IMF calls for more oversight of JA's financial sector

Business reporter

Wednesday, December 05, 2018

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A sizeable and complex financial sector dominated by large intra- and interconnected financial conglomerate groups with cross-border linkages has prompted calls from the International Monetary Fund (IMF) for improved supervision and data collection methods for the institutions.

Last Friday the IMF, in reporting on the results of Jamaica's 2018 Financial System Stability Assessment (FSSA), welcomed progress on the crisis preparedness and resolution management frameworks for institutions in banking, insurance, pension fund management, and collective investment fund management.

The directors, however, cautioned that given the increased interconnectedness of the financial sector and associated risks of contagion – the spreading of a harmful idea or practice – priority should be given to intensified oversight and consolidated risk-based supervision, especially of “systemically important groups with connections”.

Since the 2006 FSSA the Jamaican authorities have considerably strengthened macroeconomic policies, including under IMF-supported programmes. But decades of high fiscal deficits, combined with the financial sector crisis of the late 1990s, has led to rapid government debt accumulation and financial dollarisation, the IMF explained.

The directors added that the high public borrowing needs, in turn, have crowded out private credit and stifled economic growth, resulting in the IMF's Financial Sector Assessment Program stress tests indicating that 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,” the IMF said.

The directors underscored the importance of improved data sharing, cooperation, and coordination with regional supervisors, in particular for those affecting systemically important groups. It 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.

The directors further emphasised the importance of an effective oversight framework together with heightened commitment to transparency and accountability, and encouraged the continuation of work towards reinforcing the resilience of securities dealers, the deepening of capital markets, and broadening of instruments to manage credit, liquidity and market risks.

The Fund added that since the last FSSA in 2006 Jamaica's financial sector has significantly expanded, with the stock of debt declining to 60 per cent of GDP by fiscal year 2025/26 under the Fiscal Responsibility Law. The financial sector is, however, confronted with new challenges as it seeks to play a major role as an engine of economic growth but still, the stress tests suggest the country currently has broad resilience to solvency shocks.

“One significant challenge is the search for non-government investment opportunities. Even though commercial banks appear to be profitable and well-capitalised, the loan-to-deposit remains low,” the IMF said.

It added that 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 non-performing loans. A natural disaster could cause protracted negative growth and large losses for banks and other financial institutions,” the IMF continued.

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