Having reviewed the Bank of Jamaica (BOJ) 2019 Financial Stability Report, the Financial System Stability Committee (FSSC) has indicated that the data and analysis presented showed that Jamaica’s financial system remains sound and stable.

The report assessed developments in the financial system and the associated systemic risks since the September 2018 quarter.

According to the committee, both deposit-taking institutions and non-deposit taking financial institutions were well capitalised and profitable and the extent of maturity mismatch of financial entities’ balance sheets and their ability to meet significant demand for liquidity showed no significant change in the review period.

Notably, the financial system remains highly interconnected and concentrated, as the report identified a significant degree of counterparty funding between related entities operating in different financial sectors. As a result of the extent of related party funding, a shock to a single entity could be amplified through its financial group, causing further spillover to the wider financial system.

The report also concluded that the movement in stock and real estate prices during the assessment period largely reflected a reversion to levels observed prior to the 2007/2008 global financial crisis, due to Jamaica’s fiscal consolidation and accommodative monetary policy.

“The fiscal consolidation and accommodative monetary policy have also facilitated strong growth in private sector credit. The report, however, states that the lag in the real growth of disposable personal income and GDP represents a potential build-up of vulnerabilities in the financial system,” the committee stated.

“The ability of BOJ to assess systemic risk exposures due to financial conglomerates, and separately, systemic risks due to household and corporate debt, is therefore imperative. The FSSC recognises the bank’s effort to better understand the operations of Jamaica’s largest financial groups and the initiatives being taken to improve group-wide supervision.”

THREAT OF COVID-19

It is important to note that the FSSC pointed out that the COVID-19 pandemic may create new challenges for managing financial system stability as global economic activity is projected to slow or even decline due to the virus.

According to the committee, BOJ’s scenario analyses show potentially significant adverse impact on Jamaica’s gross domestic product (GDP) growth arising from the global spillover, while significant uncertainties still exist as the extent and length of the pandemic is still unknown.

“Due to the macro-financial linkages which exist within the Jamaican economy, there is the potential for the weakening of financial institutions’ balance sheet and profitability. A significant fall-off in economic activity could result in the reduced demand for credit, higher nonperforming loans and the withdrawal of bank deposits. Further, non-deposit- taking financial institutions may experience challenges associated with a sell-off in financial markets, material declines in asset prices, and subsequent market illiquidity,” the committee stated.

It added that it therefore endorses the initiatives being undertaken by BOJ to ensure adequate foreign currency and Jamaican dollar liquidity and is of the view that these initiatives will support the normal functioning of the financial system, including the payment system, during this challenging period.

The Financial System Stability Committee is a statutory committee established under section 34H of the Bank of Jamaica Act. Its functions include reviewing developments in the financial system and the economic environment, advising on macro prudential policy, and mitigating the emergence of systematic risks.