## 1jorea2023002 — IMF FSAP chapter (Jordan)

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### Executive summary — macro-financial backdrop and headline findings
- Output: contracted moderately in 2020 and rebounded by 2.2 percent in 2021; growth in 2022 is expected to be 2.7 percent.
- Downside risk sources: intensifying spillovers from the war in Ukraine; further shocks to energy and food prices; faster- or stronger-than-expected U.S. monetary policy tightening; possibility of a new COVID-19 outbreak.
- Labor market and inflation:
  - Unemployment near 23 percent as of 2022:Q3.
  - Inflation reached 5.4 percent y-o-y in September 2022.
- Public debt and external buffers:
  - Public debt estimated at 90.7 percent of GDP at end-2021.
  - International reserves reached USD 16.2 billion at end-November 2022.
- Monetary policy and banking intermediation:
  - CBJ increased policy rates by 350-375 basis points between March and November 2022.
  - Nominal claims on the private sector grew 8.2 percent y-o-y in September 2022.
  - Deposit dollarization about 19 percent.
- Pandemic-related measures:
  - Postponed loan repayments: 9 percent and 4 percent of total loans in 2020 and 2021 respectively.
  - Mid-June 2022: CBJ instructed banks to offer household borrowers with variable interest rate loans a new repayment schedule fixing monthly installments at current levels (with implementation flexibility).

### Banking sector size, structure, and exposures
- System scale:
  - Banks’ domestically consolidated assets: 97 percent of financial sector assets, or 180 percent of GDP, at end-2021.
  - Globally consolidated assets: 304 percent of GDP.
- System composition at end-2021:
  - 23 banks; six classified as D-SIBs; four Islamic banks.
  - Islamic banks’ asset share (domestic consolidation): 16.2 percent at end-2021.
  - Social Security Investment Fund assets: 37 percent of GDP at end-2021 (public pension scheme excluded from financial system perimeter).
- Asset and liability structure (domestic consolidation):
  - Loans: 50 percent of total assets.
  - Securities: 22 percent of total assets (bulk Jordanian government securities).
  - Deposits: 77 percent of liabilities.
  - Equity: 13 percent of liabilities.
- Revenue: net interest income accounts for 80 percent of operating income.
- Sovereign exposures:
  - Banks’ holdings of Jordanian government securities: about 20 percent of total assets.
  - Loans to government and other public sector (including SOEs): another 4 percent of assets.
- Capital and solvency (globally consolidated, end-2021):
  - Average CET1: 16 percent.
  - Average Tier 1: 16.4 percent.
  - Total capital adequacy ratio: 17.3 percent.

### Vulnerabilities and risk indicators
- Main vulnerabilities:
  - Large banks’ exposures to the highly indebted sovereign.
  - Stretched household borrowers.
  - Substantial concentration risk.
  - Sizeable share of corporate debt at risk in an adverse scenario.
- Asset quality and credit:
  - NPL ratio recently fell slightly below pre-pandemic level of 5 percent.
  - Household debt burden ratio (DBR): 45 percent; increased by 4½ percentage points since 2017.
  - Bank credit to NFCs (excluding commercial real estate): 40 percent of GDP at end-2021; up 5.5 percentage points of GDP since 2016.
  - Aggregate debt-to-equity of listed firms: about 54 percent in 2021.
  - Debt-at-risk for listed firms: shot up in 2020 and declined to pre-pandemic levels in 2021.
- Real estate:
  - Average loan-to-value ratios (2020): residential 73 percent; commercial 70 percent.
  - Nominal real estate prices broadly stable since 2015.
- Climate-related vulnerabilities:
  - Water stress and droughts major physical risks; Jordan is among the most water scarce countries.
  - CBJ developing a Green Finance Strategy; draft expected by mid-2023.

### Liquidity and FX risks
- Liquidity buffers:
  - Banks hold ample liquidity; simple funding structure of stable customer deposits and large holdings of government securities and central bank instruments.
  - Aggregate all-currencies LCR: declines from 220 percent to 205 percent under a severe liquidity pressure scenario; no bank exhibits a liquidity shortfall in that scenario.
- FX liquidity and monitoring gaps:
  - LCR reported for domestic currency and all currencies combined; FX component not separated in regulation.
  - FSAP-computed aggregate FX LCR: 185 percent.
  - 8 banks have substantial FX maturity mismatches.
  - FX liquidity shortfall relative to 100 percent hurdle: 3.8 percent of CBJ end-2021 international reserves.
  - Under higher haircut on government securities: FX LCR drops to 141 percent and FX shortfall reaches 4.9 percent of reserves.
- System-wide FX liquidity exercise scenarios (end-2021 network):
  - NFCs’ external FX-denominated liabilities: 94 percent of GDP.
  - NFCs’ FX liabilities to domestic banking sector: 9 percent of GDP.
  - Households’ FX deposits: 14 percent of GDP (households cannot borrow in FX).
  - Banking sector FX liabilities: 18 percent of GDP matched by equivalent FX assets.
  - Scenario definitions used: Scenario 1: capital outflows by non-residents = 2 percent of GDP; Scenario 2: households and NFCs withdraw 20 percent of their FX demand deposits; Scenario 3: 15 percent withdrawal of dinar deposits and conversion into FX assets abroad (deposit dollarization to 28 percent); Scenario 4: combination of Scenarios 1, 2, and 3.

### Stress testing, scenarios, and macro-financial assumptions
- FSAP exercises performed:
  - Standard bank solvency and liquidity stress tests (covering all banks).
  - Banking sector contagion analysis.
  - Corporate stress test on publicly listed companies.
  - System-wide FX liquidity exercise.
  - Household sector resilience not analyzed due to lack of micro-level household data.
- Scenario design:
  - Baseline aligned with July 2022 WEO; both baseline and adverse span 2022–24.
  - Adverse scenario includes: worsening of war in Ukraine, hampered cross-border trade, lower trading-partner growth, higher global food and energy prices, de-anchored inflation expectations, faster-than-expected tightening by major central banks, capital outflows, and an intense CBJ policy-rate response.
  - In adverse scenario the dollar peg holds but shocks cause deep recession and sovereign downgrade.
  - Two-year GDP growth rate in adverse scenario: 2.4 standard deviations below historical mean.
  - Sovereign credit rating: downgraded by one notch from end-2021 B+ (S&P) to B in adverse scenario.

### Banking sector stress test results and resilience
- Aggregate solvency outcomes (total CAR):
  - 18.2 percent at end-2021.
  - 16.6 percent in baseline.
  - 13.5 percent in adverse scenario.
  - Aggregate CAR remains above 12 percent hurdle.
- Bank-level impacts:
  - Baseline: One bank slightly below minimum capital before stress; 3 additional banks (including a D-SIB) become undercapitalized; combined capital shortfall = 0.34 percent of GDP.
  - Adverse: Eight small- and mid-sized banks and one D-SIB (29 percent of system assets) become undercapitalized; combined capital shortfall = 1.6 percent of GDP.
  - Minimum leverage ratio (4 percent) breached by four banks, mostly due to credit impairments.
- Drivers of stress outcomes:
  - Baseline drivers: interest rate increases, rising loan losses, growth in risk-weighted assets.
  - Sovereign risk accounts for one third of CAR decline via loss provisions on Held-To-Maturity government securities.
  - Income contribution in adverse only slightly smaller than baseline, indicating robust pre-provision earnings capacity.
- Asset quality projection:
  - NPL ratio projected to increase mildly in baseline and more severely in adverse, reaching levels last seen in early 2000s in adverse.
- Caveats:
  - Credit risk modelling done on total loan portfolios due to lack of long historical granular series.
  - Data limitations on foreign entities required assumptions on subsidiaries’ profits.
  - CBJ reported one D-SIB that was undercapitalized increased its capital in 2022.

### Concentration risk, contagion, and solvency sensitivity
- Concentration stress:
  - Default of the 10 largest nonfinancial corporate exposures would lead 14 banks to undercapitalization; collective capital shortfall = 2.5 percent of GDP (conservative assumption of no government guarantees).
  - If state-owned large borrowers fully protected by government guarantees: 10 banks would still become undercapitalized; aggregate total CAR remains above 12 percent and combined capital shortfall = 1.4 percent of GDP.
- Domestic contagion:
  - Based on 2021 data, no failure of a Jordanian bank would cause another domestic bank to fail via interbank positions, except for one bank.
  - Three banks would become slightly undercapitalized relative to 12 percent regulatory minimum under examined shock.
- Market-based spillovers:
  - Interconnectedness among banks increases during stress episodes; systemic banks generate stronger spillovers.

### Nonfinancial corporate (NFC) sector stress test outcomes
- Aggregate return on assets (weighted by debt):
  - 2.6 percent at end-2021.
  - Baseline: 1.8 percent in 2023.
  - Adverse: -1.2 percent in 2023.
- Aggregate interest coverage ratio (ICR):
  - 5.4 at end-2021.
  - Baseline: 4.7 in 2023.
  - Adverse: 1.6 in 2023.
- Debt at risk: would surge by 33 percentage points in 2023 to 53 percent of total debt under adverse scenario.
- Smaller firms: low profitability and debt servicing capacity likely to remain persistent challenges.
- Recommendation: expand corporate stress tests to broader set of firms (e.g., largest 20 borrowers at each bank) and develop multi-year corporate stress testing framework.

### Financial sector oversight — progress and recommended actions (selected)
- Progress to date:
  - Authorities implemented most previous FSAP recommendations; introduced key elements of Basel III, IFRS 9, and D-SIB regulations.
  - AML/CFT framework upgraded since last FATF assessment.
- Systemic risk analysis (recommendations):
  - Fill data gaps for cross-border systemic risk analysis and implement stress tests on globally consolidated basis.
  - Run comprehensive systemic FX liquidity analyses and granular household and corporate vulnerability analyses.
  - Monitor banking sector FX liquidity, sovereign exposures, and concentration risk.
- Macroprudential framework:
  - Strengthen decision-making, refine strategy, enhance communication.
  - Develop readiness to implement borrower-based macroprudential tools.
  - Consider prudential policies to reduce strong sovereign-bank nexus risks.
- Banking regulation and supervision:
  - Make supervisory approach more risk-based and forward-looking on solo and consolidated bases.
  - CBJ’s conservative regulatory approach (high minimum capital ratios) could be made more risk-sensitive.
  - Develop Pillar 2 risk assessment methodologies and align prudential requirements on asset classification, concentration risk, related-party exposures with Basel Core Principles.
  - Implement enforceable regulations for market, operational, IRRBB, country and transfer risk; review outdated guidance in credit risk management and FX liquidity risk management.
  - Continue close monitoring of rescheduled and restructured loans and ensure adequate supervisory resources.
- Financial integrity:
  - Strengthen AML/CFT risk-based supervision, especially customer due diligence and timely UBO information; consider mitigating virtual asset risks.
- Payment systems:
  - Improve RTGS-JO risk management and efficiency, including collateral management, intraday liquidity facility policy, and business continuity.
- Financial safety net and crisis management:
  - Form multi-agency crisis management committee (CBJ, MoF, JODIC) — ST.
  - Draft resolution plans for D-SIBs, starting with major cross-border D-SIB.
  - JODIC to develop means of payment for compensating depositors and run simulation exercises; reach agreement on borrowing source/debenture issuance to provide JODIC financial backstop.

### Financial safety net, resolution, and depositor protection
- Legal and operational progress:
  - CBJ empowered to license/operate bridge bank; emergency lending powers revised.
  - Draft Banking Crisis Management Guide (2016), D-SIB Instructions (2017), Instructions to Banks on Emergency Liquidity Assistance (2021) exist.
  - Emergency liquidity instructions approved but public version not available; internal guidelines pending.
- JODIC funding and capacity:
  - JODIC reserves about JD 1.1 billion at end-2021 (~50 percent of needed funding to resolve one of two largest systemic institutions).
  - JODIC Law mandates payment to insured deposit holder within 30 days from liquidation decision; recommendation to ensure capability to compensate insured depositors within seven business days via simulation exercises and means-of-payment development.
  - JODIC authorized to borrow or issue debentures, but sources/arrangements undecided.
- Recommendations:
  - Expedite procedures and stand-by agreements for JODIC funding access.
  - Draft resolution plans for D-SIBs and ensure structural separation and operational independence between CBJ’s functions.

### Supervisory scope, consolidated vs solo supervision, and operational recommendations
- Current practice:
  - CBJ supervises on “solo” and consolidated basis but consolidated supervision is more accounting-based than prudential and onsite assessments performed at consolidated level.
  - Supervisory focus generally on Jordan operations and consolidated bank without sufficient view of wider group risks.
- Recommendations:
  - Shift to a prudential lens for group-wide limits and deeper assessment of contagion and reputational risks.
  - Collect prudential solo-level reporting (e.g., solo CAR, financial statements in JOD and foreign currency) and expand solo prudential monitoring to include foreign branches.
  - Improve definitions, limits, and governance on related-party transactions; establish explicit country and transfer risk regulation.
  - Make CAMEL/ROCA more risk-based and forward-looking; re-balance onsite/offsite mix; implement standards for inspection frequency, timing, and scope.
  - Reduce BSD vacancies; ensure adequate staffing and technical expertise.

### Credit classification, restructuring, and provisioning
- Current framework: banks must comply with the more conservative of prudential loan classification/provisioning or IFRS 9.
- Concern: mechanical classification rules (e.g., upgrading a nonperforming exposure upon rescheduling up to three times; classifying restructured exposures as performing up to two restructurings per year) could hamper timely NPL recognition.
- Recommendation: strengthen prudential framework for asset classification, provisioning, restructuring/rescheduling; delink collateral from prudential classification; require board policies for early identification and management of problem assets.

### Financial sector development priorities
- Tackle systemic late payments across supply chain to boost factoring and accounts receivable finance.
- Develop a National Strategy for Islamic Finance and tap growth potential.
- Reverse capital market decline by building a benchmark yield curve and reviving PPP project pipeline.
- Phase out and better target CBJ subsidized funding schemes as recovery gains momentum; conduct comprehensive stocktaking of development finance initiatives to improve alignment and coordination.
- Note: CBJ plans to make JD 1.3 billion program more targeted medium term and discontinue the JD 700 million SME program by end-2023.

### Implementation status of prior FSAP recommendations (selected)
- Strengthen CARs of vulnerable banks: Implemented — all banks comply with minimum capital requirements; no bank breached CAR.
- Consolidated supervision and cross-border on-site exams: Partially Implemented — consolidated supervision in place but approach needs update.
- Contingency planning and crisis guides: Implemented — crisis guide (2016) and Emergency Liquidity Instructions (2021).
- Early warning systems and stress testing: Implemented — annual top-down stress tests and other tools in use; top-down on domestic consolidation basis; need for globally consolidated top-down capacity.
- Staffing of BSD: In progress — high vacancies; FSI Connect tool adopted and staff training provided.
- Insurance law and mutual funds legislation: Implemented (insurance law published 16 May 2021; Mutual Funds No. (115) 2018).
- Public credit registry threshold lowered: partially implemented — from JD (30) thousand to JD (20) thousand; registry shows past dues by buckets.

### Macro projections — FSAP baseline and adverse scenarios (selected percent series)
- Real GDP growth:
  - Baseline: 2021 2.2; 2022 2.4; 2023 2.7; 2024 3
  - Adverse: 2021 2.2; 2022 -2.6; 2023 -4.8; 2024 2
- Nominal GDP growth:
  - Baseline: 2021 4.6; 2022 6.9; 2023 5.8; 2024 5.6
  - Adverse: 2021 4.6; 2022 5.5; 2023 -0.1; 2024 4.5
- Inflation:
  - Baseline: 2021 2.3; 2022 4.4; 2023 3.0; 2024 2.5
  - Adverse: 2021 2.3; 2022 8.3; 2023 5.0; 2024 2.4
- Central Bank Policy Rate:
  - Baseline: 2021 2; 2022 5.8; 2023 5.5; 2024 5.2
  - Adverse: 2021 2; 2022 7.7; 2023 8.6; 2024 6.9
- Lending Rate:
  - Baseline: 2021 7.0; 2022 7.8; 2023 8.4; 2024 8.8
  - Adverse: 2021 7.0; 2022 11.9; 2023 13.1; 2024 12.0
- Unemployment Rate:
  - Baseline: 2021 24.4; 2022 23.2; 2023 22.1; 2024 21.1
  - Adverse: 2021 24.4; 2022 24.9; 2023 27.1; 2024 26.5

### Key prudential and pandemic-era measures (selected)
- Capital and dividends:
  - CBJ requested no dividend payouts for 2019, adding JD 450 million to banks’ capital.
  - 2021: CBJ allowed profit-making banks to pay dividends up to 12 percent cap of paid-in capital.
- Liquidity and reserve requirements:
  - Minimum reserve requirement ratio reduced from 7% to 5%, releasing around JDs 550 million liquidity.
- Retail and corporate borrower relief:
  - Banks allowed to postpone installments for affected retail customers without commission or delay interest; extended until December 2021.
  - Corporate postponements allowed without classifying as restructuring and without CRIF rating effect if no commission/delay interest; extended until December 2021.
- SME support program:
  - Low-cost financing program JD 500 million initially; guarantee by Jordan Loan Guarantee Corporation covered 85% implying 0 percent risk-weight for CB calculation for these loans.
  - Program later extended to JD 700 million and prolonged until 2023.

### Priority recommended actions and timing codes (I = immediate; ST = 1–3 years; MT = 3–5 years)
- Systemic risk analysis and macroprudential framework:
  - Fill data gaps; enhance consolidated top-down stress testing; model PDs on more granular portfolios; expand corporate and household vulnerability analysis. (CBJ — MT)
  - Enhance readiness to implement borrower-based macroprudential tools. (CBJ — MT)
  - Monitor LCR by significant currency; analyze FX liquidity separately. (CBJ — ST)
  - Strengthen and revamp Financial Stability Committee role. (CBJ — ST)
- Financial sector oversight:
  - Update supervisory framework to be more risk-based and forward-looking on solo and consolidated bases. (CBJ — MT)
  - Develop Pillar 2 risk assessment methodologies. (CBJ — MT)
  - Strengthen supervision and align prudential requirements on asset classification, concentration risk, related-party exposures. (CBJ — ST)
  - Ensure adequate banking supervision staff resources. (CBJ — MT)
  - Strengthen risk-based AML/CFT supervision and enhance UBO identification. (CBJ, Companies Controller — ST)
- Financial safety net and crisis management:
  - Set up multi-agency crisis management committee. (CBJ, MoF, JODIC — ST)
  - Develop depositor compensation procedures and funding backstops for JODIC. (JODIC, CBJ, MoF — MT)
- Financial development:
  - Reassess subsidized funding schemes and phase out where appropriate. (CBJ — I)
  - Assess introducing a late payments law for B2B and G2B transactions. (CBJ — MT)

*Source: IMF Financial Sector Assessment Program mission to Jordan (June and October 2022); FSAP Executive Summary.*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 7

### EXECUTIVE SUMMARY

### Background
- Recovery and headwinds
  - Output contracted moderately in 2020 and rebounded by 2.2 percent in 2021.
  - Growth in 2022 is expected to be slightly higher at 2.7 percent.
  - Sources of downside risk: intensifying spillovers from the war in Ukraine, further shocks to energy and food prices, faster- or stronger-than-expected U.S. monetary policy tightening, and the possibility of a new COVID-19 outbreak.
- Labor market, inflation, and public debt
  - Unemployment remains high near 23 percent as of 2022:Q3.
  - Inflation reached 5.4 percent y-o-y in September 2022.
  - Public debt reached an estimated 90.7 percent of GDP at end-2021.
- Monetary policy and reserves
  - The CBJ increased its policy rates by 350-375 basis points between March and November 2022.
  - Nominal claims on the private sector grew 8.2 percent y-o-y in September 2022.
  - International reserves reached USD 16.2 billion at end-November 2022.
  - Deposit dollarization hovered near a multi-year low of about 19 percent.
- Pandemic-related measures and loan forbearance
  - The CBJ implemented a sizable package of support measures, cut policy rates, injected liquidity, and introduced an SME subsidized lending scheme.
  - The CBJ allowed banks to postpone repayments and restructure credit facilities without considering this a restructuring or rescheduling for borrowers directly impacted by COVID-19.
  - Postponed loan repayments amounted to 9 percent and 4 percent of total loans in 2020 and 2021 respectively.
  - In mid-June 2022 the CBJ instructed banks to offer household borrowers with variable interest rate loans a new repayment schedule with monthly installments fixed at their current levels (with some implementation flexibility provided by the CBJ).

### Vulnerabilities and Risks
- Main vulnerabilities
  - Banks’ exposures to the highly indebted sovereign are large.
  - Household borrowers appear stretched.
  - Concentration risk in the banking system is substantial.
  - The share of corporate debt at risk in an adverse scenario appears sizable.
- Liquidity and FX risks
  - Banks have ample liquidity and could manage significant liquidity pressures, but FX liquidity requires careful monitoring given Jordan’s fixed exchange rate regime.
  - International reserves remain adequate to withstand severe systemwide FX liquidity shocks.
- Systemic amplification risk
  - The identified vulnerabilities could amplify the impact of a crystallization of key macrofinancial risks listed above.

### Systemic Risk and Financial Sector Resilience
- Overall resilience
  - Banks are broadly resilient despite pockets of vulnerabilities.
  - High starting levels of systemwide regulatory capital and a robust earnings-generating capacity would allow most banks to absorb a large stagflationary shock, resulting in a manageable aggregate capital shortfall.
- Contagion and concentration
  - Domestic contagion risks appear limited.
  - Concentration risk is substantial.
- Stress testing and liquidity
  - The CBJ’s stress testing capacity and the crisis management framework have been enhanced.
  - FX liquidity requires careful monitoring; run comprehensive systemic FX liquidity analyses and monitor LCR by significant currency.

### Financial Sector Oversight — Findings and Suggested Actions
- Progress to date
  - Authorities implemented most previous FSAP recommendations and have introduced key elements of the Basel III framework, IFRS 9, and regulations pertaining to Domestic Systemically Important Banks (D-SIBs).
  - AML/CFT framework upgraded since the last FATF assessment.
- Recommended further steps (selected)
  - Systemic risk analysis
    - Fill data gaps to enhance cross-border systemic risk analysis and implement stress tests on a globally consolidated basis.
    - Run comprehensive systemic FX liquidity analyses and perform more granular analyses of household and corporate sector vulnerabilities.
    - Carefully monitor banking sector FX liquidity, sovereign exposures, and concentration risk.
  - Macroprudential policy framework
    - Improve framework by strengthening decision-making, refining the strategy, and enhancing communication.
    - Develop readiness to implement borrower-based macroprudential tools.
    - Consider prudential policies to enhance resilience against a strong sovereign-bank nexus.
  - Banking regulation and supervision
    - Make the supervisory approach more risk-based and forward-looking on adequate solo and consolidated bases.
    - CBJ’s conservative regulatory approach with high minimum required capital ratios could be made more risk-sensitive.
    - Develop Pillar 2 risk assessment methodologies to make capital assessments more sensitive to individual banks’ risk profiles.
    - Review and align prudential requirements on asset classification, concentration risk and related party exposures with Basel Core Principles and guidance.
    - Implement enforceable regulations in key risk areas (market, operational, IRRBB, country and transfer risk); review and revise outdated or misaligned guidance/regulations (credit risk management, FX liquidity risk management).
    - Continue close monitoring of rescheduled and restructured loans.
    - Ensure adequate supervisory resources.
  - Financial integrity
    - Continue strengthening AML/CFT risk-based supervision for banks and nonbank financial institutions, especially customer due diligence obligations.
    - Ensure timely availability of beneficial ownership information for legal persons and consider measures to mitigate risks from virtual assets.
  - Payment systems
    - Improve risk management and efficiency of RTGS-JO: establish a robust/holistic risk-management framework including collateral management, intraday liquidity facility policy, and business continuity.
  - Financial safety net and crisis management
    - Form a multi-agency crisis management committee with relevant domestic agencies to improve crisis preparedness.
    - Draft resolution plans for D-SIBs starting with the major cross-border D-SIB.
    - JODIC should develop a means of payment for compensating depositors and run simulation exercises.
    - Reach agreement among agencies on a borrowing source or debenture issuance arrangements to provide JODIC with a financial backstop.

### Financial Sector Development
- Key development priorities
  - Tackle the systemic issue of late payments across the supply chain to boost access to finance through factoring and accounts receivable finance.
  - Develop a strategy for Islamic finance to tap its growth potential.
  - Reverse the decline in capital markets by building a benchmark yield curve and reviving the PPP project pipeline.
  - Phase out and better target CBJ schemes providing subsidized funding to supervised entities as the recovery gains momentum.
  - Conduct a comprehensive stocktaking of development finance initiatives to ensure greater alignment and coordination.

### FSAP Key Recommendations (summary table highlights)
- Systemic Risk Analysis and Macroprudential Policy Framework
  - Fill data gaps; enhance consolidated top-down stress testing; model PDs on more granular portfolios; expand corporate and household vulnerability analysis. (CBJ — MT)
  - Enhance readiness to implement borrower-based macroprudential tools. (CBJ — MT)
  - Monitor LCR by significant currency; analyze FX liquidity separately from total liquidity. (CBJ — ST)
  - Strengthen and revamp the role of the Financial Stability Committee. (CBJ — ST)
- Financial Sector Oversight
  - Update the bank supervisory framework to be more risk-based and forward looking on solo and consolidated bases. (CBJ — MT)
  - Develop Pillar 2 risk assessment methodologies. (CBJ — MT)
  - Strengthen supervision and align prudential requirements on asset classification, concentration risk and related party exposures. (CBJ — ST)
  - Ensure adequate banking supervision staff resources. (CBJ — MT)
  - Strengthen risk-based AML/CFT supervision and enhance UBO identification. (CBJ, Companies Controller — ST)
- Financial Safety Net and Crisis Management
  - Set up a multi-agency crisis management committee (CBJ, MoF, JODIC — ST).
  - Develop procedures and means for depositor compensation and ensure funding backstops for JODIC. (JODIC, CBJ, MoF — MT)
- Financial Development
  - Reassess subsidized funding schemes and phase out where appropriate. (CBJ — I)
  - Assess introducing a late payments law for B2B and G2B transactions. (CBJ — MT)

*Timing codes: I = immediate (within one year), ST = short term (1-3 years), MT = medium term (3-5 years).*

*Source: IMF Financial Sector Assessment Program mission to Jordan (June and October 2022); FSAP Executive Summary.*

### 4.      The banking sector is large and dominates the financial system. Banks’ domestically

### 4.      The banking sector is large and dominates the financial system. Banks’ domestically

### Overview of the banking sector
- Banks’ domestically consolidated assets amounted to 97 percent of financial sector assets, or 180 percent of GDP, at end-2021.
- The banking sector has a substantial presence abroad: globally consolidated assets reached 304 percent of GDP.
- At end-2021, the banking system comprised 23 banks, of which six were classified as D-SIBs and four were Islamic.
- The Islamic banks’ asset share amounted to 16.2 percent on a domestic consolidation basis at end-2021.
- The insurance sector remains small.
- A public pension scheme run by the Social Security Corporation is not included in the financial system perimeter; its assets, managed by the Social Security Investment Fund, amounted to 37 percent of GDP at end-2021.

### Structure and business model of banks
- On a domestic consolidation basis:
  - Loans make up half of total assets.
  - Securities account for 22 percent of total assets, the bulk of which is Jordanian government securities.
  - The remainder of assets is mostly cash and cash-like instruments.
- On the liability side:
  - Deposits account for 77 percent.
  - Equity accounts for 13 percent.
- Revenue structure:
  - Net interest income accounts for 80 percent of operating income.
- Foreign presence and cross-border links:
  - At end-2021, nine banks were foreign-owned (three were subsidiaries and another six were branches).
  - Eight banks had foreign entities abroad that accounted for 40 percent of globally consolidated bank assets, the bulk belonging to the largest bank.
  - Half of foreign entities’ assets were in GCC countries; most other foreign-presence banks concentrate on West Bank and Gaza and other non-GCC MENA countries.
  - Branches of foreign banks operating in Jordan are subject to capital requirements equivalent to those of other Jordanian banks.
  - Cross-border lending appears limited.
- The Central Bank of Jordan (CBJ) imposes a capital surcharge of 2 percent of risk-weighted assets to banks with foreign entities.

### Capital markets and market infrastructure
- Capital markets infrastructure is reasonably well developed though markets remain shallow and dominated by government bond issuance.
- Market composition and size:
  - Three-quarters of market capitalization is from the banking and mining sector, with over 50 percent from three listings.
  - Corporate bonds (including public entities) accounted for less than 1.5 percent of GDP in 2021.
  - Stock market capitalization shrunk from 250 percent of GDP in September 2008 to 48 percent of GDP at end-2021.
- Market oversight and infrastructure:
  - The market is overseen by the Jordan Securities Commission, trading facilitated by the Amman Stock Exchange and clearing/settlement by the Securities Depositary Centre.
- Secondary market trading is limited and most companies’ free float is low.

### Vulnerabilities and risk indicators
- Financial cycle and credit:
  - Real bank credit growth has been moderate in recent years.
  - The credit-to-GDP gap jumped in 2020 as economic activity contracted and has since stabilized.
- Real estate:
  - Nominal real estate prices have been broadly stable since 2015.
  - Bank credit to the real estate sector has grown in line with total bank credit.
  - Average loan-to-value ratio for residential and commercial real estate loans reached 73 percent and 70 percent in 2020, respectively.
- Bank soundness and asset quality:
  - The NPL ratio has recently fallen slightly below its pre-pandemic level of 5 percent.
  - Credit risk from foreign currency lending is limited: households are not allowed FX loans; firms can only take FX loans if they have a natural hedge.
  - At end-2021, average common equity Tier 1 (CET1) and Tier 1 capital ratios on a globally consolidated level were 16 percent and 16.4 percent respectively; the total capital adequacy ratio was 17.3 percent.
- Profitability:
  - Profitability started recovering after large COVID-related provisioning in 2020 but had not yet reached pre-pandemic levels by the latest available data.
- Sovereign-bank nexus and exposures:
  - Banks’ high exposures to Jordanian government securities amount to about 20 percent of total assets.
  - Loans to the government and other public sector, including state-owned enterprises, amount to another 4 percent of assets.
- Household and corporate vulnerability:
  - Household-debt-to-GDP ratio has edged down since the global financial crisis but is higher than in many regional peers.
  - The household debt burden ratio (DBR) is 45 percent and has increased by 4½ percentage points since 2017.
  - Bank credit to nonfinancial corporations (NFCs)—excluding commercial real estate—stood at 40 percent of GDP at end-2021, an increase by 5.5 percentage points of GDP since 2016.
  - Aggregate debt-to-equity ratio of listed firms in Jordan stood at about 54 percent in 2021.
  - Debt-at-risk for listed firms shot up in 2020 and declined to pre-pandemic levels in 2021.
- Cross-border contagion:
  - Given large foreign exposures, the banking system is vulnerable to cross-border contagion.
  - Under the current macroeconomic outlook, exposures to GCC countries (benefiting from high energy prices) will likely mitigate weaknesses in other economies where Jordanian banks operate.
- Climate-related vulnerabilities:
  - Water stress and droughts are main sources of physical climate risk; Jordan is one of the most water scarce countries in the world.
  - The CBJ is developing its Green Finance Strategy to cover climate-related financial risks and green transition opportunities; the CBJ has received World Bank technical assistance and a draft Strategy is expected to be prepared by mid-2023.
- Risk Assessment Matrix:
  - Key downside risks include spillovers from Russia’s war in Ukraine, further adverse shocks to food and energy prices, and faster-than-expected U.S. monetary policy tightening. These and other risks (including social tensions and high unemployment) are mapped in the Risk Assessment Matrix.

### Systemic risk analysis, scenarios, and macro-financial assumptions
- FSAP assessments performed:
  - Standard bank solvency and liquidity stress tests (covering all banks).
  - Analysis of banking sector contagion.
  - Corporate stress test on publicly listed companies.
  - System-wide FX liquidity exercise (Appendix III).
  - Household sector resilience was not analyzed due to unavailability of micro-level household data.
- Scenario design:
  - Baseline scenario aligned with the July 2022 World Economic Outlook (WEO) update; both baseline and adverse scenarios span 2022–24.
  - Adverse scenario assumptions include worsening of the war in Ukraine, hampered cross-border trade, lower trading-partner growth, further increases in global food and energy prices, de-anchored inflation expectations, faster-than-expected tightening by major central banks, capital outflows, and a very intense CBJ policy-rate response to preserve monetary stability.
  - In the adverse scenario the dollar peg would hold, but shocks cause a deep recession and lead to a sovereign downgrade.
  - The two-year GDP growth rate in the adverse scenario would be 2.4 standard deviations below the historical mean.
  - Jordan’s sovereign credit rating would be downgraded by one notch, from the end-2021 B+ (S&P) to B.

### Banking sector stress test results and resilience
- Aggregate solvency outcomes:
  - Total Capital Adequacy Ratio (CAR) declines from 18.2 percent at end-2021 to 16.6 percent in the baseline and to 13.5 percent in the adverse scenario.
  - The aggregate CAR remains above the 12 percent hurdle rate.
- Bank-level impacts:
  - Baseline: One bank was slightly below the minimum capital requirement before stress, and 3 additional banks, including a D-SIB, become undercapitalized. The combined capital shortfall amounts to 0.34 percent of GDP.
  - Adverse scenario: Eight small- and mid-sized banks and one of the six D-SIBs (29 percent of system assets, in total) become undercapitalized. The combined capital shortfall amounts to 1.6 percent of GDP.
  - The minimum leverage ratio (4 percent) is breached by four banks, mostly because of credit impairments.
- Drivers of stress outcomes:
  - Main drivers in the baseline: interest rate increases, rising loan losses, and growth in risk-weighted assets as the balance sheet grows with nominal GDP.
  - Sovereign risk accounted for one third of the CAR decline via loss provisions on the Held-To-Maturity government securities portfolio.
  - Contribution from income items in the adverse scenario is only slightly smaller than in the baseline, indicating robust pre-provision earnings-generating capacity.
- Asset quality projections:
  - NPL ratio is projected to increase mildly in the baseline and more severely in the adverse scenario, reaching a level in the adverse scenario last seen in the early 2000s.
- Caveats and data limitations:
  - Credit risk modelling was done on banks’ total loan portfolios because sufficiently long historical data series on more granular portfolios were not available.
  - Data limitations prevented full-fledged credit risk modelling of Jordanian banks’ foreign entities by geographies; assumptions on profits from subsidiaries abroad were applied instead.
  - According to information received from the CBJ, one D-SIB that was undercapitalized increased its capital in 2022.

*Italic: IMF staff calculations and findings as presented in the source document.*

### 19.      Concentration risk is substantial. Sensitivity tests show that most banks would be

### 19. Concentration risk is substantial.

### Concentration risk and solvency stress tests
- Sensitivity tests show that most banks would be vulnerable to the default of their largest nonfinancial corporate exposures.
- The default of the 10 largest exposures would lead 14 banks to undercapitalization with a collective capital shortfall of 2.5 percent of GDP.
- Exposures were taken into account with the conservative assumption of no government guarantees.
- Footnote sensitivity: If allowing for state-owned large borrowers to be fully protected by government guarantees, 10 banks would still become undercapitalized, but the aggregate total CAR ratio would remain above 12 percent and the combined capital shortfall would be more manageable at 1.4 percent of GDP.
- In the adverse solvency scenario, key drivers of CAR deterioration include credit losses and sovereign risk; the aggregate CAR remains above the regulatory minimum of 12 percent even in the adverse scenario (figures and panels referenced in text).

### Domestic contagion and interconnectedness
- Based on 2021 data, no failure of a Jordanian bank would cause a failure in another domestic bank as interbank positions are small relative to banks’ capital, except for one bank.
- Three banks in the sample would become slightly undercapitalized relative to the 12 percent regulatory minimum under the examined shock.
- Market-based spillover analysis using daily equity returns indicates that total interconnectedness among banks increases during stress episodes, and systemic banks tend to generate stronger spillovers in the system (Figure 13).

### Liquidity buffers and liquidity stress tests
- Banks hold ample liquidity and can manage significant liquidity pressures due to a simple funding structure based on historically stable customer deposits and large holdings of government securities and central bank instruments.
- The authorities implemented in 2021 a minimum liquidity coverage ratio (LCR) requirement of 100 percent both in Jordanian dinar and in all currencies combined, and with conservative regulatory parameters for cash outflows.
- Aggregate all currencies LCR: declines from 220 percent to 205 percent in a scenario with significant liquidity pressures including higher haircuts on government securities; no bank exhibits a liquidity shortfall in that scenario.
- Historical deposit withdrawal: the only noticeable deposit withdrawal in recent history took place in 2012, with the largest monthly deposit outflow ratio being 3 percent of total deposits.

### FX liquidity vulnerabilities (hidden in current LCR reporting)
- The LCR regulation requires banks to report the LCR in domestic currency and in all currencies combined; the FX component is not separated and monitored on its own.
- The FX LCR computed by the FSAP team:
  - Aggregate FX LCR is 185 percent.
  - 8 banks have substantial FX maturity mismatches.
  - FX liquidity shortfall (relative to a 100 percent hurdle rate) is 3.8 percent of the CBJ’s end-2021 international reserves.
- In a scenario with a higher haircut on government securities:
  - FX LCR would drop to 141 percent.
  - Size of the FX shortfall would reach 4.9 percent of the reserves.

### Systemic FX liquidity analysis (flow and reserve stress)
- Analysis based on the end-2021 network of cross-sectoral financial claims, despite significant data gaps.
- Nonfinancial corporations (NFCs) have the largest external FX-denominated liabilities, amounting to 94 percent of GDP.
- NFCs’ FX liabilities to the domestic banking sector amount to 9 percent of GDP.
- Households have sizeable FX deposits equal to 14 percent of GDP and cannot borrow in FX.
- Banking sector FX liabilities are 18 percent of GDP and are matched by an equivalent amount of FX assets.
- Stress scenarios:
  - Large capital outflow shock (calibrated using a capital-flows-at-risk methodology), conversion of local currency deposits to FX assets held abroad, and FX deposit withdrawals would put pressure on international reserves, especially if combined, but would remain far from depleting them.
  - Scenario definitions referenced: Scenario 1 (capital outflows by non-residents amounting to 2 percent of GDP), Scenario 2 (households and NFCs withdraw 20 percent of their FX demand deposits), Scenario 3 (15 percent withdrawal of dinar deposits and their conversion into FX assets held abroad bringing deposit dollarization to 28 percent), Scenario 4 (combination of Scenarios 1, 2, and 3).

### Nonfinancial corporate (NFC) sector stress test
- Aggregate return on assets (weighted by debt):
  - 2.6 percent at end-2021.
  - Baseline: 1.8 percent in 2023.
  - Adverse scenario: -1.2 percent in 2023.
- Aggregate interest coverage ratio (ICR):
  - 5.4 at end-2021.
  - Baseline: 4.7 in 2023.
  - Adverse scenario: 1.6 in 2023.
- Debt at risk would surge by 33 percentage points in 2023 to 53 percent of total debt under the adverse scenario.
- Differentiation by firm size: low profitability and debt servicing capacity are likely to remain a persistent challenge for smaller firms.
- Recommendation: expand corporate sector stress tests to a broader set of firms (for example by including the largest 20 borrowers at each bank) and develop a framework for multi-year corporate stress tests to align with bank stress testing.

### Recommendations for CBJ capacity, monitoring, and macroprudential framework
- Fill data gaps to expand the perimeter of top-down solvency stress tests to the globally consolidated level.
- Enhance modeling of the aggregate NPL ratio by collecting data to model PDs and doing so on more granular loan portfolios.
- Closely monitor and regularly analyze sovereign-bank linkages given banks’ exposure to the highly indebted domestic sovereign; collect a comprehensive dataset of sovereign-bank linkages on a regular basis.
- Continue attention to banking system concentration risk.
- Calculate and monitor the LCR separately in FX; collect comprehensive bilateral exposures for banks and perform contagion stress testing regularly.
- Consider further incorporating cross-border dimensions in the Financial Stability Report given Jordanian banks’ material exposures in foreign jurisdictions.
- Macroprudential institutional improvements:
  - Formalize the CBJ’s Financial Stability Committee (FSC) mandate, increase the frequency of formal meetings, and refine external communication on macroprudential policy decisions.
  - Refine the macroprudential strategy to include intermediate objectives and the list of instruments, including the approach to setting the countercyclical capital buffer (CCyB) rate.
  - Consider a positive cycle-neutral CCyB rate to provide policy accommodation in downturns, weighing the trade-off between the cost of the extra buffer and its benefits.
- Readiness to implement borrower-based tools: enhance readiness to implement caps on DBR and loan-to-value ratio to address household-sector vulnerabilities.
- Sovereign-bank nexus policy tools: consider supervisory responses such as stress testing requirements, diversification of excessive holdings, and additional capital requirements above concentration thresholds, with adequate phase-in periods.
- Banking supervision and regulation:
  - CBJ has introduced key elements of the Basel III capital framework, IFRS 9, regulations pertaining to D-SIBs, MoUs with foreign regulators, and a supervisory college.
  - BSD staffing: the high number of vacancies in the Banking Supervision Department poses challenges; CBJ should ensure adequate staffing and technical expertise.
  - Consider developing supervisory methodologies to assess Pillar 2 risks and additional capital banks might need to hold.
  - Make CAMEL/ROCA risk ratings and supervisory programs more risk-based and forward-looking; streamline onsite inspection program to avoid stale findings and align scope, frequency, and intensity of supervision with systemic importance and risk profile.

*Source: IMF staff calculations; Central Bank of Jordan.*

### 35.      The CBJ is supervising banks on a “solo” and consolidated basis but both dimensions

### 35.      The CBJ is supervising banks on a “solo” and consolidated basis but both dimensions

### Supervisory scope and approach
- The CBJ is supervising banks on a “solo” and consolidated basis but both dimensions need to be improved.
- Recommendation: Review and redefine supervisory approach to have a clearer view of bank risks on a “solo” basis (to include foreign branches) and a more comprehensive consolidated supervision (to include material entities/affiliates).
- Current practice:
  - Supervisory focus is generally on the bank’s operations through its Jordan branches and the consolidated bank without sufficient consideration of the risks arising from the entities in the wider group.
  - Onsite supervisory assessments are only at the level of the consolidated bank.
  - The CBJ currently undertakes consolidated supervision focused more on an accounting basis rather than a prudential basis.
- Recommendation: Adopt a “prudential lens” to include:
  - Setting group-wide prudential requirements/limits for material entities/affiliates in the bank/banking group.
  - Undertaking a deeper assessment of group-wide risks associated with potential contagion and reputational risk issues.
- Note: The CBJ’s ongoing work to automate onsite inspection processes would help resolve the issue.

### Solo-level reporting
- The CBJ requires some prudential reports and financial statements on the solo level (Jordanian branches + foreign branches of the Jordanian bank) such as:
  - Capital Adequacy Ratio.
  - Financial statements for CBJ purposes which shows the financial position and income statements balances in JOD and Foreign currency.

### Related-party, country, and transfer risk frameworks
- Findings:
  - Definitions, prudential exposure limit, and governance requirements for related party and related party transactions are not fully aligned with Basel requirements and expectations.
  - The CBJ is yet to issue a regulation that explicitly requires banks to establish appropriate risk management policies and procedures for country and transfer risks.
- Recommendation: Improve regulation and supervision of transactions with related parties and explicitly establish requirements for country and transfer risks.

### Asset classification and provisioning
- Framework:
  - Prudential and accounting frameworks jointly establish a framework for asset classification and provisioning.
  - Banks must comply with the more conservative of the prudential loan classification and provisioning requirements or the IFRS 9 requirements.
- Impact:
  - This approach has helped the CBJ remain aware of the quality of the credit portfolio and the adequacy of provisions held by banks.
  - Deferred loans benefiting from COVID-19-related support measures remained subject to IFRS 9 provisioning.
- Monitoring:
  - The CBJ has monitored deferred/rescheduled loans above a JD 1 million size threshold on a half-yearly basis and has not observed any significant deterioration in their quality to date.
- Recommendation: Continued monitoring of rescheduled and restructured loans and further strengthening of the prudential framework in this area is warranted.
- Prudential regulation example (current practice concern):
  - Banks may: (a) upgrade a nonperforming exposure as performing upon rescheduling, up to three times during the life of the exposure; and (b) continue to classify a restructured exposure as performing up to two restructurings in a year. This mechanical classification could hamper timely recognition of NPLs.

### Regulatory and supervisory expectations for risk management
- Findings:
  - Regulatory requirements and supervisory expectations for risk management are distributed over several regulations and in the Banking Law.
  - The CBJ has yet to issue enforceable regulations for several specific risks.
- Key risk areas needing improvement / clarification:
  - Credit concentration risk (requirements or expectations regarding banks’ concentration risk management framework are not adequately explicit or detailed).
  - Market risk.
  - Operational risk.
  - Interest rate risk in the banking book (IRRBB).
  - Liquidity requirements.
- Cross-reference: See the subsection on banking sector stress tests above for a recommendation to enhance FX liquidity monitoring.

### Financial Market Infrastructures (payment and settlement)
- Finding:
  - The payment and settlement system is a systemically important financial market infrastructure and needs to be operated in a sound and efficient manner.
- Recommendation: CBJ should take actions for better risk management to comprehensively manage legal, credit, liquidity, operational, and other risks, and improve efficiency of the Real Time Gross Settlement System.
- Observation:
  - The Enterprise Risk Management framework covers financial and nonfinancial risk but detailed guidance and policies are focused on operational risk.
- Recommendation: A robust/holistic risk management framework should thoroughly cover collateral management, intra-day liquidity facility policy, and business continuity.

### Financial integrity (AML/CFT)
- Background:
  - In October 2021, Jordan was publicly listed by the Financial Action Task Force (FATF) due to outstanding deficiencies in its AML/CFT framework.
  - The 2019 assessment by MENAFATF rated Jordan as having low to moderate effectiveness against 9 of the 11 immediate outcomes and Partially Compliant / Non-Compliant on 21 of the 40 recommendations.
- Actions taken since assessment:
  - Adopted a new AML law.
  - Improved RBS for banks.
  - Created specialized units and increased staffing.
  - Amended laws to collect beneficial ownership for companies and trusts and developed an electronic register to store basic and ultimate beneficial ownership information.
- Progress:
  - In June 2022, the MENAFATF upgraded Jordan’s technical compliance with several recommendations.
- Remaining actions:
  - Authorities should continue strengthening the effectiveness of the AML/CFT system in accordance with the action plan agreed with the FATF, including measures to finalize the virtual assets risk assessment and implement appropriate AML/CFT measures for mitigating risks from virtual asset activity.
- CBJ supervisory responsibilities:
  - Continue enhancing AML/CFT RBS of banks and ensure adequate supervisory oversight of D-SIBs with cross-border operations.
  - Since 2019, CBJ has undertaken several onsite inspections focusing on banks with a moderate and high residual risk rating.
  - CBJ should continue to ensure that Jordanian AML/CFT laws are adhered to by branches/subsidiaries of banks operating in foreign jurisdictions by way of onsite inspections.
  - CBJ regulations require banks with cross-border operations to implement home and host supervisor requirements, whichever is more conservative.
  - CBJ should ensure that appropriate sanctions are imposed to enforce compliance with AML/CFT requirements.
- Customer Due Diligence:
  - Progress has been made in implementing CDD measures by banks, but key improvements are still required.
  - Compliance should be enhanced in the identification and verification of beneficial owners of legal persons and arrangements.
  - Dissemination of sectoral updates to the national ML/TF risk assessments, particularly the risk assessment of legal persons and arrangements, should be expedited.

### Financial safety net and crisis management
- Key authorities: The CBJ and the JODIC are the key authorities for the financial safety net and crisis management. The CBJ is leading efforts to further build this capacity. The JODIC operates separately from the CBJ under a MoU.
- Legal and operational progress since last FSAP:
  - Legal reforms added tools to support the resolution function, including the power of the CBJ to license and operate a bridge bank institution, and revisions to emergency lending powers of the CBJ.
  - Operational procedures adopted since the last FSAP include a draft Banking Crisis Management Guide (2016), D-SIB Instructions (2017) and Instructions to Banks on Emergency Liquidity Assistance (2021), as well as multiple cross-border MoUs.
  - The CBJ has drafted and approved instructions for emergency liquidity assistance, but a public version has not been made available to the banks and internal guidelines have not yet been drafted.
- Recommendation: Set up a multi-agency crisis management committee (CMC) to expand current bilateral focus to include the Ministry of Finance (MoF) in a CMC. The CMC would be a consultative forum with the CBJ, MoF, and the JODIC as members; the consultative nature would assure independence of members is not compromised.
  - Note: Jordan Securities Commission could periodically provide briefings to the CMC as needed.
  - MoF involvement in bank-specific resolution decisions should be restricted to cases where taxpayer money is at risk.
- Resolution planning:
  - The CBJ, as resolution authority, needs to ready itself for the possibility of resolution of a D-SIB by preparing resolution plans; drafting such plans has not yet been a priority, but early planning has begun.
  - Recommendation: Develop procedures for resolution planning and draft resolution plans for D-SIBs.
  - Recommendation: Ensure structural separation and operational independence between the CBJ’s functions as lender of last resort, prudential supervisor, and resolution authority.
  - Increased cooperation with foreign counterparts is needed regarding resolution planning for cross-border banks.
- JODIC funding and depositor compensation:
  - The JODIC has authority to borrow or issue debentures, but sources/arrangements have not yet been decided.
  - JODIC’s level of reserves are about JD 1.1 billion at end-2021, which provides approximately 50 percent of the needed funding to resolve one of the two largest systemic institutions.
  - Recommendation: Expedite procedures and stand-by agreements regarding access to funding to prevent delays in payment of insured depositors.
  - JODIC should ensure technical and operational capacity to compensate insured depositors within seven business days by running simulation exercises and developing a method for compensating depositors.
  - The JODIC Law mandates payment of the sum due to the insured deposit holder within 30 days from the date of the liquidation decision.
  - JODIC notes member banks’ existing core banking systems enable reporting on a single customer view basis to facilitate timely payment, but no decisions have been made regarding means of payment.
  - CBJ and JODIC intend to revise and extend their current MoU to provide more detailed technical and operational arrangements to support prompt compensation of insured depositors.
  - The most likely approach would involve having a process for banks to apply to the JODIC and the CBJ to act as an agent bank in compensating depositors.

### Financial sector development
- MSME finance:
  - Access to finance remains a major challenge for micro, small, and medium enterprises (MSMEs) in Jordan.
  - Banks’ low appetite for lending to small businesses stifles competition in MSME credit.
  - Limited sources of affordable funding for nonbank credit providers that cater to MSMEs make their products expensive and uncompetitive.
  - Lenders rely almost exclusively on immovable collateral and personal guarantees; most MSMEs have only movable assets to offer as collateral.
  - The Secured Transactions Law (2018) establishes key requirements for creation and enforcement of security over movable assets.
  - Recommendation: Provide comprehensive trainings to lenders and main stakeholders to facilitate movable asset finance.
  - Recommendation: Consider introducing a late payments law applicable to B2B and G2B payments with financial penalties to reduce payment delays and support factoring and accounts receivable finance.
- Subsidized funding schemes:
  - Recommendation: CBJ should reassess and phase out schemes that provide subsidized funding to specific sectors and SMEs.
  - Rather than funding development finance initiatives and managing them through CBJ representation on their boards, the CBJ should focus on regulatory and supervisory oversight of these initiatives to maintain financial stability.
  - Authorities are advised to conduct a comprehensive stocktake of development finance initiatives to reduce their number, increase effectiveness, and ensure greater alignment and coordination.
  - Note: The CBJ plans to make the JD 1.3 billion program more targeted in the medium term and to discontinue the JD 700 million SME program by the end of 2023.
- Capital markets and Islamic finance:
  - Reviving declining capital markets requires building a benchmark yield curve, reviving the PPP project pipeline, broadening the investor base (international and domestic), and launching new investment instruments.
  - Supporting ‘green’ and Sharia-compliant products could act as catalyst for markets overall.
  - The potential of Islamic finance has not yet been fully tapped; financially excluded have significant latent demand for Sharia-compliant services.
  - Recommendation: Develop and implement a comprehensive National Strategy for Islamic Finance.
  - Sukuk programs can provide Sharia compliant liquidity risk management options.

### Authorities' views
- Authorities appreciated the FSAP assessment and found recommendations useful.
- They highlighted enhancements to the financial stability framework since the 2008–09 FSAP and the anticipated benefits of the recent widening of the CBJ’s supervisory umbrella.
- They underlined resilience of the domestic financial system to global and regional shocks over the past decade and a half.
- Authorities broadly agreed with the systemic risk assessment and the need to fill identified data gaps.
- They welcomed bank solvency stress test results and noted banks’ high levels of capital and conservative business model and prudent lending standards.
- They pointed to effective policy response to COVID-19: smooth flow of credit to the private sector and lack of deterioration in loan quality since the end of the loan deferment measure at the end of 2021.
- Authorities plan to:
  - Review and further develop methodologies of their Pillar 2 framework and amend regulations relating to key risk areas as needed.
  - Continue improving the RBS framework and prudential tools and techniques and have begun RBS enhancement with IMF technical assistance.
  - Enhance readiness to compensate insured deposits in a timely manner in context of revision/extension of the inter-agency MoU.
- Authorities emphasized that:
  - (i) the current high level of solvency in the banking sector,
  - (ii) the ability and willingness of the main bank shareholders to support their institutions if the need arises, and
  - (iii) the high level of JODIC reserves (3.3 percent of GDP),
  - would significantly lower the need to use public resources to deal with any future crisis.

_Compiled from the IMF FSAP chapter content provided in the source content._

### 1. Intensifying

### 1. Intensifying Spillovers from Russia’s War in Ukraine

### Global and Regional Risk Drivers
- High likelihood and high expected impact: Further sanctions and related uncertainties exacerbate trade and financial disruptions and commodity price volatility, with Europe, low-income countries, and commodity-importing emerging markets among the worst hit.
  - An increase in fuel prices would significantly increase the fuel import bill, the current account deficit and the external financing needs.
  - An increase in global risk premia combined with large capital outflows could result in a negative feedback loop between the sovereign and banks and adversely impact bank balance sheets.

- High likelihood and high expected impact: Commodity price shocks from continuing supply disruptions (e.g., due to conflicts and export restrictions) and negative demand shocks cause recurrent commodity price volatility and social and economic instability.
  - An increase in fuel prices would significantly increase fuel import bill; current account deficit and external financing needs.

- Medium likelihood and medium expected impact: De-anchoring of inflation expectations and stagflation.
  - Supply shocks to food and energy prices sharply increase headline inflation and pass through to core inflation, de-anchoring inflation expectations and triggering a wage-price spiral.
  - Central banks tighten monetary policy more than envisaged leading to weaker global demand, currency depreciations in EMDEs, and sovereign defaults, potentially causing stagflation.
  - Domestic policy response consequences:
    - Would negatively affect the nascent recovery and increase private sector vulnerabilities with adverse effects on bank asset quality.
    - Wider risk premia would result in higher funding costs for corporates and the sovereign; bank asset quality would deteriorate.
    - A negative feedback loop emerging between the sovereign and banks could emerge.
    - A sovereign credit rating downgrade would become more likely.
    - A stagflation and a decline in external demand would result in a decline in tourism receipts and remittances, widening the external deficit.

- High likelihood and high expected impact: Abrupt global slowdown or recession.
  - Sharp tightening of global financial conditions combined with volatile commodity prices leads to spiking risk premia, widening of external imbalances and fiscal pressures, capital outflows, sudden stops, and debt and financial crises across EMDEs.
  - Expected domestic effects:
    - Deterioration in bank asset quality from higher risk premia, borrowing cost and corporate vulnerabilities.
    - Potential negative feedback loop between sovereign and banks.
    - Possible capital outflows.
    - Decline in fuel prices would reduce external financing needs.
    - Growth slowdown would further increase unemployment and affect public debt sustainability.
    - A sovereign credit rating downgrade would become more likely.

- Medium likelihood and high expected impact: Local Covid-19 outbreaks.
  - Slower growth and drop in government revenues increase the fiscal deficit and public debt.
  - Corporate and household debt vulnerabilities would rise, with adverse effects on bank balance sheets.
  - An increase in global risk premia combined with accelerated capital outflows could result in a negative feedback loop between sovereign and banks and further worsening of bank balance sheets.

### Domestic and Climate/Regional Risks
- Medium likelihood and high expected impact: Increase in water scarcity due to climate change.
  - Water shortages, social unrest, and dissatisfaction with the government, disrupting economic activity and raising risk premia similarly to global risks 3 and 4 above.

- Medium likelihood and medium expected impact: Regional destabilization undoes recent border openings and export agreements.
  - Weaker regional tourism inflows, and reduced opportunities for regional electricity export would weaken external balance and economic activity.
  - Increased risk of a sovereign downgrade.

- Medium likelihood and high expected impact: Persistently high unemployment amplifies poverty and inequality.
  - Recent reform momentum would weaken.
  - Investor perceptions of business environment would be damaged.
  - Growth would slow, calling sovereign debt sustainability into question.
  - The risk of a sovereign credit rating downgrade would increase.

### Key Banking and Financial Sector Indicators (Jordan Consolidation Level; selected series, 2015–2022)
- Risk-weighted capital adequacy ratio 2/1: 19.1 17.8 17.2 16.9 17.0 18.3 17.0 18.3 17.9 18.3 18.3 18.0 17.1
- Non-performing loans (NPLs) (in millions of JD): 1,010 1,019 1,159 1,236 1,342 1,299 1,342 1,299 1,473 1,496 1,517 142 1.5 1388.7
- NPLs (in percent of total loans): 4.9 4.2 4.6 4.9 5.2 5.0 5.2 5.0 5.4 5.5 5.3 5.0 4.6
- Provisions (in percent of classified loans): 74.7 75.4 74.1 79.3 68.2 69.5 68.2 69.5 67.9 71.5 75.2 79.9 83.4
- NPLs net of provisions (in percent of equity): 4.5 4.1 5.0 4.2 7.0 6.3 7.0 6.3 7.3 6.4 5.7 4.2 3.4
- Liquidity ratio: 149.0 130.1 126.7 131.9 129.5 134.1 129.5 134.1 128.9 136.5 136.2 141.5 136.9
- Return on assets: 1.3 1.2 1.2 1.2 1.2 1.2 1.2 1.2 0.6 0.6 1.2 1.0 1.0
- Return on equity: 10.3 9.1 9.8 9.6 9.4 9.4 9.4 9.4 5.2 5.1 9.5 8.3 8.2
- FX-denominated loans to total loans ratio: 13.4 11.9 10.8 10.5 11.0 11.2 11.8 12.5 12.6 12.2 11.9 12.3 13.3
- FX-denominated deposits to total deposits ratio: 18.0 20.0 20.7 21.0 22.0 22.6 22.1 21.8 21.3 21.3 20.6 20.2 20.3
- Loans to deposits ratio: 67.6 71.8 76.6 78.7 80.6 81.5 83.4 81.6 87.5 84.5 86.0 82.8 84.7
- Loans to GDP ratio (in percent of GDP): 77.0 80.9 81.8 84.1 84.4 85.7 85.0 86.2 90.9 92.3 92.5 93.5 93.1

(Global Consolidation Level; selected series)
- Risk-weighted capital adequacy ratio 2/1: 16.6 16.6 17.9 17.8 17.8 17.5 17.3
- Non-performing loans (NPLs) (in millions of JD): 2,156 2,368 2,299 2,558 2,720 2,971 2,896
- NPLs (in percent of total loans): 5.0 5.4 5.2 5.7 5.9 5.6 5.4
- Provisions (in percent of classified loans): 88.3 73.8 74.6 74.5 74.6 77.7 82.8
- NPLs net of provisions (in percent of equity): 2.2 5.4 4.9 5.3 5.4 5.0 3.7
- Return on assets: 1.4 1.9 1.3 0.6 0.5 0.8 0.8
- Return on equity: 9.2 12.7 9.1 4.1 3.5 5.8 5.4

### Macro Projections: FSAP Baseline and Adverse Scenarios (percent)
- Real GDP growth:
  - Baseline: 2021 2.2; 2022 2.4; 2023 2.7; 2024 3
  - Adverse: 2021 2.2; 2022 -2.6; 2023 -4.8; 2024 2
- Nominal GDP growth:
  - Baseline: 2021 4.6; 2022 6.9; 2023 5.8; 2024 5.6
  - Adverse: 2021 4.6; 2022 5.5; 2023 -0.1; 2024 4.5
- Inflation:
  - Baseline: 2021 2.3; 2022 4.4; 2023 3.0; 2024 2.5
  - Adverse: 2021 2.3; 2022 8.3; 2023 5.0; 2024 2.4
- Central Bank Policy Rate:
  - Baseline: 2021 2; 2022 5.8; 2023 5.5; 2024 5.2
  - Adverse: 2021 2; 2022 7.7; 2023 8.6; 2024 6.9
- 3-year Government Bond Rate:
  - Baseline: 2021 3.4; 2022 7.0; 2023 6.5; 2024 6.2
  - Adverse: 2021 3.4; 2022 8.3; 2023 8.8; 2024 8.0
- Lending Rate:
  - Baseline: 2021 7.0; 2022 7.8; 2023 8.4; 2024 8.8
  - Adverse: 2021 7.0; 2022 11.9; 2023 13.1; 2024 12.0
- Unemployment Rate:
  - Baseline: 2021 24.4; 2022 23.2; 2023 22.1; 2024 21.1
  - Adverse: 2021 24.4; 2022 24.9; 2023 27.1; 2024 26.5
- Change in asset prices (equity and real estate), Adverse scenario: 2022 -15; 2023 0; 2024 0

(Source: July 2022 WEO projections, and IMF staff calculations)

### Summary of Bank Liquidity Stress Test Assumptions (LCR Parameters)
- Outflow Rates (percent) — Jordan LCR compared with Basel Regulation and Fire-Sale Scenario:
  - Retail Deposits:
    - Stable (insured) deposits: Basel Factor 3; Jordan LCR 15; Fire-Sale Scenario 15; FX LCR in Fire-Sale Scenario 15
    - Stable deposits (non-insured): Basel Factor 5; Jordan LCR 20-40; Fire-Sale Scenario 20-40; FX LCR in Fire-Sale Scenario 20-40
    - Less stable deposits: Basel Factor 10; Jordan LCR 20-40; Fire-Sale Scenario 20-40; FX LCR in Fire-Sale Scenario 20-40
- Haircuts on High-Quality Liquid Assets (HQLA, percent):
  - Level 1 HQLA:
    - Cash: 0 0 0
    - Central bank reserves: 0 0 0
  - Government securities (local currency): 0; Jordan average 19.3; Not applicable in FX column
  - Government securities (FX): 0; 10.3 (average); FX LCR in Fire-Sale Scenario 10.3 (average)
  - Level 2A HQLA: 15 15 15
  - Level 2B HQLA: 50 50 50

(Source: CBJ and IMF staff calculations)

### Appendix II. Key Prudential Measures Taken by the CBJ in

### Appendix II. Key Prudential Measures Taken by the CBJ in Response to the COVID-19 Pandemic

### Capital and dividend measures
- CBJ requested banks not to pay out any dividend to their shareholders for the year 2019, which added JD 450 million to banks’ capital.
- In 2021, CBJ allowed banks who had made profits in 2020 to pay out dividends to their shareholders up to a 12 percent cap of their paid-in capital.
- CBJ stated these payouts would not violate any regulatory instructions or requirements regarding regulatory capital or liquidity given comfortable levels of provisioning and capital.

### Liquidity measures and monetary policy
- CBJ reduced the minimum reserve requirement ratio from 7% to 5%, which made around JDs 550 million of additional liquidity available to banks.

### Retail borrower relief
- CBJ allowed banks to postpone the installments of the affected retail customers without any commission or delay interest.
- This measure was subsequently extended until December 2021.
- While banks were allowed to reschedule loans for negatively impacted borrowers, CBJ informed banks and auditors that they should assess the capacity of borrowers to repay based on their assessment of future cash flows and in line with IFRS9.

### Corporate borrower relief
- CBJ allowed banks to postpone the affected companies’ installments without considering this a loan restructuring, and without affecting the credit rating of companies with CRIF (credit bureau), provided that the banks did not charge any commission or impose delay interest on these companies.
- This measure was subsequently extended until December 2021.
- CBJ informed banks and auditors that they should assess the capacity of borrowers to repay based on their assessment of future cash flows and in line with IFRS9.

### SME support program
- CBJ launched a low-cost financing program amounting to JD 500 million to support SMEs and enable them to cover their operational expenses and salaries.
- CBJ decided to give a risk-weight of 0 percent for calculating the capital adequacy ratio for loans within this program given that a guarantee by the Jordan Loan Guarantee Corporation covered 85% of the loans.
- This program was later extended to JD 700 million and prolonged until 2023.

*Source: Appendix II. Key Prudential Measures Taken by the CBJ in Response to the COVID-19 Pandemic.*

### 10.      CBJ possesses the authority to set prudential conditions upon the granting of banking

### 10.      CBJ possesses the authority to set prudential conditions upon the granting of banking

### Licensing and regulatory authority
- CBJ’s Licensing Guidelines include many criteria used for ongoing supervision but need updates to:
  - assess whether applicant’s structure would impede effective supervision or the implementation of corrective measures;
  - clarify existing criteria to align with the current laws and regulations;
  - be made into an instruction/regulation so that the criteria is enforceable under the law.
- Neither the Banking Law nor regulations provide formal criteria to judge individual proposals for major acquisitions and investments; internal criteria exist and are used in practice.
- Recommendation: formalize criteria by regulation/instruction that are consistent with licensing and ongoing supervision, including:
  - adequate financial, managerial, and organizational resources to handle the acquisition/investment;
  - adequate assessment of the ownership structure for potential risks from non-banking activities to the bank/banking group.

### Supervisory cooperation and cross-border supervision (CP 3, 12, 13)
- CBJ supervises banks/banking groups on a consolidated “accounting” basis rather than a “prudential” basis that applies prudential standards to all aspects of the bank/banking group business.
- Current consolidated accounting supervision includes all financial and non-financial companies and affiliates, but does not necessarily consider the potential negative impact of the failure of a material affiliate (e.g., “step-in risk” and reputational risk).
- Recommendation: shift to a “prudential lens” to include:
  - setting group wide prudential limits (e.g., liquidity, related party transactions, large exposures);
  - deeper assessment of group-wide contagion risks (intra-group transactions and exposures) and reputational risk issues.
- CBJ should continue supervisory colleges and joint onsite inspections for banks/D-SIB with material cross-border operations.
  - Recommendation: add a crisis management planning component to the next supervisory college; share recovery plan aspects, develop resolution plans, finalize and implement the draft crisis binder.
- CBJ has multiple bilateral MoUs but needs to ensure they are up to date and cover key areas such as AML/CFT and crisis preparedness.
  - Recommendation: update bilateral MoUs and enter into a Multilateral MoU with relevant domestic agencies, including with the MoF, to operationalize crisis management framework.

### Supervision (CP 8, 9, 10)
- CBJ’s supervisory approach currently emphasizes Jordanian operations and consolidated “accounting” supervision; Basel’s prudential oversight requires inclusion of prudential oversight and analysis of banks including Jordanian branches and foreign branches.
  - Recommendation: undertake ongoing risk rating/assessment of banks, update collection, review, analysis, and prudential reporting requirements to comply with Basel’s definition of “solo” assessment of a bank’s operations.
- CAMEL/ROCA supervisory risk rating methodology needs reassessment to be forward looking, identify material risks clearly, assess potential impact of broader group entities, and include peer comparisons.
  - Recommendation: introduce a risk matrix to view material risk areas (credit, market, country, transfer, etc.) on both a solo and consolidated basis and to assess the strength of risk management control functions alongside capital, assets, liquidity, and earnings.
- Onsite inspections, offsite monitoring, and internal guidance require re-assessment:
  - Current onsite program is not sufficiently risk based, is too comprehensive, and can take up to one year or longer to finalize inspection reports, producing stale findings.
  - Inspection reports currently produce CAMEL/ROCA risk rating for the consolidated group only.
  - Recommendation: implement standards for frequency (D-SIBs visited at an acceptable frequency given systemic importance/cross-border operations/risk profile), timing (standards for completion and final delivery of the report), and scope (use thematic or focused reviews); set minimum onsite inspection requirements and ensure inspection reports address strength of risk management control functions.
- CBJ should reconsider providing a “green light” for issuance of banks’ annual audited financial statements:
  - BSD spends significant time validating external auditor work as part of allowing publication of audited statements; this duplicates external audit function and could create moral hazard.
  - Recommendation: reduce offsite staff time on validating audited statements to free resources for supervisory duties; offsite monitoring should focus on updating the risk matrix, emerging risks/macroeconomic indicators, peer comparisons, and changes in group structure, especially intra-group transactions/exposures and reputational risk.

### Corrective and sanctioning powers of supervisors (CP 11)
- The Banking Law provides an adequate range of supervisory tools, but the Framework for Corrective Measures (2004) is outdated and underused.
  - Needs updated references for minimum prudential requirements (e.g., add liquidity) and references to current laws, instructions, and orders.
  - Recommendation: consider making the Framework a regulation to strengthen enforceability and reduce legal challenges on appeal.
- Observed practice: when banks breach minimum prudential requirements (e.g., capital), banks are sometimes given time to “get back on side” using a “board approved plan” because inspectors view total regulatory capital as high enough to allow this corrective measure.

### Corporate governance, audit, and financial reporting (CP 14, 26–28)
- Instructions for Corporate Governance for conventional and Islamic banks clearly set CBJ expectations.
  - Instruction update expected to consolidate conventional and Islamic bank requirements into one regulation and incorporate key recommended changes.
  - Expected changes include explicitly requiring board members to have a “duty of care” and changing Risk Management Committee composition to ensure no representation from senior executive management (no voting power).
- Regulatory and supervisory frameworks for internal control, internal audit, external audit, financial reporting, and disclosures are largely well established and effective.
  - Recommendations to align further with Basel Core Principles:
    - make internal audit risk-based;
    - provide explicit legal protection for external auditors disclosing confidential information to the CBJ during their engagement;
    - allow supervisors access to external auditors’ working papers;
    - require supervisors to hold periodic structured meetings with external auditors.
  - Recommendations to promote transparency:
    - explicitly require banks to publicly disclose all material entities in the group structure;
    - provide disclosure templates to promote standardized disclosures;
    - require banks to publish such disclosures on dedicated webpages.
  - Recommendation: CBJ to improve contents of aggregated and periodic system-level disclosures.

### Capital (CP 16)
- Jordan’s capital framework is aligned with best practices and proportionate to local industry risks and complexities.
  - Capital adequacy framework (Pillar 1) is compliant with Basel requirements; definition and components of capital, quality of capital, and use of buffers align with Basel III; methodologies for Pillar 1 risk-weighted assets are per Basel II.
  - No bank is implementing advanced approaches for computing risk weights.
  - All banks maintain capital under the standardized approach for credit risk and standardized maturity method for interest rate risk in trading book.
  - For operational risk: 19 banks maintain capital per the basic indicator approach and three under the standardized approach.
- Minimum capital requirements are higher than the Basel framework and CET1 capital is significantly high:
  - Minimum requirements are higher than the Basel requirement by 1.5 percent (of risk weighted assets) for all banks and by 3.5 percent for banks with a foreign presence.
  - As at end December 2021:
    - average CET1 ratio for the banking sector (consolidated banks) was 16 percent;
    - average Tier 1 ratio was 16.4 percent;
    - total capital adequacy ratio was 17.3 percent.
  - As at end December 2021, CET 1 capital for the banking system was close to 95 percent of total regulatory capital, and the minimum for a bank was 87.6 percent.
  - Additional tier 1 capital must not exceed 1.5 percent and tier 2 capital must not exceed 2 percent (regulatory limits).
  - Regulations require banks to hold a minimum Tier 1 non-risk-based leverage ratio of 4 percent, compared to the Basel III requirement of 3 percent.
- All banks are required to submit ICAAP annually, but CBJ needs to develop methodologies to assess Pillar 2 risks and additional capital needs:
  - Supervisors review ICAAP for scope and adequacy; where stress tests indicate capital adequacy threats, banks must provide capital restoration plans.
  - Over the past five years there was no occasion where CBJ required a bank to hold higher capital as a Pillar 2 requirement.
  - Recommendation: develop supervisory methodologies to assess Pillar 2 risks and link additional capital to specific risks; equip supervisors to challenge/validate banks’ ICAAP internal assessments.

### Risk management (CP 15, 17–25)
- The regulatory and supervisory framework promotes risk management culture and is evolving, but enforceable regulations for specific risks are lacking.
  - Risk management requirements are distributed over several regulations/instructions and the Banking Law.
  - CBJ has not issued enforceable regulations for management of specific risks (credit risk, market risk, operational risk, liquidity risk, interest rate risk in banking book) even though these have dedicated core principles.
  - Supervisory methodology (CAMEL/ROCA) is not adequately designed to provide a risk perspective; supervisors assess risk management at the overall level rather than in-depth for specific risks.
- Credit risk management focus is fragmented:
  - CBJ requires banks to establish risk management frameworks for credit risk, but expectations are not articulated in a separate credit risk regulation promoting a comprehensive approach.
  - Supervision addresses elements such as asset quality classification, provisioning, large exposures, and related party exposures, but CAMEL addresses asset quality (A) and investment/treasury and overall risk management (M) without a comprehensive credit risk view.
  - Recommendation: issue a focused regulation on credit risk management and reorient supervision, including CAMEL/ROCA, toward a comprehensive credit risk approach.
- Asset classification, restructuring/rescheduling, and provisioning need improvement and alignment with Basel principles:
  - Recommendations include delinking collateral from prudential classification; strengthening restructuring/rescheduling framework; explicitly requiring board policies for early identification and management of problem assets and board oversight; disallowing board discretion to permit exceptions to prudential classification and expected credit loss (ECL) estimations; reducing thresholds for requiring individual item assessment of classification and provisioning; reviewing and revising prudential provisioning requirements established in 2009; and improving offsite monitoring of credit quality and provisioning.
  - Recommendation: CBJ should supplement supervisory measures with periodic system-level analyses of trends and concentrations in relation to banks’ problem assets, risk mitigants, and risk mitigation strategies to inform system-level policy and response.

*Source: 1jorea2023002 - 10.      CBJ possesses the authority to set prudential conditions upon the granting of banking*

### 28.      Regulatory and supervisory frameworks for credit concentration are in place but need

### 28.      Regulatory and supervisory frameworks for credit concentration are in place but need improvements, the related-party transaction framework needs significant improvement, and the frameworks for country and transfer risks need to be formally established.

### Credit concentration, related-party transactions, and country/transfer risk
- Laws and regulations have established a set of prudential requirements aimed at addressing concentration risk in banks, but they have not explicitly established as a set of supervisory requirements or expectations regarding banks’ concentration risk management framework (e.g., governance, policies, processes, controls, oversight, and assurance).
- Regulatory requirements and supervisory expectations on other types of concentrations (e.g., sectoral, geographic, collateral) are not adequately explicit or detailed.
- The framework for regulating and supervising transactions with related parties is in place but should be significantly improved to align with the Basel norms on:
  - definitions of related parties and related-party transactions,
  - on aggregate exposures to related parties,
  - and addressing potential conflicts of interest at levels below the board.
- Laws or regulations do not explicitly require banks to establish appropriate risk management policies, procedures, and arrangements for actively identifying, measuring, monitoring, and managing country and transfer risks.
- These country and transfer risk requirements need to be established and aligned with the requirements in the core principles.

### Market risk, operational risk, and IRRBB
- Regulation and supervision of market risk, operational risk, and interest rate risk in the banking book (IRRBB) are carried out from the perspective of capital adequacy but need to be upgraded for IRRBB and operational risk.
- In the absence of enforceable regulations on these risks and the CAMEL/ROCA methodology, offsite and onsite supervision is still evolving for these risks—more work is needed.
- Given that market risks are not significant for most banks, and that banks generally do not deal in structured products, write options, or sell protection, the current legal, regulatory, and supervisory frameworks established in Jordan and actual practice, seem to be proportionate to the activities and risk exposures.
- However, the regulation and supervision frameworks for IRRBB (to which banks have material exposures) and operational risk need to be upgraded.

### Liquidity risk framework
- CBJ requires banks to comply with three prudential liquidity risk requirements and supervises them closely.
- The framework offers scope for improvement:
  - these are not applied at the level of the “solo” bank,
  - nor applied or monitored at the level of individual significant foreign currency,
  - nor supplemented adequately by other liquidity monitoring tools recommended by Basel.
- The framework can be adapted to also focus more on foreign currency liquidity risk management, particularly in banks carrying out significant foreign currency liquidity transformation.

### AML/CFT oversight for banks (CP 29)
- Although CBJ’s AML/CFT legislative framework pertaining to banks (e.g., the AML/CFT Law and Instructions) appears effective, CBJ should ensure a continued focus on the banking sector, including an adequate onsite inspection program for large D-SIBs with cross-border operations.
- CBJ’s AML/CFT risk assessment framework, including its offsite annual risk assessment by banks and its onsite inspection program (whether carried out by CBJ or the EA) appear to be extensive.
- CBJ needs to assure itself that D-SIBs’ cross-border operations are adhering to AML/CFT requirements that are at least as conservative as CBJ’s requirements.
- CBJ’s AML Department should ensure a continued focus on banks/banking group’s compliance with AML/CFT legislative and regulatory requirements, especially in light of this Department’s/CBJ’s growing mandate to oversee AML/CFT requirements for other sectors (e.g., microfinance institutions, money exchange entities, insurance companies, etc.).

### Key findings and supervisory recommendations from Table AIV.1 (selected)
- Responsibilities, objectives and powers
  - The legislative and regulatory framework has been significantly updated over recent years, but more work is needed to clarify certain aspects of CBJ’s mandate and to ensure the various regulations are adequate to support the primary laws.
  - CBJ Law specifically provides for the protection of shareholders (Art 4(B)(3)). CBJ law should be amended to ensure that the function of protecting depositors’ interest takes precedence over the function of protecting shareholders.
  - CBJ’s involvement with providing supervised entities with medium and long-term financing under diverse subsidized lending programs is a conflict of interest with its role as banking supervisor.
  - Given the Banking Law is supplemented by CBJ’s instructions, it is necessary for CBJ to update certain guidelines to instructions (licensing, corrective measures) and develop and implement missing risk guidelines/instructions (e.g., market risk, IRRBB, etc.).
- Independence, accountability, resourcing and legal protection for supervisors
  - Although CBJ has necessary autonomy and independence, the Banking Supervision Department (BSD) has a high number of vacancies making it difficult to effectively deliver on its mandate (e.g., effectively re-instate its onsite inspection program to the same extent as pre-Covid level of supervisory activity).
  - The CBJ Law does not explicitly outline the requirement to publicly disclose the reasons for removal of the governor or board member.
  - Civil Law protections for employees do not explicitly extend to the supervisor; CBJ staff may lack explicit protection against the costs of defending actions/omissions made while discharging duties in good faith.
- Cooperation and collaboration
  - CBJ has many MoUs with relevant foreign regulators and uses informal information sharing; post Covid, CBJ should re-engage more formally with material foreign authorities and update outdated MoUs.
  - It is recommended CBJ contemplate entering into a Multilateral MoU with all relevant parties, including the MoF, and amend CBJ Law and the Banking Law to explicitly allow sharing of supervisory information with domestic authorities and foreign regulators on a need basis.
- Permissible activities and licensing criteria
  - The Banking Law clearly states permissible activities of banks, but does not define a foreign bank subsidiary; explicit definitions of foreign bank branch and foreign bank subsidiary should be added.
  - Licensing Guidelines should be updated and made into an Instruction/regulation to include missing criteria (e.g., assess whether applicant’s structure would impede effective supervision or implementation of corrective measures).
- Transfer of significant ownership
  - CBJ’s UBO Instructions (issued in 2021) require UBO assessments with respect to a change in control request; in practice, CBJ licensing and BSD onsite inspectors do not appear to undertake UBO assessment to the extent necessary.
  - The Banking Law or the UBO instructions should be amended to require banks to notify CBJ if they become aware of any material information which may negatively affect the suitability of a major shareholder or a party that has a controlling interest.
- Supervisory approach, techniques and tools, and reporting
  - CBJ’s supervisory assessment and risk rating is only undertaken at the consolidated level and does not assess individual banks within the group on an adequate “solo” basis (Jordanian branches as well as foreign branches).
  - CBJ’s CAMEL/ROCA risk rating methodology is only assessed at the time of the onsite inspection and therefore is not kept up to date, is not forward looking, and does not make use of peer comparisons.
  - CBJ’s annual stress testing program provides a limited view, of only the Jordanian branches, under certain scenarios.
  - It is recommended that the Financial Stability Department provide onsite inspectors with more frequent views of emerging risk factors throughout the year.
  - The introduction of the use of a risk matrix would assist CBJ in keeping an up-to-date view of all material risk areas (credit, market, country, transfer, etc.) on both a solo and consolidated basis.
  - CBJ needs to re-assess its use and mix of onsite inspections and offsite monitoring, implement standards for frequency/timing/scope of onsite inspections (D-SIBs should be visited on an acceptable frequency given systemic importance/cross-border operations), and consider additional supervisory tools including business model assessment and horizontal peer comparisons.
  - CBJ’s newly developed IMS is expected to greatly assist supervisors’ planning processes (beginning in 2023).
  - CBJ should update supervisory planning processes to look forward more than one year and overlay an assessment of required staff versus available staffing/technical expertise.
  - CBJ’s collection of prudential information on a “solo” basis is considered a deficiency; CBJ should collect necessary prudential information to support analysis and assessment on a solo basis, including information on foreign branches of Jordanian banks.
- Corrective and sanctioning powers
  - The Framework for Corrective Measures is outdated, requires updated references for minimum prudential requirements (e.g., liquidity), and is not enforceable under the Banking Law; updating this document to an Instruction may help clarify CBJ’s power to utilize corrective measures.
  - The Banking Law does not specifically indicate that CBJ would make use of its supervisory tools to intervene at an early stage to require banks to take action to prevent a breach in regulatory requirements.
  - Appeal provisions in the Banking Law may impede CBJ’s ability to act on a timely basis; such appeal processes should be limited to actions taken in bad faith only.
- Consolidated supervision
  - CBJ supervises banks/banking groups on a consolidated “accounting” basis that includes all financial and non-financial companies, and equity investments in affiliates, but does not apply a prudential consolidation approach that would set prudential limits on a group-wide basis.
  - The definition of “banking group” should include the holding company, the bank and its offices, subsidiaries, affiliates, and joint ventures, both domestic and foreign, and risks from non-bank entities may be relevant.
  - CBJ does not always take into consideration potential negative impacts from the failure of a material affiliate (e.g., step-in risk or reputational contagion) on the overall financial health of the Jordanian bank/banking group.
  - CBJ has not set prudential limits (e.g. capital, liquidity, related party transactions, etc.) applicable on a group wide basis (only on an accounting basis), nor undertaken deeper assessments of group-wide risks, including intra-group transactions and exposures.
  - CBJ should ensure a holistic view of risks for the entire banking group and re-engage its onsite inspection program for D-SIBs with material cross-border operations to ensure group-wide supervision.

*IMF staff summary from 1jorea2023002 - 28.      Regulatory and supervisory frameworks for credit concentration are in place but need improvements, the related-party transaction framework needs significant improvement, and the frameworks for country and transfer risks need to be formally established.*

### 13. Home-host

### 13. Home-host relationships

### Home-host cooperation and information sharing
- Historically, CBJ has shared prudential information with host jurisdictions on an informal basis; many MoUs are in place.
- CBJ has conducted a joint inspection, undertaken onsite inspections in foreign jurisdictions, and hosted a supervisory college for a D-SIB (all pre-Covid).
- CP3 recommends:
  - Update outdated MoUs to ensure adequate sharing of supervisory information.
  - Review and potentially amend the CBJ Law and the Banking Law to allow CBJ to formally share confidential supervisory information with relevant authorities on a timely basis (currently this is undertaken on an information basis).

### Supervisory colleges and crisis preparedness
- CBJ continues to undertake supervisory colleges with D-SIBs with material cross-border operations and potentially with other banks if CBJ deems they have material cross-border operations.
- Potential benefits of simultaneous colleges:
  - Increase participation by enabling host jurisdictions to attend the college to cover more than one bank.
  - Streamline the level of effort by CBJ to host colleges.
- Recommended addition to colleges:
  - Add an explicit crisis preparedness component where aspects of D-SIB recovery plans could be discussed.
  - Work towards the introduction/implementation of group-wide resolution plans.

### Corporate governance (Core Principle 14)
- CBJ’s expectations are set out in the Instructions for Corporate Governance (separate Instructions for conventional banks and Islamic banks).
- Updated Instructions for Corporate Governance were expected to be finalized and released to the industry later in 2022.
- Specific recommended changes that could be incorporated:
  - Require board members to have a “duty of care”.
  - Prohibit a senior executive management representative from being part of the Board Risk Management Committee due to perceived conflict of interest.

### Risk management process (Core Principle 15)
- Regulatory requirements and supervisory expectations on risk management are distributed over several regulations and in the Banking Law.
- CBJ has yet to issue enforceable regulations for the management of specific risks that have dedicated core principles.
- Supervisory guidance is available only at the level of overall risk management and risk governance.
- Gaps include:
  - Internal use of models to measure components of risk.
  - How banks account for risks in internal pricing, performance measurement, and product approvals.

### Capital adequacy (Core Principle 16)
- Capital adequacy framework (Pillar 1) for banks operating in Jordan is in line with the Basel requirements and yet requires banks to hold much higher minimum capital, including for D-SIBs.
- CBJ can consider making the additional capital more risk sensitive by:
  - Establishing a linkage with Pillar 2 risks, and/or
  - Linking to risk profile and systemic importance of banks to better articulate and recalibrate/modulate the additional capital required, without imposing immediate additional capital burden on the banks.

### Credit risk (Core Principle 17)
- Laws, regulations, and supervision adopt a portfolio approach to credit risk management (credit and investment).
- Supervisory expectations and supervision of credit risk management are supported by requirements on asset quality classification and provisioning, large exposures and related party exposures.
- Gaps include:
  - Lack of explicit requirements for establishment of an appropriate and properly controlled credit risk environment.
  - Areas where regulations and supervisory focus might not be explicit.
- Recommendation:
  - Make credit risk management an explicit component of risk management requirements and supervisory focus and assessment.

### Problem assets, provisions, and reserves (Core Principle 18)
- Prudential and accounting frameworks establish identification of NPEs and creation of reserves and provisioning for NPEs.
- Elements that deviate from sound principles and can lead to overstated asset quality and under provisioning:
  - Collateral can influence asset classification.
  - Restructuring and rescheduling can allow banks to avoid classifying an exposure as nonperforming or to upgrade an exposure as performing.
  - Repeated restructuring or rescheduling is explicitly permitted in regulations with relatively mild prudential consequences.
  - Bank boards can allow exemptions to CBJ’s prudential classification, with CBJ’s approval and ECL estimated by internal systems.
  - A high threshold is set for classification and provisioning assessment on an individual item basis.
  - Prudential provisioning requirements set in 2009 have not been reviewed or updated since.
- Recommendations:
  - Address the above gaps.
  - Improve offsite monitoring of quality and provisioning of credit risk exposures.
  - Consider periodic, system-level analyses of trends and concentrations in relation to banks’ problem assets, risk mitigants and risk mitigation strategies to inform system-level policy and response.

### Concentration risk and large exposure limits (Core Principle 19)
- Laws and regulations establish prudential requirements to address concentration risk, but lack explicit supervisory requirements/expectations regarding banks’ concentration risk management framework (governance, policies, processes, controls, oversight, assurance).
- Gaps:
  - Solo bank focus is partial (Jordan branches only).
  - Supervisory reporting does not include exempted exposures.
  - CBJ allows case-by-case exemptions to exceed prudential limits.
  - Gross exposures are not monitored actively.
  - Regulatory requirements and supervisory expectations on sectoral, geographic, collateral concentrations are not explicit or detailed.

### Transactions with related parties (Core Principle 20)
- Deviations from Basel norms:
  - Incomplete definition of related parties.
  - Related party transactions not explicitly and comprehensively defined.
  - Prudential limit on banks’ aggregate exposure to related parties is liberal.
  - Gaps in governance requirements.
  - Incomplete view of solo bank (only Jordanian branches).
  - Absence of explicit and comprehensive supervisory reporting requirement for transactions with related parties.
- These factors create significant gaps in the prudential regime for related-party transactions.

### Country and transfer risks (Core Principle 21)
- Laws or regulations do not explicitly require banks to establish policies, procedures, and arrangements for actively identifying, measuring, monitoring, and managing country and transfer risks.
- Frameworks lack details on:
  - Measurement and grading of exposures to country and transfer risks.
  - Periodical reporting of these exposures to CBJ.
  - Provisioning requirements for these risks.
  - Stress testing country and transfer risk exposures.
- Supervision of banks’ management of these risks is not explicit in current onsite and offsite frameworks.

### Market risk (Core Principle 22)
- Regulatory and supervisory requirements regarding market risk are largely based on capital adequacy perspective, portfolio perspective (investments, classification, valuation as per IFRS), and management of foreign currency risks through prudential limits on net open positions.
- Given market risks are not significant for most banks and banks generally do not deal in structured products, the current frameworks appear proportionate to activities and risk exposure.

### Interest rate risk in the banking book (IRRBB) (Core Principle 23)
- Risk management requirements for IRRBB are guidelines, not enforceable.
- CBJ’s supervisory guidance in CAMEL and ROCA frameworks do not explicitly require supervisors to review or assess IRRBB management or provide guidance on how this can be achieved.
- Supervisors tend to assess IRRBB via ICAAP documents and overall risk management reviews.
- As banks have material exposure to IRRBB, CBJ must:
  - Make regulatory and supervisory requirements/expectations more explicit, formal, and binding.
  - Strengthen supervision of management of IRRBB in banks.

### Liquidity risk (Core Principle 24)
- Three liquidity risk requirements deployed and closely supervised by CBJ have gaps:
  - Not applied at the level of the solo bank.
  - Not applied or monitored at the level of individual significant foreign currency.
  - Not supplemented adequately by other liquidity monitoring tools recommended by Basel.
- Regulations and supervision do not focus adequately on foreign currency liquidity risk management in banks carrying out significant foreign currency liquidity transformation.

### Operational risk (Core Principle 25)
- Risk management requirements for operational risk are guidelines, not enforceable.
- CAMEL and ROCA frameworks do not explicitly require supervisors to review/assess operational risk management or provide guidance on how to achieve this.
- Supervisors tend to assess operational risk from a capital adequacy perspective (Pillar 1 and ICAAP).
- Supervisors have taken action against a large bank to mitigate operational risk management weaknesses.

### Internal control and audit (Core Principle 26)
- Legal, regulatory, and supervisory frameworks and practice are mostly in line with the core principle.
- Areas for strengthening:
  - Explicitly require internal audit to be risk-based.
  - Require adequate and appropriate resourcing of control functions.
  - Assure adequate authority for control functions.

### Financial reporting and external audit (Core Principle 27)
- Frameworks and practice are mostly in line with the core principle.
- Areas for improvement:
  - Provide legal protection to external auditors for sharing confidential information with CBJ in discharge of duties.
  - Require external auditors to notify CBJ about instances of banks’ failure to comply with licensing criteria or breaches of laws.
  - Require that structure and process for fair value estimation be subject to independent verification and validation.
  - Establish a system for periodic (at least annual) structured meetings between supervisors and external auditors.
- At present, CBJ does not have the power to access external auditors’ working papers.

### Disclosure and transparency (Core Principle 28)
- Frameworks and practice are mostly in line with the core principle.
- Scope for improvement:
  - Explicitly require banks to publicly disclose all material entities in the group structure.
  - Provide disclosure templates to promote standardized disclosures.
  - Require banks to make disclosures on dedicated webpages on their websites.
  - CBJ can improve contents of aggregated and periodic system-level disclosures.

### Abuse of financial services / AML/CFT (Core Principle 29)
- AML/ATF legislative framework (including the AML/CFT Law, the Banking Law and the AML/CFT Instructions) pertaining to banks in CBJ’s mandate appears effective.
- CBJ’s AML/CFT risk assessment framework, including offsite annual risk assessment by banks and onsite inspection program, appears extensive.
- CBJ needs to assure that D-SIBs’ cross-border operations adhere to AML/CFT requirements at least as conservative as CBJ’s.
- Certain outdated MoUs with domestic agencies (JODIC and JSC) and foreign regulators need updating to reflect more specific information sharing regarding banks’ compliance with CBJ’s AML/CFT requirements.
- CBJ’s AML Department should ensure continued focus on banks/banking groups’ compliance with AML/CFT legislative and regulatory requirements, given the Department’s oversight role.

*Source: 1jorea2023002 - 13. Home-host*

### 32.      Table A2 below provides a set of recommended actions to improve compliance with the

### Table AIV.2. Jordan: Recommended Actions

### Legal and institutional framework (Principles 1–5)
- Principle (1)
  - Amend the CBJ Law and the Banking Law to remove the provision for CBJ to protect shareholders.
  - Review checks and balances on a regular basis to ensure that other objectives (e.g., developmental objectives, helping financial consumers) are subordinate to safety and soundness of the financial sector.
  - Gradually reduce CBJ’s involvement, both direct and indirect, with providing supervised entities financing.
  - Develop and implement regulations pertaining to the material risk domains.
- Principle (2)
  - Ensure effective supervisory planning (both on/offsite inspections) supported by adequate staffing levels, including technical risk expertise, within the BSD to effectively deliver on its mandate to supervise banks/banking groups.
  - Amend either the Civil Law or the CBJ Law to strengthen to explicitly ensure protection for both supervisors and staff against lawsuits for actions taken and/or omissions made while discharging their duties in good faith and for protection against the cost of defending.
- Principle (3)
  - Update bilateral MoUs with domestic authorities and contemplate entering a Multilateral MoU with all relevant agencies, including the MoF, and finalize/implement the draft crisis management binder with domestic agencies.
  - Share recovery plans, develop resolutions plans on a group-wide basis with foreign regulators as well as update outdated MoUs, where necessary.
  - Consider reviewing and amending the CBJ Law and the Banking Law to allow for the sharing of confidential supervisory information with domestic and foreign regulators on a need basis.
- Principle (4)
  - Introduce the definition of a foreign bank branch and a foreign bank subsidiary in the Banking Law, when appropriate, to clarify the use of the term “bank”.
- Principle (5)
  - Update the Licensing Guideline to an Instruction, include missing criteria (assess whether applicant’s structure would impede effective supervision or the implementation of corrective measures) and clarify criteria to align with the current laws and regulations.

### Ownership, acquisitions, and fit-and-proper (Principles 6–7)
- Principle (6)
  - Ensure UBO assessment goes beyond the “legal person” to the “natural person” to ascertain who ultimately owns the banks/banking groups, including performing due diligence on the natural person.
  - Amend the Banking Law or UBO Instruction to require banks to notify CBJ if they become aware of any material information which may negatively affect the suitability of a major shareholder or party that has a controlling interest.
- Principle (7)
  - Develop an Instruction that formalizes CBJ’s internal criteria to judge major acquisitions, including an assessment of undue risk that the acquisition will hinder effective supervision, the implementation of corrective measures or risks to the banks/banking groups from non-banking activities.

### Supervisory approach, assessment, and tools (Principles 8–12)
- Principle (8)
  - Update the supervisory approach to assess not only the consolidated bank/banking group but the individual banks within the group on a more adequate “solo” basis (Jordanian branches as well as foreign branches of the Jordanian bank).
  - Re-assess CBJ’s CAMEL/ROCA risk rating system to ensure it is risk based.
  - Obtain and use key macroeconomic indicators on emerging risks to incorporate a forward-looking view in its assessment of the risk profile.
  - Expand CBJ’s annual stress testing exercise to include a “consolidated” and “solo” view, not just a Jordanian operations view.
  - Undertake cross sectoral assessments, including incorporating an assessment of the potential impacts from entities in the broader group.
  - Introduce a risk matrix to help keep an up-to-date view of the overall risk profile and therefore risk rating of banks/banking groups.
  - Reassess the need to provide a green light on annual audited financial statements to free up supervisory resources to focus on more qualitative aspects of supervision.
- Principle (9)
  - Reassess the use and mix of both onsite inspections and offsite monitoring.
  - Adopt additional supervisory tools, including business model analysis and horizontal peer reviews.
  - Improve its supervisory planning processes.
  - Implement standards for the frequency, timing, and scope of its onsite inspection program.
- Principle (10)
  - Update its collection, review, analysis, and prudential reporting requirements to be in compliance with Basel’s definition of “solo” assessment of bank’s operations (to include Jordanian banks and both domestic and foreign branches).
- Principle (11)
  - Update the Framework of Corrective Measures to an Instruction, to help clarify and enforce CBJ’s use of corrective measures.
  - Ensure the Framework has up to date references to laws, instructions and incorporate key prudential requirements (e.g., liquidity).
  - Update the Banking Law provisions to a) explicitly indicate that CBJ would make use of its various supervisory tools in order to intervene at an early stage to require banks to take action to prevent a breach in regulatory requirements and b) limit the ability to appeal CBJ’s decisions to actions taken in bad faith.
- Principle (12)
  - Adopt consolidated supervision that goes beyond “accounting” to prudential supervision, including setting group-wide prudential requirements.
  - Undertake assessments of bank’s material investments of affiliates to assess the step-in risk from both a reputational and financial impact to the bank/banking group.
  - Collect and monitor all intra-group transactions and exposures to adequately assess contagion risk.
  - Assess the other non-financial entities in the banking group to understand potential impact on the bank/banking group.
  - Create a group-wide supervisory group for the large D-SIBs with a lead supervisor to ensure a holistic view of the risk profile and collectively undertake consolidated supervision.
  - Ensure foreign regulators for conglomerates with material cross-border operations are informed of CBJ’s expectations plus augment the contact and sharing of adequate information with these regulators to support consolidated supervision.

### Cross-border cooperation, recovery and resolution (Principles 13, 29)
- Principle (13)
  - Undertake supervisory colleges with D-SIB/banks with material cross-border operations at the same time to ensure greater attendance, and to include a crisis management component (e.g., to share/discuss D-SIB recovery plans, where needed, and begin group-wide resolution planning).
- Principle (29)
  - Continue to ensure D-SIBs with material cross-border operations are considered a priority for CBJ’s onsite inspection program.
  - Update MoUs with domestic and foreign regulators to ensure adequate information sharing arrangements are in place to address AML/CFT requirements.
  - Ensure a continued focus of AML staff on the banking sector given CBJ’s expanded mandate.

### Governance, internal controls, and corporate oversight (Principles 14–17, 26–28)
- Principle (14)
  - Update the Instructions for Corporate Governance to include the requirements for “duty of care” for board members.
  - Update the Banking Law and Instructions for Corporate Governance to ensure that a member of the senior executive management may not be allowed to sit as a member of the Board’s Risk Management Committee.
- Principle (15)
  - Streamline the regulatory framework for risk management, and issue risk specific regulations for the material risks.
  - Explicitly include requirements and supervisory expectations on internal use of models to measure components of risk, and how banks account for risks in their internal pricing, performance measurement and product approvals.
- Principle (16)
  - Make the currently required higher capital (than Basel requirements) more risk sensitive by establishing a linkage with Pillar 2 risks, and/or risk profile and systemic importance of banks.
- Principle (17)
  - Clarify explicitly regulatory and supervisory requirements/expectations pertaining to establishment of appropriate and properly controlled credit risk environment (EC 3 elements), and credit risk management (strategy, policies, and processes) specific to credit risk management.
- Principle (26)
  - Review and revise laws, regulations, and supervisory manual/guidance to achieve the following (a) formalize the internal audit function as risk-based internal audit, (b) require that the bank’s back-office (control) functions must have an adequate balance in the skills and resources and have sufficient expertise and authority within the organization to be an effective check and balance to the business origination units.
- Principle (27)
  - Review and revise laws, regulations and supervisory manual/guidance to address the identified gaps.
  - Propose amendment to the Banking law (and any other relevant law(s)) to have the power to access the working papers of external auditors.
- Principle (28)
  - Review and revise laws, regulations and supervisory manual/guidance to address the address the identified gaps.
  - Make more disclosures on CBJ website, on financial performance and prudential indicators at aggregated level or at the disaggregated level to further promote transparency and market discipline, without compromising on the confidentiality of disclosures.

### Credit, concentration, related-party, and country/transfer risk (Principles 18–21)
- Principle (18)
  - Review and revise the prudential framework for classification and provisioning to address the deviations from Basel principles and guidance, to explicitly require board approved policies and processes for identifying and managing problem assets, to improve board oversight and to improve CBJ offsite monitoring of quality and provisioning of credit risk exposures.
  - Undertake periodic system-level analyses of trends and concentrations in relation to banks’ problem assets or risk mitigants or risk mitigation strategies to inform system level policy and response, that may be required.
- Principle (19)
  - Review and revise regulations to introduce a more comprehensive approach to supervision of concentration risk management in banks, that addresses the gaps identified in the assessment. Improve clarity in regulations on control and economic interdependence instead of allowing case-by-case exemptions.
  - Make the regulatory requirements and supervisory expectations more explicit and detailed for management of the types of concentrations (e.g., sectoral, geographic, collateral).
  - Make corresponding changes to the supervision manual, offsite reporting, and analyses, to strengthen the Supervisory Review and Evaluation Process with reference to concentration risk management by banks.
- Principle (20)
  - Review and comprehensively revise the regulation and supervision of exposures to and transactions with related parties to bring these on par with the specific requirements of this core principle.
  - Make corresponding improvements to the offsite reporting and analyses, and guidance provided in supervision manuals for conducting onsite supervision of transactions with related parties.
- Principle (21)
  - Explicitly establish regulatory requirements and supervisory expectations on identification, measurement, monitoring and management of country and transfer risks from immediate and ultimate risk perspectives; including grading these risk exposures and provisioning therefor.
  - Introduce appropriate prudential reporting requirements, and revisions to supervisory manual.
  - Provide appropriate training and capacity building to enhance relevant supervisory skills.

### Market risk, IRRBB, operational risk, and reporting (Principles 22–25)
- Principle (22)
  - Issue revised regulations that articulate the supervisory expectations from a more comprehensive market risk management perspective for each material component of market risk as relevant (e.g., interest rate risk in trading book, foreign currency risk, equity risk), to provide improved risk focus to supervision.
  - These can be supported by appropriate revisions to the supervision manual.
- Principle (23)
  - Issue enforceable regulation on the management of IRRBB, that clearly articulates the supervisory expectations based on Basel Committee norms and principles mentioned in its Standard on “Interest Rate Risk in the Banking Book” issued in April 2016.
  - Supplement this with relevant revised offsite reporting templates, supervisory methodologies for assessment of banks’ exposure to IRRBB and the potential impact on banks’ capital.
  - Incorporate the above and other specific elements relevant for supervision of IRRBB in banks in the supervision manual.
  - Provide appropriate training and capacity building to enhance relevant supervisory skills.
- Principle (25)
  - Formalize regulatory requirements and supervisory expectations for operational risk management by banks through enforceable regulations; consider including Basel Committee’s latest principles issued in March 2021 on sound management of operational risk and on operational resilience.
  - Strengthen regulation by explicitly laying down the regulatory and supervisory expectations regarding outsourcing by banks.
  - Modify the offsite framework to systematically collect, maintain and use periodic and structured operational risk event and loss data.
  - Incorporate the above and other specific elements relevant for supervision of operational risk management in banks in the supervision manual.
  - Provide appropriate training and capacity building to enhance relevant supervisory skills.

### Supervisory manuals, reporting, and capacity building (cross-cutting)
- Update supervision manuals and offsite reporting templates to reflect revised regulatory expectations across risk domains (market risk, IRRBB, concentration risk, related-party exposures, country and transfer risk, operational risk, classification and provisioning).
- Provide appropriate training and capacity building to enhance relevant supervisory skills across identified areas (country/transfer risk, IRRBB, operational risk, consolidated supervision).
- Improve public disclosure on CBJ website of financial performance and prudential indicators at aggregated or disaggregated levels while maintaining confidentiality safeguards.

### Authorities' response to the assessment
- Paragraph 33–39: The Jordanian authorities provided the following response to the assessment:
  - “The Jordanian authorities thank the members of the FSAP Mission (with special thanks to the BCP team) for their dedicated, professional, and thorough work in the Jordanian Financial System Assessment Program (FSAP). Addressing the different topics under evaluation, not only with the supervisory authorities, but also with participants from the industry, sectors, and other related parties.
  - As a result of this exercise, the progress made by supervisory authorities in Jordan since the last FSAP mission which took place during the period (2003-2004) and its update during the period (2008-2009) is highlighted. Thus, recognizing the country's commitment to reinforce the recommendations as indicated in the current policies, regulations, and supervisory practices on the financial system and evident to the highest international standards.
  - Notwithstanding of the final grading for CPs, CBJ believes that it is important to take into account the tremendous developments and improvements that have taken place in the supervisory framework in Jordan, as well as having many topics that are still under development especially with regard to risk management.
  - Regarding CP 8 supervisory approach, the procedures to apply IMS (Inspection Management System) have been finalized and launched formally. This system will enable CBJs supervisors to keep an up-to-date view of all material risk areas (credit, market, country, transfer, etc.) of banks/banking groups operations
  - Regarding CP 23 Interest Rate Risk in the Banking Book (IRRBB), it is worth noting that from the practical side, this type of risk is minor for banks in Jordan due to their business models. However, the guidelines for CBJ supervisors are to ensure that banks are able to define and manage their risks. Moreover, CBJ’s supervisory guidance for onsite inspections contained in the CAMEL and ROCA frameworks require banks to review and assess all types of risks including IRRBB, and we confirm that work carried out by the CBJ in this regard will be developed to be more aligned with the International Basel Standards.
  - Finally, we reaffirm our commitment to continue advancing in the implementation of the recommendations, best practices and robust standards that continue to enhance the robustness, resilience, and credibility of the Jordanian financial system.”

*Source: Table AIV.2. Jordan: Recommended Actions (extracted content).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1jorea2023002.pdf_