Financial Regulations to Target Capital Adequacy


The Financial Services Commission (FSC) and the Bank of Jamaica (BOJ), the main regulators of the financial services sector will shortly address issues of capital adequacy and margin requirements for securities dealers, as recommended by the International Monetary Fund (IMF).
According to Deputy Executive Director of the FSC, George Roper, while the changes to capitalisation and margin requirements cannot be specified at this time, the existing framework is to be reviewed, with technical assistance provided through the IMF.
In an interview with the Jamaica Information Service (JIS) the FSC Executive sought to allay the fears of securities dealers, that the increased regulatory role of the FSC and the BOJ will constitute overregulation of the sector.
With respect to the BOJ, he explained that there was a growing trend for central banks, worldwide, to broaden their mandate in financial surveillance for purposes of monitoring financial system stability, given their role as lenders of last resort.
In the case of the FSC, he noted that the regulators were aware of the issue of overregulation and the need to address it in a coordinated manner.
“The issue of overregulation can be addressed through appropriate coordination and reporting mechanisms, and will involve close collaboration among the FSC, the BOJ and the Ministry of Finance and the Public Service,” he said.
“There are already established processes for formal collaboration, but the operation of the BOJ’s financial stability mandate would require additional operational protocols,” he advised.
With respect to the allusion in the IMF Memorandum of Understanding that some securities dealers are not well capitalised, while others have become overleveraged as a result of lax controls, Mr. Roper explained that the capital adequacy of dealerships had improved in 2009 for the sector as a whole, and was above current regulatory benchmarks.
He added that the IMF’s diagnosis of the financial sector problems are indications of the need for improvement in the FSC’s existing regulatory framework, rather than as a widespread failure on the part of licensees to meet regulatory requirements.
“Currently, the FSC relies on two indicators of capital adequacy for the securities dealers, namely the ratio of capital to total assets and the ratio of ‘tier one’ and ‘tier two’ capital to risk weighted assets. The FSC requires that securities dealers maintain capital sufficient to satisfy certain minimum thresholds. Based on the latest quarterly filings from licensees, as at the end-September 2009, the ratio of capital to total assets for securities firms taken as a whole stood at 9.6 per cent compared to an FSC minimum benchmark of 6 per cent. The ratio of tier one and tier two capital to risk weighted assets stood at 53.8 per cent compared to an FSC minimum benchmark of 10 per cent,” he emphasised.
This outturn compares with ratios of capital to total assets and tier one and tier two capital to risk weighted assets of 8.2 per cent and 39.6 per cent, respectively at the end of December 2008, at the height of the global financial crisis.
Mr. Roper also noted that, at any point in time, capitalization levels would always vary among licensed entities.
“There is an established procedure to resolve issues of inadequate capital, by either requiring shareholders to inject additional capital, or requiring the entity to adjust its balance sheet to reduce the riskiness of its portfolios, according to an agreed timetable. In the event that the solvency of the entity is threatened and additional capital is not forthcoming, there are established powers available to the FSC under its governing statutes to seek an orderly resolution,” he said.
Mr. Roper also advised that the FSC was currently undertaking a review of the relevant legislation for regulating collective investment schemes, with a view to strengthening the overall framework, as well as allowing for appropriate regulatory oversight for different types of collective investment schemes.
With specific reference to the recent re-focus on the mutual funds market, Mr. Roper explained that in the past it had not been possible for locally established mutual funds to be established and marketed in Jamaica, due to certain inconsistencies with the mutual fund regulations, the Companies Act and the taxation regime.
“The Government has now committed to removing these obstacles as part of the structural conditionalities under the Stand-by Arrangement agreed with the IMF. Notwithstanding these problems, current regulations allow for the registration and marketing of overseas-based mutual funds, and several such funds have been actively marketed to investors in Jamaica.”
He also observed that the Government recently lifted the 11-plus year-old moratorium on the registration of new unit trust and unit trust products.
This has opened the way for new locally-based collective investment schemes to be established. This development improves the outlook for more robust financial system stability, as it provides additional avenues for securities dealers to progressively re-align their business models, restructure their balance sheets to reduce their direct exposures to riskier instruments and to provide alternative avenues for the generation of income from fees and commissions.

JIS Social