Like all other financial institutions with investments in Government of Jamaica (GOJ) securities, the entity mandated to protect depositors’ funds in the event of bank insolvency — the Jamaica Deposit Insurance Corporation (JDIC) — saw a reduction in earnings on its investments following the Jamaica Debt Exchange (JDX).

With the JDX the GOJ exchanged its high interest bearing securities for those with lower yields and longer maturities, effectively reducing net interest income for investors.

Yield on JDIC’s investment portfolio was 18.3 per cent at December 2009, which was before the JDX in February 2010. At March 31, 2010, JDIC’s financial year end, the yield on the portfolio was 11.5 per cent, an almost seven-percentage-points reduction in interest.

Antoinette McKain, CEO of the JDIC, told the Business Observer that while the interest payments on the GOJ investments reduced following the JDX, the principal invested remained intact and untouched.

“JDIC is statutorily mandated to invest in Government of Jamaica securities. As such its investment portfolio in terms of time to maturity and yield was affected as with all investors in GOJ securities,” she said. “It is to be noted that under the JDX there was no hair cut to principal, therefore, the current value of the portfolio was not reduced at the implementation of the JDX. There was therefore no significant impact to the Corporation’s ability to respond to a crisis.”

However, the principal, less accrued interest, which stood at $6.1 billion at March 2010, grew three per cent over December 2009, at which time the balance was $5.9 billion.

“More significantly, the Deposit Insurance Fund at the financial year end was $6.6 Billion dollars. This was actually better than the $6.3 Billion which was budgeted,” McKain said.

Contingency funding and stress testing also mitigated the impact of the JDX.

“Ordinarily, the main risk to the Corporation is the risk of failure of a policyholder, thereby causing the JDIC to have to pay out depositors out of the Deposit Insurance Fund (DIF),” McKain told the Business Obserer. “In the implementation of the JDX, the work of the supervisors, in the stress testing of the system and the availability of the contingency funding to the financial system mitigated the risk of the JDX to policyholders. The position therefore is that there was no specific elevation of risk for the corporation during this time,” McKain argued.

JDIC manages the DIF from which payments would be made to depositors in commercial banks in the event of a financial sector meltdown. The DIF is financed by initial and annual premiums from policyholders, sums borrowed by the Corporation and proceeds from investments made out of it, according to the JDIC. Despite the reduction in interest, McKain said the risks of the JDIC being called upon to pay out insolvency claims to depositors is very minimal.

“The potential impact of the JDX on financial institutions in Jamaica was comprehensively stress tested by the supervisory agencies and multilateral funding (Financial System Stability Fund [FSSF]) was made available to the Government for a specified period for certain contingencies assessed as being possible, arising out a debt restructuring in the nature of the JDX. No financial institution has had to access any of these funds. Some time has now passed since the JDX and it would be highly unusual for an institution to experience insolvency because of the JDX at this point,” added.