November 30, 2018

On November 5, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the IMF’s latest Financial System Stability Assessment (FSSA) of Jamaica. [1]

The financial sector has significantly expanded since the last FSSA in 2006. Financial sector assets now stand at about 180 percent of GDP. The financial sector is dominated by large and complex financial conglomerates that span many activities, including banking, insurance, pension fund management, and collective investment fund management.

Since the 2006 FSSA, the authorities have considerably strengthened macroeconomic policies, including under IMF-supported programs. Decades of high fiscal deficits, combined with the financial sector crisis of the late 1990s, had led to rapid government debt accumulation and financial dollarization. The high public borrowing needs, in turn, had crowded out private credit and stifled economic growth. Fiscal discipline has been central to the reduction in the public debt since 2013.

With the stock of debt declining (to 60 percent of GDP by FY2025/26 under the Fiscal Responsibility Law), the financial sector is confronted with new challenges, as it seeks to play a major role as an engine of economic growth. One significant challenge is the search for non-government investment opportunities. Even though commercial banks appear to be profitable and well capitalized, the loan-to-deposit remains low.

The main risks to the financial system arise from exposure to natural disasters (including climate-related disasters), tightening global financial conditions, and economic reform fatigue. Delays in the economic reform agenda could erode confidence and impact financial institutions’ balance sheets. A tightening of global financial conditions could reduce foreign inflows, which would dampen economic growth (through consumption and investment) and lead to rising nonperforming loans. A natural disaster could cause protracted negative growth and large losses for banks and other financial institutions.

The FSAP stress tests suggest broad resilience to solvency shocks; however, highly interconnected financial conglomerates make the financial sector particularly vulnerable to contagion. Vulnerabilities arise from concentrated ownership, related party and large group exposures, and off-balance sheet positions. Also, several conglomerates operate in multiple jurisdictions with different oversight practices. Sizable public debt holdings by all segments of the groups and across financial institutions mean that the stability of the financial system is closely bound to discipline in public finance, sustainability of the macroeconomic outlook, and debt dynamics.

Executive Board Assessment [2]

Executive Directors concurred with the main findings and recommendations of the Financial System Stability Assessment (FSSA). They commended the authorities for the progress made in the implementation of the reform program since the 2006 FSSA.

Directors noted that the financial sector is sizeable and complex, and dominated by large intra- and inter-connected financial conglomerate groups with cross-border linkages. They agreed that the financial sector overall shows broad resilience, and the main risks arise from exposure to natural disasters, the tightening of global financial conditions, and a possible reversal of fiscal discipline driven by reform fatigue. Directors cautioned that, given the increased interconnectedness of the financial sector and associated risks of contagion, priority should be given to intensified oversight and consolidated risk-based supervision, especially of systemically important groups with systemically important connections.

Directors underscored the importance of improved data sharing, cooperation, and coordination with regional supervisors, in particular for those affecting systemically important groups. They emphasized the importance of an effective oversight framework together with heightened commitment to transparency and accountability. Work reinforcing the resilience of securities dealers, the deepening of capital markets and broadening of instruments to manage credit, liquidity and market risks should continue.

Directors encouraged efforts to expand skilled supervisory resources, highlighting that all supervisory agencies need to expand their capacity to fulfill their current mandates and new demands. They noted that data collection also needs to be strengthened to further facilitate the monitoring of risks of a complex group-based financial system, and to conduct sound financial stability analyses and risk assessments.

Directors welcomed progress on the crisis preparedness and resolution management frameworks, but highlighted that the reforms are incomplete. They underscored the need for further work to clarify several key aspects and properly sequence the work on recovery planning, resolution plans, and resolvability assessments. Directors agreed that system-wide preparation for a systemic crisis is an area that requires the authorities’ attention.

Directors welcomed efforts to maintain correspondent banking relationships in Jamaica, including through ongoing strengthening of the AML/CFT framework.