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TECHNICAL ASSISTANCE REPORT

JAMAICA Systemic Risk Monitoring

OCTOBER 2024

Prepared By

Petr Jakubik

MEMBERS

Anguilla, Antigua and Barbuda, Aruba, The Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Curaçao, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Maarten, St. Vincent and the Grenadines, Suriname, Trinidad and Tobago, Turks and Caicos Islands

PARTNERS

Canada, United Kingdom, European Union, Netherlands, Mexico, USAID, Caribbean Development Bank, Eastern Caribbean Central Bank

DISCLAIMER

The contents of this document constitute technical advice provided by the staff of the International Monetary Fund to the Bank of Jamaica (the “CD recipient”) in response to their request for technical assistance. This document (in whole or in part) or summaries thereof may be disclosed by the IMF to the IMF Executive Director for Jamaica, to other IMF Executive Directors and members of their staff, as well as to other agencies or instrumentalities of the CD recipient, and upon their request, to World Bank staff, and other technical assistance providers and donors with legitimate interest including members of the Steering Committee of CARTAC, unless the CD recipient specifically objects to such disclosure (see Operational Guidelines for the Dissemination of Technical Assistance Information). Publication or Disclosure of this report (in whole or in part) to parties outside the IMF other than agencies or instrumentalities of the CD recipient, World Bank staff, other technical assistance providers and donors with legitimate interest including members of the Steering Committee of CARTAC shall require the explicit consent of the CD recipient and the IMF’s Monetary and Capital Market department.

MEMBERS

PARTNERS

Executive Summary

The mission aimed to build up capacity to enhance financial stability analyses and assessments in the Bank of Jamaica (BOJ). It reviewed the latest available Financial Stability Report (FSR) and the analytical toolkit. In particular, the mission helped the BOJ to estimate sectoral credit risk models to enhance the forward-looking element of its financial stability assessment.

The estimated credit risk models will allow the BOJ to project the impact of different macroeconomic scenarios on banks’ balance sheets. The mission explained the Bayesian Model Averaging (BMA) approach as the suitable methodology for short time series of sectoral non-performing loans. It provided R script with initial estimates for five sectoral credit risk models – mortgages to households, personal loans, corporate loans for tourism, corporate loans for construction, and other corporate loans. The estimated models allow the BOJ to make NPL ratio projections by employing the macroeconomic forecasting framework that is available to the BOJ. Moreover, the mission discussed how to measure financial stability, credit risk, and stress testing, insurance & pension economic balance sheets and corresponding financial stability risks, basic elements of climate risk, interconnectedness, and contagion risk. Special attention was devoted to the macroprudential policy as the BOJ is in the process of setting up macroprudential tools, particularly in the near term, the systemic risk buffer and, in the medium term, borrower-based tools. In this context, the mission explained methodological approaches calibrating loan-to-value ratio (LTV) and countercyclical capital buffer (CCyB).

The mission provided several recommendations to the BOJ. They covered the financial stability report (FSR), methodological work on the BOJ financial stability analytical toolkit, internal and external communication, data sources and their management. Those outcomes reflect on both the structure of the organization in the BOJ considering the financial stability agenda as well as the composition of the financial system in Jamaica that is dominated by commercial banks (40% of the total financial system assets [TFA] in 2023) and securities companies (15% of TFA in 2023). Pension funds (11% of TFA in 2023) and insurance companies (8% of TFA in 2023) assets are lower but still significant.

Financial stability should be seen as equally important as monetary policy and supervision. This needs to be reflected in the BOJ’s external communication and internal processes. For the FSR, a project group/coordinator should be established. A detailed production plan that provides a sufficient time frame for internal discussion and analytical work should be prepared. It needs to be complemented by a detailed external communication strategy, including actively promoting financial stability reports via press conferences, social media, seminars with market participants, interviews, etc. The foreword of the report could help communicate the Governor’s key messages. Moreover, the background figures/statistics published in the FSR could be provided together with the report on the BOJ website, and the date of the publication should be stated in the report. The report should be streamlined, providing fewer nominal figures to follow the central risk story and using appropriate language understandable not only to supervisors or financial stability experts but also to the public. All additional information should be moved to annexes, including a statistical annex. The current boxes resemble thematic/special feature articles that should be moved after the main part of the FSR. The key arguments/messages from the boxes must be integrated into the main text/body of the FSR.

Financial stability analyses spelled out in the FSR, and the corresponding toolkit should be strengthened to be more forward-looking. Credit risk plays a key role in the Jamaican financial system. Therefore, its analysis should be substantially enhanced. In this respect, the newly established models and their initial estimates could help, but other indicators to complement NPL ratios, such as the probability of default, should also be explored. Moreover, as a crucial risk for the insurance and pension sector, market risk should be enhanced based on the economic balance sheets of insurance companies and pension funds to capture underlying risks for the sectors. Besides traditional risks, BOJ should also regularly report on new emerging risks in its FSR, especially climate and cyber risks, as their surveillance should fall within the scope of the Financial Stability Department. In addition, econometric modeling should be employed to project other key financial institutions’ balance sheet items under different adverse scenarios. Given the amount of existing analytical work employed in the FSR, it could be considered to publish a comprehensive methodological document covering the whole financial stability toolkit to have one reference for FSR readers to understand better the results reported.

Financial stability indicators need to be communicated together with the key aspects of the existing regulatory framework. This is the case for all segments of the financial system, not only banks and securities companies but also insurance companies and pension funds, where especially liabilities might not be reported as market-consistent values, therefore not capturing underlining risks. This needs to be reflected in the FSR to focus on identifying key risk drivers and their discussion rather than simply describing the reported indicators. In this context, non-bank analysis should be improved considering the upcoming IFRS17 reporting for the insurance sector.

In the context of twin-peaks regulation, the non-bank analysis should be improved. For the insurance sector, the role of reinsurance needs to be considered to understand the potential implications of any instability in the sector. For the pension sector, defined benefits (DB) and defined contribution (DC) schemes need to be distinguished when making financial stability assessments.

The BOJ should organize all data in one data warehouse and fully utilize them for analytical purposes to support the financial stability analytical toolkit. A copy of the database – mirroring database – should be set up for analytical purposes. The statistical mirroring database needs to support analytical tools to process large data (e.g., R), as data should be processed directly at the server. Any chosen data management solution needs to provide full flexibility to conduct any complex analysis that might not be possible to foresee when setting up the BOJ data management system. Moreover, the BOJ could consider setting up a centralized credit register at the bank as a rich data source to be utilized for analytical purposes to calculate important financial stability indicators such as default rates or average LGDs. In the meantime, any existing data gaps could be covered by different surveys.

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Table of Contents

  • Executive Summary

  • Acronyms and Abbreviations

  • Preface

  • I. Introduction

  • II. Key Elements of Financial Stability Reports

  • III. Financial Stability Analyses and Assessments and the Corresponding Toolkit

  • BOJ Stress Testing Framework

  • Potential Improvements and Recommendations

  • IV. Organizational and Operational Setup of the Financial Stability Work

  • IV. Data Sources and their Management

  • V. Conclusions

Acronyms and Abbreviations

AFSI

Aggregate Financial Stability Index

AST

Aggregate Stress Test

BOJ

Bank of Jamaica

BSI

Bank Stability Index

CARTAC

Caribbean Regional Technical Assistance Centre

CAR

Capital Adequacy Ratio

CCA

Contingent Claims Approach

CCyB

Countercyclical Capital Buffer

CISS

Composite Indicator of Systemic Stress

CoVaR

Conditional Value-at Risk

DB

Defined contribution

DC

Defined benefit

EWS

Early Warning System

FDI

Financial Development Index

FSC

Financial Services Commission

FSI

Financial Soundness Index

FSR

Financial Stability Report

FVI

Financial Vulnerability Index

GDP

Gross Domestic Product

HP

Hodrick-Prescott

IFRS

International Financial Reporting Standards

IMF

International Monetary Fund

JSE

Jamaica Stock Exchange

LGD

Loss given default

LTV

Loan-to-value ratio

MaFi

Macro-financial index

MiPi

Micro-prudential index

NPL

Non-performing loan

PD

Probability of default

PL

Performing loan

RAI

Risk Appetite Index

VAR

Value at risk

WECI

World Economic Climate Index

Preface

At the request of the Bank of Jamaica (BOJ), a CARTAC mission was organized in person from October 19 to October 28, 2023, to assist the authorities in enhancing its systemic risk monitoring.

The mission was conducted by Mr. Petr Jakubik. It met with the BOJ Deputy Governor, Financial Stability and Research and Economic Programming, Mr. Robert Stennett, BOJ Head of the Financial Stability Department, Ms. Sherene Bailey, BOJ Head of Financial Risk Management Oversight, Ms. Lisa-Kaye Wallace, BOJ Head of Macroprudential Surveillance & Policy Ms. Andrene Senior, and the staff of the Financial Stability Department. The mission wishes to thank all BOJ staff for their cooperation and productive discussions.

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Near term: < 12 months; Medium term: 12 to 24 months.

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Jamaica: Technical Assistance Report-Systemic Risk Monitoring
Author:
International Monetary Fund. Monetary and Capital Markets Department