KINGSTON — The Bank of Jamaica (BOJ) has released a discussion paper on institutional arrangements for safeguarding financial stability, which outlines proposed amendments to the BOJ Act to vest the bank with overall responsibility for financial stability, through a Financial Stability Committee.
The paper which was posted on the BOJ website at the beginning of the month (November 2011) reflects amendments and comments received from the Attorney General's Chambers, Ministry of Finance, the Financial Services Commission, the Jamaica Deposit Insurance Corporation, the Jamaica Securities Dealers Association as well as individual financial institutions.
However, that being done, the BOJ has extended the discourse to other interested parties, through publication of the proposed amendments on its website, www.boj.org.jm, with an invitation for comments.
The major policy shift would arm the BOJ with institutional responsibility for financial stability in Jamaica. It is an element of the set of reforms that underpin the Stand-By Arrangement with the International Monetary Fund (IMF), while seeking to provide appropriate safeguards, going forward.
According to the paper, "one of the important lessons emanating from the global financial crisis, is that institutional responsibility for the stability of the financial system, as a whole, needs to be clearly defined, codified and assigned."
The discussion paper noted that full responsibility for financial stability is “unclear where there are multiple supervisory agencies, with none having the authority or mandate to oversee the links among different kinds of activities and to recognize and address systemic risks."
The document stated that, in order to address this deficiency, the route taken by most jurisdictions has been to locate this function within their central banks.
"Adding financial stability oversight to the role of central banks has been a logical choice in light of their existing supervisory role over banking institutions, in most cases, their core mandate to influence conditions in money and credit markets and their essential function as store of liquidity in the economy,” the BOJ document stated.
The paper argued that the main requirement to effect this change is the definition of a set of amendments to the BOJ Act, to facilitate a more macro-prudential approach to oversight of the financial system as a whole.
"This would complement the BOJ’s traditional direct prudential approach to supervision of the deposit-taking system and expand both the focus and scope of the consultative process currently conducted through the Financial Regulatory Council,” The Paper added.
The Central Bank reflected that many other jurisdictions around the globe are concurrently pursuing a similar process of financial architecture reform, to formalize the financial stability role and that, based on Jamaica’s “own experience and regulatory architecture as well as other considerations”, amendments to the BOJ Act have been proposed to meet the objective of assigning formal responsibility to the BOJ and ensuring its ability to discharge the function.
The proposed amendments, which will “mandate the financial stability objective of the BOJ”, includes macro-prudential oversight of financial institutions, in addition to the current mandate for the direct prudential supervision of individual institutions and sub-sectors within the deposit-taking system.
In this regard, financial institutions would include those that currently fall under the regulatory oversight of the BOJ or Financial Services Commission, including deposit-taking institutions, securities dealers, insurance companies, cooperatives, collective investment schemes and pension funds. Provisions would also be necessary to allow for the BOJ to designate any other type of financial institution to be subject to this type of oversight.
Importantly, the BOJ Act would be amended to establish the Financial Stability Committee, which would be charged with the responsibility for coordinating the activities “pursuant to the objective of financial system stability."
The tasks of the Committee to be set out in the BOJ Act and would include: macro-prudential analysis; oversight of the design and conduct of periodic stress test scenarios in regard to plausible systemic threats to the stability of the financial system; periodic consultation with representatives from financial sector stakeholders in order to seek their views and obtain their input in assisting the Committee’s understanding of developments that may impact on financial stability; determination of an institution’s risk to financial stability;
Determination of parameters which trigger action in respect of a financial institution as required under the BOJ’s financial stability mandate; co-ordination of crisis prevention, crisis management and crisis resolution mechanisms and procedures; international cooperation in support of financial stability objectives; preparation and provision of periodic and exceptional reports to the Minister of Finance assessing the performance of the financial system; and any other activity as determined by the Committee in support of its financial stability objective.
The composition of the Committee, which is expected to include non-BOJ staff, will be specified by regulations made under the BOJ Act. The law should also contain appropriate provisions to ensure that all members of the Committee are subject to confidentiality requirements relating to the work of the Committee, similar to those that bind supervisory staff of BOJ and should also be indemnified with respect to their activities as Committee members.
An important proposed amendment to the BOJ Act is granting the Central Bank discretionary powers to provide liquidity, which would“allow expressly for the provision of emergency liquidity assistance to financial institutions in the event of a threat to systemic stability and in accordance with criteria of systemic importance, solvency and collateral sufficiency."
Interested parties wishing to contribute to the discussion paper should send comments to the Governor, Bank of Jamaica, Nethersole Place, Kingston; Fax: 876-967-4265; Email: firstname.lastname@example.org. Comments should be received by December 31.
By Allan Brooks, JIS Senior Reporter