Investment houses are on BOJ’s radar:
THE BANK of Jamaica, BOJ, whose remit under the banking reform in 2014 includes stability of the overall financial system, is assessing the oversight of financial firms that do not report directly to the central bank due to concerns about capital adequacy.
Asked what was the end game, BOJ Senior Deputy Governor John Robinson said the central bank does not plan to tighten oversight.
Rather: “It’s more about streamlining. It’s about taking a look at the overall system as a whole, the interaction between banks and non-banks, and seeing where regulations may be adjusted to improve efficiency,” Robinson told the Financial Gleaner on Friday.
“There may be a need to modify regulations to have them more synchronised across regulators,” he said.
According to BOJ data, the total assets of the non-bank financial sector topped $1.7 trillion or 92 per cent of GDP at the end of 2017. Private pension funds accounted for $513 billion of the total.
Comprised of firms that provide financial services but which are not licensed to take deposits, the non-bank sector includes insurance companies, securities dealers, collective investment schemes and pension funds – all of which fall under the supervision of the Financial Services Commission, FSC; as well as cambios, remittance companies, electronic payment service providers and credit bureaus – which are regulated by the BOJ.
The FSC-regulated firms are also answerable to the BOJ in areas supervised by the central bank, such as foreign exchange trading and transactions.
In the 2017 Financial Stability Report, released last Friday, the central bank compared the non-deposit takers unfavourably with banks, saying that while they continue to expand assets, this is not accompanied by an increase in average capital adequacy.
Also on the BOJ’s watch list are asset classes held by the companies, such as equities and real estate, which can be high yielding but which, the central bank notes, have a higher probability of impairment.
Those holdings are on the rise. The report notes that the share of real estate, unquoted equities and debtors in total assets for life insurance companies rose year-on-year from 3.8 per cent to 4.1 per cent, and from 8.4 per cent to 9.7 per cent for general insurers.
“A continued decline in interest rates may lead to a more aggressive search for yields by financial sector participants,” said the central bank. “Such a development in 2018 may result in an overinflation of asset prices or an extension of exposures into riskier assets.”
The Government itself is alert to the danger, and is seeking guidance on how to proceed.
In April, Minister of Finance Dr Nigel Clarke announced that David Marston, a former senior adviser, deputy director and chief risk officer of the International Monetary Fund, had been retained to advise the BOJ on the non-banking financial sector.
BOJ’s overarching role as monitor of the
entire financial sector was granted under the Banking Services Act, which was operationalised in 2015.
“The health and stability of the financial system as a whole is a vital element of the proper functioning of a market economy. The Bank of Jamaica has been assigned oversight responsibility for monitoring and safeguarding financial system stability. This necessarily includes the need to take account of the interaction among various parts of the system, even where institutional responsibility for the supervision of entities may be different,” said Robinson in the wake of the new stability report.
“A safe, healthy, inclusive financial system that can efficiently meet the various needs of savers and investors is a key requirement for a vibrant, modern economy,” he said.
The central banker said, however, that given the existing supervisory coverage of the sector, by BOJ and the FSC, no other authority is being considered to keep the non-banking sector in line.
BOJ regulates the activities of deposit takers, that is, commercial banks, merchant banks and building societies, both at the individual and conglomerate levels, and will soon assume regulatory responsibility for credit unions.
“Almost all providers of financial services are currently regulated and there are institutional arrangements for coordination and cooperation between regulators. Smaller firms such as microcredit providers, which are currently outside of this framework, are soon to be added to complete the coverage,” Robinson said.
The Financial Stability Report notes that for the banking sector, there was as an improvement in asset quality in 2017, as measured by the stock of non-performing loans. Solvency and profitability also improved, as reflected in an increase in the average capital adequacy ratio and return on assets.
In the non-bank segment, the report noted a decrease in capital ratios for both securities dealers and insurance companies due to unmatched growth in regulatory capital. However, capital ratios were maintained above prudential benchmarks, the central bank said.