## Financial System Structure, 1995–2004 (IMF staff report extract, _cr06156) ## Source details **Canonical URL:** [Financial System Structure, 1995–2004 (IMF staff report extract, _cr06156)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06156.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06156.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06156.pdf.json) --- ### Key findings and macro-relevant recommendations - Strengthened oversight since the 1996–97 crisis; regulatory framework largely aligned with best international practices and supervision implemented systematically and professionally. - Data limitations prevented a full system-wide quantitative analysis of risks. - Overarching vulnerabilities: - Public debt = 135 percent of GDP at end-September 2005 constrains policy options. - Weak underlying economic growth. - Interconnections: - Financial institutions closely linked via conglomerate structures and common exposure to domestic public debt. - Rapid growth of securities dealers: - Dealers’ assets and funds under management (FUM) now exceed the deposit base of commercial banks, raising interest rate, liquidity, legal, operational, and settlement risks. - Regulatory capital and supervision: - Regulatory capital increased in most institutions. - Supervisory agencies need more resources and budgetary flexibility; aspects of operational independence should be strengthened in law. - Consolidated supervision of conglomerates is a priority; passage of the proposed Omnibus Banking Bill and enhanced inter-agency cooperation (notably via the Financial Regulatory Council (FRC)) recommended. - Selected macro-relevant action items (verbatim from Box 1): - Reduce the public debt. - Raise margin requirements on securities dealers’ repos in GoJ securities to at least 10 percent this year. - Strengthen monitoring and analysis of housing and equities prices. - Enhance analysis of insurance risk concentration and reinsurance coverage. - Develop and test crisis management plans. - Strengthen coordination across supervisory agencies and close remaining legal gaps (including through passage of an Omnibus Banking bill) to permit comprehensive consolidated supervision and more effective supervision of conglomerates. - Give supervisory agencies more resources and budgetary flexibility. - Further codify the legal and operational independence of supervisory agencies. - Overhaul creditor rights and the insolvency regime and introduce a credit bureau. - Ensure new regulatory regime for credit unions is balanced to preserve outreach. - Pass legislation to enable FSC to begin registering and regulating pension funds; equalize income tax treatment of approved retirement schemes with superannuation funds. - Expedite introduction of a sound legal framework for payment and settlement systems; introduce an RTGS system. - Establish a CSD for fixed income securities. ### Macroeconomic context, markets, and fiscal vulnerabilities - Market conditions: - "Generally stable" but "interest and exchange rates have exhibited considerable volatility". - First half of 2003: interest rates rose to over 30 percent due to capital outflows and exchange rate pressure. - 6-month interest rates brought down to 13 percent at end-2005. - "Inflation excluding volatile food and energy prices averaged just over 10 percent in 2005." - "Stock prices have quadrupled since 2000," P/E ratios around 15 (from 6–9 range); market capitalization = 150 percent of GDP. - Anecdotal run-up in property prices; no official data. - Growth and shocks: - Economic growth averaged little more than 1 percent a year (real GDP series: "0.8", "0.9", "2.2", "1.9", "0.4" for 2000/01–2004/05). - Hurricanes in 2004 and 2005 caused significant damage and added fiscal costs. - Fiscal and external indicators (selected from Table 3): - Nominal GDP growth series: "11.6", "9.5", "10.0", "18.9", "12.1". - CPI (end of period): "6.4", "7.6", "6.2", "16.8", "13.2". - Unemployment rate (percent): "15.5", "14.8", "14.2", "11.8", "12.2". - Budgetary revenue (percent of GDP): "29.1", "27.0", "28.1", "29.4", "30.8". - Interest payments (percent of GDP): "16.0", "13.4", "14.9", "17.8", "16.7". - Budget balance (percent of GDP): "-4.5", "-5.6", "-7.6", "-6.6", "-4.9". - Overall fiscal balance (percent of GDP): "-4.8", "-6.1", "-10.8", "-9.7", "-7.1". - Public debt (percent of GDP): "132.0", "135.1", "148.0", "143.7", "137.9". - Current account balance (percent of GDP): "-6.7", "-9.2", "-15.2", "-6.8", "-6.1". - Net international reserves (millions of US$): "1,286", "1,942", "1,340", "1,569", "1,902". - Private sector credit growth: "18.6", "-56.7", "30.5", "38.9", "18.7". - Broad money (percent change): "9.2", "10.0", "7.5", "20.2", "10.3". - Nominal GDP (in billions of Jamaican dollars): "346.8", "380", "418", "497", "556". - Exchange rate (end of period, J$/US$): "45.7", "47.6", "56.2", "60.8", "61.5". ### Deposit-taking institutions, credit, and credit unions - DTI structure: - Three types of DTI supervised by the BoJ under a common framework. - Six commercial banks most important; two banks account for about three fourths of commercial bank assets. - Five banks representing 97 percent of commercial bank assets have foreign parents. - Merchant banks and building societies (specialize in mortgage lending) complete the DTI set. - Competition and funding: - Deposit rates are significantly below returns on securities dealers’ and insurance companies’ products. - Banks hold about a quarter of assets in GoJ securities; annual income from government securities ≈ 35 percent to 40 percent of their regulatory capital. - Credit unions: - Some 760,000 members (about 60 percent of the adult population). - Savings held by credit unions ≈ 4 percent of GDP. - Number of credit union loans exceeds that of bank personal loans. - Jamaica Cooperative Credit Union League Limited regulates credit unions and acts as industry advocate, savings insurer (Stabilization Fund), lender of last resort, and service provider. - BoJ expected to take over supervision of credit unions in 2006. ### Financial soundness indicators and stress-test results (selected, end-September/Dec-2004 data) - Banking system soundness (selected indicators): - Aggregate capital adequacy (estimated): about 19 percent vs. 10 percent prudential requirement (end-September 2005). - Return on assets high by international standards; reported NPLs ≈ 3 percent. - Statutory average liquid assets to total assets (series): Dec-98 "34.7", Dec-99 "32.9", Dec-00 "31.8", Dec-01 "30.7", Dec-02 "27.4", Dec-03 "23.5", Dec-04 "28.3", Sept-05 "29.1". - Regulatory capital to risk-weighted assets (estimated): Dec-98 "8.8", Dec-99 "22.7", Dec-00 "25.6", Dec-01 "23.6", Dec-02 "18.5", Dec-03 "16.1", Dec-04 "16.6", Sept-05 "19.2". - NPLs to gross loans: Dec-98 "22.8", Dec-99 "12.7", Dec-00 "9.6", Dec-01 "6.8", Dec-02 "4.6", Dec-03 "3.6", Dec-04 "3.0", Sept-05 "3.0". - ROAA (annualized): Dec-98 "(0.3)", Dec-99 "1.6", Dec-00 "2.8", Dec-01 "2.5", Dec-02 "3.1", Dec-03 "4.3", Dec-04 "3.1", Sept-05 "4.0". - Customer deposits to total (noninterbank) loans: Dec-98 "250.0", Dec-99 "302.6", Dec-00 "321.2", Dec-01 "294.5", Dec-02 "236.0", Dec-03 "198.7", Dec-04 "199.6", Sept-05 "188.2". - Stress-test overview and key results: - DTIs resilient to a variety of single-factor shocks; could withstand a three-to-fourfold increase in NPLs before capital fell significantly below required levels (gross NPLs would reach about 14 percent of gross loans). - Personal loan shock thresholds: - If 20 percent of personal loans became nonperforming → one commercial bank and some building societies become undercapitalized. - If personal sector NPLs rose to 23 percent → aggregate capital of building societies below the 10 percent minimum requirement. - Interest rate shocks: - Most commercial banks could withstand interest rate hikes of 1,000 basis points or more across the entire local currency yield curve for 12 months. - Two small banks with long durations and negative repricing gaps are vulnerable to such large shocks. - Two building societies and one merchant bank could be impaired assuming +500 basis points. - Exchange rate shocks: - Direct aggregate exchange rate vulnerability small in isolation; indirect risks from over one third of foreign currency lending. - Sharp depreciation combined with large interest rate hikes could be damaging. - Equity price shocks: - DTIs could remain adequately capitalized after a 50 percent decline in the stock market index; one building society vulnerable to a 40 percent drop in its stock holdings. - Liquidity: - Loan-to-deposit ratio rose from 31 percent in 2000 to about 50 percent in 2004. - Most liquid funds channeled to government financing; removal of government papers from liquid assets substantially reduces liquidity ratios. - Selected stress-test numeric impacts (Table 8, change in CAR in percentage points; numbers in parentheses = number of institutions falling below minimum): - Interest rate +500 bps: Total banking system -0.2 (3); Commercial banks 0.1 (0); Merchant banks 0.0 (1); Building Societies -1.9 (2). - Interest rate +1000 bps: Total banking system -1.7 (4); Commercial banks -1.3 (1); Merchant banks 0.1 (1); Building Societies -6.4 (2). - Interest rate +1500 bps: Total banking system -4.7 (7); Commercial banks -3.0 (2); Merchant banks 0.1 (2); Building Societies -26.3 (3). - Exchange rate depreciation 10% (with defaults): Total banking system -0.2 (1); 30%: -0.6 (1); 50%: -1.2 (1). - Rise in NPLs by 360% with 100% provisioning: Total banking system -5.8 (7). - 20% of loans to a major sector become NPL (50% provisioning): Total banking system -1.4 (2). - 100% risk weights on government papers: Total banking system -4.8 (2). - 50% equity market fall: Total banking system -2.0 (2). - Removal of government papers from liquid assets (change in liquidity ratio): Total banking system -5.7; Commercial banks -6.2; Merchant banks -7.9; Building Societies -4.2. - Memorandum items: - Risk weighted assets (percent of total): Total 100; Commercial banks 72.6; Merchant banks 13.4; Building Societies 14.0. - Capital adequacy ratio: Total banking system 15.1; Commercial banks 15.9; Merchant banks 9.9; Building Societies 16.3. - Buffer capital/risk weighted assets: Total banking system 7.8; Commercial banks 5.0; Merchant banks 6.7; Building Societies 23.5. ### Nonbank financial sector: insurance, securities dealers, pensions - Securities dealers: - Dealers’ assets > 50 percent of GDP; 10 largest dealers manage about 70 percent of sector FUM. - Dealers primarily finance long-term investments with very short-term repos, creating interest rate and liquidity risk. - For the 10 largest dealers, end-2004 maturity mismatches implied a 5 percentage-point increase in interest rates could erode capital by as much as 20 percent; some dealers could temporarily fall below the FSC’s 6 percent minimum capital asset threshold. - Supervisory measures by FSC: - Introduced minimum capital adequacy ratio of 10 percent. - Limits on margin borrowing and repo margin requirements: - Initially "1 and 3 percent" (GoJ paper and other approved assets). - Increased to "3 and 9 percent in September 2005." - Slated to rise to "5 and 15 percent in April 2006." - Cap on growth of new retail repo business: limit = lower of repo balances held on July 31, 2004 or "50 percent of a dealer’s total assets and FUM." - FSAP recommendation: implement at least a "10 percent" margin requirement before "end-2006" or adopt a differentiated-margin framework. - Additional recommended capital regime refinements (selected): include liquid capital requirement, tiered initial capital by business type, restrictions on large exposures, deadline for segregating client money. - Insurance sector: - Premiums ≈ 5 percent of GDP. - Concentration: largest three companies account for 75 percent (life) and 49 percent (nonlife) of sector assets. - Life insurers exceed required capital adequacy ratios (zero risk-weighting on government paper aids capitalization); nonlife segment less well capitalized in 2004. - Vulnerabilities: interest rate risk, catastrophic natural disaster exposure and reinsurance limits, sizeable holdings of GoJ bonds with annual interest receipts > 5 percent of assets. - Supervisory priorities: improve risk management systems, transparent reporting, review reinsurance coverage. - Private pensions: - Sparse data; 2004 FSC survey suggested about one tenth of households belong to a superannuation fund registered under the Income Tax Act. - Older/larger defined-benefit schemes hold average assets per member of "6–7 times per capita GDP." - Regulatory recommendations: - Pass legislation to enable FSC to register and regulate pension funds; correct unequal tax treatment of employer-independent retirement schemes; emphasize solvency requirements for defined-benefit plans and disclosure-oriented approach for defined-contribution plans. - Parliament urged to approve FSC as pensions regulator early. ### Supervisory framework, legal issues, and institutional arrangements - Banking supervision: - Legal framework generally sound and modern; BoJ supervision comprehensive and professionally staffed. - Implementation gaps: - Consolidated supervision remains challenging; concept of large exposures needs clearer legal definition including off-balance-sheet items. - BoJ’s operational independence in supervisory matters should be strengthened in law; Minister of Finance retains final say on key operational issues (granting/revoking licenses, remedial actions). - Shortage of FISD staff noted; need to recruit/retain qualified staff. - Recommended legal and operational actions (selected): - Pass Omnibus Banking Bill; transfer powers to grant/revoke licenses from Minister to BoJ; empower BoJ to issue legally binding prudential regulations; strengthen FRC legal basis; define large exposure in law; require consolidated reporting and consolidated prudential norms. - Financial Services Commission (FSC): - Operational speed achieved; regulatory/supervisory framework broadly aligned with international best practices. - Needs: more budgetary flexibility to attract/retain staff; increase frequency of on-site inspections; require and enforce firm provision of stress tests and other supervisory information with penalties for noncompliance. - Minister of Finance’s power to direct FSC should be strictly limited in law. - Conglomerate supervision and FRC role: - Gaps where groups do not include a DTI: no legal provision to force reorganization into financial holding group. - BoJ and FSC lack full legal powers to obtain consolidated information and enforce group prudential regulations. - Recommended actions: - Intensify BoJ’s consolidated supervision for groups including DTIs; complete Omnibus Bill; FSC to seek legislative powers for consolidated supervision; FRC to appoint joint working group to develop prudential framework for conglomerates and institute formal protocols for information sharing. - Designate lead supervisors for conglomerates per FRC MOU; consider pros and cons of a unified regulator. - Crisis management and safety nets: - Priorities: strengthen early warning systems; make joint-agency intervention matrix more operational; modify Deposit Insurance Act to enable insurer participation in resolution. - JDIC: - Deposit coverage up to J$300,000 = 1.8 times per capita GDP. - JDIC assets = 1.4 percent of insured deposits; assets invested 100 percent in government securities; diversification recommended to high-quality liquid foreign government obligations. - Internal simulation revealed practical and legal uncertainties against target of making payouts within 3 months; gaps to be closed. - BoJ’s overnight overdrafts and lender-of-last-resort facility appear satisfactorily designed. ### Payments, settlement systems, and market infrastructure reform - Major systems and deficiencies: - CIFTS (BoJ-operated), ACH (privately-owned), JETS Limited retail platform, trading OTC for government securities, JCSD for equities. - Weak legal foundations: questions on finality of payments, validation of netting, protection in participant bankruptcy; implicit settlement guarantee exposes BoJ to settlement risk. - Absence of a CSD for fixed-income securities; paper-based securities settlement heightens settlement risk. - ACH settlement lags (T+3 for check clearing); operating hours narrow; lack of robust backup and business continuity arrangements. - Reform priorities and recommended changes: - Urgently introduce RTGS to replace CIFTS and achieve delivery versus payment (DvP) with an integrated CSD for fixed-income securities. - Strengthen legal framework via a Payment Systems Act and secondary legislation; explicitly establish BoJ payment system oversight function. - Implement liquidity management tools in RTGS: queuing, intraday liquidity via intraday repos with haircuts, extended operating hours, routines for channeling government payments early. - For ACH: introduce guarantee funds and participant agreements; reduce systemic importance of the check clearinghouse. - Establish National Payment System Council (created August 2005) to coordinate reforms; form users’ group and interdepartmental BoJ committee. - CPSS Core Principles highlighted actions: - CP I: prioritize legal reform project and Payment Systems Act. - CPs II–III: define settlement risk rules, eliminate implicit end-of-day BoJ guarantee, pursue RTGS as matter of urgency. - CP VII: implement back-up site and Business Continuity Plans; ongoing testing ahead of RTGS launch. - CP VIII–X: consult participants, set transparent participation criteria, improve governance and pricing policy, remove large value checks from ACH, and publicly disclose oversight policy. - Authorities’ stance: deficiencies identified and recommendations are being pursued; comprehensive reform program underway covering legal/regulatory framework, modernization/integration including the CSD, and establishment of oversight function. ### AML/CFT, transparency, and observance of standards - AML/CFT: - Basic elements in place but shortcomings: legislation does not cover all serious offences or DNFBPs; FIU needs stronger statutory footing; implementing legislation and CFT measures require strengthening; arrangements for non-profit organizations need review. - Ongoing reforms: comprehensive revisions to the Proceeds of Crime Act, strengthening FIU, expanding coverage to DNFBPs. - Consolidated AML/CFT supervision of financial groups remains challenging without enabling legislation. - Observance of standards: - Basel Core Principles assessment (May 16–26, 2005): - Preconditions for effective supervision largely exist. - Main issues: excessive government debt, lack of a credit bureau, ineffective insolvency regime, legal impediments to deposit insurer acting before insolvency, payments system weaknesses. - Detailed CP recommendations include passing the Omnibus Bill, empowering BoJ to issue legally binding regulations, defining large exposure in law, establishing consolidated reporting and prudential norms, and improving staff resourcing and tools for consolidated supervision. - Transparency: - BoJ compliance with MFP Transparency Code largely good; practices highly transparent with laws and guidance available on BoJ website and frequent public communication. - Recommended: empower BoJ to issue legally binding prudential regulations; formally establish payment system oversight function; disclose relations with SROs and credit union data; codify consultation obligations in law. - JDIC transparency generally strong; recommendations include establishing permanent internal audit and pursuing international information-sharing arrangements. ### Payments and securities market integration, public debt management, and market development - Integrate government securities infrastructure with large value system to guarantee payments system functioning and more active GoJ market. - Recommended debt management objectives and operational aims (publicly stated by government): - increase share of fixed-rate component of domestic debt to 60 percent, - extend debt maturity profile, - limit external borrowing to needs for gross external amortization. - Operational recommendations: - Set targets for maturity lengthening and FX exposure reduction; conduct systematic vulnerability analysis of debt profile; minimize heavy reliance on private placements; disclose results of debt issuance; establish benchmark GoJ issues and a market-determined yield curve. - Market infrastructure developments: - Introduce CSD and electronic trading platforms to develop private repo market, enhance transparency, and reduce interest rate dispersion. - BoJ to evaluate CSD design impacts on payment system safety. *Source: IMF staff report extract — "Financial System Structure, 1995–2004" (chapter content provided).* ### 1. Financial System Structure, 1995–2004 ..............................................................................1 ### 1. Financial System Structure, 1995–2004 ### Key points and macro-relevant recommendations - Jamaica has considerably strengthened financial system oversight following a costly financial crisis in 1996–97; the regulatory framework has in many respects been brought into line with best international practices and supervision appears to be implemented in a systematic and professional manner. - Data limitations prevented a full system-wide quantitative analysis of risks. - The very large public debt (135 percent of GDP at end-September 2005) and weak underlying economic growth are overarching vulnerabilities that constrain macroeconomic policy options. - Financial institutions are closely linked via conglomerate structures and common exposure to domestic public debt, making the financial system’s stability closely bound to macroeconomic sustainability. - Securities dealers have grown rapidly; dealers’ assets and funds under management (FUM) now exceed the deposit base of commercial banks, posing heightened interest rate, liquidity, legal, operational, and settlement risks. - Regulatory capital has increased in most financial institutions to levels that permit a reasonable degree of resilience against macroeconomic shocks. - Supervisory agencies will likely need more resources and budgetary flexibility to attract and retain qualified staff; some aspects of their operational independence should be strengthened in the law. - A consolidated approach to supervising conglomerates is a priority; passage of the proposed Omnibus Banking Bill and strengthened inter-agency cooperation (notably via the Financial Regulatory Council (FRC)) would support consolidated supervision. ### Background: financial sector structure and developments - The 1996–97 crisis cost some 40 percent of GDP and led to consolidation in the banking and insurance sectors. - Total financial sector assets amount to about 185 percent of GDP. - Table 1 (summary figures): Total Assets = 1,026,725 (million Jamaican dollars); Percent of GDP = 184.6. - Major system features: - Active primary and secondary markets for government bonds; OTC bond trading with manual transfers and deliveries. - Automated stock exchange for equities; Jamaica Central Securities Depository facilitated increased trading in equities across regional CSDs, but number of listings = 41 and market liquidity remains low. - Deep repo-based money market; active short-term commercial paper market (small); spot foreign exchange market. - Intermediation of public debt: - More than half of the public debt is held by domestic financial institutions. - A persistently large public debt crowds-out private credit; private credit was around 25 percent of GDP before the crisis. - Rapid growth of securities dealers driven by: - Increased issuance of securitized debt. - Deregulation allowing retailers to participate. - Yield pickup in government paper relative to bank deposits. - 2002 legislation separating banking from non-banking activities, transferring large FUM from merchant banks to less-regulated securities dealers. ### System vulnerabilities and transmission channels - Sovereign exposure and conglomerate linkages: - Conglomerates dominate the financial system, raising risks of multiple gearing of capital, connected lending, conflicts of interest, regulatory arbitrage, and reputational contagion. - Sizable public debt holdings by financial institutions increase system-wide vulnerability to macroeconomic shocks. - Securities dealers’ specific risks: - Dealers primarily finance long-term investments with very short-term repos with retail and institutional clients, exposing them to interest rate and liquidity risks. - Complexity of instruments increases operational and legal risk, including mis-selling and fraud. - Settlement risk heightened by reliance on paper securities and delays in establishing a CSD. - Failures in dealers could lead to legal uncertainty over investors’ title to securities and could disrupt government financing via rapid repo unwinds. - Payments and settlement infrastructure weaknesses: - Payments system has poor legal foundations and technical deficiencies. - Absence of a central securities depository (CSD) for fixed-income securities despite large volumes of government paper. - Introducing an appropriate legal framework and a real time gross settlement (RTGS) system is a priority. ### Development priorities and structural reforms - Access to credit: - Fiscal crowding out contributes to relatively low credit/GDP; strengthening insolvency and creditor rights and establishing a credit bureau would improve credit supply conditions. - Planned Bank of Jamaica (BoJ) supervision of credit unions should preserve outreach to small savers and borrowers under a risk-based regime. - Pensions: - Enact regulatory regime to complement the recently enacted legal framework for pensions to protect consumers and encourage participation. - Regulations should emphasize adequate minimum solvency requirements for defined-benefit plans and a disclosure-oriented approach for defined-contribution plans. - Unequal tax treatment of employer-independent retirement schemes should be corrected quickly. - Parliament should rapidly approve making the Financial Services Commission (FSC) the regulator of pensions. ### Box 1 — Key macro-relevant recommendations (selected, verbatim) - Maintaining financial stability and enhancing supervision: - Reduce the public debt. - Raise margin requirements on securities dealers’ repos in GoJ securities to at least 10 percent this year. - Strengthen monitoring and analysis of housing and equities prices. - Enhance analysis of insurance risk concentration and reinsurance coverage. - Develop and test crisis management plans. - Strengthen coordination across supervisory agencies and close remaining legal gaps (including through passage of an Omnibus Banking bill) to permit comprehensive consolidated supervision and more effective supervision of conglomerates. - Give supervisory agencies more resources and budgetary flexibility. - Further codify the legal and operational independence of supervisory agencies. - Addressing development and infrastructure priorities: - Overhaul creditor rights and the insolvency regime and introduce a credit bureau. - Ensure that the new regulatory regime for credit unions is carefully balanced to minimize risks without stifling credit unions’ impressive outreach. - Pass legislation to enable FSC to begin registering and regulating pension funds; equalize the income tax treatment of approved retirement schemes with that of superannuation funds. - Expedite introduction of a sound legal framework for payment and settlement systems; introduce an RTGS system. - Establish a CSD for fixed income securities. *Source: IMF staff report extract — "Financial System Structure, 1995–2004" (chapter content provided).* ### 16. The vulnerabilities stemming from high public indebtedness aside, current ### _cr06156 - 16. The vulnerabilities stemming from high public indebtedness aside, current ### Macroeconomic context and market conditions - Current economic conditions described as "generally stable", but "interest and exchange rates have exhibited considerable volatility". - In the first half of 2003, "capital outflows and strong downward pressure on the exchange rate prompted steep rises in interest rates to over 30 percent". - Subsequent exchange rate stability enabled "6-month interest rates to be brought down to 13 percent at end-2005". - "Inflation excluding volatile food and energy prices averaged just over 10 percent in 2005." - "Stock prices have quadrupled since 2000," increasing P/E ratios "to around 15 from the 6–9 range," and raising market capitalization "to 150 percent of GDP." - "Anecdotal evidence also suggests a run up in property prices, but no official data are maintained." ### Growth performance and external shocks - "Economic growth remains subdued." Growth "has averaged little more than 1 percent a year." - "Hurricanes are endemic to the Caribbean and active seasons in 2004 and 2005 caused significant damage, disrupted output, and added to fiscal costs." ### Fiscal position and public debt vulnerabilities - High public indebtedness identified as a source of vulnerability. - From Table 3 (selected indicators, fiscal years shown): - Real GDP: "0.8", "0.9", "2.2", "1.9", "0.4" (for 2000/01 through 2004/05). - Nominal GDP: "11.6", "9.5", "10.0", "18.9", "12.1". - Consumer price index (end of period): "6.4", "7.6", "6.2", "16.8", "13.2". - Consumer price index (average): "7.7", "8.0", "6.5", "12.9", "12.7". - Exchange rate (end of period, in J$/US$): "8.3", "4.0", "17.9", "1.7", "0.9". - End-of-period REER (percent change, appreciation +): "0.2", "3.9", "-14.2", "-2.7", "5.6". - Unemployment rate (in percent): "15.5", "14.8", "14.2", "11.8", "12.2". - Budgetary revenue (percent of GDP): "29.1", "27.0", "28.1", "29.4", "30.8". - Budgetary expenditure (percent of GDP): "33.6", "32.6", "35.7", "36.0", "35.7". - Interest payments (percent of GDP): "16.0", "13.4", "14.9", "17.8", "16.7". - Budget balance (percent of GDP): "-4.5", "-5.6", "-7.6", "-6.6", "-4.9". - Overall fiscal balance (percent of GDP): "-4.8", "-6.1", "-10.8", "-9.7", "-7.1". - Public debt (percent of GDP): "132.0", "135.1", "148.0", "143.7", "137.9". - Current account balance (percent of GDP): "-6.7", "-9.2", "-15.2", "-6.8", "-6.1". - Net international reserves (in millions of US$): "1,286", "1,942", "1,340", "1,569", "1,902". - Private sector credit growth: "18.6", "-56.7", "30.5", "38.9", "18.7". - Broad money (percent change): "9.2", "10.0", "7.5", "20.2", "10.3". - Nominal GDP (in billions of Jamaican dollars): "346.8", "380", "418", "497", "556". - Exchange rate (end of period, J$/US$): "45.7", "47.6", "56.2", "60.8", "61.5". ### Financial markets and credit - Figures indicate substantial financial sector developments: - Figure 1: Assets by financial institution, 2004 (percent of GDP) — data provided by Jamaican authorities and staff estimates (details in figure). - Figure 2: Credit to the private sector, 1990–2004 (percent of GDP) — source: IFS. - Figure 3: Private Credit/GDP vs. Per Capita GDP, 2004 — regression R^2 = "0.3112", equation "y = 0.0175x - 18.19"; labeled countries include those with public debt ratios in excess of 100 percent of GDP. - Figure 4: Exchange Rates and Selected Interest Rates, 2000–05 — sources: IFS and Jamaican authorities; selected interest rates series show short-term Treasury bill rate, deposit rate, lending rate, 180-day reverse repurchase rate; exchange rate series show nominal exchange rate and NEER (right axis). ### Deposit-Taking Institutions (DTIs): structure and competition - "Three types of DTI are supervised by the BoJ under a common regulatory framework." - "The most important are the six commercial banks, with two banks accounting for about three fourths of the assets." - "All commercial banks are members of broader financial groups and five, representing 97 percent of commercial bank assets, have foreign parents." - "The other DTIs are merchant banks and building societies. The latter specialize in mortgage lending." - Competition and profitability: - "Commercial bank profitability is perhaps helped by low competition and the perceived safe-haven of some banks." - Deposit rates are "significantly below returns on investment products offered by securities dealers and insurance companies." - Banks hold "about a quarter of their total assets in GoJ securities," with estimated annual income from government securities amounting "to about 35 percent to 40 percent of their regulatory capital." - Table 4: Comparison of Interest Rate Spreads, 2000–05 — Jamaica spreads: "13.2", "11.9", "11.4", "12.6", "11.7", "12.0" (2000–2005, as of September 2005). ### Credit unions and supervision - Credit unions: "some 760,000 members (about 60 percent of the adult population)." - Savings held by credit unions are "equivalent to about 4 percent of GDP." - "The number of credit union loans exceeds that of bank personal loans." - Credit unions are "regulated by the Jamaica Cooperative Credit Union League Limited," which acts as industry advocate, savings insurer (Stabilization Fund), lender of last resort, and service provider. - "The BoJ is expected to take over their supervision in 2006." ### Financial soundness indicators and stress testing - At end-September 2005: - "Estimated aggregate capital adequacy for the banking system was about 19 percent compared to the 10 percent prudential requirement." - "Return on assets was running at a high rate by international standards." - "Ratio of liquid assets to total deposit liabilities was well above prudential requirements." - Reported NPLs "have shrunk significantly since the crisis to about 3 percent." - Stress test findings: - "Most DTIs would be resilient to a variety of single factor shocks." - "Large interest rate hikes could potentially be damaging, particularly for some building societies depending on the limits to their ability to pass on higher rates to borrowers." - DTIs could withstand "large increases in NPLs (three- to fourfold) before capital fell significantly below required levels." - "Exchange rate vulnerability appears small in isolation although a sharp depreciation could be potentially damaging if followed by large interest rate hikes." - "Vulnerability to severe housing price declines is a potential concern, especially given that property is the main form of collateral." - Recommendation: "More careful evaluation and the collection of price and other relevant data on exposures are strongly recommended." ### Banking sector indicators (selected highlights from Table 5) - Regulatory capital to risk-weighted assets (estimated): Dec-98 "8.8", Dec-99 "22.7", Dec-00 "25.6", Dec-01 "23.6", Dec-02 "18.5", Dec-03 "16.1", Dec-04 "16.6", Sept-05 "19.2". - NPLs to gross loans: Dec-98 "22.8", Dec-99 "12.7", Dec-00 "9.6", Dec-01 "6.8", Dec-02 "4.6", Dec-03 "3.6", Dec-04 "3.0", Sept-05 "3.0". - ROAA (annualized profitability): Dec-98 "(0.3)", Dec-99 "1.6", Dec-00 "2.8", Dec-01 "2.5", Dec-02 "3.1", Dec-03 "4.3", Dec-04 "3.1", Sept-05 "4.0". - Statutory Average Liquid assets to total assets: Dec-98 "34.7", Dec-99 "32.9", Dec-00 "31.8", Dec-01 "30.7", Dec-02 "27.4", Dec-03 "23.5", Dec-04 "28.3", Sept-05 "29.1". - Customer deposits to total (noninterbank) loans: Dec-98 "250.0", Dec-99 "302.6", Dec-00 "321.2", Dec-01 "294.5", Dec-02 "236.0", Dec-03 "198.7", Dec-04 "199.6", Sept-05 "188.2". *IMF staff report content (excerpt). * ### 23. The supervisory and regulatory framework for banking shows high compliance ### 23. The supervisory and regulatory framework for banking shows high compliance ### Banking supervisory framework — findings - The legal framework is "generally sound and modern" and the BoJ’s system for supervision is "comprehensive and professionally staffed." - Accounting and financial disclosure standards are "broadly in line with international standards." - Implementation gaps and vulnerabilities: - Supervisory capacity limits could be tested by new mandates to supervise credit unions and money transfer systems, intensify supervision of financial conglomerates, and enhance anti-money laundering work. - Consolidated supervision implementation "remains a challenge, notwithstanding much recent progress." - The concept of large exposures needs clearer legal description to include all claims, "including balance sheet and off-balance sheet items." - The BoJ’s independence in supervisory matters should be strengthened in law: "in practice the BoJ acts independently, in principle the BoJ Act gives the Minister of Finance final say on a number of important operational issues, including the granting or revocation of licenses and remedial actions." - Authorities propose addressing remaining weaknesses in an Omnibus Banking Bill, which is being prepared. ### Credit unions — findings and trade-offs - The regulatory draft framework seeks to balance prudential standards for larger credit unions with preserving access for small savers and borrowers. - Key draft provisions: - Redefines credit unions’ capital structure. - Introduces a new definition of unsecured credit, limited to "5 percent of assets and one percent of capital (20 percent of capital for very small institutions)." - Potential consequences: - A move to a more conventional corporate structure could shift credit unions away from member ownership and "potentially curtail financial services secured on member shares." - The proposed limit on unsecured credit could restrict lending against movable property and borrowers’ income flow, potentially curtailing loans (e.g., working capital for small commercial operations) that "have consistently outperformed conventional credit in Jamaica." ### Structure of the nonbank financial sector — key facts - Securities dealers dominate the nonbank sector with assets of "over 50 percent of GDP." - The 10 largest dealers manage "about 70 percent of the sector’s funds." - Insurance sector: - Premiums of "about 5 percent of GDP"—about twice the Latin America and Caribbean average. - Concentration: largest three companies account for "75 percent" (life) and "49 percent" (nonlife) of sector assets. - Ultimate control of the life sector rests "predominantly abroad." - More than half of the life sector’s assets derive from savings products, which "do not typically provide long-term interest rate guarantees." - "Some 90 percent of property insurance is reinsured," but "most reinsurance contracts have event limits of 20 percent of the total amount insured." - A local insurer with Cayman Islands concentration was devastated by Hurricane Ivan in 2004 and "is being liquidated." - Private pensions: - Data sparse; a 2004 FSC survey suggested about "one tenth of all households belong to a superannuation fund registered under the Income Tax Act." - Older and larger schemes typically provide defined benefits and hold average assets per member of "6–7 times per capita GDP." ### Insurance sector — profitability, vulnerabilities, and exposures - Profitability: - "Both life and nonlife insurance have been profitable in recent years." - "All life insurers considerably exceed required capital adequacy ratios," helped by zero risk-weighting on investments in government paper. - The nonlife segment is less well capitalized; in 2004 several nonlife companies "fell below, or were only slightly above, target solvency levels." - Main vulnerabilities: - Interest rate risk: interest rate hikes could prompt policyholders of savings products to withdraw funds and generate liquidity crunches for life insurers; some life insurers with asset durations shorter than liabilities could gain from higher rates. - Natural disasters: nonlife companies face concentration of catastrophic risks combined with reinsurance limits. - Sovereign exposure: "all insurers have sizable holdings of GoJ bonds, with annual interest receipts equivalent to more than 5 percent of assets," exposing them to domestic sovereign risk. - Supervisory priorities: - Ensure companies develop proper risk management systems and transparent reporting. - Strengthen review and monitoring of reinsurance coverage for nonlife insurers. ### Securities dealers — risks, indicators, and supervisory measures - Risks and indicators: - Interest rate and liquidity risks are potentially sizable. - For the 10 largest dealers, maturity mismatches at end-2004 implied that "an increase in interest rates of 5 percentage points (an amount well within historical experience) would have eroded capital by as much as 20 percent," with some dealers temporarily falling below the FSC’s "6 percent minimum capital asset threshold." - Some assets carry variable rates repricing after six months (compared to repos that mostly reprice within 30 days), which may offset part of revenue losses. - Data gaps (absence of a precise breakdown between fixed and floating rate securities) limited comprehensive quantitative assessments. - Foreign exchange risk could be significant as a number of dealers hold dollar- and euro-denominated bonds. - Credit risk due to investment in foreign or domestic corporate instruments and sovereign risk (other than GoJ) appears small. - Industry concentration and market risks: - Run-up in stock prices in a thinly-traded market increases potential for a reversal impacting the financial system. - Investment portfolios have significant equity shares: private pensions "26 percent" and general insurance "13 percent"; one building society has "39 percent" of its investment portfolio in equities (unrealized gains not included in regulatory capital). - Low market liquidity, industry structure, and manual monitoring procedures increase potential for market abuse. - Supervisory measures taken by the FSC: - Introduced a minimum capital adequacy ratio of "10 percent." - Introduced limits on margin borrowing and margin requirements for repos with non-financial corporations and retail investors. - Margin requirements timeline: - Initially set at "1 and 3 percent" for repos where underlying security is, respectively, GoJ paper and other approved assets. - Increased to "3 and 9 percent in September 2005." - Slated to rise to "5 and 15 percent in April 2006." - Put a cap on growth of new retail repo business, limiting aggregate balances to the lower of either repo balances held on July 31, 2004 or "50 percent of a dealer’s total assets and FUM." - Recommended further refinements (FSAP mission and staff views): - Enhance and strictly enforce margin requirements. - FSAP urged implementing at least a "10 percent" margin requirement before "end-2006" or use a more sophisticated, differentiated-margin framework. - Carefully screen dealers allowed to use a more sophisticated framework. - Other suggested capital regime refinements include: - (i) refining capital adequacy to include a liquid capital requirement; - (ii) introducing tiered initial capital requirements for different types of business that dealers engage in; - (iii) introducing and monitoring restrictions on large exposures; - (iv) stipulating a deadline for transferring client money into segregated accounts. - Moving to a more risk-sensitive prudential regime would obviate the need for a cap on repo business, although supervisory verification that dealers apply appropriate margins remains essential. ### Supervisory and regulatory assessment for the nonbank sector - The Financial Services Commission (FSC): - "Has quickly got up to operational speed." - Regulatory and supervisory framework "is broadly aligned with international best practices," though detailed assessment identified needed refinements. - Supervisory focus is on ensuring proper risk management systems, transparent reporting, and sufficient capital coverage. - On securities, the FSC combines prudential requirements and conduct of business rules emphasizing disclosure and governance; improvements in accounting and valuation standards have strengthened the industry. - The FSC's collaborative approach has benefits but requires guarding "against straying toward regulatory forbearance." - Resource and supervisory intensity needs: - FSC staffing "is approaching needed levels," but "more budgetary flexibility would help to attract and retain qualified staff." - Frequency of on-site inspections is "insufficient." - Need more emphasis on industry contacts, communication with other supervisory bodies within and outside Jamaica, and monitoring of risk management practices. - Requirements on firms to provide information to supervisors—including stress tests—should be extended and enforced with penalties for noncompliance. - Improve collection and monitoring of market surveillance data at the JSE and FSC. - Independence and legal powers: - Although the FSC has "a high degree of independence," the Minister of Finance’s power to give direction to the FSC "should be strictly limited in the law." *Source: IMF staff report excerpt "23. The supervisory and regulatory framework for banking shows high compliance" (content unit provided).* ### 38. Early parliamentary approval for the FSC to begin regulating private pensions ### 38. Early parliamentary approval for the FSC to begin regulating private pensions ### Early parliamentary approval and legal framework - The 2004 Pensions Act established a detailed legal framework for private schemes. - The FSC cannot begin registering existing pension funds until it receives formal parliamentary approval to be the regulator. - The subjection of all new pension regulations to affirmative parliamentary resolution should be reviewed because it could reduce administrative flexibility to adjust to rapidly changing, technically complex circumstances. ### Regulatory design to encourage sound private pensions - Regulations should encourage the development of sound private pensions consistent with the structure of the economy, recognizing high labor mobility in a dynamic, services-oriented economy. - Portability: - Elimination of restrictions on the portability of pensions is part of reform plans. - Portability is seamless with employer-independent funds; their disadvantageous tax treatment should be eliminated as soon as possible, as called for in the government’s White Paper on pensions. - Tax and structural neutrality: - Regulatory and tax systems should avoid bias in favor of defined-benefit schemes, which are more expensive to administer than defined-contribution schemes. ### Risk-based regulation: defined-benefit versus defined-contribution - Defined-benefit schemes: - The risks and complexity of defined-benefit schemes mean they should be subject to strict solvency requirements. - Defined-contribution schemes: - Emphasis should be on disclosure and market discipline. - The Registration, Licensing and Reporting Regulations issued by the FSC and the obligation for secrecy imposed by the Pensions Act: - May be appropriate—although perhaps too costly—for established superannuation funds. - Are less appropriate for independent pension funds, which are not essentially different from mutual funds or other publicly-offered collective investment vehicles; investors need accurate and frequent information on the value and composition of their portfolios to enable effective market discipline. ### Cross-sectoral issues: Conglomerate supervision - Remaining legal and supervisory gaps: - Where a group does not include a DTI, there are no legal provisions to enforce a reorganization (e.g., through a financial holding group). - Legislative changes are needed to empower the FSC to obtain information from related companies to assess a group’s consolidated financial position and to formulate and enforce group prudential regulations. - The BoJ lacks full legal powers to formulate and enforce prudential regulations for consolidated supervision (including capital adequacy, large exposure limits, and fit-and-proper requirements). - The BoJ and FSC lack powers to require consolidated (quarterly) prudential reports at the group level for effective off-site monitoring. - Inter-agency cooperation: - The FRC’s potential for information sharing and evaluating financial stability and contagion risks is underutilized. - Cross-border cooperation has been enhanced via the BoJ’s bilateral MOU with the Cayman Islands and a multilateral MOU with eight neighboring countries, and supervisors’ participation in regional groups; but common regional approaches and standards are still lacking. - Recommended institutional actions: - Intensify the BoJ’s consolidated supervision of groups that include DTIs. - Complete the proposed Omnibus Bill, have it reviewed by FRC members, and present it to parliament at an early date. - FSC to seek changes to its legislative powers to enable effective consolidated supervision and better apply consolidated supervision principles. - FRC to play an enhanced coordinating role and appoint a joint working group to develop a framework for prudential supervision of conglomerates and draft supporting regulations. - FRC to institute more formal protocols for information sharing and working-level contact between agencies outside crises. ### Lead supervisors and possible unification - Designating lead supervisors for conglomerates: - Lead supervisors could ensure communication and joint work to monitor financial stability and prudential compliance on a consolidated basis. - Lead supervisors for interventions are defined in the MOU that established the FRC as the supervisor exercising jurisdiction/oversight of the highest asset value within the group. - Responsibility for supervising individual entities would remain with the relevant agencies. - Consideration of a unified regulator: - A unified regulator could make more efficient use of limited resources and reduce regulatory arbitrage. - Risks include lack of clarity of objectives, moral hazard (e.g., market participants assuming deposit protection covers all supervised entities), reduced operational independence, parliamentary approval requirements for new legislation, and increased staff management problems. ### Crisis management and safety nets - Priorities for crisis management system updates: - Strengthen early warning systems. - Make the joint-agency intervention matrix (resolution and exit issues for problem institutions) more comprehensive and operational. - Modify the Deposit Insurance Act to enable the insurer to participate more fully in resolution processes. - Coordination and stress testing: - BoJ produces regular internal financial stability reports on banks; FSC carries out some stability analysis of the nonbank sector. - Coordination of analysis across agencies would help understand quantitative links and anticipate contagion risks. - All major financial institutions should be required to undertake regular stress tests and report results to supervisors. - Role of the FRC: - The FRC is the logical body for coordinating crisis management. - Crisis planning should evaluate how systems operate in a crisis and whether legal or practical obstacles impede effectiveness. - Simulations (“war games”) of the most probable events should be designed and carried out as coordinated exercises. - Deposit insurance and JDIC: - The Jamaica Deposit Insurance Corporation (JDIC) provides coverage for individual deposits up to J$300,000, which is equivalent to 1.8 times per capita GDP. - JDIC assets amount to 1.4 percent of insured deposits and should be built up more rapidly than planned. - JDIC assets are currently 100 percent invested in government securities; investment should be diversified to include high quality, liquid foreign government obligations. - A recent JDIC internal simulation revealed practical and legal uncertainties that could prevent meeting its target of making payouts within 3 months; these gaps should be closed. - Greater legal certainty is needed to permit potentially less-costly work-out options in resolution cases. - Other safety nets: - BoJ’s overnight overdrafts and lender-of-last-resort facility for deposit-taking institutions and authorized primary dealers appear satisfactorily designed. ### Anti-Money Laundering (AML/CFT) - Status and shortcomings: - Jamaica has most basic elements for a comprehensive AML/CFT framework, but important shortcomings remain. - Legislation does not yet cover all categories of serious offences and does not apply to designated nonfinancial businesses and professions (DNFBPs). - Implementing legislation and mechanisms for counter-terrorism financing (CFT) can be strengthened, including stronger provisional measures for dealing with terrorism-related assets. - The legislation and arrangements for non-profit organizations need review to mitigate CFT abuse risk. - The Financial Intelligence Unit (FIU) should be placed on a more solid statutory footing, and its mandate and operations strengthened to support efforts to join the Egmont Group of FIUs. - Regulatory framework and supervision: - The Jamaica AML/CFT regulatory and institutional regime incorporates most FATF customer due diligence requirements. - Framework can be strengthened by explicitly prohibiting anonymous and fictitious name accounts and by requiring due diligence on certain beneficial owners of accounts and transactions. - BoJ has implemented onsite inspections of DTIs and money remitters for AML/CFT compliance. - FSC has developed AML/CFT examination procedures for non-deposit taking institutions, though not fully implemented. - A key challenge is conducting AML/CFT supervision of financial groups on a consolidated basis; absent legislation, there is no AML/CFT supervision of DNFBPs. - Ongoing reforms: - Authorities are preparing comprehensive revisions to the Proceeds of Crime Act to modernize AML/CFT, strengthen the FIU, and expand coverage to DNFBPs. - Strengthening consolidated supervision of financial conglomerates will improve BoJ and FSC capacity to supervise AML/CFT risk on a group-wide basis; enhanced supervisory capacity and training will be needed. - Cooperation: - Jamaica has reasonably adequate domestic and international cooperation mechanisms, including a National Anti-Money Laundering Committee. - BoJ’s MOUs with regional supervisors cover AML/CFT issues. - Limitations remain, such as the FIU’s ability to share information directly with foreign counterparts; Egmont Group membership would facilitate this. ### Key development and infrastructure issues - Access to credit: main challenges and recommended measures - Macroeconomic constraint: public debt reduction is essential to crowd-in more lending and reduce lending rates. - Measures to improve credit supply conditions include: - Passing draft legislation to enable establishment of a credit reference agency. - Modernizing insolvency procedures and creditor rights systems; current insolvency laws are out of date, lack efficient means for debtors to rearrange affairs, and have no provisions to regulate, license or bond insolvency practitioners. - Improving enforcement efficiency of secured rights; foreclosure, receivership and litigation are time-consuming and costly; Bills of Sale Act procedure for securing chattels is outdated. - Providing more resources to the courts to reduce considerable litigation delays; the Commercial Court has been under-used since it opened in 2002 and the new Civil Procedure Rules have not reduced waiting lists. - Payment and settlement systems: weaknesses and reforms - Major systems: BoJ-operated Customer Inquiry and Funds Transfer System (CIFTS), privately-owned electronic automated clearing house (ACH), and retail electronic systems (ATM, EFT). - Weaknesses identified against international core principles: - Legal framework leaves open questions about finality of payments, validation of netting arrangements, and protection of the payment system in case of participant bankruptcy; this plus an explicit settlement guarantee exposes the BoJ to significant settlement risk. - Absence of fully secure backup systems and business continuity plans, lack of prompt settlement (three days for ACH), and narrow operating hours increase risks and inefficiencies. - BoJ’s oversight function of the payments system is not effectively established. - Recommended actions: - Strengthen the legal framework. - Launch a modern automated system based on real time gross settlement (RTGS) and remove all large value items from the check clearinghouse. - The National Payment System Council, led by the BoJ, was established in August 2005 to help establish effective payment system oversight. - Securities market infrastructure: - Integrate government securities infrastructure with the large value system to guarantee smooth payments functioning and create a more active market for government paper. - Enhance arrangements to allow securities market transactions to be settled on a true delivery versus payment basis. - BoJ should carefully evaluate the impact of decisions related to securities markets, particularly the design of a CSD for fixed-income securities, on the safety of the national payments system. - Monetary policy implementation and related market infrastructure - Effectiveness and independence: - Monetary policy is implemented effectively and generally transparently; BoJ enjoys a high degree of independence. - A revision to the BoJ Act to explicitly limit the scope of the Minister of Finance to override monetary policy decisions is expected to further strengthen independence. - Monetary policy is oriented around a base money target; BoJ has well-developed operational structures and instruments to monitor, forecast, and manage liquidity. - BoJ overdraft rates are set at punitive rates and banks cannot mobilize part of their reserve requirements to finance clearance requirements. - Central bank losses and implications: - Annual losses have been running at more than 1 percent of GDP as the BoJ sterilizes sizable foreign exchange rate inflows through open market operations (OMO). - Government is required under the BoJ Act to cover the central bank’s operating losses at the end of each fiscal year. - Losses effectively create liquidity by transferring more cash to external entities than the central bank receives; large stocks of OMO instruments (currently about 29 percent of GDP) could make it self-defeating to raise central bank rates to squeeze liquidity. - Reserve requirements and dollarization incentives: - Reserve requirements were as high as 25 percent after the financial crisis, but have been progressively reduced to 9 percent. - In the mini-crisis of 2003, special reserve requirements of 5 percent on local currency deposits were introduced, although they were reduced to 1 percent in the first half of 2005. - Reserve requirements on foreign currency deposits are remunerated at the policy rate of the central bank of issue; this creates some incentive for dollarization and should be reviewed. - Market infrastructure development: - Introducing the CSD and electronic trading platforms would help develop the deep private repo market by making market arrangements more transparent, enhancing price discovery, and reducing the wide interest rate range. *Source: IMF staff report (Section 38 and following, _cr06156).* ### introduction of the CSD would reduce settlement risks and contribute to more liquidity in the ### introduction of the CSD would reduce settlement risks and contribute to more liquidity in the money market and over-the-counter treasury security market. ### Exchange rate and market infrastructure - The exchange rate is largely market determined. - Market infrastructure needs upgrading and surrender requirements should be reviewed. - BoJ efforts to seek an appropriate electronic trading platform to replace the over-the-counter foreign exchange market are encouraged. - An electronic system would foster development of a local forward foreign exchange market, which currently does not exist. - Under the surrender requirement, authorized foreign exchange dealers and cambios are required to sell 5 percent of their gross purchase of foreign exchange to the BoJ. In addition, the government sells to the BoJ the proceeds of its foreign borrowing and bauxite operators sell foreign exchange directly to the BoJ. ### Ensuring continued effective public debt management - Government has a publicly-available debt management strategy with stated objectives to: - lower borrowing costs and maintain a prudent and diversified debt structure, - use market mechanisms for domestic debt issuance, - promote a liquid and efficient market for government securities, and - increase the transparency and predictability of debt issuance. - Targets and operational aims: - increase the share of the fixed-rate component of domestic debt to 60 percent, - extend the maturity profile of debt, - limit external borrowing to the extent of the needs for gross external amortization. - Recommended adjustments to strategy and operational framework: - Set targets for lengthening debt maturity profile and reducing exposure to foreign exchange risk to provide objective benchmarks. - MOF should conduct systematic and regular analysis of vulnerabilities of the debt profile. - Minimize heavy reliance on private placements for issuing fixed-rate instruments: they provide too much discretion to the MOF, are not fully transparent, and may not always be consistent with minimizing borrowing costs. - MOF could further increase transparency by disclosing information on the results of debt issuance. - Market development recommendations: - Establish benchmark issues for GoJ securities and a market-determined yield curve to improve liquidity, encourage wider investor participation, and reduce refinancing risks. - Consider greater competition and auction processes to cut debt costs. - Consider introduction of automatic trading systems to enhance transparency, price discovery, and market depth (examples cited: South Africa and Mauritius). - Challenges noted: low liquidity in GoJ securities and trading predominantly in maturities up to two years. ### Stress testing of the banking system — overview - Stress tests conducted on all deposit-taking institutions (DTIs) using end-2004 data; designed and carried out with BoJ staff. - BoJ enhanced capacity for quantitative risk analysis and introduced stress testing as part of regular vulnerabilities assessment. - Tests assessed resilience to credit and market (interest rate, exchange rate, equity prices) risks. - Calibration of shocks took into account historical variability; macroeconomic scenarios were hard to design due to trend recovery in bank balance sheets since the 1996/97 financial crisis. - Absence of consolidated data for financial conglomerates limited contagion analysis. - Preliminary bank profit and balance sheet data for 2005 suggest broad conclusions would not alter with more recent data. ### Credit risk findings - DTIs seem relatively resilient to credit risks, though some institutions may be vulnerable to sectoral problems. - Aggregate resilience: DTIs in aggregate could withstand a three-to-fourfold increase in NPLs before capital adequacy fell below required levels. - Such an increase would push gross NPLs to about 14 percent of gross loans. - If the shock is evenly distributed across DTIs, capital base of three banks and three building societies would fall below required minimum. - Main sectoral vulnerability: personal lending (including mortgage lending). - If 20 percent of personal loans became nonperforming, one commercial bank and some building societies become undercapitalized. - If personal sector NPLs rose to 23 percent, the aggregate capital of building societies falls below the 10 percent minimum requirement. - Lack of data on house prices and loan quality spectrum limited risk analysis. ### Market and liquidity risks - Interest rate risk: - Stress tests used repricing gap and duration mismatch models. - Most commercial banks could withstand interest rate hikes of 1,000 basis points or more across the entire local currency yield curve for 12 months. - Two small banks with long durations and negative repricing gaps seem vulnerable to such large shocks. - For two building societies and one merchant bank, capital bases could be impaired assuming interest rate shocks of 500 basis points. - Tests may overstate vulnerability because DTIs can respond by raising lending rates; historical lending rates have tended to be sticky, though building societies tend to pass through rate hikes fairly quickly. - Given NPLs stability despite wide policy rate movements (including an upward spike of more than 20 percentage points in 2003), credit risks from interest rate shocks appear small. - Exchange rate risk: - In aggregate, direct exchange rate risks appear minimal; net open positions are either positive or relatively small. - Indirect risks arise from a high proportion of foreign currency lending (over one third) and potential currency mismatches for borrowers. - Stress tests assumed graduated default and recovery rates on foreign currency loans for different levels of depreciation. - Only one merchant bank appears to carry notable exchange-rate-related risk. - A sharp depreciation could be potentially damaging if followed by large interest rate hikes. - Equity price risk: - DTIs could remain adequately capitalized even with a 50 percent decline in the stock market index, given small share of equities in total assets. - One building society’s capital could fall below minimum requirement with a 40 percent drop in its stock holdings. - Capital gains on equities are not included in regulatory capital; recent steep rise in Jamaican stock market provides a buffer. - Liquidity risk: - High liquidity ratios and moderate loan-to-deposit ratios suggest potential liquidity risk is low. - Loan-to-deposit ratio rose from 31 percent in 2000 to about 50 percent in 2004. - Most liquid funds are channeled to government financing. - Removal of government papers from liquid assets would change liquidity ratios substantially (see stress test table). ### Systemic risks - Interbank contagion risks appear small due to highly limited interbank lending. - Financial conglomerates control about 80 percent of the financial system’s assets and could foster contagion across sectors. - Example simulation: failure of an insurance company 100 percent owned by a commercial bank — parent company’s capital ratio could fall below minimum if it assumes more than 10 percent of the subsidiary’s liabilities, and falls to zero if it assumes 60 percent. This does not lead to further failures of other DTIs in the system. - Overarching vulnerability: high exposure of all financial institutions to domestic sovereign credit risk. - In a catastrophic scenario where the government suspended payment or restructured its debt, the financial system could amplify macroeconomic consequences and could lead to insolvency for some highly exposed institutions. - No history of the government failing to honor its commitments. - Financial sector supervision strengthened substantially since the financial crisis; banking system is better capitalized. ### Key quantitative stress-test results and metrics (as of end-December 2004) - Aggregate system resilience: - DTIs could withstand a three-to-fourfold increase in NPLs before capital adequacy fell below required levels. - Such increase would push gross NPLs to about 14 percent of gross loans. - Personal loan stress thresholds: - 20 percent of personal loans becoming nonperforming → one commercial bank and some building societies undercapitalized. - 23 percent personal sector NPLs → aggregate capital of building societies below the 10 percent minimum requirement. - Loan-to-deposit ratio: - 31 percent in 2000; about 50 percent in 2004. - Financial conglomerates: - Control about 80 percent of the financial system’s assets. - Table 8 selected stress impacts (change in CAR in percentage points; numbers in parentheses = number of institutions falling below minimum): - Impact of an increase in interest rates: - +500 basis points: Total banking system -0.2 (3); Commercial banks 0.1 (0); Merchant banks 0.0 (1); Building Societies -1.9 (2) - +1000 basis points: Total banking system -1.7 (4); Commercial banks -1.3 (1); Merchant banks 0.1 (1); Building Societies -6.4 (2) - +1500 basis points: Total banking system -4.7 (7); Commercial banks -3.0 (2); Merchant banks 0.1 (2); Building Societies -26.3 (3) - Impact of depreciation in exchange rate together with defaults in foreign currency loans (assuming depreciation increases default rate 2 percent-10 percent and reduces recovery rate 20 percent-2 percent): - Depreciation 10%: Total banking system -0.2 (1); Commercial banks -0.3 (0); Merchant banks -0.6 (1); Building Societies 0.4 (0) - Depreciation 30%: Total banking system -0.6 (1); Commercial banks -0.8 (0); Merchant banks -1.7 (1); Building Societies 1.1 (0) - Depreciation 50%: Total banking system -1.2 (1); Commercial banks -1.5 (0); Merchant banks -3.0 (1); Building Societies 1.7 (0) - Impact of credit deterioration: - Rise in NPLs by 360 percent with 100 percent provisioning: Total banking system -5.8 (7); Commercial banks -5.2 (3); Merchant banks -1.5 (1); Building Societies -14.0 (3) - 20 percent of loans to a major sector in each institution becomes NPL (with 50 percent provisioning): Total banking system -1.4 (2); Commercial banks -0.4 (1); Merchant banks -7.0 (3) - 100 percent risk weights on government papers: Total banking system -4.8 (2); Commercial banks -5.3 (1); Merchant banks -2.5 (1); Building Societies -4.7 (0) - Impact of equity market decline: - 50 percent fall in major equity index: Total banking system -2.0 (2); Commercial banks -1.3 (0); Merchant banks -2.2 (1); Building Societies -6.0 (1) - Impact of liquidity risk: - Removal of government papers from liquid assets: Change in liquidity ratio — Total banking system -5.7; Commercial banks -6.2; Merchant banks -7.9; Building Societies -4.2 - Memorandum items: - Risk weighted assets (in percent of the total): Total 100; Commercial banks 72.6; Merchant banks 13.4; Building Societies 14.0 - Capital adequacy ratio: Total banking system 15.1; Commercial banks 15.9; Merchant banks 9.9; Building Societies 16.3 - Buffer capital/risk weighted assets: Total banking system 7.8; Commercial banks 5.0; Merchant banks 6.7; Building Societies 23.5 ### Observance of financial sector standards — Basel Core Principles (summary) - Assessment conducted May 16–26, 2005 as part of the joint IMF/World Bank FSAP by World Bank assessors. - Assessment based on review of laws, regulations, best practice standards, and discussions with BoJ, Ministry of Finance and Planning, Financial Services Commission, Jamaica Deposit Insurance Corporation, and private sector stakeholders. - BoJ has legal responsibility for bank supervision under Bank of Jamaica Act (BoJA) of 2002, Banking Act (BA), Financial Institutions Act (FIA), and Building Societies Act (BSA). - BoJ supervises all deposit-taking institutions (commercial banks, merchant banks, building societies, and credit unions), money transfer companies, cambios, and exchange bureaus; Financial Institutions Supervisory Division (FISD) is the supervisory unit. - Jamaica’s financial system: - Total financial sector assets are almost twice the level of the country’s GDP. - 15 deposit-taking institutions and numerous nonbank financial institutions. - Commercial banks are dominant with assets equivalent to more than 60 percent of GDP at end-2004. - Nonbank financial institutions include credit unions, financial houses and trust companies, securities dealers, insurance companies, cambios, and pension funds. - Aggregate capital adequacy ratio of about over 16 percent as of end-2004. - Post-crisis changes: - Financial crisis of 1996-97 led to major restructuring; fiscal cost some 35-40 percent of GDP. - Number of commercial banks, insurance companies, and building societies fell sharply; foreign ownership increased (by assets, foreign ownership amounts to some 97 percent). - Supervision was revamped. - Preconditions for effective supervision largely exist, but specific areas needing attention: - excessive government debt, - lack of a credit bureau, - ineffective insolvency regime, - legal impediments preventing deposit insurance from acting before insolvency, - weaknesses in the payments system. *Source: _cr06156 - introduction of the CSD would reduce settlement risks and contribute to more liquidity in the money market and over-the-counter treasury security market.* ### 82. During the past five years, Jamaica has made impressive progress in updating its ### _cr06156 - 82. During the past five years, Jamaica has made impressive progress in updating its ### Banking regulatory and supervisory framework — overview - Jamaica has updated its regulatory and supervisory framework to bring it further into line with best practice, but important impediments remain in operational independence for supervisors and consolidated and conglomerate supervision. - The assessment references the Basel Core Principles (CPs) framework and provides detailed evaluations across CP 1–25. ### Objectives, autonomy, powers, and resources (CP 1) - Findings: - Objectives of the BoJ in relation to bank supervision are clearly defined in relevant laws. - BoJ management and staff have good qualifications, are knowledgeable and receive training on a regular basis. - Supervisors are protected from liability when performing supervisory responsibilities in good faith by an explicit provision in the BoJA. - The BoJ does not have operational independence and powers to issue legally binding regulations. - BoJ does not have the power to grant and withdraw licenses or set legally binding prudential rules; in many cases, the power to take prudential decisions rests with the Minister of Finance, who usually acts on the recommendation of the BoJ. - Shortage of staff in the FISD requires attention. - Recommended actions (from Table 9): - CP 1.1: It is recommended that the proposed Omnibus Bill be passed and to strengthen the legal foundations of the Financial Regulatory Council. - CP 1.2: BoJ should be completely independent from the Ministry of Finance; appointment of senior bank supervisors should be a responsibility of Parliament; powers to grant or revoke licenses to deposit taking institutions should be transferred from the Ministry of Finance to the BoJ. - CP 1.3: Legislation to empower BoJ to set legally binding regulations should be passed. - CP 1.6: There is a need to strengthen the legal basis of the FRC. ### Licensing and structure (CPs 2–5) - Findings: - The Banking Act provides a general definition of “banking business” and the licensing criteria of banks. - Relevant laws define “controlling interest” and notification and approval requirements for changes in ownership and management. - Pre-notification requirements are not embedded in laws or regulations. - Jamaica prohibits individuals with a record of wrongdoing in financial institutions from becoming board members. - Recommended actions: - CP 2: Pass the Omnibus Bill to mitigate supervisory arbitrage and create a level playing field. - CP 3: Amendments proposed by the authorities to strengthen licensing criteria for new banks should be passed. - CP 4: The practice of requiring pre-notification for any ownership changes of 5 percent should be embedded in law. - CP 5: The need for prior notice should be codified in existing legislation. ### Prudential regulations and requirements (CPs 6–15) - Findings: - Minimum primary capital ratio: 6 percent. - Minimum risk-weighted capital ratio: 10 percent. - The risk-weighted ratio is based on the model of the Basel Capital Accord; in some respects definitions used are stricter than those in the Basel Accord. - Comprehensive rules exist for credit policies, evaluation of loans, and loan-loss provisions. - Definition of large exposure (CP 9) should be provided in laws or regulations and consolidated reporting should be implemented. - Law should be amended to ensure lending to related parties is done at arm’s length. - Supervisory guidelines on country risk (CP 11) have been issued recently; current exposures are limited to Jamaican banks. - For market risks (CP 12) supervisory guidelines exist for risk management and reporting, but no capital charges, other than for open foreign exchange positions, are imposed. - For other banking risks (CP 13) supervisory guidelines have been implemented and are generally in line with international standards; these will need updating to address increasingly complex activities. - Jamaica complies with the Principle on internal control systems (CP 14); BoJ has issued guidelines mandating a number of control mechanisms within banks. - Existing money laundering guidelines (CP 15) issued by the BoJ are adequate but some improvements are under way. - Recommended actions: - CP 7: Establish a credit bureau. - CP 9: Amend legal framework to define “large exposure,” which should include all claims, on-balance sheet and off-balance sheet. - CP 12: Improve supervisors’ capacity to monitor complex market activities of banks. ### Methods of ongoing supervision (CPs 16–20) - Findings: - Framework for on-site and off-site supervision is based on a CAMELS+R approach and is adequate. - Procedures for on-site examinations are laid down in a manual. - Critical deficiency: weaknesses in the consolidated supervision regime. - Since the last BCP assessment in 2001, BoJ has made enormous progress to carry out supervision of financial groups on a consolidated basis: authority to require re-organization of financial groups to obtain information from all entities; obstacles to share information and cooperate with domestic or foreign supervisory agencies have been removed. - BoJ still needs to develop tools to supervise on a consolidated basis, including basic prudential norms—consolidated capital, extra-group exposure limits—and train staff on consolidated supervision. - Recommended actions: - CP 16: Present official findings of on-site examinations more rapidly; address shortage of staff due to past departures; recruit additional staff. - CP 17: After each examination, examiners should meet with the Board of Directors to discuss results; if Board unavailable, meet with Chairman of the Audit Committee. - CP 18: Improve risk management monitoring and analysis. - CP 19: Amend legislation to empower BoJ to replace a bank’s external auditor whenever necessary. - CP 20: To make consolidated supervision fully operational: - Enactment of the Omnibus Bill - The completion of the restructuring plan by FIs - Establishment of prudential regulations on a group-wide basis - Drafting of reporting forms on a consolidated basis ### Information requirements and formal powers of supervisors (CPs 21–22) - Findings: - CP 21: Jamaica largely complies. Reporting generally complies with international accounting standards (IAS). Effective 2002, IFRS must be used for reporting. - Audited financial statements must be published within three months after fiscal year-end. - External audits must be conducted according to International Auditing Practices and cover loan quality, loan loss identification and provisioning, asset valuation, trading activities and internal controls. - External auditors have a statutory duty to inform the supervisory agency within a stated timeframe if they detect matters of significant importance to the bank concerned. - To be fully compliant, BoJ needs legal power to revoke a bank’s auditor. - CP 22: Range of remedial actions is adequate. Power to impose temporary management in a problem bank without Ministerial consent is a significant improvement. Granting and revoking licenses remains with the Minister; transferring this power to BoJ is recommended. - Recommended actions: - CP 21: BoJ should consider establishing a committee comprising members from BoJ and the audit profession to exchange information and improve accounting and auditing framework. - CP 22: Transfer power to grant and revoke licenses from the Minister to the BoJ. ### Cross-border banking (CPs 23–25) - Findings: - MOUs have been signed with neighboring countries in the Caribbean. - The same standards apply to local and foreign-owned banks operating in Jamaica. ### Authorities’ response - General: - Authorities viewed the assessment as a strict interpretation of the Principles and felt it did not fully account for the implementation environment. - Most legal framework weaknesses identified will be solved once the Omnibus Law is passed. - Specific points: - BoJ expressed disappointment with findings for CP 3 and CP 5: - On CP 3: BoJ argued the law is specific on bases for license approval; current regulations detail required documents (business plans, projections, comprehensive questionnaire for fit and proper assessment, audited financials). Section 29 D outlines acceptable group structures for DTIs; Section 13 sets investment limits. These regulations will be revised and updated via the proposed Omnibus bill. - On CP 5: BoJ felt there is sufficient legal guidance on appropriate investments for banking groups and prescribed investment limits and argued criteria should not be overly prescriptive. - BoJ requested due credit for efforts to establish framework for consolidated/conglomerate supervision given Jamaican conglomerate group structures, noting the Core Principles primarily address consolidated supervision of banking groups only. - BoJ welcomed recommendations from the FSAP team on addressing conglomerate supervision. ### Systemically important payment systems — assessment context - Assessment conducted in the context of a Financial Sector Assessment Program (FSAP) joint IMF–World Bank mission that visited Jamaica from May 11–13, 2005. - Two systems assessed: the central bank operated Customer Inquiry and Funds Transfer System (CIFTS) and the automated check clearinghouse (ACH). - Assessment performed by Massimo Cirasino (Senior Financial Sector Specialist, World Bank); main counterparty agency was the BoJ. ### Payment systems infrastructure — overview and findings - Key existing systems and initiatives: - CIFTS established in 1993; participants enter instructions throughout the day on accounts held at the central bank; payment instructions are deemed final as BoJ guarantees all outgoing funds transfer instructions. - In October 2002, a privately owned automated clearinghouse (ACH) replaced the BoJ manual clearing system, allowing electronic clearing and settlement among the seven clearing banks. - Since checks are used for some large value payments, the ACH presents important financial risks. - The Jamaica Clearing Bankers Association (JCBA), comprised of the clearing banks (BoJ and the six commercial banks), administers the ACH and enforces its Rules and By-laws. - Customers receive cleared funds on a check deposit within T+3. - Electronic products such as direct debits and credit transfers will be processed through the ACH when the second phase is implemented. - JETS Limited: a service platform for noncash retail banking services using a shared Electronic Transaction Switching Network for cash dispenser withdrawals and EFT/POS services; interbank claims are settled through JETS own clearinghouse on member banks settlement accounts on a net basis the business day following transaction date. - Securities market: - Dominated by Government of Jamaica (GoJ) debt: Treasury Bills, Local Registered Stock, Debentures, US dollar Indexed Bonds, and US dollar Bonds. - BoJ’s e-Gate electronic front-end system gives 14 Primary Dealers and 6 commercial banks direct access to primary issues. - Trading takes place OTC; securities dealers may use CIFTS or checks to settle trades; MOF as registrar administers transfer of legal title. - Jamaica Stock Exchange (JSE) modernized operations; Jamaica Central Securities Depository (JCSD) established January 1999 as a wholly owned subsidiary of the JSE. - JCSD and broker dealers operate accounts at the BoJ and transfer funds through CIFTS for equity trade settlement. - Trading system SUNRISE is linked to the JCSD’s system; trades are executed through book entry transfers with securities blocked in seller’s account before trade and transfer of title when payment received. - In 2004, the monthly value of stocks traded was J$2.41 billion. - JCSD proposes to expand custody, trading and settlement of fixed income securities aiming to issue new GoJ and BoJ securities directly into the depository and achieve delivery versus payment (DvP) without moving physical certificates. - Reform program (started February 2005) focusing on: - (1) Implementation of a real time gross settlement (RTGS) system to replace CIFTS and linking a central securities depository to RTGS to achieve DvP. - (2) Establishment of a National Payments Council with representatives from major stakeholders and BoJ in a leadership role. - (3) Development of legislation and an appropriate legal framework for payment systems. - (4) Development of the payment system oversight function in the central bank. ### Main findings and recommended improvements for payment systems - CIFTS and ACH are considered systemically important and do not observe many Core Principles. - Several redesign and enhancement needs identified: - Proactive measures to reduce systemic importance of the check clearinghouse. - Assessment of legal risk. - Implementation of effective risk management measures to reduce settlement risks currently borne by the central bank. - Extension of operating hours. - Improvement of overall efficiency. - Effective interconnection with other systems, particularly the government securities settlement system. - Better management of operational risks with tight physical and operational security measures. - Business continuity and resilience arrangements, including a secondary site located in a distant location. - Routines for channeling government payments early in the operating day. - More effective governance arrangements. - BoJ observations and actions: - BoJ does not fully observe many responsibilities in applying the CPSIPS and needs to establish its oversight function over the payments system as a whole and have the ability to exercise that function effectively. - To enhance cooperation, a formal cooperative body led by BoJ, the National Payment System Council, was created in August 2005. *Source: IMF staff report content from _cr06156 - 82.* ### 96. Important efforts to integrate the government securities infrastructure with the large ### Important efforts to integrate the government securities infrastructure with the large ### Integration with the large value system and securities settlement - "Important efforts to integrate the government securities infrastructure with the large value system should be put in place soon, to guarantee both the smooth functioning of the payments system and the creation of a more active market for government papers." - Current arrangements need enhancement to allow securities market transactions to be settled on a safe and efficient basis (i.e. through true delivery versus payment, DvP). - The BoJ should "carefully evaluate the impact of all decisions related to securities markets (in particular the design of the new CSD for fixed-income securities) on the overall safety of the national payments system." (paragraph 96) - The BoJ’s reform program "will address many of the weaknesses in the payments system" and authorities are "encouraged to make early implementation of the program a priority." (paragraph 97) ### Key reform components highlighted - Legal and regulatory framework reform, including development of a Payment Systems Act and provisions in Law for the oversight role of the central bank. - Modernization and integration of the payment systems, including replacement of CIFTS with a LVTS and the modernization/integration of the CSD. - Establishment of the oversight function for payments and securities settlement systems. (paragraph 98) ### Observance of CPSS Core Principles — recommended actions (selected highlights) - CP I (Legal foundation) - "The highest priority should be given to the legal reform project." - A comprehensive legal framework is being established as part of the overall payment systems reforms, including a Payment Systems Act and replacement of CIFTS with a LVTS intended to have prescribed legal underpinnings. - CPs II–III (Understanding and management of risks) - BoJ should define rules and operating procedures covering management of settlement risk and modify the implicit end-of-day guarantee to reduce BoJ risk exposures. - Introduce RTGS to eliminate credit risk for the central bank and other participants; pursue this "as a matter of urgency." - For CIFTS specifically: - Provide participants with real-time information on operating account balances. - RTGS redesign should include liquidity management tools: queuing mechanisms possibly with optimization procedures; efficient operating hours and interconnections (particularly with securities settlement systems); routines for channeling government payments early in the operating day; provision of intraday liquidity through intraday repos with application of haircuts. - For ACH: - Introduce risk management procedures such as guarantee funds and/or participant agreements (e.g., loss-sharing agreements) monitored over time depending on systemic importance. - CPs IV–VI (Settlement) - "The central bank should eliminate the delay in posting the CIFTS settlement operations on participants’ accounts in order to ensure that 'settlement finality' also occurs in the accounting system procedures." - For ACH some items are settled on T+1; recommendation is to ensure the check clearinghouse loses its status as SIPS rather than reduce the cycle to T+0. - Legal finality issues in case of participant bankruptcy should be addressed within legal reform. - CP VII (Security, operational reliability, contingency) - Implement a back-up site, develop comprehensive Business Continuity Plans for the large value system, and conduct ongoing tests ahead of RTGS launch. - Implement an adequate overall security policy for RTGS with documented objectives, procedures, standards for protection of data communication infrastructure, and proactive operational risk identification. - JCBA (for check clearinghouse) should implement similar backup and BCP measures under BoJ supervision. - CP VIII (Efficiency and practicality) - BoJ should consult CIFTS participants on changes to enhance safety and efficiency. - Formulate pricing policies to rearrange transactions efficiently and securely among systems and instruments, in particular by removing large value checks from the check clearinghouse. - RTGS implementation and phase 2 of the ACH project will create conditions for enhanced efficiency; banks and BoJ encouraged to reduce use of checks in Jamaica. - CP IX (Criteria for participation) - BoJ should provide transparent participation criteria and set eligibility standards to ensure financial and technical reliability. - Objective and transparent access criteria to all SIPS should be determined by the BoJ and ratified by the National Payments Council. - CP X (Governance) - BoJ should establish effective and accountable organizational and governance arrangements consistent with the Core Principles. - Create a formal users’ group urgently to address system needs from participants’ perspective. - Develop clear guidelines on triggers, reporting, and monitoring requirements in event of a bank or systemic failure. - Form a formal interdepartmental committee, chaired by a Deputy Governor, to address payments system issues affecting multiple departments. - For the check clearinghouse, either reduce its systemic importance drastically or seek full compliance with the Core Principles. - Use the National Payment System Council, under BoJ leadership, to coordinate discussions among stakeholders on system design and improvements. ### Central bank responsibilities in applying the CPs (Responsibilities A–D) - Establish the BoJ’s oversight function on the payments system as a whole in Jamaica. - Implement appropriate primary and secondary legislation (bylaws, circulars, etc.) "as a matter of urgency" to strengthen the legal framework and ensure secure payment mechanisms that contribute to integrity, efficiency and safety of financial markets and monetary policy operation. - Publicly disclose implementation strategies for achieving oversight objectives across significant payment system matters. - Consider broadening policy objectives beyond efficiency and reliability to include promotion of competition in payment services and protection of consumer interests. - Prepare a Policy Statement including objectives, policy stance and instruments of the oversight function and discuss it with stakeholders. - Take actions to ensure large value payment system achieves full observance of the CPs "as a matter of urgency." - Work with ACH operators to ensure full compliance with core principles and give this high priority. - To effectively carry out oversight, BoJ should: - (1) establish appropriate organizational arrangements and staffing; - (2) ensure adequate participant cooperation; - (3) verify systems satisfy user needs and risk/efficiency requirements through interventions at development and operational phases; - (4) define and implement actions for participant noncompliance (e.g., predetermined penalties and sanctions); - (5) collect and distribute relevant statistical information demonstrating system use and satisfaction of end-user needs. - Disclose information and public policy statements widely (for example in a payment system chapter of the annual report or other appropriate publication). - Ensure cooperation among regulators (BoJ, FSC, Ministry of Finance, and others) to evaluate, identify, and implement procedural changes to address weaknesses and inconsistencies; consider joint task forces and memoranda of understanding. - Continue BoJ involvement in international fora on payment systems. ### Authorities’ response - "The deficiencies have already been identified and the recommendations are being pursued by the central bank." - The BoJ considers it "critical to embark on a process of comprehensive reform of the payment and settlement systems" encompassing: - (a) the legal and regulatory framework, - (b) the modernization and integration of the payment systems, including the CSD, - (c) the establishment of the oversight function for payments and securities settlement systems. (paragraph 98) - Authorities "generally agreed with the assessment" on monetary transparency and noted draft legislation before Parliament to facilitate compliance with identified principles. (paragraphs 109–110) ### Transparency of Monetary Policy — summary of findings (paragraphs 99–108) - Assessment based on: (i) review of laws, regulations and policies; (ii) analysis of BoJ documentation and publications; (iii) discussions with BoJ staff and selected commercial banks. - "The BoJ has legal responsibility for the conduct of monetary policy." The BoJ Act (BoJA) specifies parameters, mandate, objectives and responsibilities. - While the BoJ has "achieved a high degree of transparency in the actual conduct of monetary policy," legal provisions in the BoJA "have lagged behind the practices." - Draft legislation presented to Parliament is intended to align legal provisions with actual practices. (paragraphs 99–102) - Monetary policy formulation and implementation: - Well established internal Economic Policy Committee and Operating Targets Committee meeting weekly and daily, respectively. - Information on composition, structure and functions of policy bodies disclosed on BoJ website; minutes are not disclosed. - Framework, instruments and targets are discussed in multiple publications on the website; rules/procedures for transactions with counterparties are stipulated in the Act. - Governor holds regular press meetings and appears before cabinet; changes in policy instruments are communicated via press releases and interviews; progress discussed in the Quarterly Monetary Policy Report (QMPR). - Public availability: - Extensive publications on the website: monthly economic reviews, QMPR, annual reports, research papers and statistical publications. - Jamaica participates in IMF’s GDDS and is reviewing plans for SDDS participation. - BoJ balance sheet is published on the web-site on a fortnightly basis. - Accountability and integrity: - BoJ must transmit to the Minister of Finance, within three months of the close of the financial year, a report on BoJ operations; these reports are presented to the House of Parliament by the Minister. - Although not legally required, the Governor appears before Cabinet as needed. - BoJ has internal audit department, external auditors, and an Audit Sub-Committee chaired by a nonexecutive director. - Policy manual and Code of conduct exist internally; personal conduct standards governed by the corruption prevention act which is public. *Source: Extracted text from the IMF staff report annex on payment systems reform and monetary policy and transparency assessments.* ### 111. The assessment was based on the MFP Transparency Code and its Supporting ### _cr06156 - 111. The assessment was based on the MFP Transparency Code and its Supporting ### Main findings (Bank of Jamaica—BoJ) - Assessment basis: MFP Transparency Code and its Supporting Document. - Cooperation: Jamaican authorities cooperated fully and provided all necessary information and clarifications. - Transparency practices: - BoJ practices with respect to bank supervision are highly transparent. - Practically all relevant laws, regulations, circulars, and standards of best practice for the banking industry are available on the BoJ’s website. - BoJ disseminates supervisory work via quarterly press briefings, website and other publications and articles, quarterly meetings with the Bankers Association, quarterly meetings with supervised institutions, annual report, and regularly scheduled meetings with supervised entities. - The Governor holds regular meetings with the press and appears before the cabinet to explain key decisions; Governor obliged to brief Parliamentarians whenever needed on BoJ responsibilities. - BoJ obliged to disclose regularly details of activities, including departmental projects, contracts, audited financial statements, and detailed commentaries on financial sector issues (financial system, supervision of all deposit-taking financial institutions, and financial legislation). - Overall compliance: Jamaica is in compliance with most internationally accepted practices covered by this report, though room exists to continue improving transparency in banking supervision. ### Clarity of roles, responsibilities, and objectives (BoJ) - Legal foundation: - Broad objectives of the BoJ are clearly defined in the BoJA and other banking laws: Banking Act, Financial Institutions Act, Building Societies Act. - Legal limitation identified: - A problem: lack of legal powers of the BoJ to issue legally binding regulations for the banking industry. - Current practice: BoJ issues "Standards of Best Practices" which are not legally binding but are observed in practice by regulated entities. - Remedy in progress: Amendments to the law are being proposed to empower the BoJ to issue and amend all prudential regulations for the banking industry. - Coordination: - Financial Regulatory Council (FRC) formed December 2001 under the Chairmanship of the Governor of the BoJ. - FRC mandate: develop policies and strategies to facilitate greater coordination, reduce regulatory arbitrage, and increase information sharing among supervisory agencies. - FRC meeting frequency: periodically, at least once per quarter; in several instances monthly; discusses regulatory issues relating to BoJ and FSC regulated institutions. ### Open process for formulating and reporting of banking supervisory policies - Consultation practice: - BoJ consults with supervised entities on proposed changes to financial regulation structure. - Public submissions are taken into account, but there is no defined appropriate period for public consultations; consultations occur on an ad-hoc basis. - For substantive changes or constitutional implications requiring amendments to law, the Minister of Finance and Planning may submit matters to a joint select committee of Parliament, which accepts public submissions. ### Public availability of information on banking supervision - Public materials: - All laws applicable to financial institutions available on the BoJ’s website. - Website contains guidelines and standards of best practice; BoJ provides training on finalized laws/guidelines. - Publications: Annual Report (comprehensive review of economic developments and banking sector performance and regulatory changes), Statistical Digest, and various aggregated-data reports on banking institutions. - Institutional support: fully staffed Public Relations Department and Protocol and Media Relations Unit. - Media engagement: - Press conferences organized when necessary; statements and press releases posted immediately on website. - BoJ officials attend Parliament meetings when required to explain supervisory decisions/actions. ### Accountability and assurances of integrity (BoJ) - Financial reporting: - Section 44 of the BoJA: audited financial statements submitted to the Minister within three months of the close of the financial year and published immediately thereafter. - Financial statements form part of the BoJ Annual Report; published at Government Printers in the Gazette and posted on the BoJ’s website. - Audited accounts prepared by an independent auditor. - Section 43 of the BoJA: auditors appointed annually by the Board with approval of the Minister of Finance and Planning. - Jamaica adopted IFRS and auditing standards in 2002; BoJ complies with these international standards. - Integrity and conduct: - Governor and Deputy Governors may not engage in other employment without approval of the Minister and the Board. - Banking Inspection Department staff subject to integrity standards: not permitted to invest in shares of licensees regulated by the BoJ and prohibited from other employment without Minister’s permission. - Staff Rules and Orders and Human Resources Manual provide for disciplinary action for noncompliance. - Policy manual on intranet discusses Code of Conduct but is not publicly disclosed. - Corruption (prevention) Act (public domain) requires staff whose emoluments exceed a prescribed threshold to file annual declaration of assets, liabilities, and income to a public commission for the prevention of corruption. ### Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code Practices—Banking Supervision (excerpted items) - Reference 5.1: - Issue: lack of legal powers of BoJ to issue legally binding regulations for the banking industry, creating uncertainty about the legal force of BoJ’s standards of best practices. - Recommended action: empower the BoJ to issue and amend all prudential regulations for the bank industry, as it considers necessary. - Reference 5.3: - Recommended action: BoJ should formally establish its payment system oversight function; implement appropriate secondary legislation (bylaws, circulars, etc.) to complete legal framework and ensure secure foundation of payment mechanisms; publicly disclose implementation strategies relating to significant payment system matters. - Reference 5.4: - Recommended action: FSC and BoJ should urgently define and disclose their relations to effectively oversee SROs in securities settlement. - Additional recommended actions: - BoJ should require the League of Credit Unions of Jamaica to disclose more data and information to the general public through its website. - BoJ and FSC should consider issuing formal regulations for self regulatory organizations, especially in securities settlement systems; consider extending SRO status to the new Central Securities Depository (CSD), provided it is regulated and capitalized appropriately. - Reference 6.1.4: - Recommended action: The license fee structure for cambios should be publicly disclosed. - Reference 6.4: - Recommended action: The obligation of BoJ to consult on regulatory changes with affected parties should be reflected in law; situations where consultation is not appropriate should also be reflected in law. ### Authorities’ response (BoJ) - BoJ generally agreed with the report. - BoJ noted it is working on a comprehensive regime for the Payment and Settlements Systems, including upgrading/promulgating relevant laws, which when completed will see compliance in this area. --- ### Main findings (Jamaica Deposit Insurance Corporation—JDIC) - Assessment basis: MFP Transparency Code and its Supporting Document; assessors José de Luna Martinez, Robert Liu, Gyeongsoo Bae (World Bank). - Cooperation: Jamaican authorities cooperated fully and provided all necessary information and clarifications. - Transparency practices: - JDIC practices with respect to financial policies are highly transparent. - Practically all relevant laws, regulations, and JDIC’s broad objectives are available on the JDIC’s website and the annual report. - Dissemination: media advertisements, brochures, public fora for schools/community organizations/business and trade associations; CEO and senior officials frequently make presentations and answer public questions. - JDIC obliged to disclose regular details of activities, including policy objectives and audited financial statements. - Overall compliance: Jamaica is in compliance with most internationally accepted practices covered by this report, though room exists for continued improvement. ### Clarity of roles, responsibilities, and objectives (JDIC) - Legal framework: - Broad objectives and institutional framework clearly defined in the Deposit Insurance Act (DIA) and publicly disclosed. - JDIC main objectives: establish and manage a scheme for insurance of deposits or parts of deposits against loss; DIA prescribes a limit for insurance per depositor. - DIA prescribes establishment of a Deposit Insurance Fund to pay depositors where a financial institution fails due to intervention by the Minister of Finance and Planning or the BoJ. - Policy and general administration of JDIC and management of Deposit Insurance Fund are vested in a seven-member Board of Directors. - Disclosure of objectives: annual report and JDIC website. - Coordination: - Relationship between JDIC, BoJ, and Ministry of Finance and Planning specified in the DIA. - JDIC is a member of the Financial Regulatory Council (FRC). ### Open process for formulating and reporting of deposit insurance policies (JDIC) - Legal compliance: - Activities conducted in accordance with the DIA; JDIC discloses information on activities consistently. - Premium structure detailed in the DIA; premium rate stipulated by regulations. - Information sharing: - Arrangements for information sharing between BoJ and JDIC documented in the DIA. - No arrangements exist for sharing information between JDIC and international agencies. - Consultation: - JDIC policy is to consult with insured financial institutions before introducing substantive technical regulations, via bankers' association or relevant associations; external auditors of relevant financial institutions should be involved. ### Public availability of information on deposit insurance (JDIC) - Communication channels: - Information communicated consistently via television and radio interviews, media advertisements, public fora, annual report. - Annual report is primary publication for disclosure of JDIC activities. - Financial disclosure: - Aggregate premium received from insured financial institutions disclosed in the annual report and audited financial statement; size of Deposit Insurance Fund disclosed. - Public engagement: - CEO and senior officials frequently available for presentations and public questions. - JDIC officials can be required to appear before relevant Parliamentary Committees (e.g., Public Accounts Committee) and before the Cabinet. ### Accountability and assurances of integrity (JDIC) - Financial and governance reporting: - Audited financial statements published annually in hard copy or on the website. - Annual Report covers internal governance procedures, Board composition, and JDIC Board Committees. - Internal audit: - JDIC has no permanent internal audit function; internal audit is outsourced because of small operational size. - Disclosure of these expenses and revenues is made through the Annual Report. - Legal and personnel frameworks: - Board and employees bound by Public Bodies Management and Accountability Act (duties of directors, requirement for an Audit Committee, periodic reporting to Minister, limitations on purchasing shares and borrowing). - Human Resource Manual sets disciplinary processes for breaches of ethical standards; no explicit public disclosure but accessible under the Access to Information Act. ### Recommended Action Plan to Improve Observance of IMF’s MFP Transparency Code Practices—JDIC (excerpted items) - Practice VI.6.1.5: - Recommendation: JDIC may consider establishing bilateral or multilateral information sharing arrangements with foreign financial agencies in addition to membership with International Association of Deposit Insurers (IADI) and disclosing them to the public. - Practice VIII.8.2.2: - Recommendation: JDIC should have permanent internal audit function in place within its organization. - Practice VIII.8.4: - Recommendation: Unlimited disclosure of the Human Resource Manual can help assure the public of JDIC integrity. ### Authorities’ response (JDIC) - On practice 6.1.5: - JDIC noted formal membership with IADI and that collaboration on international best practices occurs in this forum; disclosed in the Annual Report and press as necessary. - JDIC did not view additional formal arrangements with international agencies and attendant disclosures as imperative within current JDIC mandate and domestic financial safety net role. - On practice 8.2.2: - JDIC recognized the efficacy of placing internal audit within its organizational structure due to sensitivity of information and perceived/real conflict-of-interest risks with outsourced providers. - Current outsourced arrangement seen as short-term to help determine best practices; near-term objective is to establish a framework to coordinate corporate risk management and encompass internal audit within the small organizational structure. - On practice 8.4: - JDIC interpretation of the Access to Information Act allows unlimited disclosure of the Human Resource Manual and other HR policies; human resource policies are incorporated into employment contracts and prohibit exploitation of conflicts of interest. - Corporate officers comply with the Corruption Prevention Act; duties imposed on corporate directors under the Public Bodies Management and Accountability Act address fiduciary duties, standard of care, and conflict of interest. *Content based on the assessment text provided in the source document.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06156.pdf_