Financial System Stability Committee Issues Statement On Bank Of Jamaica’s 2020 Financial Stability Report

On the occasion of its meeting on 30 March 2021 and on its review of financial system risks in 2020, the Financial System Stability Committee (“FSSC”) issued the following statement:

“The Financial System Stability Committee (“FSSC”) has reviewed Bank of Jamaica’s (BOJ) 2020 Financial Stability Report (the Report).  The Report assesses developments in the macroeconomic environment, the financial system and the associated systemic risks during calendar year 2020.

The events of the review period were profoundly affected by the COVID-19 pandemic and the measures that were put in place to contain it. Real economic activity for 2020 fell relative to the previous year in both Jamaica and in Jamaica’s main trading partners, which in turn adversely affected asset markets. For Jamaica, the economy contracted by an estimated 10.0 per cent in 2020. The shock affected most sectors of the domestic economy, the most notable being hotels & restaurants, transportation, mining, entertainment, distribution, and communication. The economic down-turn was also evident in the Jamaican labour market where the employed labour force fell by forty-three thousand (43 000), resulting in an increase in the unemployment rate by 2.5 percentage points to 10.7 percent towards the close of the year.

The analysis presented in the Report shows that near-term risks to financial stability are contained. While the significant fall-off in economic activity resulted in reduced demand for credit extended by deposit taking institutions, loan quality has so far not deteriorated dramatically. In addition, the balance sheets of non-deposit taking financial institutions have not reflected significant adverse pressures. These entities continued to demonstrate sufficient solvency and liquidity positions, despite the challenges associated with a sell-off in financial markets over the first half of 2020. In terms of Jamaica’s capital markets, volatility associated with the initial onset of the pandemic moderated in the second half of 2020 and market liquidity remained buoyant.

The containment of the risks to the financial system represented the outcome of prudent fiscal, monetary and regulatory policies. The Government of Jamaica deployed substantial fiscal stimulus at the outset of the crisis which helped to stabilize incomes and deposits in the financial sector. Bank of Jamaica initiated liquidity support, in excess of 12 percent of GDP, which ensured operational continuity in the both the Jamaica dollar and the US dollar financial markets. There was also enhanced cooperation and heightened joint surveillance of the system among the regulators. For their part, banks, with the support of forbearance by the Supervisor, granted loan payment accommodations (or moratoria) to their borrowers who were experiencing financial difficulties in the context of the crisis. They also agreed with the request by the Central Bank to suspend dividend payments to large shareholders for a period, and subsequently not to declare further dividends, which helped them to shore up their liquidity positions and their capital base.

Significant risk still looms over the medium to long term and is elevated relative to previous years. Broad economic recovery depends on the course of the COVID-19 virus. Risks over the medium term are associated with the direct balance sheet exposures of financial entities to household, corporate and public sector debt. The report shows that the decline in real economic activity, the fall in employment and the resultant fall in incomes, are slowly but steadily deteriorating the debt profile of borrowers. Risks will remain elevated, over the medium-term, until there is a notable improvement in the debt repayment capacity of private borrowers and the public sector.

In this vein, the FSSC endorses the coordination of the Financial Services Commission and Bank of Jamaica in enhancing system surveillance of the most significant risk exposures and the implementation of the various initiatives for ensuring the maintenance of sound financial conditions. At the same time the FSSC encourages financial entities to continue to ensure prudent risk management practices as the economy gradually recovers.

Finally, the FSSC is of the view that the various public and private partnership initiatives being undertaken to develop and deepen the financial system will support the enhanced functioning of the financial system, including the payment system, over the long-term. As well, the current pandemic highlights the criticality of the BOJ’s work on advancing its macroprudential toolkit and stress testing, aimed at ensuring that the financial system as a whole is able to manoeuvre future systemic events.

At its meeting on 30 March 2021, the Financial System Stability Committee endorsed these conclusions drawn in the report.

The report is available at http://boj.org.jm/publications”

Financial System Stability Committee

31 March 2021

 Background:

The FSSC is a statutory committee established under section 34H of the Bank of Jamaica Act, as amended. Its job includes reviewing developments in the financial system and the economic environment, advising on macroprudential policy, engaging with stakeholders, and providing oversight of financial stability assessments prepared by Bank of Jamaica staff.

The financial stability mandate of the FSSC and Bank of Jamaica provides a statutory foundation for the identification, mitigation and control of systemic threats to financial system stability, based on assessments of vulnerabilities within the financial system as a whole, as well as those arising from the links between the financial system and developments in other parts of the Jamaican economy and the global economy.  Bank of Jamaica, in consultation with the FSSC, is empowered to develop prescriptive rules, standards and codes for financial institutions which specifically address gaps and imbalances that could threaten financial system stability as a whole.

This oversight complements and does not replace the responsibilities and authority of Bank of Jamaica and the Financial Services Commission to supervise and regulate, respectively, the deposit-taking, insurance, securities and pensions industries. Bank of Jamaica and the Financial Services Commission also meet regularly with the Jamaica Deposit Insurance Corporation and the Ministry of Finance on the Financial Regulatory Committee, a statutory committee also established in 2015 to foster timely information-sharing, coordinated policy development and effective crisis management with respect to the financial sector.

The FSSC consists of six ex officio members and two members appointed by the Minister of Finance on the recommendation of the Bank of Jamaica governor.  The appointed members are Mr. David Marston, former Chief Risk Officer of the International Monetary Fund and Professor Claremont Kirton, retired Professor of the Department of Economics at The University of The West Indies, Mona campus, Jamaica.  Both were appointed on 02 January 2020 for a term of three years.  The ex officio members are Bank of Jamaica Governor Richard Byles (Chair), Financial Secretary Darlene Morrison, Senior Deputy Governor Wayne Robinson, Deputy Supervisor Maurene Simms, Financial Services Commission Executive Director Everton McFarlane and Jamaica Deposit Insurance Corporation CEO Antoinette McKain.