (BoJ)
  - Implementation Status: Ongoing.
  - Measures taken:
    - 2015 MoU between BoJ and the National Housing Trust (NHT) for compilation of a housing price index for Jamaica.
    - NHT provides transactions and data; BoJ produces a quarterly aggregate housing price index and two sub-indices for St Catherine and Kingston & St Andrew.
    - A rolling-window hedonic price model for housing is utilized.
    - BoJ has been producing this index since 2016.

- 4. Enhance analysis of insurance risk concentration and reinsurance coverage. (FSC)
  - Implementation Status: Ongoing.
  - Measures taken:
    - 2005 plan to improve regulatory capacity; 2006 consultant engagement to train staff and advise on reinsurance regulation with two on-site examinations included.
    - Current practices: general insurance companies instructed to file copies of reinsurance treaties annually; FSC reviews treaties and submits assessment reports to Board of Commissioners.
    - All general insurers instructed to file Reinsurance Risk Management Plan/Procedure to the FSC.
    - Annual on-site examinations include assessment of reinsurance programs.

- 5. Develop and test crisis management plans.
  - National Financial Crisis Management Plan:
    - The Financial Regulatory Committee (FRC), established under Section 34 BB of the BoJ Act, approved and maintains a National Financial Crisis Management Plan (NFCM Plan) in 2015, including supporting policies, procedures and guidelines.
    - The Guide to Intervention for Financial Entities (Crisis Intervention Matrix) provides guidance on actions by each member of the financial system safety net.
    - Updates are made to operationalize the NFCM Plan; the NFCM Plan and other elements have not yet been tested/simulated. Jamaica has not had a financial crisis since the 1990s.
  - Special Resolution Regime (SRR):
    - In process. FRC published a consultation paper recommending introduction of an SRR in February 2017.
    - SRR proposes framework including a specialized insolvency limb and an administrative limb; facilitates orderly resolution of non-viable FIs.
    - BoJ and other FRC stakeholders submitted SRR proposals to Cabinet; approved in October 2017.
    - Technical Working Group drafting instructions for legislative measures; under proposed regime BoJ would become the Resolution Authority.
    - Legislative framework is to be tabled in 2019.

- 6. Strengthen coordination across supervisory agencies and close remaining legal gaps (including through passage of an Omnibus Banking bill) to permit comprehensive consolidated supervision and more effective supervision of conglomerates. (BoJ/FSC/JDIC/MOFPS)
  - Implementation Status: In process.
  - Measures taken:
    - Omnibus Banking Bill commenced as the Banking Services Act, 2014 (BSA), consolidated disparate primary statutes; BSA is primary legislative tool supporting enhancements including Consolidated Supervision.
    - BoJ to license and supervise FHCs; responsible for ensuring groups are adequately capitalized on a consolidated basis and subject to effective governance and risk management.
    - Effective implementation requires enhanced consultation between BoJ and other regulatory agencies.
    - Additional legislative measures in process: (i) the Banking Services (Capital Adequacy) Regulations; and (ii) the Banking Services (Financial Holding Companies) (License Application) Rules.
    - March 2016: FSC submitted proposal to MOFPS for legislative amendments to enable group-wide supervision of financial groups that do not include a deposit-taking institution.

- 7. Give supervisory agencies more resources and budgetary flexibility. (BoJ/FSC)
  - Implementation Status: Pending.
  - Measures and constraints:
    - BoJ’s Financial Institution Supervisory Division (FISD) budget is part of BoJ’s broader budget, primarily funded through central banking operations (Section 9 of BoJ Act); if inadequate, Bank entitled to funding from Government’s Consolidated Fund.
    - Annual supervision budget determined by senior management and approved by the Board; division’s requests generally fully met.
    - Supervisory staff funded to participate in international meetings.
    - BoJ subject to public sector wage guidelines and periods of wage increase constraints, constraining ability to attract and retain qualified staff, particularly senior examiners.
    - FISD experiences high attrition; countermeasures include external recruitment at sufficiently high-level to offer competitive remuneration and use of contracts.
    - FSC’s surplus and reserves have grown between 2005-2017; 2008 increases in rates/fees on assets of securities dealers and on general insurance companies.
    - Resource constraints remain important.

- 8. Further codify the legal and operational independence of supervisory agencies. (BoJ/FSC)
  - Measures taken:
    - BSA passed by Parliament in 2014 and in effect in 2015; introduced provisions supporting BoJ operational independence.
    - Appointment process change: Governor appointed by Governor-General on advice of the Cabinet of Ministers (Section 6A of the BoJ Act).
    - Establishment of a Supervisory Committee with critical supervisory powers previously held by the Minister of Finance (powers include granting/revocation of licenses; fitness and propriety determinations; variation of prudential capital adequacy requirements).
    - Supervisor can take prompt corrective action independently.
    - Reforms remove scope for government interference in supervisory process but do not confer overall independence: BoJ’s Board has majority members appointed by MoF.
    - Supervisory Division subject to operational oversight of the Committee of Bank Supervisors (COBS), chaired by the Governor and comprising Deputy Governor, FISD Division Chief, department heads and legal counsel.
    - In relation to the FSC, no action was taken.

### Stability Module — Addressing development and infrastructure priorities
- 9. Overhaul creditor rights and the insolvency regime and introduce a credit bureau. (BoJ)
  - Measures taken:
    - Credit Reporting Act passed in 2010; BoJ designated Supervising Authority for credit bureaus.
    - Since implementation of the CRA in 2011, three credit bureaus licensed by the MoF based on BoJ recommendations; continued exchange of information with credit information providers (CIPs).
    - Insolvency Act 2014, effective January 2015, established orderly process for debtor rehabilitation and protection of creditors’ rights.
    - Security Interests in Personal Property Act (SIPPA) 2013 took effect January 2014: allows personal property as collateral, governs priority by registration date, and provides a registry for filing interests.

- 10. Ensure that the new regulatory regime for credit unions is carefully balanced to minimize risks without stifling credit unions’ impressive outreach. (BoJ)
  - Measures and status:
    - Credit unions currently provide information on operations to BoJ as preliminary step toward BoJ supervisory oversight.
    - Cabinet submission by MOFPS in April 2017 advised that framework proposals for BoJ (Credit Unions) regulations reside in principal legislation.
    - Drafting process: preliminary draft received 17 July 2017; second draft received 16 January 2018 and circulated to stakeholders; comments received from Credit Union League, FSC, BoJ and MOFPS.
    - Meeting on 18 April 2018 led to further drafting instructions; third draft submitted to BoJ on 18 May 2018 and currently under review.
    - BoJ continues preparation for commencement of regulatory regime; interim oversight remains with Department of Co-operatives and Friendly Societies; industry self-regulatory role assumed by Credit Union League.

- 11. Pass legislation to enable FSC to begin registering and regulating pension funds; equalize the income tax treatment of approved retirement schemes with that of superannuation funds. (FSC)
  - Implementation Status: Completed.
  - Measures taken:
    - Pensions (Superannuation Funds and Retirement Schemes) (Registration, Licensing and Reporting) Regulations came into force on March 13, 2006.
    - Income tax treatment changes covered in the Income Tax (Amendment) Act 2008 and the Pensions (Superannuation Funds and Retirement Schemes) (Validation and Amendment) Act 2013.

- 12. Expedite introduction of a sound legal framework for payment and settlement systems; introduce an RTGS system. (BoJ)
  - Measures taken:
    - Payments Clearing and Settlement Act, 2010 enacted; Government Securities Dematerialization Act repealed in 2012 and replaced by the Public Debt Management Act (PDMA).
    - Implementation in 2013 of the Guidelines for Electronic Retail Payment Services; Guidelines are currently being updated.
    - RTGS implemented in February 2009.

- 13. Establish a CSD for fixed income securities. (BoJ)
  - Implementation Status: In process / implemented.
  - Measures taken:
    - JamClear®-CSD implemented in May 2009, replacing paper-based issues of GoJ and BoJ fixed income securities.
    - New issues of BoJ and GOJ securities dematerialized; electronic system provides authentic record of ownership and efficiencies in issue, management and redemption.
    - JamClear®-CSD reduces settlement risk and improves liquidity and efficiency; seamlessly integrated with JamClear®-RTGS to allow Delivery versus Payment (DVP) settlement.

### Development Module — Overall and MSME finance
- 14. Develop an umbrella financial inclusion strategy, covering key areas, MSME finance, housing finance, payments, rural finance, and financial consumer protection and literacy (BoJ and other key stakeholders)
  - Measures taken:
    - The National Financial Inclusion Strategy (NFIS) was launched on 29 March 2017.
    - The National Financial Inclusion Council held its inaugural meeting on 29 March 2017.

- 15. Encourage the development of financial instruments for MSMEs, by developing the legal and regulatory framework and infrastructure: (i) factoring; (ii) leasing, and (iii) venture capital (DBJ/MoFPS)
  - Measures taken:
    - Under the NFIS, simultaneous projects by MICAF and DBJ to promote factoring and receivables financing.
    - April 2017: MICAF completed review of secured transactions regime.
    - September 2017: feasibility assessment on factoring completed by DBJ.
    - DBJ continues to pursue development of venture capital ecosystem via proposals for tax reform to incentivize venture capitalists.

- 16. Review and revamp the PCG scheme to provide adequate incentives for lenders to participate (DBJ/MoFPS)
  - Measures taken:
    - DBJ is project lead for Access to Finance project with the World Bank, approved in January 2018; work will strengthen institutional arrangements for the Credit Enhancement Fund.
    - GOJ entered agreement with Inter-American Development Bank to recapitalize the credit enhancement fund over a 4-year period.
    - November 2016: BoJ revised risk weighting for loans supported by the partial credit guarantee considering existing governance framework.

- 17. Ensure an adequate regulatory and supervisory framework for different lenders to guarantee a level playing field for financial institutions providing the same activities (MoFPS/BoJ)
  - Measures and status:
    - Deposit-taking institutions subject to supervisory framework established under the Banking Services Act.
    - Policy to enhance regulatory framework for money lending institutions approved by Cabinet in 2013; legislation drafted and being reviewed; expected to be tabled in Parliament in FY 2018/2019.
    - Draft legislation includes designation of regulatory authority, licensing, fit and proper requirements, record keeping and reporting, offences and penalties, transparency in lending practices and consumer protection.
    - Credit Union (Special Provisions) Bill: third draft sent to BoJ in May 2018 for stakeholder consultation; comments to be provided.

*Source: Authorities.*

### 18. Simplify documentation requirements

### 18. Simplify documentation requirements for MSMEs and consider adopting measures in prudential regulations to incentivize lending to MSMEs (BoJ)

### Financial Inclusion — NFIS action items
- Recommendation informed the NFIS with two action items for BoJ:
  - (a) Evaluate, design and implement a policy framework for opening transaction accounts with graded KYC requirements for MSMEs.
  - (b) Review and enhance the prudential framework regarding provisioning for SIPPA registered collateral.

### Implementation status and measures taken (Authorities’ view)
- Item (a):
  - BoJ provided policy proposals for graded KYC/CDD requirements to be accommodated as part of the risk-based framework for AML/CFT under the Proceeds of Crime Act in May 2017.
  - This action item has been merged with another work-stream on AML/CFT.
- Item (b):
  - On 28 February 2018, BoJ published its consultation paper on Problem Asset Management and Provisioning Requirements.
  - There has been ongoing consultation with stakeholders and IFC.

### Prudential requirements and regulatory measures
- At year-end 2016, in keeping with the provisions of the Banking Services (Deposit-Taking Institutions) (Capital Adequacy) Regulations, 2015, Bank of Jamaica approved a reduction in capital requirements for development banks.
- Bank of Jamaica recommended that loans (or portions thereof) with guaranteed coverage by credit guarantee schemes (subject to conditions) should be risk-weighted twenty per cent, with uncovered portions remaining one hundred per cent risk-weighted.
- The application of the twenty per cent risk-weighting is limited to loans extended in Jamaican currency.

### Implications of reduced risk-weighting
- The application of a reduced risk-weighting to loans (or portions thereof) with guaranteed coverage by credit guarantee schemes would include the following implications:
  - Incentivized lending, enabling creditors to increase financing levels to MSMEs;
  - Regulatory capital relief, as lowering the risk-weighting will lead to reduced regulatory capital requirements for exposures covered by the guarantees; and
  - Jamaica’s financial inclusion aims are promoted in manner that is consistent with the existing framework of prudential regulatory requirements.

### Duration and review
- The approval for capital relief with respect to exposures guaranteed under this framework will remain effective for a period of three years, at the end of which, Bank of Jamaica will conduct an assessment to determine if there is a basis for the continued application of the reduced risk-weighting.

*Source: cr18347 - 18. Simplify documentation requirements*

### 4. Risks and

### 4. Risks and buffers

### Positions / risk factors assessed
- Credit losses.
- Losses from securities in the banking and trading books.
- FX risk.
- Counterparty concentration risk (consistency will be ensured with network analysis stress test).
- Industry concentration risk.
- Liquidity risk from calls on deposits and other non-deposit short term liabilities e.g. repo and same group position unwinding (consistent will be ensured with network analysis stress test).

### Behavioral adjustments and dynamic balance sheets
- Balance sheets evolve with key macroeconomic aggregates adjusting for credit demand effects.

### Domain framework (TD by Bank of Jamaica / TD by FSAP Team)
- (Listed in source as domain framework items; no additional details provided.)

### Calibration of risk parameters
- Credit risk projections are based on loan loss provision ratios and non-performing exposures.
- Changes in NPLs provisioning rates are based on response functions calibrated to Jamaica past crises during 1990s and 2008.
- Macroeconomic outcomes expected from a severe natural disaster shock are calibrated using analysis in IMF WP/17/235; IDB Policy Brief IDB-PB-208 and IMF Policy Paper “Small States’ Resilience to Natural Disasters and Climate Change.”
- Regulatory standards: Minimum capital requirements were based on Jamaica-specific regulatory minimums.

### Reporting format for results / Output presentation
- Evolution of Capital adequacy, liquidity, and probability of failure, for the aggregate banking system, and individual banks.
- Contribution of key drivers to aggregate net profits and aggregate CET1 capital ratios.
- Number of banks and share of total assets below hurdle rates.
- Capital shortfall in terms of nominal GDP.

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### Appendix IV. Insurance: Overall Stress Testing Approach

### General approach and scope
- Central to the insurance sector stress test is a bottom-up exercise for which the IMF team, in cooperation with the Jamaican authorities, provides scenario specifications and an Excel reporting template to selected undertakings.
- The stress test broadly follows the same principles as the DCAT exercise currently prescribed for the life insurance sector which should similarly also be applied by general insurers for this exercise.
- The reference date for the stress test exercise should be December 31, 2017.
- The stress test should be run at the highest level of consolidation which includes all insurance activities of domestic as well as foreign subsidiaries and branches. Banking and other non-insurance activities should be excluded.
- The scope of consolidation should be as of the reference date—entities acquired after that date should not be included. Entities that do not contribute materially can be excluded after consultation with FSC.

### Scenarios (three developed)
- Baseline: in line with the October 2017 World Economic Outlook projections for Jamaica and other relevant countries.
- Adverse scenario 1: global repricing of risk premia.
- Adverse scenario 2: domestic natural catastrophe causing a short and severe economic recession in combination with price corrections on financial markets.

### Jamaica: Narrative for the Scenarios (baseline projections)
- Real GDP growth:
  - 2017: 1.7 percent
  - 2018: 2.3 percent
  - 2019: 2.7 percent
  - 2020: 2.8 percent
  - 2021: 2.8 percent
  - 2022: 2.8 percent
- Inflation (change in consumer prices):
  - 2017: 3.4 percent
  - 2018: 5.2 percent
  - 2019: 5.5 percent
  - 2020: 5.5 percent
  - 2021: 5.5 percent
  - 2022: 5.4 percent
- Unemployment rate:
  - 2017: 12.2 percent
  - 2018: 11.6 percent
  - 2019: 11.0 percent
  - 2020: 10.5 percent
  - 2021: 10.0 percent
  - 2022: 9.5 percent

### Adverse scenario descriptions
- Adverse scenario 1:
  - Global repricing of risk premia with higher declines in asset prices in emerging economies and a sharper increase in credit spreads of non-investment grade debt.
  - Inflationary pressures are assumed to decrease so central banks would pursue a slightly more accommodative monetary policy.
- Adverse scenario 2:
  - Assumes a major natural catastrophe, similar to hurricane Gilbert (September 1988).
  - Following the event during the storm season of 2018, real GDP is assumed to decline sharply (annual growth for 2018: -2 percent), followed by a steady recovery in line with the baseline projections for 2019-22.
  - Domestic financial markets assumed to react with a sharp decline in equity and property prices, and increases in credit spreads of the domestic sovereign and domestic corporates.

### Insurance sector scenario assumptions (instantaneous shock)
- All market shocks are assumed to occur at the beginning of the first year (instantaneous shock). Asset prices are assumed not to recover after the instantaneous shock.
- Focused financial market variable shocks:
  - Shocks to risk-free interest rates: separate for relevant currencies.
  - Shocks to corporate bond spreads: separate per rating class.
  - Shocks to equity prices: separate for relevant countries.
  - Shocks to property prices: separate for domestic and foreign real estate holdings.
  - Shocks to foreign exchange rates: changes of relevant FX rates.

### Jamaica. Insurance Sector Stress Testing: Scenarios and Assumptions (change compared to the reference date)
- Risk-free interest rates (parallel shift of the interest rate term structure):
  - Jamaica: Adverse scenario 1: -100bp; Adverse scenario 2: -150bp
  - United States: Adverse scenario 1: -50bp; Adverse scenario 2: 0bp
  - Other advanced economies: Adverse scenario 1: -50bp; Adverse scenario 2: 0bp
  - Other emerging and developing economies: Adverse scenario 1: -100bp; Adverse scenario 2: 0bp
- Sovereign bond spreads:
  - Jamaica: Adverse scenario 1: +300bp; Adverse scenario 2: +450bp
  - United States: Adverse scenario 1: 0bp; Adverse scenario 2: 0bp
  - Other advanced economies: Adverse scenario 1: +50bp; Adverse scenario 2: 0bp
  - Other emerging and developing economies: Adverse scenario 1: +300bp; Adverse scenario 2: 0bp
- Corporate bond spreads (Jamaica):
  - AAA: Adverse scenario 1: +30bp; Adverse scenario 2: +40bp
  - AA: Adverse scenario 1: +55bp; Adverse scenario 2: +75bp
  - A: Adverse scenario 1: +100bp; Adverse scenario 2: +140bp
  - BBB: Adverse scenario 1: +190bp; Adverse scenario 2: +270bp
  - BB or lower: Adverse scenario 1: +300bp; Adverse scenario 2: +400bp
  - Unrated: Adverse scenario 1: +300bp; Adverse scenario 2: +400bp
- Corporate bond spreads (Other):
  - AAA: Adverse scenario 1: +20bp; Adverse scenario 2: 0bp
  - AA: Adverse scenario 1: +40bp; Adverse scenario 2: 0bp
  - A: Adverse scenario 1: +65bp; Adverse scenario 2: 0bp
  - BBB: Adverse scenario 1: +120bp; Adverse scenario 2: 0bp
  - BB or lower: Adverse scenario 1: +200bp; Adverse scenario 2: 0bp
  - Unrated: Adverse scenario 1: +200bp; Adverse scenario 2: 0bp
- Currencies (Change of JMD against major currencies):
  - Adverse scenario 1: -10 percent
  - Adverse scenario 2: -15 percent
  - (Negative values denote a depreciation of the domestic currency.)
- Equity:
  - Jamaica: Adverse scenario 1: -27 percent; Adverse scenario 2: -35 percent
  - United States: Adverse scenario 1: -15 percent; Adverse scenario 2: 0 percent
  - Other advanced economies: Adverse scenario 1: -15 percent; Adverse scenario 2: 0 percent
  - Other emerging and developing economies: Adverse scenario 1: -27 percent; Adverse scenario 2: 0 percent
- Real Estate:
  - Jamaica: Adverse scenario 1: -15 percent; Adverse scenario 2: -20 percent
  - United States: Adverse scenario 1: -10 percent; Adverse scenario 2: 0 percent
  - Other advanced economies: Adverse scenario 1: -10 percent; Adverse scenario 2: 0 percent
  - Other emerging and developing economies: Adverse scenario 1: -15 percent; Adverse scenario 2: 0 percent

### Additional assumptions for adverse scenarios
- Adverse scenario 1:
  - New business in year 1 to decline by 10 percent (life), compared against 2017; in years 2 to 5, new business growth rates back in line with baseline projections (but starting from the lower levels caused by the decline in year 1).
  - Lapse rates in life insurance in year 1 to increase by 10 percent against baseline projection; lapse rates for years 2 to 5 in line with baseline projections.
- Adverse scenario 2:
  - A hurricane event mirroring Hurricane Gilbert (1988) in terms of size, strength and routing: Claims from this scenario should be estimated based on exposures as of the reference date. Reinsurance recoverables as well as reinstatement costs for reinsurance should also be taken into account. In the reporting template, insurance undertakings should provide the reinsurance recoveries from the participant’s top 5 reinsurers (on a group basis).
  - New business in year 1 to decline by 30 percent (life) and 10 percent (general insurance), compared against 2017; in years 2 to 5, new business growth rates back in line with baseline projections (but starting from the lower levels caused by the decline in year 1).
  - Lapse rates in life insurance in year 1 to increase by 25 percent against baseline projection; lapse rates for years 2 to 5 in line with baseline projections.

### Methodological approaches and outputs
- Main output: effect on available capital and resulting coverage of the capital requirements (MCCSR for life insurers and MCT for general insurers).
- Hurdle rates:
  - Life insurers: coverage of 150 percent.
  - General insurers: coverage of 250 percent.
- Internal models, if approved by the supervisor, can be used. Management actions should only be included if they relate to non-discretionary rules already in place at the reference date.
- The impact of the stress event should be assessed under national GAAP.

### Presentation of results
- No individual company results will be published.
- Results will be presented in an aggregated format for groups of companies, e.g. life and non-life insurers.
- Aggregated numbers and dispersion of results will be shown, taking into account the small sample size.
- The Jamaican authorities will clear all documents before publication to ensure no individual company results can be derived from aggregated information.

---

### Appendix V. Network Analysis

### Approaches applied (based on market data)
1. Interconnectedness inferred from RTGS data
   - Payments among RTGS participants during 2017 are used to infer direct connectedness among the 26 participants.
   - The RTGS dataset differentiates among seven different (very broad) categories. Three of them contribute with about 95 percent of all payments:
     - Transfers in JDM: 45.01 percent
     - Intraday repos with the central bank: 31.53 percent
     - Long-term repos: 18.56 percent
   - Visualization: graphs by category and aggregation for 2017 displayed using a circular layout (alphabetically ordered); arrows display direction of payments (from sender to receiver), with arrow width and color representing contribution to total payments; node diameter represents contribution (importance) of the participant as sender of payments.
2. Interconnectedness inferred from stock market data
   - Two methodologies implemented:
     - Asset graph: discards correlations that may be deemed weak, preserving meaningful ones; threshold set to ±0.3.
     - Minimal spanning tree: correlations transformed into distances; only the most important linkage for each node is displayed (without cycles), regarded as the skeleton that better describes the system under analysis.

*Source: cr18347 - 4. Risks and buffers (IMF).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18347.pdf_