Jamaica: Financial Sector Stability Assessment

IMF Country Report No.
18/347
JAMAICA
FINANCIAL SECTOR STABILITY ASSESSMENT
December 2018
This Financial System Stability Assessment paper on Jamaica was prepared by a staff
team of the International Monetary Fund [as background documentation for the periodic
consultation with the member country. It is based on the information available at the
time it was completed on October 18, 2018.
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© 2018 International Monetary Fund

JAMAICA
FINANCIAL SYSTEM STABILITY ASSESSMENT
October 18, 2018
Approved By This report is based on the work of the Financial

James Morsink and Sector Assessment Program (FSAP) Stability
Nigel Chalk Module mission that visited Jamaica in April and
Prepared By June 2018. The FSAP findings were discussed with
Monetary and Capital the authorities during the Fourth Review of the SBA
Markets Department mission in September 2018.
• The FSAP team was led by Maria Oliva and comprised Dan Nyberg (Deputy),
Qianying Chen, Luc Riedweg, Karim Youssef (all IMF staff); Antonia Menezes,
William Price (both World Bank staff); Timo Broszeit, Richard Gresser, Keith Hall,
Carlos Leon, Claire McGuire, Greg Tanzer (all IMF external experts).
Uma Ramakrishnan (IMF staff) and Mr. Williams of the Executive Director’s Office
joined the concluding discussions. Greg McCoy assisted the mission from IMF
Headquarters and Camille Ritchie coordinated logistics from the IMF Resident
Representative’s office in Kingston.
• FSAPs assess the stability of the financial system as a whole and not that of
individual institutions. They are intended to help countries identify key sources of
systemic risk in the financial sector and implement policies to enhance its resilience
to shocks and contagion. Certain categories of risk affecting financial institutions,
such as operational or legal risk, or risk related to fraud, are not covered in FSAPs.
• This report was prepared by Maria Oliva and Dan Nyberg, with contributions from
the members of the FSAP team.
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CONTENTS
Glossary __________________________________________________________________________________________ 4
EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS ______________________________________ 5
TABLE OF MAIN RECOMMENDATIONS ________________________________________________________ 7
MACROFINANCIAL SETTING ____________________________________________________________________ 8
RISKS AND VULNERABILITIES __________________________________________________________________ 9

A. Financial Conglomerates and Interconnectedness_____________________________________________ 10
B. Deposit-Taking Institutions ____________________________________________________________________ 11
C. Non-Bank Financial Institutions _______________________________________________________________ 12
OVERSIGHT FRAMEWORK ____________________________________________________________________ 14

A. Macroprudential Policy Framework ___________________________________________________________ 14
B. Microprudential Supervision __________________________________________________________________ 14
C. Financial Integrity _____________________________________________________________________________ 20
CRISIS READINESS, MANAGEMENT, AND RESOLUTION ____________________________________ 21
CREDITOR INFRASTRUCTURE _________________________________________________________________ 22
BOXES
1. The World Bank FSAP Development Module, 2015 ____________________________________________ 24
2. Insurance and Pension Funds FX Investment Limit Regulation ________________________________ 25
FIGURES
1. Macrofinancial Developments, 2006–17 _______________________________________________________ 26
2. Deposit Taking Institutions’ Balance Sheet Structure, December 2017 ________________________ 27
3. Securities Dealers’ Activities Balance Sheet (2017) Rolling Investment Contracts ______________ 28
4. Strong Growth in CIFs and Exempt Distribution _______________________________________________ 29
5. Large-value Payment System Network Analysis _______________________________________________ 30
6. Exposure Network Analysis ____________________________________________________________________ 31
7a. Stress Test Scenarios for Deposit Taking Institutions _________________________________________ 32
7b. Adverse Scenario Solvency and Liquidity Stress Test Results _________________________________ 33
7c. Severe Adverse Scenario Solvency and Liquidity Stress Test Results__________________________ 34
8. Insurance Stress Test Results __________________________________________________________________ 35
9a. Bank/DTI Credit to GDP Ratio by Selected Countries, 2016___________________________________ 36
9b. Composition of DTI Consumer Loans ________________________________________________________ 36
2 INTERNATIONAL MONETARY FUND

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TABLES
1. Selected Economic Indicators _________________________________________________________________ 37
2. Financial Sector Structure _____________________________________________________________________ 38
3. Financial System Groups ______________________________________________________________________ 39
4a. Financial Sector Key Indicators _______________________________________________________________ 40
4b. Financial Sector Indicators ___________________________________________________________________ 41
5. Financial Sector Aggregate Exposures Network _______________________________________________ 42
ANNEXES
I. Report on Observance of Standards and Codes: Basel Core Principles _________________________ 43
II. Report on Observance of Standards and Codes: Core Principles for Effective
Deposit Insurance________________________________________________________________________________ 61
APPENDICES
I. FSAP Risk Assessment Matrix __________________________________________________________________ 63
II. Implementation of Previous FSAP Recommendations, Preliminary Assessment _______________ 65
III. Stress Testing Matrix (STeM) __________________________________________________________________ 78
IV. Insurance: Overall Stress Testing Approach ___________________________________________________ 82
V. Network Analysis ______________________________________________________________________________ 86
INTERNATIONAL MONETARY FUND 3

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Glossary
AML Anti-Money Laundering
BCP Basel Core Principles
BoJ Bank of Jamaica
BoJA Bank of Jamaica Act
BSA Banking Services Act
CAR Capital Adequacy Ratio
CFT Combatting the Financing of Terrorism
CIF Collective Investment Funds
COBS Committee of Bank Supervisors
CPC Chief Parliamentary Council
DBJ Development Bank of Jamaica
DTI Deposit Taking Institutions
FATF Financial Action Task Force
FHC Financial Holding Companies
FSAP Financial Sector Assessment Program
FSC Financial Services Commission
FX Foreign Exchange
FSSC Financial System Stability Committee
GOJ Government of Jamaica
ICO Initial Coin Offerings
JDIC Jamaica Deposit Insurance Corporation
MiCAF Ministry of Commerce, Agriculture and Fisheries
MOFPS Ministry of Finance and Public Service
MSME Micro Small- and Medium-sized Enterprises
NPL Nonperforming Loans
NRA National Risk Assessment
OTC Over-the-Counter
RAM Risk Assessment Matrix
SD Securities Dealers
SRR Special Resolution Regime
TA Technical Assistance

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EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS

The macroeconomic environment has improved, reflecting the authorities’ efforts, supported
by an IMF arrangement. Previously, years of high fiscal deficits, public enterprise borrowing, and
financial sector bailouts led to rapid government debt accumulation, crowded out private credit,
increased financial dollarization, and stifled economic growth. Fiscal discipline has been essential to
reduce public debt (to about 100 percent of GDP). With government debt accounting for a sizable
share of financial institutions’ assets, falling interest rates on government debt are leading to a
search for yield. Also, entrenched structural obstacles, including high crime, bureaucratic processes,
insufficient labor force skills, and poor access to finance still constrain economic growth.
The authorities have made good progress in implementing the 2006 FSAP recommendations.
Work on the regulatory framework has significantly advanced in several areas such as securities
dealers’ activities, powers to the Bank of Jamaica (BoJ), payment systems, and the introduction of
the centralized securities depository. However, the crisis management framework and risk-based
supervision work has been lagging.
The financial sector has significantly expanded since the 2006 FSAP and is now highly
interconnected and dependent on foreign funding. The sector is dominated by large, complex
and highly interconnected groups that operate in several jurisdictions.
The stress tests suggest broad resilience to solvency shocks, but the interconnectedness
analysis points to high risk of contagion. The main risks to the financial system arise from
exposure to natural disasters, the tightening of global financial conditions, and the possible reversal
of fiscal discipline driven by reform fatigue. Under an adverse scenario of temporary economic
recession, banks would be able to recover due to high profits and large buffers. A natural disaster
shock could require large recapitalization needs of 3.3 percent of GDP. Insurance companies would
also be able to recover relatively fast with a global repricing of the risk premium due to high
profitability. At the group level, the large and complex intra- and inter-group direct exposures puts
the system at risk via contagion.
In this context, priority should be given to intensified oversight and group-wide risk-based
supervision, especially of groups with systemic connections. Implementation of Basel’s Pillar I on
minimum capital requirements and Pillar II on the supervisory review process should help build
enough buffers at the individual and group level based on inherent risk undertaken to ameliorate
regulatory arbitrage. Active cooperation and coordination with other supervisors also in the region,
and in particular, for those affecting systemic groups, should be strengthened; access to timely
granular data, analyses, and monitoring is key. An effective macroprudential framework should build
on strong micro-prudential foundations of supervisory oversight and go hand-in-hand with
heightened commitment to transparency and accountability. Work reinforcing the resilience of
securities dealers, the deepening of capital markets and broadening of instruments to manage
credit, liquidity and market risks should continue.

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Immediate efforts are needed to expand skilled supervisory resources. All supervisory agencies
need to expand their capacity to fulfill their current mandate and new demands. Advances towards
the adoption of international standards by 2020/21 will pose important challenges to the authorities
and the industry and require further inter-agency coordination. The databases available also need to
be strengthened to further facilitate the monitoring of risks of a complex group-based financial
system, and to conduct informative and sound financial stability analyses and risk assessments.
Progress on the Special Resolution Regime for Financial Institutions and on the broader crisis
management framework is welcome, but more needs to be done. The consultation paper issued
last February 2017 addressed many complex issues requiring the attention of all safety net
stakeholders in the economy. Ongoing engagement with the industry on this important effort will
increase buy-in for the many changes that will result from adoption of a new resolution regime.
Further work is ongoing for clarifying several key aspects (e.g., defining specific responsibilities in
the new resolution framework, defining systemically important institutions, and funding) and
properly sequencing the work on recovery planning, resolution plans, and resolvability assessments.
System-wide preparation for a systemic crisis is also an area that requires attention.

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TABLE OF MAIN RECOMMENDATIONS

Recommendations, Responsible Authorities, and References to Main Text Time1
Financial Stability and Resources
1 Increase supervisory resources (All) I
2 Enhance data collection and technical skills needed for risk-based supervision, including frequency, I
granularity, and quality, with a focus on exposures data for analysis (All)
3 Strengthen the IT platform for supervisory data sharing and regulatory collaboration, including sharing I/NT
costs (All)
Microprudential Oversight
4 Provide greater delegation to the BoJ to enact legally enforceable rules and include the most important I
Standards of Sound Practices in the binding set of prudential rules (Government)
5 Fully deploy and implement risk-based supervision (BoJ, FSC) I
6 Fully deploy and implement risk-based AML/CFT supervision for Deposit Taking Institutions (DTIs) and NT
Cambios (BoJ)
7 Implement consolidated supervision and intensify cross-agency cooperation (BoJ, FSC) I
8 Strengthen the regulatory framework by implementing Basel III capital adequacy requirements and NT
liquidity requirements at the solo and group levels (BoJ)
9 Intensify dialogue with the industry (BoJ, FSC) I
Securities Dealers
10 Complete the retail repo reforms through the staged introduction of the mismatch ratio (FSC) I/NT
11 Securities dealers should be able to intermediate in a wider range of financial instruments, in particular, MT
corporate debt and equity instruments (FSC)
12 Introduce the revised large exposure regime to improve resilience against contagion (FSC) NT
13 Introduce formal arrangements for group-wide supervision of conglomerates which include securities NT
dealers, both within the FSC and between the FSC and BoJ (FSC and BoJ)
Insurance Sector
14 Enact binding regulations for asset-liability management and introduce regular stress tests for general MT
insurers (Government, FSC)
15 Introduce a risk-based solvency regime, ideally at the time of adoption of IFRS 17 (Government, FSC) NT
Macroprudential Policy and Framework
16 Develop a toolkit for macroprudential policy (BoJ) MT
17 Develop a communication strategy to convey financial stability assessments and link them to policy MT
actions (BoJ)
Crisis Preparedness, Recovery Planning, and Resolution
18 Introduce a special resolution regime (SRR) closely aligned with international best practice for resolving NT
systemic financial institutions (Government)
19 Finalize an MoU between BoJ and the Jamaica Deposit Insurance Corporation (JDIC) to allow JDIC to I
better prepare for possible resolution action (BoJ, JDIC)
20 Develop a contingency plan for a systemic crisis (All) MT
21 Develop guidance for FIs on recovery plans and begin a pilot project to request such plans from the most I
significant institutions on a rolling basis (BoJ, FSC, JDIC)
22 Develop strategy for funding of resolution, including whether to establish a resolution fund (All) MT
Capital Market Development
23 Adopt a strategy for capital markets deepening, including developing the short end of the yield curve for NT
benchmarking (Government)
1 I (immediate) = within one year; NT (near term) = 1–3 years; MT (medium term) = 3–5 years.

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MACROFINANCIAL SETTING
1. The authorities have made considerable progress on the macroeconomic stabilization
front, supported by IMF arrangements. Previously, years of high fiscal deficits, borrowing, and
financial sector bailouts led to an unsustainable stock of sovereign debt (restructured in 2010 and
2013), crowded out private credit, financial dollarization, 1 and stifled economic growth. Since then,
fiscal discipline has helped reduce sovereign debt to about 100 percent of GDP (Figure 1 and
Table 1) and interest rates on sovereign debt have fallen, resulting in a search for yield. With
economic growth continuing to disappoint, reform fatigue could emerge as a risk. Structural
obstacles include high crime, bureaucratic processes, insufficient labor force skills, poor access to
finance, and exposure to weather shocks.
2. In recent years, the authorities have implemented important financial sector reforms,
but strengthening the capacity to oversee risks in financial groups is crucial (Appendix II). The
2006 FSAP recommended strengthening the prudential framework for securities dealers, enhancing
the oversight of conglomerates, the development and testing of crisis management systems, and
improving the insolvency and creditor rights regime. Since then, progress has included the
Insolvency Act in 2014, Bank of Jamaica Act (BoJA) in 2015, Banking Services Act (BSA) in 2014, the
operationalization of the Financial System Stability Committee (FSSC) in 2016, and the production of
the Financial Stability Report (FSR). Fund TA has supported efforts to enhance financial sector
resilience.
3. The financial sector has grown rapidly and become more complex and interconnected.
Over the past decade, Jamaica’s financial sector has tripled in assets, and the number of institutions
has grown eight-fold (Table 2). Total assets now amount to about 180 percent of GDP. Nonbank
financial institutions play a key role in financial intermediation. Conglomerate groups have financial
sector activities that span banking, insurance, pensions fund management, collective investment
fund (CIF) management, and securities dealers (Table 3). These groups often operate in multiple
jurisdictions, especially in the Caribbean, searching for economies of scale and regulatory arbitrage
opportunities in relatively dispersed and small markets.
4. Commercial banks appear to be well capitalized and profitable (Tables 4a and 4b).
Banks’ business model is largely traditional, with large retail deposit funding and some wholesale
funding structures, excess reserves at the BoJ, sovereign long-term securities, and a conservative
lending policy, with the loan-to-deposit ratio at about 70 percent in 2017 (Figure 2). Banks’
profitability is healthy, with non-interest income (e.g., fees) accounting for almost a third of total
revenue.
5. The nonbank financial sector is large and multi-layered. Gross assets were over
100 percent of GDP in 2017, including insurers, pension funds, securities dealers, asset managers,
1
Dollarization accounts for over 45 percent of assets and liabilities in banks, limiting monetary policy transmission
(Jamaica April 2018 Art IV Report).

JAMAICA
and collective investment schemes. Private pension funds have been growing fast (Table 2).
Jamaica’s insurance sector is large and highly concentrated (four life insurances hold 99 percent
market share). Securities dealers manage an asset portfolio of 33 percent of GDP and have
significant retail rolling investment schemes (“retail repos”) (Figure 3). “Retail repo” means the offer
of 1-2 month repurchase agreements to households or nonfinancial corporates, backed by long-
maturity government bonds (implying a significant maturity mismatch). CIFs and pooled funds have
been growing (Figure 4) on average 30 percent in the last two years, partly with injections from
small retail investments that have been prohibited from being reinvested in repos.
6. The financial sector is dominated by complex financial conglomerates that operate in

multiple jurisdictions. Some large groups’ headquarters are based in jurisdictions with different
oversight practices; cross-border linkages are concentrated in a few entities, and there is no
consolidated supervision. Even with proper separation between bank and nonbank group members,
reputational risks and direct and indirect exposures could be a source of contagion (Table 5).
Common exposures to sizable public debt holdings by all segments of the groups and across
financial institutions means that the stability of the financial system is closely bound to the discipline
in public finances, sustainability of the macroeconomic outlook, and debt market dynamics.
7. The secured money market in Jamaica is small. There is a primary market for government
securities and a deep market for rolling investment contracts. A secondary bond market and a
foreign exchange (FX) market are being developed.
8. The authorities have an ambitious financial inclusion agenda that was covered in the
World Bank (2015) FSAP Development Module (see Box 1 and Appendix II). Financial inclusion
policies should take into consideration the financial stability risks.
RISKS AND VULNERABILITIES

9. The main risks to the financial system arise from exposure to natural disasters,
tightening global financial conditions, and reform fatigue (see the Risk Assessment Matrix
(RAM) in Appendix I). Delays in the reform agenda would erode confidence and fuel FX outflows. A
tightening of global financial conditions could reduce foreign inflows including remittance inflows,
which would dampen economic growth (through consumption and investment) and lead to rising
nonperforming loans (NPLs). A natural disaster would cause protracted negative growth and large
losses for banks and other financial institutions.
10. The large, complex, and highly interconnected structures make the financial sector
particularly vulnerable to contagion. Risks arise from their concentrated ownership, related party
and large group exposures, and off-balance sheet positions. Against this background, the Financial
Sector Stability Assessment focused on resilience to solvency and liquidity shocks, direct and
indirect exposures and interconnectedness.

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A. Financial Conglomerates and Interconnectedness

11. The interconnectedness assessment found important links in the repo market and the
large value payment system, significant counterparty exposures, and notable similarities in
business models (Figures 5&6). The analysis used data on (i) direct exposures. (ii) indirect
exposures via financial institutions’ balance sheet similarities and hierarchical clustering, and
(iii) large-value payment system liquidity. (Appendix V).
12. The direct exposure network analysis showed a highly interconnected financial system
with concentrated dependence on foreign funding (Table 5). The system displays significant
interconnectivity across financial entities in the system, also by international standards, and with
complex and sparse links. Foreign institutions play a central lender role, with links to about
33 percent of the participants in the network, and high intensity vis-à-vis a few systemically
important DTIs. Failure to roll over borrowing from abroad would significantly impact the domestic
exposure network.
13. Jamaica’s financial institutions show large overall indirect common exposures,
especially across banks’ balance sheets. Balance sheet correlations are substantial among
financial institutions pertaining to the same financial segment. The strongest correlation is in the
DTIs segment (about 0.9 on average). DTIs balance sheets account for about 62 percent of assets
and 64 percent of liabilities of the financial system—hence, common exposures to the financial
system’s balance sheet are significant.
14. Four groups are systemic to the large-value payment system (see Figure 5). Over
80 percent of the large payments system network is accounted for by 18 financial institutions; four
(DTIs in particular) account for about half of the transactions, with systemic implications for the
financial sector. If any of these four institutions were to fail to participate in the large-value payment
system, liquidity and asset exchanges among financial institutions as well as operations in the real
sector could be extensively affected.
15. The authorities should further strengthen the resources and skills devoted to the
assessment of risks arising from interconnectedness. Existing data limits a full assessment on
cross-exposures. The authorities are building data sets to help strengthen their analyses along
several dimensions, including (i) adopt mechanisms to comprehensively measure and understand
financial stability risks associated to the large-value payments system; (ii) take advantage of the
informational content of real-time gross settlement (RTGS) data for supplementing traditional
analysis based on low-frequency data reported by financial institutions; (iii) develop tools to
comprehensively measure, understand, and manage the risks that arise from DTIs’ and non-DTIs’
common exposures (e.g., sovereign exposures) amid different idiosyncratic and systemic shocks;
(iv) expand and enhance the existing datasets and models that allows periodic measurement and
analysis of direct and indirect exposures in the financial system; and (v) measure and monitor the
extent to which events involving major global participants in the exposure network may impact the
solvency and liquidity of financial institutions.

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B. Deposit-Taking Institutions
16. Banks are broadly resilient on a solo-basis (Figures 7a and 7b and Appendix III). Under
the adverse scenario with GDP growth declining to 0 percent, 2 the banking sector’s aggregate
capital adequacy ratio (CAR) would remain above the regulatory minima (about 13 percent) despite
a sharp increase in NPL ratios across all sectoral loan balances and lower profitability. However,
some banks’ CARs would fall below the 10 percent CAR regulatory minimum. Restoring it across all
banks would require 0.7 percent of GDP.
17. The severely adverse scenario causes several banks’ CARs to fall well below regulatory
minima (Figure 7c). 3 the declines in capital are due to the negative impact on interest rates (and
profitability) and on NPLs as a second factor. For the system, the aggregate CAR would fall to
5.1 percent. The required recapitalization injection would amount to about 3.3 percent of GDP.
18. Sensitivity analyses suggest that the banking system is vulnerable to counterparty
risk, interest rate risk, and concentration risk.
• Counterparty risk: Assuming each bank’s top three borrowers default with zero recovery, the
system’s aggregate CAR would decrease to 0.7 percent one period ahead, with a recapitalization
need of 4.8 percent of GDP.
• Interest rate risk: The high share of banks’ holdings of long-dated government bonds results in
significant vulnerabilities to interest rate volatility. A 300-basis point interest rate shock would
reduce the systemwide CAR by 4.4 percentage points.
19. Asset-class concentration risk is high. Banks’ holdings of sovereign government bonds
and of personal loans are significant. Under the adverse scenario, for some banks, concentration risk
is large due to loan book concentration in tourism and financial services. For some other banks,
large exposures to manufacturing, construction, and trade drive NPL growth.
20. The large exchange rate shocks considered in the assessment have negligible effects.
This is due to the banks' relatively covered position between FX assets and liabilities and significant
financial dollarization. However, a significant rise in FX non-performing loans associated with
currency movements would require increasing provisioning.
21. Banks’ reserves at BoJ are sizable and would allow them to withstand shocks to their
funding. Banks hold large liquid assets both in JM$ and FX, at the BoJ. BoJ’s liquid asset ratio
2
Cumulative three-year growth would be 5 percentage points lower than the baseline. Important reforms would stall
and confidence in the reform program would begin to erode. Investors would begin demanding higher yields from
the government. Demand for FX would ramp up, and the currency would begin to depreciate by up to 15 percent
per year. Inflation volatility would increase materially and repeated breaches of the central bank inflation target
band would prompt interest rates increases of up to 300 basis points.
3
Real GDP growth would drop by 1-2 percentage points in the first year (i.e. almost 3 percentage points lower than
the baseline) and be permanently lower by 2 percentage points thereafter. Interest rates would spike by 600 basis
points, led by a flight to safety. The exchange rate would depreciate significantly.

JAMAICA
requirement in respect to domestic currency liabilities is 26 percent and 29 percent for FX liabilities;
these could be readily available if needed. In the adverse scenario, over a five-day horizon, most
banks would be able to withstand a proportional withdrawal run on banks’ liabilities for at least
2 consecutive days. After 4 consecutive days, most DTIs would need access to their liquidity
balances at the BoJ and potentially to the BoJ’s liquidity facilities. Highly liquid banks would likely
initially benefit from a “flight to safety” and reputation effects, which would delay any initial liquidity
squeeze impact to their balance sheet.
C. Non-Bank Financial Institutions

Institutional Investors: Insurance and Pensions
22. Life insurers face challenges of declining interest rates on domestic sovereign bonds,
while non-life insurers are exposed to catastrophe risks (Appendix IV).
 With strict investment limits in place for insurers and other institutional investors, life
insurers are holding 59 percent of their assets in Jamaican sovereign debt. Even though life
insurance products do not typically feature interest rate guarantees, the sector’s profitability
is declining albeit from rather high levels—the average return on equity during 2012–17 was
26 percent.
 Non-life insurers are exposed to tail risks stemming from natural catastrophes as the
country faces risk from hurricanes and earthquakes. However, in particular, for property
insurance, retention levels are low, and more than 90 percent of the business is ceded to
reinsurers abroad.
 Both the life and the non-life sector are challenged by potential FX mismatches: While
only few insurers offer products denominated in or linked to foreign currencies, many more
companies hold non-JM$ investments, mainly in US$, exposing them to JM$ appreciation.
23. All insurers proved to be resilient in the assumed repricing of global risk premia
(Figure 8, Appendix IV). While all companies stayed above the regulatory minimum thresholds of
150 and 250 percent for life and non-life insurers, respectively, within the current solvency regime
the impact of the modelled sovereign shock is likely to be underestimated. The assumed shock to
domestic sovereign spreads which reduces the value of bond holdings is compensated by a
decrease in liabilities as the discount rate increases in line with higher expected investment
returns—under a fully market-consistent valuation, the discount rate would need to be corrected for
higher expected default rates in such a scenario.
24. General insurers face a substantial decline in their solvency ratios if a major hurricane
strike the country (adverse scenario 2). From a median pre-stress solvency ratio of 261 percent
and therefore barely above the regulatory minimum, the sector falls to 231 percent, but with large
dispersion across companies. However, most companies stay profitable and is therefore expected to
recover rather quickly after such an event.

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25. Pension funds appear to have a relatively sound funding model. Pension funds are
typically well-funded on current estimates. This is driven by high rates of member exit and long
vesting rules which both leads to employer contributions being left in the plan when a member
exits and takes only their own contributions. Solvency is also enhanced because there is no
requirement typically to increase pensions each year by even price inflation.
26. While the sector is sustainable, many pension fund members risk receiving inadequate
pensions. The flip side of good sustainability in Jamaica is poor adequacy—as many pension
members who were at one time contributing receive little or nothing at retirement because they
withdrew their benefits too early and others see the real value of their pension fall if funding is not
adequate. This is a particularly critical issue in Jamaica given fears over the level of income provided
by the National Insurance System.
Securities Dealers
27. The securities dealers sector can withstand significant shocks. Top-down stress tests
conducted by the authorities using a range of adverse but plausible shock scenarios (e.g., equity
prices dropping 20 percent, domestic interest rates changing by 3 percent) suggest that, while some
brokers would fail, the significant majority of the industry is sufficiently capitalized to withstand
adverse shocks.
28. Legal and operational risks inherent in the securities dealers’ “retail repo” business
model have declined with recent reforms (e.g., the master repurchase agreement and
underlying securities being held on trust). The introduction of a JM$1M minimum subscription
threshold to reduce retail exposures has led to a 12 percent orderly reduction in aggregate repo
holdings between end-2014 and 2017 but remain a very high proportion of dealers’ liabilities
(Figure 3).
29. Securities dealers’ business models will need to evolve over the medium term to
provide a wider range of intermediation services, especially with respect to corporate debt
and equity products. In the immediate (1 year) and near term (1–2 years), from a financial stability
angle, the focus should be on the implementation of the retail repo mismatch ratio to minimize
maturity mismatch risk. 4 In addition, the Financial Services Commission (FSC) should collect and
analyse data on securities dealers’ over-the-counter (OTC) transactions.
30. The expansion of securities dealers’ intermediation activities into corporate debt or
equity instruments will require:
• A viable trade reporting or (preferably) secondary trading platform to aid price discovery;
• A risk-based supervision framework and a fixed timeline for implementation;
4The FSC is assessing the introduction of a retail repo mismatch ratio, which would require a dealer falling below the
acceptable ratio to either increase its regulatory capital, reduce the duration of the assets underlying retail repos,
and/or reduce the size of its retail repo portfolio.

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• Focus on developing liquid markets in these instruments, while ensuring that securities dealers
enhance their liquidity management;
• Implementation of effective group-wide supervision by the BoJ and FSC;
• Review of the existing foreign exchange requirements to determine whether they place
unreasonable impediments on the development of financial products which provide hedging
capacity against the US$, especially for Jamaican corporates;
• Review of the existing risk weightings for corporate debt and equity instruments;
• If repurchase agreements are used to offer short term fixed interest products backed by long-
term corporate debt securities to non-accredited investors, the same trust, standard master
repurchase agreement, and mismatch ratio infrastructure should apply to manage the risks of
that business.
OVERSIGHT FRAMEWORK
A. Macroprudential Policy Framework
31. Jamaica has established a macroprudential policy framework. A high level inter-agency
FSSC has been established by way of an amendment to the BoJA. The FSSC is tasked with producing
regular financial stability assessments and providing recommendations to the BoJ on potential
macroprudential policy actions. Final responsibility for the actions resides with the BoJ.
32. The BoJ has made good progress in establishing a system for monitoring of systemic
risk. Important information gaps remain. In tandem with this work on indicators, the BoJ is also
considering instruments to include in a “macroprudential policy toolkit” for mitigating and
containing systemic risks across time and structural dimensions, including those found within
Basel III. Finally, there is much work to be done to broaden and deepen financial markets so that
institutions are better provided with the financial instruments that they need for managing their
credit, liquidity and foreign exchange risks on a day-to-day basis.
33. To support the development of the macroprudential policy framework, the BoJ should
develop a communication strategy. A macroprudential policy framework allows the BoJ to correct
the mispricing of risks and associated misalocation of bank credit to the household and corporate
sectors. The legitimacy of such powers requires that the public can understand what powers are
being exercised in support of financial stability and why. A communication strategy should be
developed to help convey the BoJ’s stability assessments clearly, link them to any policy action and
manage public expectations about what these policies can achieve.
B. Microprudential Supervision
34. The BoJ is fully empowered under the BSA to supervise financial groups with a DTI
but does not yet impose prudential standards on a consolidated basis. The dominant role
played by large financial conglomerates underscores the importance of effective consolidated and

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group supervision. Preparatory work is underway. As contemplated by the BoJ, further action is now
needed to license Financial Holding Companies (FHCs), impose prudential standards on a
consolidated basis (solvency, liquidity, large exposures, and related parties), collect prudential data
on a group-wide basis, establish and enforce fit-and-proper standards for owners and senior
management of parent companies, and strengthen regulations on internal control and risk
management while ensuring compliance with these provisions on a consolidated basis compulsory.
35. In addressing financial groups risks, consolidated risk-based supervision remains a

critical priority. The BoJ has taken first steps towards the implementation of a risk-based
supervision methodology (Annex I). These recent steps applied to one DTI are in the right direction,
and should be extended to FHCs and to all its business entities (including all DTIs) as well as
intensified to manage interconnectedness and contagion risks (see Risk and Vulnerabilities Section).
Yielding the benefits of the risk-based approach to FHCs will hinge on (i) the availability of adequate
skills and resources in all regulatory agencies, and (ii) the time needed to adjust resources and
practices beyond the solo institution approach currently applied.
36. Also, coordination among supervisors will prove critical in the implemetation of
group-wide risk-based supervision. Areas of further work will need to cover timely and enhanced
granular data sharing mechanisms, regular collaboration and information exchanges between
different agencies at the technical level, consistency of regulations (including interpretations), and
cooperation between the BoJ and FSC through joint rule-makings and intensified oversight, notably
through joint onsite inspections. Efforts on cross-border supervision should be intensified with more
MoUs signed between the domestic and foreign supervisors.
Banking Supervision
37. Considerable progress has been made since the last FSAP in 2006 (Appendix II). Owing
to the BSA passed in June 2014, the architecture of the supervisory framework has been
substantially improved, with critical supervisory functions being transferred from the Ministry of
Finance and Public Service (MoFPS) to the Governor of the BoJ. The current legal framework gives
the BoJ powers to license DTIs and FHC, conduct ongoing supervision and undertake timely
corrective action. The BSA gives the BoJ a broad range of powers to address individual situations
where DTIs do not comply with laws and regulations or where DTIs engage in unsound practices.
Permissible activities for DTIs, licensing, transfers of ownership, and mergers and acquisitions are
appropriately defined and controlled. The BoJ carefully assesses compliance with prudential
regulations. Valuable information is shared among banking regulators in the Caribbean region.
38. The BoJ’s inability to issue binding prudential regulations constitutes a limitation. The
BoJ has over the years introduced several standards of sound practices which are intended to guide
DTIs’ practices. While these standards do not by themselves have the force of law, they cover key
aspects of supervision (e.g., corporate governance, internal control, fit and proper assessments,
credit risk management, liquidity management). Including more streamlined standards of sound
practices in the binding set of rules would enhance the BoJ’s ability to use preventative measures to

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address risk management issues. The BoJ should be empowered to leagally enact legally
enforceable prudential rules.
39. The BoJ needs to intensify oversight. Adopting a more intrusive approach to DTIs’ risk
management processes, corporate governance, and internal control will be important. Shortening
the timelines for providing recommendations to DTIs and performing a thorough follow-up on
remediation progress will further enhance the effectiveness of its supervisory approach.
40. Capital and liquidity requirements are no longer aligned with international widely
observed regulations. Several elements of the framework are prudent (minimum level of the ratio,
composition of Tier I), but the calculation of capital requirements still reflects the analytical
methodology of the Basel I framework. Current methodology focuses exclusively on credit and FX
risks and leaves aside other market and operational risks that are likely to be significant under a
consolidated basis approach. Introducing a broader comprehensive Pillar I approach capturing all
risks, a thorough Pillar II methodology, a surcharge reflecting the systemic importance of DTIs, as
well as a minimum quantitative prudential liquidity standard would enhance the risk coverage of the
prudential framework and complement BoJ’s efforts to foster convergence with international
standards.
41. While related party and large exposures are well defined and controlled through
statutory requirements, large exposure limits need to be changed to meet current and
prospective international standards. The BSA provides a comprehensive and transparent
definition of exposure, and counterparties to capping credit risk concentration and limiting
exposure to related parties. International standards for large exposure to a group of connected
accounts are stricter (25 percent rather than 40 percent of capital base), but the BoJ in cooperation
with the FSC is already consulting on proposals to bring the regime in line with international
standards. Further action is also required in implementing prudential standards on a consolidated
basis.
42. Loan loss provisions are currently calculated using a conservative rules-based
approach imposed by the BoJ (i.e., automatic triggers for loan classification, minimum
provisioning percentages for each category). The forthcoming implementation of IFRS 9 raises
new challenges. A better alignment with international accounting standards is desirable, and
defining a transition period, as intended by the BoJ, would be prudent considering the complexities
associated with the calculation of expected credit losses and the limitations on historical
information that may be needed. The BoJ should, however, be transparent to the DTIs about how it
will use the current regulatory provisions regime in an IFRS 9 environment. The BoJ should also
develop its technical capabilities and provide a clear set of definitions (non-performing exposures,
forebearance, and restructured loans).
Insurance Supervision
43. There has been significant progress in the area of insurance supervision. Strengths of
the supervisory framework for the insurance sector encompasses surveillance, inspection and

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enforcement powers, information sharing and cooperation powers, a rather comprehensive

supervisory reporting, and strong corporate governance framework (e.g., fit and proper), as well as
the regular dialogue with the Insurance Association of Jamaica.
44. However, there are still significant weaknesses to be addressed, These include aspects
of FSC’s independence from the government (balanced against accountability); the need to have
formal mechanisms to support group-wide risk assessment and supervision; a supervisory approach
that is rather compliance-based and less proactive, and that instead should move towards risk-
based and forward looking assessments; as well as the need to modernize life insurance liabilities as
well as solvency regime. The shortage of skilled staff is a major challenge.
45. The current regulatory framework needs to be modernized to keep up with the risks
and challenges the insurance sector is facing. The framework for the valuation of long-term
liabilities as well as the solvency regime were originally adopted based on the Canadian regime. Life
insurers have some discretion in valuing their liabilities, and the parameters used to calculate
required capital underestimate the volatility observed in the Jamaican financial market. The
adoption of IFRS 17, planned for 2021, should be introduced in combination with a modernized
risk-based solvency regime, allowing for consistency between valuation and capital adequacy and
supporting consistency of the prudential framework. In the meantime, binding regulations for asset-
liability management should be introduced and the regular stress testing framework should be
extended also to general insurers. Additionally, establishing consolidated supervision, including for
cross-sectoral groups, is a priority.
Pension Supervision
46. The regulatory framework for pension funds is relatively comprehensive, but gaps in
resources, enforcement, and coverage remain. Jamaica has the foundations for a sound pension
system with clear legislation and regulation, a functioning court system, and the required industry
and professional support. But the FSC’s capacity to adequately regulate and supervise 399 active
pension plans, many very small, and with 27 licensed pension administrators and 28 licensed
investment managers is limited. Chances of fraud and errors—a key consideration ahead of any
investment liberalization—could be large. Also, there are some parts of a Risk-Based Model in place,
but resources for pension regulation need to be strengthened. Breaches of important rules, such as
self-investment of a pension plan in the sponsor seems to persist for many years without resolution,
suggesting lack of adequate supervisory focus.
47. Reform of the investment regulations is perhaps the most pressing pension policy
issue (Box 3). A number of regulations constrain pension funds’ investment opportunities:
(i) permitted locations of foreign assets (currently constrained to the U.S.A., Canada, and the U.K.);
(ii) total foreign asset allocation limits; (iii) domestic asset allocation limits (allow new investment
categories). Two additional restrictions on concentration limits and related party limits, however,
broadly follow international best practice, and support the soundness of the sector.

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48. From a financial stability perspective, FX investment opportunities should be

gradually broadened to enhance diversification and returns. The phase-in should be aligned
with strengthened risk management, regulatory capacity and cooperation, and the deepening of
capital markets.
• Foreign investment locations for pension plans to invest could be widened to add OECD
countries and exposures to emerging markets and frontier markets through well-known multi-
country index funds.
• There is scope for a gradual increase in the FX investment limits. The process should be
consistent with enhanced data collection, enforcement capacity, risk management frameworks
in place, and cooperation among supervisors. Recent FSC stress testing work does not find
significant impact of FX investment liberalization. However, changes to investment limits for
nonbank institutions, including insurance and pension funds to avoid regulatory arbitrage,
should be gradually designed along with enhancements in the supervision capacity of the
authorities. The gradual relaxation of investment limits would be preceded by full
institution-by-institution assessments of FX and JM$ exposures, assuring micro- and
macroprudential regulations are in place, and intra- and inter-group spillovers are assessed. This
will require upgrading supervisory capacity, data reporting and collection, and assesments.
• Perceptions of regulatory forebearance should be avoided, with an appropriate sanctioning by
the relevant authority. Data suggest that funds have been exceeding the regulatory limit for
some time and a gradual raising of the limit (to, say, 10 percent) would entail a relatively minor
impact on aggregate FX placements given any impact would have been already absorbed in the
balance of payments. In any case, the capacity to monitor the implementation of the current
regulatory limit and enforceability capacity needs to improve.
49. The consolidation of the pension sector would strengthen its capacity and alleviate
existing challenges. Small funds face gaps in expertise, capacity (in a broader sense), and
governance structures necessary for undertaking good investments and exploiting economies of
scale in pension administration and investments. FSC faces challenges given the very small size of
most plans. For example, in the U.K. (with thousands of small schemes) estimated administrative
costs per member rise dramatically for small schemes.
50. The FSC should finalize the newly developed stress testing methodology and integrate
it into its risk-based methodology. Significant efforts have been made to develop the stress
testing methodology that has enhanced supervision in general and to assess the investment policy
liberalization. The process should be completed—and embedded into the supervisory approach.
The FSC should also finalize its guidelines for risk management with the enhancements implicit in
the new investment regulation and stress testing methodology.
Securities Supervision
51. BoJ and FSC should focus on risk-based consolidated supervision and market conduct.
Implementation plans have been drafted and a long-term TA project is about to commence. In this

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context, it is important to finalize the manuals for risk-based supervision. Training of staff on RBS
need to be intensified to be more proactive, courageous to make judgements and able to defend
their point of view. The FSC also needs to strengthen the horizontal analysis of the market (business
models, building peer groups, identify outliers, dynamics within the market).
52. The FSC enforcement of regulations needs to be stepped up. The FSC relies in part on
complaints from the public to identify potential enforcement cases, but the complaint numbers are
relatively low, suggesting that the public does not know where to complain. Enforcement based on
complaints is inevitably reactive. Enforcement activity is often directed to prudential rather than
conduct issues. There is, therefore, a need for the enforcement activities to be more proactively
targeted at emerging risks. In this context, transparency and communication are important to give
the public and industry confidence in the system.
53. In the near term, there is a need to strengthen the regulatory framework for securities
dealers in three ways:
(i) Continue and complete the retail repo reforms through the staged introduction of the mismatch
ratio—the proposed liquidity-based ratio should be used as a monitoring tool while the impact of
the mismatch ratio on liquidity works through the system;
(ii) Introduce the revised large exposure regime to improve resilience against contagion;
(iii) Introduce formal arrangements for group-wide supervision of conglomerates which include
securities dealers, both within the FSC and between the BoJ and FSC.
54. In the medium term, once pre-conditions are met, to serve economic development and
investor needs, and as sovereign debt issues reduce, securities dealers should be able to
intermediate in a wider range of financial instruments, in particular corporate debt and equity
instruments, commencing with JM$ and then US$.
55. However, because of the risk of poor liquidity with new financial instruments, there
are three pre-conditions to be met in the near term before previous medium-term
recommendations can be fully applicable: (i) the development of the risk-based supervision
framework and firm timeframe for introduction; (ii) FSC collects data on securities dealers’ OTC
trading as part of normal data collection; and (iii) a trade reporting mechanism is put in place to
assist price discovery and systemic risk monitoring.
56. Fintech, crowd funding and, cryptocurrencies are currently at an embryonic level, but
the authorities should develop guidance to the industry. The authorities seem to be following
Fintech developments, especially crowd funding and initial coin offerings (ICOs) but have not yet
developed a regulatory framework. The FSC has also begun to examine the regulatory changes that
may be required in this context. While the current developments in this area are not a major
financial stability concern, the authorities need to issue guidance to the industry and assess risk-
based supervision on a case-by-case basis. Before considering new digital asset trading platforms
for crypto assets trading the authorities should first address gaps in the current infrastructure,

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including the secondary trading infrastructure and reporting platform of sovereign bonds, as well as
risks and benefits of new proposals in a context of resource scarcity.
Cooperative and Credit Union Supervision
57. The authorities are in the process of bringing credit unions under BoJ supervision. The
bank licensing process for credit unions should be carefully sequenced and managed with a
properly designed communication strategy. Before granting access to the deposit insurance scheme
the BoJ will need to assess licensing criteria are met by each institution and conduct a rigorous asset
quality review of all credit unions to diagnose potential capital needs (Annex II). Agreement will be
needed on incorporating the current credit union stabilization fund to the deposit insurance fund.
C. Financial Integrity
58. Jamaica was assessed against the 2012 Financial Action Task Force (FATF) standard in
2015. The mutual assessment report (MER) concluded that Jamaica had taken many steps since the
2005 assessment to strengthen its AML/CFT framework, but that important shortcomings remained
both in terms of technical compliance with the standard and effectiveness of the AML/CFT regime. 5
The MER also identified deficiencies with respect to, inter alia, understanding of ML/CFT risks,
combatting terrorism financing framework, AML/CFT preventive measures framework, transparency
and beneficial ownership of legal persons and arrangements, and supervisory activities.
59. Jamaica has since taken important steps to address some deficiencies and should
continue its efforts to establish an effective AML/CFT regime. Since the 2015 MER, the 2014
BSA has entered into force establishing strengthened supervisory powers, the International Trusts
and Corporate Services Act was adopted, and amendments related to transparency of beneficial
ownership were brought to the Companies Acts. Proposed amendments to the Terrorism
Prevention Act and the Proceeds of Crimes Act are expected to further strengthen the legal
framework. Building on the 2016 ML/CFT National Risk Assessment (NRA), the authorities are
carrying out with the assistance of the World Bank, a comprehensive NRA expected to be
completed in 2019. The authorities are also in the process of establishing a risk-based approach to
AML/CFT supervision of DTIs and cambios with IMF technical assistance. Sustained efforts are
required to address pending shortcomings with the FATF standard, including to strengthen
AML/CFT preventive measures obligations and ensure their enforceability, enable consolidated
supervision of financial conglomerates, ensure the transparency of legal entities and support efforts
to fight organized crime.
60. Pressure on correspondent banking relationships (CBRs) have stabilized, albeit with
remaining fragilities, in particular, for money services businesses and micro-finance entities.
Domestic banks continue to experience pressures and restrictions imposed on CBRs, in particular
5
The AML/CFT mutual evaluation report is based on information provide to assessor in the context of the onsite visit
conducted on June 1-12, 2015. The final report was adopted by the Caribbean Financial Action Task Force in
November 2016 and published in January 2017. The report is available online.

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with respect to the handling of cash and clearing of checks. These restrictions on local banks affect
their ability to service cash-intensive businesses such as money services businesses and micro-
finance entities. Despite those challenges, growth in remittances and foreign direct investments has
not been impacted. The authorities have engaged with foreign regulators to communicate efforts to
address perceived risks and are in the process of implementing the recommendations resulting
from the 2015 AML/CFT MER.
CRISIS READINESS, MANAGEMENT, AND RESOLUTION

61. MOFPS is the resolution authority for DTIs under the BSA. The FSC does not have any
significant resolution powers (as opposed to the power to initiate a winding up proceeding under
the Companies Act) for those entities it supervises. DTIs and insurance companies are specifically
excluded from the 2014 Insolvency Act unless the appropriate regulator gives written consent for
the application of the Act.
62. The BoJ has enforcement powers for entities licensed under the BSA (DTIs and FHCs)
that include the power to appoint a temporary manager and to revoke an institution’s
license. In addition to these powers the BoJ may recommend to the MOFPS that it make an order
vesting a licensee’s shares and subordinated debt in the Accountant General under Section 114 of
the BSA (a vesting order). The BSA specifies the effects of the entry of such an order including
providing MOFPS with the power to carry out transactions to sell to or merge the licensee with a
buyer. Certain time limits apply to these actions after which MOFPS must apply to the court for a
winding up order.
63. Work is underway to modernize the resolution framework for financial institutions.
The bank resolution regime in Jamaica is the subject of significant reforms. A consultation paper
was jointly published by the members of the Financial Regulatory Committee (FRC) in February
2017. It is an ambitious initiative that will require substantial resources and close cooperation by all
safety net regulators to implement its provisions. After receiving public comment, a proposal was
submitted to the Cabinet in July 2017 and in October approval was given for drafting instructions to
be prepared and issued to the Chief Parliamentary Counsel to prepare legislation to establish a
Special Resolution Regime (SRR) for FIs. The proposal is to be submitted to Parliament in 2019.
64. The new framework proposes a hybrid approach to resolution. There are two separate
parts to the new framework being proposed for the resolution of financial institutions (currently
including DTIs, insurers and securities firms). 6 The first part, the special Resolution Regime (SRR), will
apply to all DTIs and certain other FIs deemed systemically important. The SRR will be an
administrative resolution mechanism. The second part, the Modified Insolvency Framework, will
apply to other nonviable/insolvent FIs and any residual portions of an entity subject to the SRR.
6
It is anticipated that any new resolution regime will also apply to credit unions once they come under the
supervision of BOJ.

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65. The independence of the resolution authority will be addressed. BoJ’s function as
resolution authority (RA) will be operationally separate from its regulatory and supervisory functions
under the BoJA and the BSA. The RA will be given the power to appoint one or more entities to
assist in the performance of its functions under the statute with certain specified legal capacities
and competencies (for example, the ability to secure financing and hold and deal with shares of FIs
and other companies).
66. The specific responsibilities in the new resolution framework are not yet finalized.
While the roles of the authorities in resolution will be strengthened as a result of the proposed
changes, the specific responsibilities of the various authorities will only become clear once the new
resolution regime is drafted, adopted, and operationalized. The proposed new framework
establishes BoJ as the resolution authority for DTIs/FHCs and any non-DTI deemed systemically
important; the FSC will continue to have powers to deal with non-DTIs that are either insolvent,
facing imminent insolvency, or is being wound up. The new framework will also allow for the
appointment of a Resolution Administrator (RAdmin) which could be the JDIC or the FSC. In this
context:
• The resolution framework reforms need to be properly sequenced. Detailed standards to classify
systemic/non-systemic institutions, the applicable priority scheme for claims under the SRR and
how a bridge institution would be established and under what rules need to be adopted.
• Recovery planning is not underway and BoJ should develop guidance for financial institutions to
assist them in preparing such plans, including for financial groups.
• JDIC’s access to funds for its operations as a resolution administrator is not clear; this is being
addressed at the SRR drafting stage. There is a deposit insurance fund (i.e., a pay box) with
reserves at about 5.5 percent of insured deposits. However, there are no formal arrangements in
place for a dedicated back-up funding system.
67. The authorities have not prepared formal contingency plans for dealing with a
systemic crisis such as was experienced in the mid-1990s. No systemic simulation exercises to
assess the authorities’ ability to deal with a systemic crisis have been undertaken. A systemic crisis
contingency planning and simulation exercise agenda should be pursued as part of normal business
practice in due course. Also, the draft 2014 Emergency Liquidity Facility Policy should be reviewed
and finalized; it has not yet been used.
CREDITOR INFRASTRUCTURE
68. The credit-to-GDP ratio is relatively low and credit to the economy is not effectively
intermediated (Figure 9a). Though credit has recently recovered to its trend level, the credit-to-
GDP ratio is still low compared to Jamaica’s peers in the Caribbean and many other emerging
markets, which are typically in the range of 40–60 percent.
69. Overall, the formal credit environment in Jamaica appears to support access to credit
for consumers and corporates, but not micro, small and medium enterprises (MSMEs).

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Although bank lending to consumers is expanding (Figure 9b), this appears to be primarily secured
with traditional types of collateral, such as motor vehicles. Unsecured lending is typically issued to
prime customers known to the financial institution or to public servants. Most lending to the MSME
sector is taking place via still unregulated micro-finance institutions (MFIs) and credit unions, which
lend to medium sized corporates, also not fully regulated. The credit reporting system built recently
should facilitate creditor risk management, but financial institutions are not fully utilizing it, partly
because of informational gaps. In addition, the effectiveness of the secured transactions law can be
enhanced together with an effective communication and public awareness strategy on the
opportunities opened by the Insolvency Act and related insolvency regime to the industry. Given the
rapid growth of lending by unregulated financial institutions, strengthening the monitoring of such
entities would be important.
70. The 2015 World Bank FSAP Development Module covered capital markets deepening.
One of the key recommendation included the development of movable asset-based financing
instruments (e.g., factoring, leasing, and venture capital). More recently IMF TA provided detailed
recommendations on the primary dealer system, strengthening sovereign debt markets
benchmarks, and developing the secondary market.

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Box 1. The World Bank FSAP Development Module, 2015
The World Bank (2015) assessment noted that credit to the private sector by DTIs remains limited,
despite a high proportion of formally banked households. This lack of access to credit and equity
constrain MSMEs’ operations and growth, and ultimately their contribution to the economy. The authorities
have taken significant initiatives to improve the legal and regulatory environment and financial infrastructure
that would contribute to enhancing financial inclusion, including the establishment of credit bureaus, the
modernization of the secured transactions legal framework and establishment of the movable collateral
registry, and improvements to the insolvency and creditor rights framework that would facilitate corporate
rehabilitations. To further strengthen the framework, key findings and recommendations include:
(i) enhance the credit reporting oversight and financial consumer protection framework, and adopt measures
to encourage credit bureaus to compete in services and not in data;
(ii) enhance the regulations of the movable collateral registry; and
(iii) develop regulations for the insolvency law along with training of judges and insolvency administrators.
Alternative sources of SME finance beyond credit lines or personal loans, such as factoring, leasing,
and venture capital are limited. Specific instruments to facilitate access to finance for low income
households and agriculture finance, should be designed, including micro-insurance and regular saving
products.
High interest rates and low penetration of credit can be explained by high credit risk owing to
information asymmetries, as well as limited competition in the banking sector. Financial institutions
have not been able to accurately assess borrowers’ level of indebtedness and repayment capacity and credit
activity has been low and highly concentrated in existing customers. In this context, and despite the low cost
of funding and high requirements for traditional collateral, interest rates are high. Policies that encourage
competition in the banking sector should be considered, including promoting enhanced transparency and
consumer disclosure that would enable consumers to compare products and quality of service amongst
financial institutions, strengthening dispute resolution mechanisms, and expanding financial literacy.
Additional recommendations included enhancing housing policy strategy, retail payments innovation and
consumer protection. The Development Module FSAP recommended that (i) a comprehensive national
housing policy strategy be developed, (ii) policy reforms that encourage innovations in retail payments be a
priority and the current regulatory framework reviewed to encourage competition amongst bank and
nonbank providers; and (iii) the financial inclusion agenda also requires a comprehensive strategy on
consumer protection regulation and supervision.
Source: World Bank – Jamaica Financial Sector Assessment, April 2015.

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Box 2. Insurance and Pension Funds FX Investment Limit Regulation1

The 2006 investment regulations impose a range of quantitative limits at the level of asset classes,
related parties, individuals and foreign exchange (FX) exposure with some differences depending on
the vehicle through which the assets are invested. Plan assets can be invested directly, through a
‘segregated fund’ where an investment manager has the mandate for one fund only, or through a range of
pooled funds. A Type I pooled fund can only manage assets of pension plans. They are bound by exactly the
same rules as pension plans in terms of asset allocation limits—except that Type I plans are exempt from the
concentration limits (5 percent) and related party limit (10 percent). These features were subject to confusion
among several market participants and in previous reviews of the pension system. Next are Deposit
Administration Contracts, run by insurers but following the 2006 regulations, which are also exempt from the
concentration and related party limits like Type 1 funds. They are supervised by the insurance teams and
subject by the BoJ 5 percent ceiling on foreign investments. Type II pooled funds—open-ended investment
funds, mutual funds, collective investment schemes (CIS), unit trust, and any investment fund, other than a
Type I Pooled Fund—are subject to the concentration and related partly limits. But for CIS’s the BoJ has
relaxed the original 5 percent FX restriction and can now have FX investments up to 25 percent.
Quantitative limits on FX investments were set in the 2006 regulations at 20 percent of the total
portfolio; these were over-ridden by a BoJ intervention to reduce the exposure to 5 percent for all pension
investments except via CISs, with a limit of 25 percent. The foreign exchange regulations also specify that
only investments in the U.S., Canada and the U.K. are permitted. The BoJ issued a Discussion Paper in 2015
showing its support for removing restrictions on pension plans (so they could invest 20 percent of assets in
foreign securities as originally envisaged) and insurance companies in the medium term (3 years) but noted
a range of concerns about liberalizing. These included the impact on ‘system stability’ due to the impact on
FX reserves, increasing yields on Government of Jamaica (GoJ) securities if demand from pension funds or
insurance companies were to plummet and the impact of any volatility in the bond market on plans to
reform the retail repo market. The Paper also noted that liberalization for pension plans and insurance
companies would have to follow that for CIS for whom the BoJ had liberalized the 5 percent restriction on FX
holdings to 25 percent. The Paper also highlighted the potential for regulatory arbitrage caused by the
permission given to one investment manager to offer exposure to foreign currency returns more than
5 percent or even 20 percent of total assets in the pool because the pension plan investors were using
Jamaican dollars to buy Jamaican dollar denominated units and receiving Jamaican dollar returns and hence
were not judged by the BoJ to be breaching its 5 percent ceiling. However, the BoJ only gave this
clarification to one investment manager—leaving the others subject by the 5 percent limit until they either
receive a similar clarificatory letter from the BoJ, or the 5 percent limit is increased.
--------------------------
1
The investment of pension plan assets DACs is subject to the investment regulations. Similar to Type I pooled funds,
DACs are exempt from the general concentration and related party limits (regulations 17 and 34).

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Figure 1. Jamaica: Macrofinancial Developments, 2006–17

Low and volatile growth, with high structural …Recent reforms have lowered public debt, but the debt
unemployment… burden remains high.
Growth and unemployment Restoring Fiscal Sustainability
(in percent of GDP)
(In percent) Unemployment Rate
4 16 20
Public debt (rhs) Budget balance Interest payments
150
(rhs)
140
2 14 10
130
0 12 0
120
-10
-2 10 110
-20 100
-4 8
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Note: Public debt prior to 2016 uses the definition under the EFF. Starting
in 2016 consolidated central government and public bodies' debt is
consistent with Jamaica's Fiscal Responsibility Law.
…trend nominal exchange rate depreciation and FX

Inflation is well anchored and interest rates have
reserves have recovered but remain at the lower end of
declined…
adequacy.
Inflation and Interest Rates REER, NEER and Reserve Adequacy
(in percent)
160 7
25
Core CPI Inflation
3 months T-bill rate 140 6
Commercial Banks' weighted average loan rates
20 120
5
100
4
15 80
3
60
2
10 40
20 1
5 0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
GIR in percent of ARA metric
0 REER
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 NEER
GIR in months of current year imports of goods and services (rhs)
Tourism and remittance inflows are important for external …credit growth is contributing to financial deepening, but
sustainability… credit-to-GDP remains relatively low.
Flows supporting external sustainability Credit growth for deposit taking institutions
(in percent of GDP) (in percent)
20 12 40
Tourism Receipts Remittances FDI (rhs) Private Sector Loan Growth
10 Private Sector Loans in percent of GDP
18 30
8
16 6 20
4
14 10
2
12 0 0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Bank of Jamaica and Staff calculations.

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Figure 2. Jamaica: Deposit Taking Institutions’ Balance Sheet Structure, December 2017
2017, Structure in the Assets' Side

100
Other assets, 6 Other assets, 5 Other assets, 7
Letters of credit , 2 Letters of credit , Letters of credit ,
Physical capital, 2 Physical capital, Physical capital,
90
Cash items and balances at Cash items and balances at Cash items and balances at
BoJ, 12 BoJ, 13 BoJ, 10
80 Due from banks, 3
Due from banks, 8
Due from banks, 10
70
60
Loans and advances, net of
50 Loans and advances, net of provisions ,
provisions , Loans and advances, net of
provisions ,
40
30
20
Financial Investments , 29
Financial Investments , 25 Financial Investments , 23
10
-
Total Foreign Banks Domestic Banks
2017, Structure in the Liabilities' Side

100
Other liabilities, 6 Other liabilities, 6 Other liabilities, 7
90 Other borrowed funds, 9 Other borrowed funds, 9 Other borrowed funds, 9

Letters of credit ,
Letters of credit , 2 Letters of credit ,
Repos, 3 Repos, Repos, 3
80 Due to banks, 3 Due to banks, 2
Due to banks, 3
70 Term deposits, 15
Term deposits, 21
Term deposits, 34
60
50
Savings deposits, 37
40
30
20
Demand deposits, 24
10 Demand deposits, 18
Demand deposits, 7
-
Total Foreign Banks Domestic Banks
Source: Bank of Jamaica and IMF staff calculations.

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Figure 3. Jamaica: Securities Dealers’ Activities Balance Sheet (2017) Rolling Investment
Contracts (“Repo”) by Client
(As percent of “repo” liabilities, 2015-17)
100%
90% 22 24.2 28
80%
70%
60% 40.4
50% 47.2
47.7
40%
30%
20% 37.7
28.6 24.3
10%
0% Retail clients Non-financial corporate clients Financial Institutions
2014 2015 2016
Source: Bank of Jamaica and IMF staff calculations

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Figure 4. Jamaica: Strong Growth in CIFs and Exempt Distribution
Sources: Authorities data and IMF staff calculations.

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Figure 5. Jamaica: Large-value Payment System Network Analysis
A. Four DTIs appear to be central in the large-value payment system … B. three DTIs, actively borrow from BoJ’s short-term
network… repos.
…C. two of them, belonging to groups, engage in long-term repos … D. in the large-value payment system network by
with their own securities dealers (SDs)… groups show strong intra-linkages (i.e. self-connecting
nodes).
… E. in the large-value payment system, transactions between DTIs …F. in the long-term repo transactions network, about 73
and SDs account for 31 percent, and among DTIs for 28 percent … percent of the transactions involve a DTI and a SD.
Source: Calculations based on Bank of Jamaica data.

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Figure 6. Jamaica: Exposure Network Analysis

A. Two DTIs have intense interlinkages with foreign …B. in the exposure network by groups and foreign
financial institutions … financial institutions are dominant.
…C. by type of institutions, DTIs and foreign financial institutions dominate against other segments in the domestic
exposures network …
Source: Calculations based on Bank of Jamaica data.

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Figure 7a. Jamaica: Stress Test Scenarios for Deposit Taking Institutions
Real GDP Growth under different scenarios

(in percent)
4
Baseline
3 Adverse
Severe Adverse
2
-1
-2
-3
-4
1997/98 2002/03 2007/08 2012/13 2017/18 2022/23
Source: IMF staff calculations.

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Figure 7b. Jamaica: Adverse Scenario Solvency and Liquidity Stress Test Results1
0.8
0.7
Capital injection (% GDP)

0.6
0.5
0.4
0.3
0.2
0.1
0.0
FBs
DBs
All
25
Baseline
After shocks
After shocks & contagion
20
Capital adequacy ratio (%)
15
10
0
All
FBs
DBs
3
Baseline
Stress
2
Average rating
1
FBs
DBs
All

1
The analysis and charts are underpinned by the April 2018 WEO assumptions.

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Figure 7c. Jamaica: Severe Adverse Scenario Solvency and Liquidity Stress Test Results1
3.5
3.0
Capital injection (% GDP)

2.5
2.0
1.5
1.0
0.5
0.0
FBs
DBs
All
25
Baseline
After shocks
After shocks & contagion
20
Capital adequacy ratio (%)
15
10
0
All
FBs
DBs
3
Baseline
Stress
2
Average rating
1
FBs
DBs
All

1
The analysis and charts are underpinned by the April 2018 WEO assumptions.

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Figure 8. Jamaica: Insurance Stress Test Results
Life insurers are largely exposed to domestic sovereign Most life insurers remain above the regulatory threshold,
bonds, while equity and real estate play only a minor role. while the majority of non-life firms drop below their
respective threshold in Scenario 2.
Asset allocation before stress Solvency ratios before and after stress
500%
450%
Life 400%
350%
300%
250%
Non-Life 200%
150%
100%
0% 20% 40% 60% 80% 100% 50%
0%
Cash Government bonds
Other bonds Equity
Real Estate Mortgages
Other investments Other assets Life Non-life
Segregated accounts Interquartile range Median
The value of assets and liabilities is less sensitive to The median company remains profitable after stress, and
adverse market developments, but a natural disaster especially after Scenario 1, expected returns on equity
substantially impacts non-life insurers’ balance sheets. converge soon towards the baseline.
Change in assets and liabilities Median Return on Equity

(historic and projected)
70%
30%
60%
50% 25%
40% 20%
30% 15%
20%
10%
10%
5%
0%
0%
-10%
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018p
2019p
2020p
-20%
Life (Scen1) Non-life Life (Scen2) Non-life
(Scen1) (Scen2) Life (baseline) Non-Life (baseline)
Life (Scen1) Non-life (Scen1)
Assets Liabilities
Life (Scen2) Non-life (Scen2)
Source: IMF staff calculations based on company submissions.

Notes: Return on equity projections in Scenario 2 were only requested for the first year of the projection horizon.

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Figure 9a. Jamaica: Bank/DTI Credit to GDP Ratio by Selected Countries, 2016
(In percent)
p
120
100
80
60
40
20
0
Figure 9b. Jamaica: Composition of DTI Consumer Loans

(In billions of JM$, 2006-2017)
900
800
700
600
500
400
300
200
100
Unsecured
Other secured credit (excl. mortgage)
Total mortgage (commercial banks + building Societies)
Source: FSAP Team and Authorities’ Data.

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Table 1. Jamaica: Selected Economic Indicators1

Population (2013): 2.8 million Per capita GDP (2014): US$4955
Quota (current; millions SDRs/% of total): 382.9/0.08% Literacy rate (2015)/Poverty rate (2016): 87%/17.1%
Main products: Alumina, tourism, chemicals, mineral fuels, bauxite, coffee, sugar Unemployment rate (Apr. 2018): 9.7%
Est. Projections
2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21
(Annual percent change, unless otherwise indicated)

GDP and prices
Real GDP -0.7 1.0 0.2 1.0 1.4 0.9 1.4 1.6 1.8
Nominal GDP 6.2 9.2 7.2 7.7 5.9 8.1 5.5 7.1 6.9
Consumer price index (end of period) 9.1 8.3 4.0 3.0 4.1 4.0 4.7 5.1 5.0
Consumer price index (average) 7.2 9.4 7.2 3.4 2.4 4.6 3.7 5.5 5.0
Exchange rate (end of period, J$/US$) 98.9 109.6 115.0 122.0 128.7 126.0 … … …
Exchange rate (average, J$/US$) 91.2 103.9 113.1 118.8 127.3 127.9 … … …
Nominal depreciation (+), end-of-period 13.3 10.8 5.0 6.1 5.4 -2.1 … … …
End-of-period REER (appreciation +) (INS) -2.0 -4.6 7.5 -2.4 … -2.4 … … …
End-of-period REER (appreciation +) (new methodology) -3.4 -3.5 -0.2 -2.4 -2.6 3.2 … … …
Treasury bill rate (end-of-period, percent) 6.2 9.1 7.0 5.8 6.3 5.1 … … …
Treasury bill rate (average, percent) 6.6 7.9 7.8 6.3 6.1 5.1 … … …
Unemployment rate (percent) 3/ 14.5 13.4 14.2 13.3 12.7 9.7 … … …
(In percent of GDP)
Government operations
Budgetary revenue 25.7 27.1 26.3 27.0 27.9 29.0 29.8 28.9 28.6
Of which: Tax revenue 4/ 24.0 23.6 23.6 24.5 25.7 25.7 25.9 25.4 25.3
Budgetary expenditure 29.8 27.0 26.7 27.3 28.1 28.6 29.6 28.1 27.9
Primary expenditure 20.3 19.5 18.8 19.8 20.3 21.6 22.8 22.0 22.1
Of which: Wages and salaries 11.0 10.1 9.5 9.4 9.4 9.4 9.1 9.1 9.0
Interest payments 9.5 7.5 8.0 7.4 7.8 7.0 6.8 6.2 5.8
Budget balance -4.1 0.1 -0.5 -0.3 -0.2 0.5 0.2 0.8 0.7
Of which: Central government primary balance 5.4 7.6 7.5 7.2 7.6 7.4 7.0 7.0 6.5
Public entities balance 8/ 0.1 0.0 0.9 1.8 2.0 0.6 0.0 0.0 0.0
Public sector balance -3.9 0.1 0.4 1.6 1.5 1.1 0.2 0.8 0.7
Public debt (FRL definition) 4/ 6/ … … … … 115.1 102.2 99.6 93.6 88.3
Public debt (EFF definition) 5/ 7/ 145.0 140.5 139.7 121.3 121.8 109.1 105.8 99.0 92.7
External sector
Current account balance -10.3 -8.7 -7.0 -2.0 -2.6 -5.4 -5.0 -4.0 -3.7
Of which: Exports of goods, f.o.b. 11.9 10.6 10.2 8.3 8.8 9.2 10.8 11.2 11.1
Exports of services 14.3 15.5 14.8 15.8 14.2 14.5 15.3 15.7
Of which: Imports of goods, f.o.b. 38.7 37.5 36.4 30.0 31.5 34.9 36.9 36.6 35.9
Imports of services 18.8 19.8 19.5 21.4 20.6 21.1 23.0 24.1
Net international reserves (US$ millions) 884 1,304 2,294 2,416 2,769 3,075 2,965 3,168 3,221
NIR (excl. prefinanced repayments of maturing bonds) … … 1,995 2,363 2,769 3,075 2,965 3,168 3,221
of which: non-borrowed … 714 1,335 1,470 1,944 2,398 2,454 2,820 2,887
(Changes in percent of beginning of period broad money)
Money and credit
Net foreign assets -13.5 18.7 27.9 10.1 7.1 5.5 2.8 5.5 2.6
Net domestic assets 26.8 -12.6 -22.3 8.6 15.4 2.6 2.7 1.6 4.3
Of which: Credit to the private sector 13.0 8.2 3.1 8.2 22.4 9.0 7.8 8.4 8.8
Of which: Credit to the central government 5.2 -3.1 -15.2 5.5 0.4 2.8 2.8 0.0 -2.1
Broad money 13.3 6.1 5.7 18.7 22.5 8.1 5.5 7.1 6.9
Velocity (ratio of GDP to broad money) 3.4 3.5 3.5 3.2 2.8 2.8 2.8 2.8 2.8
Memorandum item:
Nominal GDP (J$ billions) 1,340 1,462 1,568 1,688 1,789 1,933 2,039 2,184 2,334
Sources: Jamaican authorities; and Fund staff estimates and projections.
1/ Fiscal years run from April 1 to March 31. Authorities' budgets presented according to IMF definitions.
2/ The new methodology uses trade weights for Jamaica that also incorporate trade in services especially tourism.
3/ As of January 31.
4/ Consolidated central government and public bodies' debt, consistent with the Fiscal Responsibility Law. The most significant deviation from the
5/ Central government direct debt, guaranteed debt, and debt holdings by PCDF, consistent with the definition used under the EFF approved in
6/ Consistent with the Fiscal Responsibility Law (FRL), implementation of the FRL-consistent debt definition began in FY16/17. A backward series
7/ The decrease in debt in FY15/16 partly reflects the PetroCaribe buyback operation that generated an immediate 10 percentage point reduction
8/ Projections for 18/19 reflect the special distribution from PCDF to Central Government, ahead of its reintegration by end 18/19.

38
JAMAICA
INTERNATIONAL MONETARY FUND
Table 2. Jamaica: Financial Sector Structure

Financial Institutions 2005 2017
Percent
Percent Percent
Number In billion1 Percent of Total Assets Number In billion1 of Total
of GDP2 of GDP2
Assets
Commercial Banks 6 376 36.6 53.7 7 1,277 40.2 72.6
Near Banks (FIAs)3 5 45 4.4 6.4 2 39 1.2 2.2
Building Societies 4 89 8.7 12.8 2 129 4.1 7.3
Credit Unions 50 33 3.2 4.7 29 98 3.1 5.6
Life Insurance Companies 6 79 7.7 11.3 6 295 9.3 16.8
Non-Life Insurance
Companies 11 36 3.5 5.1 11 77 2.4 4.4
Unit Trust Funds 4 16 1.5 2.2 14 197 6.2 11.2
Securities Firms4 34 354 34.5 50.6 31 582 18.3 33.1
Pension Funds 805 483 15.2 27.5
Total 120 1,027 907 3,176 181

Sources: Prudential_Indicators as at 31 Dec 2005 and Prudential_Indicators as at 30 Jun 2017, Publisher: Bank of Jamaica; Statistical Institute of Jamaica, Publisher: Statistical
Institute of Jamaica.
1
Total Assets (incl. contingent accounts). Total Assets and Liabilities reflected net of IFRS Provision for Losses and include Contingent Accounts (Customer Liabilities for
Acceptances, Guarantees and Letters of Credit). In keeping with IFRS, Total Assets and Liabilities were redefined to include Contingent Accounts.
2
Gross Domestic Product at current market prices JM$700,276 and JM$1,758,449 for 2005 and 2016 respectively. Units: ' Millions of Jamaican dollars.
3
Merchant banks
4
At 9, 2017, there were 42 securities dealer companies, 3 individual dealers, 2 investment advisor companies and 2 individual investment advisors registered by the FSC to
operate in Jamaica. Of the 42 securities dealer companies, 32 were recognized as core securities dealers while 10 dealers were recognized as non-core securities dealers. With
regards to the core securities dealers 8 received primary dealer status from the BoJ, 13 were approved by the JSE as stockbrokers, 10 operated as FSC approved Collective
Investment Schemes fund managers. 10 non- core securities dealers includes one (1) commercial bank, four (4) insurance companies, two (2) credit unions, one (1) pension
fund management company, one (1) trust company and one (1) education savings plan company.
Table 3. Jamaica: Financial System Groups
Deposit Taking Subsidiary/Branch HQ location Building Securities' Dealers Life Insurance General Insurance Real Estate
Institutions (immediate parent) Societies
Commercial Banks (7)
Bank of Nova Scotia Ja Subsidiary Barbados (Canada) Scotia Scotia Investments Ja. Scotia Scotia Life Insurance (Ja.)
Ltd. Jamaica Asset Management Jacotia
Building Life Insurance (Ja.)
Citibank N.A. Branch USA S i
FirstCaribbean Subsidiary Barbados (Canada) First Caribbean International
International Bank Securities Ltd.
(Jamaica) Ltd
First Global Bank Subsidiary Jamaica GK Capital Management Ltd. GK General Insurance
Limited (FGB) Co.
JN Bank Limited Subsidiary Jamaica National JN Fund Managers JN Life Insurance Co. JN General Insurance Ja. Joint Venture
(JNBANK) Building Co. Investment Co.
Society (Property Co.)
(Cayman) Building Societies
Development Co.
JN Properties Ltd
National Commercial Subsidiary Jamaica NCB Cap. Markets Ja. NCB Insurance Company Guardian General
Bank Ja Ltd. (NCBJ) NCB Insurance Company Ltd. Ltd. Insurance Jamaica
West Indies Trust Co. Guardian Life Jamaica Ltd. Ltd. Advantage
Guardian Life Jamaica Ltd. General Insurance
Sagicor Bank Jamaica Subsidiary Jamaica Sagicor Securities Limited Sagicor Life Jamaica Real Estate X Fund Ltd
Limited (SBJL) Sagicor Investments Jamaica Sigma Real Estate Fund
Sagicor Life Jamaica
Merchant Banks (2)

JMMB Merchant Bank Subsidiary Jamaica Jamaica Money Market JMMB Real Estate
Limited (JMMB) Brokers Ltd Holdings
JMMB Securities (Ja.) Ltd.
JMMB Fund Managers (Ja.)
Ltd.
MF&G Trust & Finance Stand-Alone Jamaica
Building Societies (2)
The Scotia Jamaica Subsidiary Jamaica (Canada) The Scotia
Building Society (SJBS) Jamaica
Building
Victoria Mutual Building Subsidiary Jamaica Victoria Victoria Mutual Pension British Caribbean Victoria Mutual
Society (VMBS) Mutual Management Insurance Ltd. Property Ltd
Building VM Wealth Investments Ltd. Victoria Mutual
Society Ja. Property Services
VMBS Realty
JAMAICA
39
JAMAICA
40
Table 4a. Jamaica: Financial Sector Key Indicators

June 2017 2005
Domestic
Domestic Private Foreign
Depoit Taking institutions All Banks Foreign (FB) All Banks Private
(DB) (FB)
(DB)
Capital Adequacy
Total capital / RWA (CAR) * 21.4 20.6 21.7 32.6 39.6 29.9
Asset Quality
NPLs (gross)/ total loans * 2.6 3.2 2.3 2.9 4.8 2.3
Provisions/NPLs 120.3 95.8 136.4 69.4 35.0 92.1
(NPLs-provisions)/capital * -1.8 0.4 -2.8 2.3 5.8 0.5
FX loans/total loans 25.9 15.6 30.8 35.3 18.5 40.6
RWA/total assets 67.3 69.2 66.3 42.2 41.0 42.7
Profitability (quarterly)
ROA (after-tax) * 0.7 0.3 1.0 3.1 2.2 3.4
ROE (after-tax) * 5.1 2.0 6.6 22.3 13.8 26.6
Liquidity
Liquid assets/total assets 26.3 21.5 28.6 23.9 11.8 28.7
Liquid assets/short-term liabilities* 35.0 28.1 38.4 30.4 15.0 36.5
Sensitivity to Market Risk
Net FX exposure / capital * 7.6 -9.1 15.7 6.9 12.2 4.2
Insurance sector General Insurance Life Insurance

Capital to Assets* 28.4 87.5
Liquid Assets to Total Liabilities 77.4 23.2
Return on Equity 3.0 8.6
Securities Dealers June 2016 June 2017 Dec. 2017

Tier 1 Capital to RWA 17.5 16.7 16.0
Return on Assets 0.8 0.5 0.7
Table 4b. Jamaica: Financial Sector Indicators1
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Balance sheet growth (y/y)

Capital 11.5 14.7 13.8 5.1 5.3 4.0 18.3 7.4 9.0 12.6 8.1 10.4
Loans 28.7 24.2 5.3 -1.4 4.8 12.9 14.1 6.6 9.3 18.3 7.2 11.2
NPLs 14.2 57.6 68.0 36.1 44.0 -10.8 -12.9 0.2 -11.6 -16.9 -2.6 10.3
Liquidity
Domestic currency liquid assets 2 25.0 30.3 31.3 36.2 30.5 26.7 26.3 31.5 26.5 27.4 31.5 30.8
Asset Quality
Prov. for loan losses/NPLs 103.4 87.2 75.7 69.9 75.2 90.3 95.7 101.6 106.4 117.5 121.3 111.2
NPLs/loans 2.3 2.9 4.7 6.5 8.9 7.0 5.4 5.0 4.1 3.5 3.5 3.5
Capital Adequacy
NPLs/Capital+Prov. for loan losses 9.1 12.3 17.7 20.2 28.4 24.1 18.6 17.4 14.5 11.0 10.0 11.6
Capital Adequacy Ratio (CAR) 16.0 15.2 18.8 18.2 16.1 14.1 15.1 15.9 14.9 14.5 14.5 14.5
3
Profitability (calendar year)
Pre-tax profit margin 26.7 26.3 21.4 21.1 30.8 21.4 19.0 18.9 19.8 26.8 24.9 28.0
Return on average assets 3.4 3.5 2.9 2.5 3.9 2.4 2.0 2.1 2.1 2.1 2.1 2.1
Source: Bank of Jamaica.

1
Commercial banks, building societies, and merchant banks.
2
Data for 2013 refer to the September calendar quarter.
3
/Percentgof prescribed liabilities.
p y p y p
JAMAICA
41
42
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Table 5. Jamaica: Financial Sector Aggregate Exposures Network
(Figures represent borrowing as percent of all borrowing; borrowers in rows and lender in columns)
As percent of
Foreign Total Borrowing As percent of
Financial Public Total Network
Lender/Borrower DTI 1 DTI 2 Financial from Foreign Total
Institutions1 Institutions Contribution
Institutions Financial Borrowing
Institutions
DTI 1 - 0.1 4.0 0.7 0.2 5.0 3.7 4.9

DTI 2 0.1 - 12.3 16.9 0.5 29.8 83.9 29.7
Financial Institutions1/ 1.5 4.7 21.5 2.5 7.8 38.0 12.4 38.1
Foreign Financial
9.1 6.6 11.2 - 0.0
Institutions 26.9 - 26.9
Public Institutions 0.0 0.0 0.3 0.0 - 0.3 0.0 0.3
Total 10.7 11.4 49.3 20.2 8.4 100 100 100

1
Excludes DTI 1 and DTI 2.
Source: FSAP team and authorities’ data.

JAMAICA
Annex I. Report on Observance of Standards and Codes: Basel

Core Principles
A. Introduction
1. This assessment of the implementation of the Basel Core Principles for Effective
Banking Supervision (BCP) in Jamaica has been completed as part of the Financial Sector
Assessment Program (FSAP).
2. This FSAP has been undertaken by the International Monetary Fund (IMF) in 2018, at
the request of the Jamaican authorities. 1 The assessment reflects the regulatory and supervisory
framework in place as of the completion of the assessment. It is not intended to analyze the state of
the banking sector or crisis management framework, which are addressed by other assessments
conducted in this FSAP.
3. An assessment of the effectiveness of banking supervision requires a review of the

legal framework, and detailed examination of the policies and practices of the institutions
responsible for banking regulation and supervision. The assessment focused on the regulation
and supervision by the Bank of Jamaica (BoJ) of the Deposits-Taking Institutions (DTIs) and did not
cover the specificities of regulation and supervision of other financial intermediaries.
B. Information and Methodology Used for Assessment
4. This assessment was performed against the standard issued by the Basel Committee
on Banking Supervision (BCBS) in 2012. Since the previous BCP assessment, which was conducted
in 2006, the BCP standard has been revised. The revised Core Principles (CPs) strengthen the
requirements for supervisors, the approaches to supervision, and the supervisors’ expectations of
banks through a greater focus on effective risk-based supervision and the need for early
intervention and timely supervisory actions. Furthermore, the 2012 revision placed increased
emphasis on corporate governance and supervisors’ conducting sufficient reviews to determine
compliance with regulatory requirements and thoroughly understanding the risk profile of banks
and the banking system. This assessment was thus performed according to a significantly revised
content and methodological basis, compared to the BCP assessment carried out in 2006.
5. Compliance with the BCP was assessed and rated against the essential criteria of the
BCP. To assess compliance, the BCP Methodology uses a set of essential criteria (EC) and additional
criteria (AC) for each principle. The EC were the only elements by which to gauge full compliance
with a Core Principle (CP). The AC are recommended as the best practices against which the
authorities of some more complex financial systems may agree to be assessed and graded. The
assessment of compliance with each principle is made on a qualitative basis. The assessment of
compliance with each CP requires a judgment on whether the criteria are fulfilled in practice.
1
The assessment team comprised Richard Gresser (former Senior Director, Capital Division of the Office of the
Superintendent of Financial Institutions Canada) and Luc Riedweg (IMF).

JAMAICA
Evidence of effective application of relevant laws and regulations is essential to confirm that the
criteria are met.
6. The assessment team held extensive meetings with BoJ officials, as well as the Minister
of Finance, the banking industry, and other relevant counterparts who shared their views with
the assessors. The team also reviewed the framework of laws, regulations, and supervisory
guidelines. The BoJ provided self-assessments of the CPs and comprehensive questionnaires filled
out by the authorities. The BoJ also facilitated access to supervisory documents and files, staff, and
systems.
7. The assessment team appreciated the excellent cooperation, including extensive

provision of internal guidelines, supervisory files, and reports. The team extends its thanks to
staff of the BoJ staff who responded to the extensive and detailed request promptly and accurately
during the assessment at a time when supervisory staff were burdened by many supervisory and
regulatory initiatives related to consolidated and risk-based supervision.
C. Preconditions for Effective Banking Supervision 2
8. Sustained fiscal discipline and a multitude of supply-side reforms have helped

establish macroeconomic stability in Jamaica. Macroeconomic fundamentals have been steadily
improving, which is reflected in high employment levels, a well-anchored inflation, and a primary
surplus exceeding 7 percent of GDP since 2013/14. However, DTIs operate in a low growth
environment (real GDP growth has averaged 0.9 percent in the last four years).
9. Building on the progress so far in strengthening the macro-economy, the Jamaican

authorities are seeking to establish an effective financial stability framework. The important
first step of establishing institutional arrangements is complete. A high level inter-agency Financial
System Stability Committee (FSSC) has been established by way of an amendment to the BoJ Act.
The FSSC is tasked with producing regular financial stability assessments and providing
recommendations to the BoJ on potential macroprudential policy actions. Final responsibility for the
actions resides with the BoJ who now faces the challenging task of operationalizing the
macroprudential policy framework. While good progress has been made, there are still many
information gaps to be closed before an early warning system is in place. In tandem with this work
on indicators, the BoJ is also engaged in a search for instruments to include in a “macroprudential
policy toolkit” for mitigating and containing systemic risks.
10. The current framework for crisis management does not provide sufficient tools for the
resolution of the complex financial conglomerates that are predominant in Jamaica’s financial
sector and does not establish one resolution authority for such institutions. To address such
shortcomings the authorities have proposed a two-part solution: an administrative resolution
framework for all DTIs, and a modified insolvency framework for all other financial institutions with
the BoJ acting as the resolution authority. Drafting instructions for the former have been prepared
2
This summarized section draws from other documents produced for the FSAP. A complete analysis of the
macroeconomic framework is contained in Article IV reports.

JAMAICA
and sent for transmission to the Office of the Parliamentary Counsel while such instructions are not
complete for the latter initiative although both proposals are to be submitted for adoption by
Parliament in early 2019. In this context, much work is needed to have an operational system for
financial institution resolution in place within the proposed timeline.
11. The deposit insurance framework, managed by the Jamaica Deposit Insurance
Corporation (JDIC), broadly conforms to international best practices. Although the JDIC is part
of the institutional framework for system-wide crisis preparedness there has not been any
contingency planning for a systemic crisis. There is a plan for a crisis simulation exercise to be
conducted in 2019 under the auspices of the Financial Regulatory Committee (FRC) which is aimed
at facilitating information sharing, cooperation and collaboration among domestic authorities on
regulatory matters.
12. Transparent information is provided by DTIs to the public. Given Jamaica’s adoption and
implementation of IFRS and in particular IFRS 7 (Financial Instruments: Disclosures), DTIs are
required to disclose their financial statements to enable users to evaluate the nature and extent of
risks arising from financial instruments to which the entity is exposed and its management of those
risks.
D. Main Findings
Responsibility, Objectives, Powers, Independence, Accountability (CPs 1–2)
13. Considerable progress has been made since the last FSAP in 2006. Owing to the Banking
Services Act (BSA) passed in June 2014, the architecture of the supervisory framework has been
substantially improved, with critical supervisory functions being transferred from the MoFPS to the
Governor of BoJ. The legislation has established a clear allocation of responsibilities for the
supervision of financial institutions between the BoJ and the Financial Services Committee (FSC). The
legal framework gives the BoJ powers to authorize DTIs and FHCs, conduct ongoing supervision and
undertake timely corrective action. The BoJ has a broad range of powers provided for in the BSA to
address individual situations where DTIs do not comply with laws and regulations or where DTIs
engage in unsound practices.
14. Whilst the architecture of supervision has been improved, the BoJ’s inability to issue
binding regulations constitutes a limitation. Minimum prudential requirements for DTIs are
primarily to be found in the banking law itself and in the supplementary Regulations and Supervisory
Rules which, upon a proposal from the BoJ’s Supervisory Committee, must systematically be subject
to consultation of the MoFPS and affirmative resolution from the Parliament. The BoJ has over the
years introduced several standards of sound practices (SSP) which are intended to serve as guidance
to DTIs. While these standards do not by themselves have the force of law, they deal with key
aspects of supervision (corporate governance, internal control, fit and proper assessments, credit risk
management, liquidity management, etc.). Furthermore, breaches of provisions included in these
standards cannot lead directly to enforcement action. They have to be viewed as constituting unsafe
and unsound practices. Also, the guidance notes are not as detailed and prescriptive as the
Regulations already issued by the BoJ.

JAMAICA
15. Supervisory resources are stretched and insufficient for the range and nature of the
tasks the BoJ must carry out for effective supervision. The BoJ has not yet quantified the impact
of risk-based supervision and carry out a mapping of the skills that are required. The legislation does
not include express prohibitions against members of the Supervisory Committee and senior
supervisory staff from holding any position of responsibility in a supervised entity for a determined
period after they demit office.
Ownership, Licensing, and Structure (CPs 4-7)
16. Permissible activities for banks, licensing, transfers of ownership, and bank mergers
and acquisitions are appropriately defined and controlled. The permissible activities of DTIs
supervised by the BoJ are well defined leaving little doubt as to the status of institutions using the
word bank in their name. The BSA provides an adequate basis for the BoJ to approve or reject major
acquisitions or investments by a DTI. The BoJ also has well established supervisory practices to limit
and monitor risks arising from such acquisitions. Entry to the banking business, either through a de
novo license or a change in ownership or an acquisition are controlled by the BoJ using consistent,
well defined criteria to evaluate, as appropriate, the investor’s financial capacity, management
strength, suitability and business plan viability.
Methods of Ongoing Supervision (CPs 8–10)
17. The BoJ carefully assesses compliance with prudential regulations. The BoJ uses a
reasonable range of techniques and tools to implement its supervisory approach, which also
includes monitoring of macroeconomic and sector-wide developments. It employs a mix of on- and
offsite supervisory elements to assess the risks that DTIs are running and has broad information
gathering power. However, while thorough analyses of the risks taken by the banking system as a
whole have been conducted on a regular basis, the offsite assessment is not sufficiently analytical
and does not compare banks with peer groups and / or the banking sector. Further, the assessment
of the risk profile of each individual DTI as part as offsite supervision has been rather limited and the
frequency of on-site examination rather low.
18. The BoJ has taken firsts step towards improving its supervisory approach by initiating
the implementation of a risk-based supervision methodology. A well-designed risk-based
methodology has already been defined. Under the risk-based supervision framework, the assessed
risk profile of a licensee will determine the frequency and intensity of monitoring. It is important to
remain cautious as only one DTI is currently supervised under the new methodology. Nonetheless,
the first results look promising. A thorough analysis of the risk profile was performed by offsite
examiners. The quality of on-site work has also improved substantially, with a clear focus on
governance, risk profile and risk management framework; findings were detailed and substantiated.
19. The recent enhancements are in the right direction, although some time needs to be
given to yield results and others need to be materially intensified to achieve the desired goal.
Successful implementation requires adequate staffing, a revision of the examiner guidance assessing
licensee’s credit risk processes, governance and internal control, and refocus on core supervisory
functions. As the BoJ matures and develops its experience with risk-based supervision, the

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authorities should reconsider whether it is still appropriate to approve ex ante all new products
designed by DTIs and conduct fit and proper evaluations for all DTIs officers, managers and key
employees.
Corrective and Sanctioning Powers of Supervisors (CP 11)
20. Despite the vast range of corrective measures and powers that the BoJ enjoys based
on the BSA, evidence of effective application of these new powers is somewhat limited. The
BoJ has considered so far more effective to get DTIs to agree to an action plan for completing
corrective actions. Applying gradual responses rather than immediately resorting to more coercive
measures is not questionable per se as long as tools and processes are in place to (i) addresses
supervisory concerns with banks in a proactive and timely manner, including formal communication
and escalation to senior management and the DTIs’ Boards as appropriate, and (ii) ensure adequate
and timely follow-up of actions taken by DTIs. In this regard, it was noted that the process of
providing recommendations to DTIs based on on-site examinations was lengthy, which weakens its
effectiveness, and remediation progress were insufficiently monitored and documented.
Cooperation, Consolidated and Cross-Border Banking Supervision (CPs 3, 12–13)
21. The BoJ is fully empowered under the BSA to supervise financial groups but does not
yet impose prudential standards on a consolidated basis. Preparatory work is underway. As
contemplated by the BoJ, further action is now needed to better understand the overall structure
and tisk management of the bank, banking group, and the wider group, review the main activities of
parent and affiliated companies, implement the process for the licensing of FHC, impose prudential
standards on a consolidated basis (solvency, liquidity, large exposures, related parties), collect
prudential data on a group-wide basis, establish and enforce fit-and-proper standards for owners
and senior management of parent companies, and strengthen the regulations on internal control
and risk management while making compliance with these provisions on a consolidated basis
compulsory.
22. In terms of cooperation between regulators, significant achievements have been

accomplished in the recent years, but further enhancements are necessary. Instruments for
cooperation and collaboration, such as Memorandum of Understanding (MoUs), are in place to
exchange information with all relevant domestic authorities and a large number of foreign
supervisors. A Financial Regulatory Committee (FRC) has been established in Jamaica, and the BoJ
participates in several colleges of supervisors with foreign counterparts. There is long tradition of
information sharing among regulators in the Caribbean region. Conversely, the assessment team
was not provided with sufficient evidence confirming the effectiveness of cooperation arrangements
with the FSC. Aggregate system-wide information is exchanged, but no joint inspections have been
conducted and there are have been limited attempts to understand risks arising from intra group
transactions.
Corporate Governance (CP 14)

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23. The BoJ should also adopt a more intrusive approach to corporate governance. The BoJ
uses its on-site inspection process for the determination of the status and effectiveness of corporate
governance in the banking sector and for the oversight of Boards in individual risk areas.
Governance is duly included in the scope of on-site inspection. However, the BoJ did not provide
sufficient evidence of action taken to address weaknesses identified by examiners in Board oversight
and committees’ structures. Moreover, the BoJ has organized a limited number of formal meetings
with executive and non-executive Board members in order to discuss the strategy, risk appetite, risk
policies, risk profile and the way they oversee senior management.
Prudential Requirements, Regulatory Framework, Accounting and Disclosure (CPs 15–28)
24. Capital requirements are no longer aligned with international widely observed
regulations. Several elements of the framework are prudent (minimum level of the ratio,
composition of the Tier 1 capital), but the calculation of capital requirements still reflects the
analytical methodology of the Basel I framework, thereby focusing exclusively on credit risk and
foreign exchange risk and leaving aside the other market risks and operational risk that are likely to
be significant when measured on a consolidated basis. Although the BoJ has the general power to
increase capital adequacy ratio requirements, it has not yet elaborated a comprehensive
methodology to determine capital surcharges reflecting the risk profile using a Pillar II approach. In
practice, the BoJ applies a crude approach which requires the two largest DTIs to maintain minimum
capital at least 2.5 percent above the general 10 percent requirement. The authorities are also
encouraged to increase transparency around the main drivers of the decision to determine capital
surcharges reflecting the systemic importance.
25. Loan loss provisions are currently calculated using a conservative rules-based
approach imposed by the BoJ. Minimum provisioning percentages are imposed for the exposures
classified in various categories defined under a draft regulation which is considered by DTIs and
legal auditors as binding. Provisions calculated based on regulatory requirements that exceed the
amounts required under the accounting standards are transferred from retained earnings to a non-
distributable loan loss reserve, leading to prudent NPLs coverage ratios (higher than 100 percent).
26. The forthcoming implementation of IFRS 9 in Jamaica raises new challenges. Going
forward, the BoJ would like a period of experience with IFRS 9. While a better alignment with
international accounting standards is desirable, the definition of a transition period, as intended by
the BoJ, would indeed be prudent considering the complexity of the calculation of expected credit
losses. However, it is unclear whether the BoJ intends to keep the existing provisioning regime as a
backstop or just as a benchmark in an IFRS 9 environment and how it will operationalize the use of a
regulatory floor. Clarification is therefore needed, as well as the establishment of safeguards to be
used during the transition period should the BoJ decides to change the loan loss provisions rules so
as to be better aligned with internal standards (technical capabilities to assess the methods
employed by DTIs to calculate expected credit losses in accordance with IFRS 9, legal powers to
require changes in valuation, impact study).

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27. While related party and large exposures are well defined and controlled, large
exposure limits will need to be changed to meet international standards. The BSA provides a
comprehensive and transparent definition of exposures and counterparties for the purpose of
capping concentrations risk and limiting exposure to related parties. International standards for
large exposures are stricter (25 percent rather than 40 percent of capital base), but the BoJ in
cooperation with the FSC is consulting on proposals to bring the regime more in line.
28. While qualitative guidance on liquidity risk management has been issued, there are no
quantitative minimum prudential liquidity requirements. The qualitative guidance on liquidity
risk management needs to be updated. A binding standard that incorporates the BoJ’s work on what
constitutes a sound liquidity contingency plan should be established. It is noted that the current
liquid asset requirements imposed on banks are not prudential in nature.
29. Market risks other than foreign exchange and banking book interest rate risk are
inherent in groups of companies comprising securities dealers under a regulated FHC.
Adopting a group wide supervision means the BoJ will have to expand capital requirements and
expectations for market risk management in order to address the marked to market price and
valuation risks that likely resides in securities dealers.
30. The supervisory approach to operational risk management is fragmented and

incomplete. A more comprehensive approach to operational risk quantification and management,
would require the bringing together the various operational risk related expectations of the BoJ into
a single enforceable standard along with supporting requirements for industry collection of
operational risk loss data.
31. Accounting and disclosure frameworks in Jamaica standard help facilitate market
discipline and could be better leveraged by the BoJ. The forthcoming risk-based framework for
on-site supervision would benefit from a regular sharing of perspectives with bank external auditors
who use a risk-based approach to external audits that identify material and emerging risk.
Abuse of Financial Services (CP 29)
32. Concerning AML/CFT, efforts to strengthen the legal and supervisory frameworks
should continue. The applicable Guidance notes do not have the force of law. The BoJ has already
made considerable strides in combatting abuse of financial services and is working towards
establishing a well-structured risk-based AML/CFT supervision program. that sets measurable
targets for banks to cure identified compliance deficiencies.

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Table 1 offers a principle-by-principle summary of the assessment results, while

recommendations to improve the effectiveness of regulatory and supervisory frameworks are
summarized in Table 2.
Table 1. Jamaica: Summary Compliance with the BCPs

Core Principle
Comments
1. Responsibilities, objectives, and powers

The allocation of supervisory responsibilities is clear and the BoJ has a broad set of supervisory powers.
However, the BoJ’s inability to issue binding regulations constitutes a limitation. In the absence of
regulatory power to issue binding rules, the BoJ has over the years introduced several standards of
sound practices (SSP) which are intended to serve as guidance to DTIs. While these standards do not by
themselves have the force of law, they deal with key issues (corporate governance, internal control, fit
and proper assessments, credit risk management, liquidity management, etc.). Furthermore, breaches of
provisions included in these standards cannot lead directly to enforcement action.
2. Independence, accountability, resourcing, and legal protection for supervisors
The BoJ has full discretion to take supervisory actions. However, several legal requirements designed to
improve transparency and accountability have not yet been implemented and the level of supervisory
resources is insufficient for the range and nature of the tasks the BoJ must carry out for effective
supervision.
3. Cooperation and collaboration
Instruments for cooperation and collaboration, such as MoUs, are in place to exchange information
with all relevant domestic authorities and a large number of foreign supervisors. There is long tradition
of information sharing among regulators in the Caribbean region. However, the exchange of
information with the FSC is done as the need arises and not on a regular basis.
There is no comprehensive formal mechanism of cooperation between the BoJ, the MoFPS and other
regulators for bank resolution, except that in the case of a liquidation.
4. Permissible activities
The BSA clearly defines the business of banking, for licensees classified as Banks, merchant banks and
building societies, while also providing additional clarity regarding which service/activities are
prohibited or constrained. Credit unions are not regulated by the BoJ and can take deposits. The
Government of Jamaica has given the BoJ the power to collect information from credit unions as a first
step to bringing them under the supervisory umbrella of the BoJ.
5. Licensing criteria
The BoJ has the legal authority to grant banking licenses under the BSA with a transparent set of
criteria for applicants, that require the collection of relevant information as to the ownership, financial
wherewithal, business plans, projections and supervisability of corporate structure. For foreign entrants

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The BoJ also has a routine for confirming the non-objection by the foreign supervisor of the applicant
and enters into information sharing arrangements.
6. Transfer of significant ownership
Licensees are required by the BSA, to submit notification to the Supervisor of an acquisition of 5
percent or more of their issued share capital and any subsequent incremental acquisitions of 5 percent
or more of their issued share capital. Significant ownership and control are defined in legislation.
Change in ownership control/effective control requires Supervisory Committee approval and the BoJ
has to nullify breaches of ownership changes that were not approved.
7. Major acquisitions
The BSA provides an adequate basis for the BoJ to approve or reject major acquisitions or investments
by a DTI. These powers extend to the establishment of cross-border operations. The BoJ also has well
established supervisory practices to limit and monitor risks arising from such acquisitions. However, while
the BoJ has adopted a detailed internal approach to assessing proposals for major acquisitions using the
criteria in legislation for a de novo license and other criteria, the criteria for conducting such assessments
are not laid out in regulation. While the due diligence process undertaken by the BoJ thoroughly assesses
the impact of the acquisition on the acquirer, it is not sufficient to determine that the DTI has from the
outset adequate managerial and organizational resources to handle the acquisition.
8. Supervisory approach
The BoJ carefully assesses compliance with prudential regulations. Until recently, the BoJ has not been
conducting on a regular basis a forward-looking assessment of the risk profile of individual banks and
banking groups. The BoJ has taken a first step towards improving its supervisory approach by initiating
the implementation of a risk-based supervision methodology. The new framework is still in its early
stages of implementation.
The BoJ is not yet empowered to require changes to business strategies, managerial, operational and
ownership structures, and internal procedures when bank-specific barriers to orderly resolution are
identified. Recovery and resolution plans also have not been required by the BoJ.
9. Supervisory techniques and tools
The BoJ uses a reasonable range of techniques and tools to implement its supervisory approach. The
supervisory approach in the BoJ relies to a very significant extent on determinations made pursuant to
the BSA (licensing, major acquisition, fit and proper, etc.).
Equally, however, the frequency and intrusiveness of on- and offsite supervision has not been driven
until recently by the evolving risk profile and systemic importance of the individual DTIs. There have
been few findings on internal control, risk management and governance until the implementation of
risk-based supervision. When findings were made, the were not always followed by explicit
recommendations and remedial actions. Additionally, the onsite inspection planning process was made
on subjective terms, the frequency of on-site inspections was low regardless of the size and/or the risk
profile of DTIs, and several reports were not finalized and communicated to the inspected entities.
10. Supervisory reporting

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Information is collected in a consistent format, on weekly, monthly quarterly and annual basis.
Comparable quality data on licensees permits off-site analysis completed for pre-examination
preparation, and for one-off/occasional system-wide studies.
The scope of information is limited to licensees on a stand-alone basis, which is consistent with the
scope of supervision that is currently in effect. Consequently, an equally robust picture of parent and
affiliated entities is missing.
11. Corrective and sanctioning powers of supervisors
The BSA contains a large range of tools, measures and powers to bring about timely corrective actions.
The BoJ has considered so far more effective to get DTIs to agree to an action plan for completing
corrective actions rather than immediately resorting to more coercive measures. However, the process
of providing recommendations to banks based on on-site examinations was lengthy, which weakens its
effectiveness, and remediation progress and completion were insufficiently monitored and
documented.
12. Consolidated supervision
The legal framework that could support the conduct of the consolidated supervision is extremely
detailed and provides the BoJ with a broad range of powers and tools. However, while the BoJ is fully
empowered to supervise financial groups, its understanding of risks and activities across existing
financial groups is rather limited, given that a methodology for consolidated supervision has not yet
been operationalized. Also, the BoJ does not yet impose prudential standards on a consolidated basis
and does not require the submission of routine prudential data on a consolidated basis.
13. Home-host relationships
Significant achievements have been accomplished in the recent years. Processes for sharing information
and cooperating on a continuous basis have been established. Valuable information is shared on a
continuous basis. Additional work is ongoing. However, the cross-border crisis management policies
and a formal communication strategy with foreign supervisors have not yet been finalized. Resolution
planning and measures to facilitate cross-border cooperation such resolution colleges have not been
established so far.
14. Corporate governance
The BoJ uses its on-site inspection process for the determination of the status and effectiveness of
corporate governance in the banking sector and for the oversight of Boards in individual risk areas.
Governance is duly included in the scope of on-site inspection. However, the BoJ did not provide
sufficient evidence of action taken to address weaknesses identified by examiners in Board oversight.
The BoJ has organized a limited number of formal meetings with executive and non-executive Board
members in order to discuss the strategy, risk appetite, risk policies, risk profile and the way they
oversee senior management. No review on compensation policies and practices has been conducted.
Under the BSA, it is unclear whether the BoJ is in a position to replace weak performing Directors.
15. Risk management process

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Supervision of risk management by the BoJ is in a transition period where it is moving from a more
compliance based CAMEL approach to a more Risk Based Supervision framework that assesses risk
management in the context of inherent risk in key business activities.
Internal guidelines and examination manuals provide a sound foundation for evaluating Board
involvement in oversight of the risk management program of a bank, ensuring an effective risk control
culture in management and Board engagement. However, the framework for reviewing risk
management exhibits deficiencies with respect to integrating an enterprise wide view of risks given the
absence of formal guidance on (i) Internal Capital Adequacy Assessments (taking into consideration all
material risks) (ii) stress testing and (iii) a requirement for a Chief Risk Officer at systemically important
DTIs.
16. Capital adequacy
Several elements of the capital adequacy framework are prudent (minimum level of the ratio,
composition of the Tier 1 capital). However, capital requirements are no longer aligned with
international widely observed regulations. The calculation of capital requirements still reflects the
analytical methodology of the Basel I framework, thereby focusing exclusively on credit risk and foreign
exchange risk and leaving aside the other market risks and operational risk that are likely to be
significant when measured on a consolidated basis. Although the BoJ has the general power to increase
capital adequacy ratio requirements, it has not yet elaborated a comprehensive and transparent
approach to determine capital surcharges reflecting the risk profile using a Pillar 2 approach and/or the
systemic importance. In practice, the BoJ applies a crude approach which requires the largest DTIs to
maintain minimum capital at least 2.5 percent above the general 10 percent requirement.
17. Credit risk
Credit risk is the most significant risk factor in the banking sector. The framework of requirements is
detailed and comprehensive. However, no comprehensive on-site review assessing DTIs’ credit risk
management policies and practices has been conducted by the BoJ since 2013; similarly, the last credit
file review was performed by on-site examiners in 2013. The BoJ did not provide sufficient evidence of
actions taken to address weaknesses identified by examiners in credit risk management processes.
18. Problem assets, provisions, and reserves
The current regime for problem assets is governed by piecemeal regulations, which makes it difficult to
understand. Moreover, the current norms are of different nature, some of them are binding (BSA),
others are not enforceable (SSP) or have never been finalized (draft CCPNR). Minimum provisioning
percentages are imposed for the exposures classified in the Substandard, Doubtful and Loss categories
defined by the BoJ. This approach has proved to be prudent (NPL coverage ratio above 100 percent in
the largest banks). Provisions calculated based on regulatory requirements that exceed the amounts
required under IFRS are transferred by DTIs from retained earnings to a non-distributable loan loss
reserve.
Going forward, the BoJ would like a period of experience with IFRS 9 in order to ensure that provisions
remain prudent. However, it is not clear how the BoJ will operationalize the use of the current
regulatory provisioning regime as a backstop or a benchmark in an IFRS 9 environment.

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19. Concentration risk and large exposure limits
There is a clear and objective measure of exposure (balance sheet and off-balance sheet including
commitments to lend) and counterparty group (for purposes of aggregating exposures to parties that
are not related to the licensee). Limits on single counterparty and counterparty groups of 20 percent
and 40 percent of the bank’s capital base are in place and enforceable.
While the limits expressed in the BSA and the credit risk management practices with respect to
diversification are supposed to apply on a consolidated basis at the FHC, there is neither consolidated
reporting nor evidence of supervisory view on a group-wide basis.
20. Transactions with related parties
The BSA provides a legally enforceable requirement that caps related party exposures, defines clearly
what a related party is, based on a comprehensive definition of exposure. The JamFIRMS reporting
framework supports monitoring of related party exposures, while the supervisory framework and
powers to obtain information permit examiners to confirm and review the details of a bank’s related
party exposures.
21. Country and transfer risks
The BoJ has not supervised licensees against the CP21 for Country and Transfer risks, based on the near
exclusive Jamaican asset footprint of entities supervised on a solo basis. Due to the gaps in the current
reporting framework, it is impossible to confirm with absolute certainty that trans-border risk is not
material.
22. Market risk
The market risk of DTIs is limited to foreign exchange risk and the market risk of available for sale
securities because the BSA prohibits a DTI from managing or investing funds on behalf of its customers
and engaging in proprietary trading in securities for its own accounts. Once consolidated supervision is
implemented, market risks of securities dealers, and requirements for identification, monitoring and
control of position risk will have to be incorporated into the supervision at the FHC level.
23. Interest rate risk in the banking book
Although the BoJ has published a SSP for Interest Rate Risk Management that sets out the minimum
policies and procedures each DTI needs to have in place, the framework remains largely
unimplemented. Examiners generally do not conduct routine assessments of DTI’s interest rate risk
management policies, procedures and processes. There is no requirement for DTIs to conduct stress
testing and include appropriate scenarios to measure their vulnerability to loss under adverse interest
rate movements.
24. Liquidity risk
While qualitative guidance on liquidity risk management has been issued, there are no quantitative
minimum prudential liquidity requirements. The BoJ relies on a Standard of Sound Business Practices
for Liquidity Management as the basis for on-site review. However, the Standard has become dated
and consequently is deficient compared to current international standards including stress testing of
liquidity and contingency planning.

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25. Operational risk
Currently, there is no law, regulation or specific guidance note on operational risk. There is evidence
that the BoJ efforts in the operational risk space are addressing IT security issues, adequacy of vendor
and outsourcing management and Business Continuity/Contingency Planning. However, the assessors
did not see evidence a more systematic supervisory approach to operational risk management that
would place these risks in a framework of key risk indicators.
26. Internal control and audit
The BoJ has issued a fairly comprehensive framework for internal control and audit even though the
coexistence of several guidelines affects their readability. Moreover, the provision on the separation of
duties is not sufficiently specific. Lastly, there have been few findings on internal control and internal
audit as a result of on-site inspections.
27. Financial reporting and external audit
The BSA mandates the preparation and disclosure of financial statements of licensees that are audited
in accordance with internationally recognized accounting standards. The BSA also gives the BoJ
adequate and appropriate powers to remove an external auditor, require an expanded or special audit
and require external auditors to report any material transactions or condition that comes to their
attention. Given the BoJ relies in part on external auditors to test valuation assumptions for hard to
value assets that require modelling inputs, and external auditors conduct risk-based scoping of their
audits, the accounting firms are a valuable input to supervisory work that argues for more than as
needs discussions/contact.
28. Disclosure and transparency
BSA-mandated disclosure of financial statements in accordance with international accounting and

disclosure standards promulgated by the ICAJ work in tandem with Jamaican Stock Exchange
requirements for listed companies. Equally the bank data made available on the BoJ’s web site helps
complete the snapshot of the financial condition of licensees. The result is complete coverage of BoJ
regulated DTIs with useful financial information that can assist investors play their role in enforcing
market discipline.
29. Abuse of financial services
The BoJ has made considerable strides in combatting abuse of financial services including through its
ongoing work towards establishing effective risk-based AML/CFT supervision regime for DTIs and
Cambios.

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Table 2. Jamaica: Summary of Recommendations

Reference
Recommended Action
Principle
Principle 1 • The authorities should provide greater delegation to the BoJ to reduce delay
and improve proactivity and flexibility in enacting legally enforceable
prudential rules BoJ.
• The most relevant Standards of Sounds Practices (governance, credit risk
management, internal control and audit) should be included in the binding
set of rules.
• Legislation is needed to update and clarify the BoJ’s supervisory mandate.
Principle 2 • There should be a requirement in the legislation that there be public
disclosure made of the reason(s) for relieving the governor or deputy-
governor.
• Steps should be engaged to operationalize measures included in the BSA
that were intended to enhance accountability.
• The BoJ should develop a formally documented guide for the delegation of
supervisory decisions along BoJ Financial Institution Supervisory
Department’s organizational hierarchy as well as procedures governing the
execution of offsite and onsite supervisions.
• Resources should be increased. A thorough evaluation of the staffing and
capacity building needs should be initiated by the BoJ in the context of the
implementation of risk-based supervision.
Principle 3 • The BoJ should intensify the exchange of information among domestic
authorities with a view to better understanding risks arising from intragroup
transactions initiated within the largest financial conglomerates.
• The authorities should consider amending the legal framework to adequately
protect information exchanged through cooperation arrangements by
explicitly prohibiting disclosure to third parties.
• As Jamaican authorities develop a recovery and resolution framework, they
should establish effective mechanisms for cooperation between the BoJ, the
Minister of Finance other financial institution regulators to undertake
recovery and resolution planning. Further efforts are also necessary to
establish an effective framework for cross-border cooperation in the context
of bank resolution.
Principle 7 • The criteria for assessing proposed acquisitions and investments should be
included in the regulation. The power to impose prudential conditions on an
acquisition should be included in the legislation.
• Due diligence should be more intrusive to determine that the DTI a has from
the outset adequate managerial and organizational resources to handle the
acquisition.
Principle 8 • The BoJ should take further steps to fully deploy the risk-based
methodology.

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• The BoJ should be empowered to require changes to business strategies,

managerial, operational and ownership structures when bank-specific
barriers to orderly resolution are identified.
Principle 9 • Onsite inspection tool should be utilized on a more frequent basis.
• The BoJ should develop risk-focused examination manuals with detailed
objectives and controls.
• The BoJ should develop and implement mechanisms to increase its contact
with licensees’ Board and non-executive Board members and senior
managers to reinforce priority messages and develop knowledge of and
insight into individual DTIs.
• The BoJ should (i) develop early warning indicators to better identify, assess,
and mitigate any emerging risks across DTIs and (ii) consider deploying
horizontal reviews on key risks it has identified in the banking sector.
• The authorities are encouraged to redefine supervisory priorities and
reconsider whether it is still appropriate to approve all new products
designed by DTIs and conduct fit and proper evaluations for all DTIs officers,
managers and key employees.
Principle 10 • The authorities should expand supervisory reporting to include consolidated
information in a level of detail and frequency that supports the approach to
consolidation they decide on in future. At minimum monitoring risk on a
consolidated basis, should include capital adequacy, credit exposures, market
risk exposures, large exposures, operational risk loss events and liquidity.
• The BoJ should collaborate with competent authorities for the collection of
information from securities dealers (SDs) to accommodate their supervisory
needs should it be decided that SD reporting could benefit from sharing the
BoJ IT platform.
Principle 11 • The BoJ should shorten the turnaround time of a supervisory review from
initiation to final report.
• The BoJ should perform a thorough follow up on the implementation of
supervisory recommendations.
• As part of the implementation of risk-based supervision and the
intensification of banking oversight, the authorities are encouraged to use
proactive, preventative and earlier corrective actions to address governance
and risk management issues.
Principle 12 • The BoJ should (i) better understand the overall structure and risk
management of the bank, banking group, and the wider group, (ii) review the
main activities of parent and affiliated companies; (iii) implement the process
for the licensing of financial holding companies, (iv) impose prudential
standards on a consolidated basis (solvency, liquidity, large exposures,
related parties); (v) routinely collect prudential data on consolidated basis, (vi)
establish and enforce fit-and-proper standards for owners and senior
management of parent companies, and (vii) strengthen the regulations on
internal control and risk management while making compliance with these
provisions on a consolidated basis compulsory.

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• The BoJ is encouraged to develop a policy for determining the basis on which
to conduct onsite visits in host jurisdictions.
• Cooperation with the FSC should be intensified through on-site joint
inspections, staff exchanges, and regular exchange of information to better
understand and analyze intragroup transactions.
• Financial Institution Supervisory Department’s internal policies should include
a focus on Jamaican DTI/FHC’s oversight of their foreign operations.
Principle 13 • The authorities should develop a cross border crisis cooperation plan,
including a formal communication strategy and establish resolution colleges.
Principle 14 • The authorities should include requirements related to governance and fit
and proper tests in binding rules. The issuance of the regulation will enable
the BoJ to adopt a more intrusive approach to corporate governance, as well
as strengthen enforcement. The regulation should explicitly state that
remunerations (including bonuses) have to be aligned with prudent risk-
taking and that minimum number of board members with relevant banking
experience without being an officer is required.
• Regular coverage of corporate governance is needed. In view of overarching
resource constraints, this may be an appropriate topic for a horizontal review
performed by offsite examiners. The BoJ should also adopt a more intrusive
on-site approach to corporate governance and ensure that in-depth and
thorough assessments of governance framework and compensation policies
are performed during on-site inspections.
• The authorities should amend the legal framework granting the BoJ the
power to change the composition of DTIs’ Board subject to appropriate
constraints.
Principle 15 • The authorities should develop and implement Guidelines/Standards for an
internal capital adequacy program (ICAP) at DTIs that specify - as appropriate
- a requirement for a CRO function that is responsible for the ICAP and that
incorporates firm-wide stress testing of the inherent risks.
• The authorities should take a more risk-based approach to new product
approval by setting standards for and assessing on site the internal new
product approval process at DTIs on a regular basis.
Principle 16 • The risk-weights should better differentiate risks and all significant risks
should be captured through a broader comprehensive Pillar 1 approach and
a new Pillar 2 surcharge.
• The authorities should specify how Tier 1 and Tier 2 will be calculated on a
consolidated basis and how risk-weighted will be determined by capturing all
risks on a group-wide basis.
• The authorities are encouraged to increase transparency around the main
drivers of the decision to determine capital surcharges reflecting the systemic
importance.
• The BoJ should ensure that banks develop a forward-looking approach to
managing capital.

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Principle 17 • The should also clearly specify that DTIs have to monitor all risk factors that
may lead to a default of the borrowers, including unhedged foreign
exchange risk.
• The BoJ should revise examiner guidance assessing licensee’s credit risk
processes and include a detailed list of inspection objective and checks.
• Supervisory expectations as regards DTIs’ credit risk modeling and stress
testing should be clearly defined.
Principle 18 • The BoJ should be transparent about how it will use the current regulatory
provisions regime in an IFRS 9 environment.
• The authorities should implement a regulation transposing the BCBS
guidelines on the prudential treatment of problem assets, with a clear set of
definitions (non-performing exposures, forbearance measures). Sound
valuation principles should be included as well.
• Changes to the loan loss provisions rules should be preceded by a careful
quantitative impact study.
• Explicit powers should be given to the BoJ to require a change in the risk
classification and/or additional provisions when it is considered appropriate.
• The BoJ should revise the loan review methodology in such a way that the
supervisor develops a profound understanding of the banks internal risk
management policies.
• The BoJ should develop its technical capabilities to assess the methods
employed by DTIs to calculate expected credit losses.
Principle 19 • The authorities should consider adopting the treatment of interbank
exposures proposed in the updated Basel standard for large exposures
coming into force in 2019. Alternatively, a local adaptation that provides for a
higher limit rather an exemption for these short-term bank exposures may be
prudent given the need to be proportional to the needs of local markets.
Principle 21 • The authorities should supplement their off-site monitoring by conducting
periodic horizontal focused reviews that include obtaining and reviewing
information on country and transfer risk on a periodic basis to confirm
immateriality.
Principle 22 • The authorities should implement a framework for market risk under
consolidated supervision that includes:
• Capital requirements for debt specific and general market risk, and for traded
equity risk.
• Standard of Sound Business Practice for Market risk that incorporates
existing Standards for foreign exchange and securities portfolios.
• Requirements for licensees to conduct stress testing including for market risk.
Principle 23 • The authorities should implement a binding regulation on the management
of interest rate risk in the banking book.
• Such a regulation should include requirements for DTI’s to conduct stress
testing to measure their vulnerability to loss under adverse interest rate
movements.

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Principle 24 • The authorities should update their qualitative standards for liquidity risk
management with explicit inclusion of requirements for liquidity stress
testing and internal policies for asset encumbrance consistent with Basel
standards as appropriate to local conditions.
• The authorities should consider the merits of a minimum quantitative
prudential liquidity standard taking into account interactions with existing
central bank’s requirements for minimum liquid assets that are not available
in times of stress.
Principle 25 • The authorities should develop an Operational Risk Management
Guideline/SSP based on Basel Committee’s guidance documents Principles
for the Sound Management of Operational Risk (June 2011).
• The authorities should develop standards for the collection and reporting of
operational risk loss events by DTIs in support of their responsibilities for
quantifying monitoring and managing operational risk.
Principle 27 • The authorities should enforce, enhance and rationalize supervisory
requirements on internal controls. The BoJ should consider the option of
consolidating all requirements on internal control in one binding regulation.
• Greater frequency of off-site assessment of internal audit and internal control
is needed. In view of overarching resource constraints, this may be an
appropriate topic for a horizontal review.
• The BoJ should adopt a more intrusive approach to internal control and
audit. As a complement to the Section Notes guiding the examiners, the BoJ
should incorporate into the on-site examination function a robust program
for examining and assessing internal audit and internal control.
Principle 28 • The authorities should establish a regular contact with external auditors of
DTIs in Jamaica for the purposes of matters of common interest, for example
planned areas of focus for annual external audits, considerations for
upcoming implementation of changes to accounting standards and
developments/experience in valuation of hard to value assets.
Principle 29 • The provisions currently included in the AML/CFT Guidance Note, which do
not have the force of law, should be incorporated into biding regulation.
• The authorities should include a review of correspondent banking
relationships in the review of a licensee’s AML/CFT policies.

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Annex II. Report on Observance of Standards and Codes: Core

Principles for Effective Deposit Insurance
Core Principle 1: The DIA should be amended to make clear that Medium Term
Public Policy JDIC may fund the payment of insured deposits
Objectives but may not offer loans, guarantees or
advances to policyholders in excess of such
amounts.
Core Principle 3: The Chief Executive Officer should have a fixed Medium Term
Governance term of office.
Core Principle 4: There should be a formal Service Level Short Term
Relationships With Agreement between JDIC and BoJ governing
Other Safety-Net the necessary sharing of information to allow
Participants for adequate preparation by JDIC to meet its
mission.
Core Principle 5: JDIC should enter into agreements with Medium Term
Cross-Border Issues relevant deposit insurers for all foreign banks
operating as subsidiaries in Jamaica to allow for
the sharing of information about failing or
failed institutions in the home country. Such
information sharing will allow for contingency
planning by JDIC in case such difficulties cause
stress at the local subsidiary and to ensure that
communication is accurate and consistent
between the various deposit insurers.
Core Principle 6: There should be system-wide contingency Medium Term
Deposit Insurer’s planning and simulation exercises that include
Role in Contingency JDIC and that would consider the roles of all
Planning and Crisis safety-net players in a financial crisis including
Management one with potentially systemic consequences.
Core Principle 9: JDIC contributions from its deposit insurance Medium Term
Sources and Uses of fund to the resolution of a DTI should be
Funds limited to the amount needed to compensate
insured depositors in a liquidation scenario.
JDIC should finalize an agreement with BoJ and
MOF to allow it to access funding in case of
need. Such an agreement could provide for
access to BoJ funding with a government
backing. JDIC should enter into a repo
agreement with BoJ to provide access to
liquidity funding in case of need. Funding for
any additional role for JDIC such as a liquidator

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or administrator for a non-DTI as contemplated

under the plans for a SRR should be identified
as this role will require JDIC to prepare in
advance of any possible liquidation or
administration even if such an action is
ultimately not taken and therefore no funds
from the estate of the non-DTI become
available Seed funding for any obligation JDIC
takes on for the insurance of deposits at credit
unions should be provided.
Core Principle 14: The process of revising the resolution regime Short Term
Failure Resolution should take into account the detailed
recommendations made in this Assessment to
better align the operations of JDIC with good
international practices.
Core Principle 15: The law provides JDIC up to 90 days to Medium Term
Reimbursing reimburse depositors. JDIC’s internal
Depositors procedures require it to be prepared to
reimburse depositors within 14 days but it is
operating with an interim payment system in
advance of completion of an automated
payment system. It should complete its
adoption of a system that would allow it to
reimburse depositors within 7 days and work
with BoJ to implement a rule requiring
Policyholders to adopt required recordkeeping
practices
Core Principle 16: JDIC should receive a higher priority in the Medium Term
Recoveries hierarchy of claims in a winding up than that of
an unsecured creditor to allow it to recover
more of the payments it makes to insured
depositors and its costs incurred in making
such payments.
Short Term: 6-12 months; Medium Term: 1-2 years.

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Appendix I. FSAP Risk Assessment Matrix1

Source of Risks Relative Likelihood Expected Impact and Transmission Channels
Risk #1: Domestic High High

shock. A heavy reform agenda coupled In the adverse stress test scenario, a slowdown in the
Delays in with low implementation capacity. reform momentum could trigger real GDP growth
There are still important declining by 0.5 percentage point in the first year, and
implementing the
challenging reforms to be hover at zero for the following two fiscal years, with
economic and
completed, including in the cumulative three-year growth falling by 5 percentage
structural reforms financial sector. If stopped (or points against the baseline. This would increase spreads
agenda. delayed) growth, the fiscal deficit and trigger JM$ depreciation, increase credit risk (specially
and confidence would be in credit unions and microfinance). It would also increase
impacted. DTIs’ NPLs; DTIs’ capital is very sensitive to NPLs increases,
which directly impact capital.
Confidence in the economy is
currently high, sovereign spreads At the same time, investors would begin demanding
have declined, and dollarization higher sovereign bond yields, adding fiscal pressures and
has declined somewhat, although a loss of investors’ confidence. DTIs would further add
it remains at high levels. Broader- sovereign bond holdings in a crowding out reversal effect.
based economic growth remains
Foreign borrowing would be affected, especially given the
anemic.
existing concentration model, and quickly transmit
domestically with refinancing risks to DTIs and liquidity
would be affected.
Second round effects on growth and FX reserves would
add further pressures on dollarization, via FX exposures,
off-balance sheet and off-shore activities despite the
tightening of FX regulation.
Risk #2: External Medium/High High

financial shock. There are no immediate sovereign An external financial shock in advanced economies would
Tighter global financing needs, but the increase negatively impact tourism, remittances and FDI inflows.
in the US$ rates and appreciation The real sector channel would negatively impact FX
financial conditions
of the US$ would further tighten reserves, credit spreads, JM$ weakening, and lead to an
fiscal-driven growth and a search increase in NPLs. Liquidity, quite concentrated into two
for US$-denominated yield search banks, would further exacerbate.
efforts.
The shock will also directly impact lending terms from
abroad, which would channel through the foreign entities
with foreign funding access and via domestic capital
markets and further compress domestic lending.
Dollarization pressures would accelerate, leading more a
further off-shore activity.
Second round effects include investors would begin
demanding higher yields from the government to hold the
debt, and reversing the progress made against crowding
out.

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Risk #3: External Medium High

natural shock. Jamaica’s exposure to natural With a natural disaster, there would be a negative impact
Natural disasters disasters ranks in the top 20 on the fiscal deficit and growth. The financial sector would
globally, given its low-lying see credit risk increase in the lending portfolio and market
and epidemics.
coastal zones, mountains, and five
risk (interest rate and JM$) would be adversely affected.
major fault lines. The country has
The DTI NPLs, capital and liquidity would also suffer in the
withstood about 40 disasters
between 1950-2017, averaging aftermath of a natural disaster, with possible second-
about a disaster a year. Sixty round effects to FX reserves, growth and debt levels.
percent of these were hurricanes
and storms, and about a quarter In the severely adverse stress testing scenario, a natural
of floods, droughts, and disaster of historical dimension would have a three-
epidemics. dimension impact: material physical damage of 2-3
percentage of GDP; real GDP growth dropping by 1-2
percentage points in the first year and by 2 percentage
points thereafter; the primary balance would revert to a
deficit of around 0.1 percent of GDP, and debt would
revert towards an upward trend.
Interest rates would spike by 600 basis points, led by a

flight to safety. The exchange rate would depreciate by
about 60 percent, and aggregate banking system NPLs
would increase three-fold. Liquidity shortages would
require of CB immediate assistance to the system.
1 The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize
in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline
(“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a
probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of
discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

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Appendix II. Implementation of Previous FSAP

Recommendations, Preliminary Assessment
Stability Module
2006 FSAP recommendation Implementation Status and measures taken (Authorities’
view)
Maintaining financial stability and enhancing supervision:
1. Reduce the public debt. (MOFPS) Ongoing. Implementation of Responsibility Framework
Legislation in 2010 lead to a reduction in the FY2015/16 public
debt ratio to about a 100 percent of GDP. Under the
FY2014/15 Enhanced Fiscal Rules the debt ratio should drop to
of 60 percent of GDP by FY 2025/26.
2. Raise margin requirements on securities Done. A new framework is in place and involves the JCSD
dealers’ repos in GoJ securities to at Trustee Services Limited functioning as trustee and registrar to
least 10 percent this year. (FSC) hold the securities underlying retail repos in the trust for the
benefit of retail repo investors. A new retail repo transaction
structure became operational in August 2015. It included the
new margin requirement based on the type of assets used as
the underlying security for the retail repo contract. Margins for
retail repos range between 5-15 percent depending on the
type of assets used as the underlying security for the retail
repo contract.
Current Margin Requirements for Retail Repo:
(i) The minimum initial and maintenance margin

requirements for the following list of ‘qualifying issuers’ shall
be 5 percent: (i) the GOJ, inclusive of central government,
statutory bodies, companies owned or controlled by the GOJ
and agencies of the GOJ; (ii) the BoJ; and (iii) Governments and
Government Agencies of the US, Canada, and the U.K.
(ii) For all other allowable assets, the minimum initial and
maintenance margin requirements shall be 15 percent as long
as the issue is: (i) a locally issued JM$ denominated
immobilized corporate bond; an Investment grade sovereign
foreign security (excluding U.S., Canada and U.K.); or
Investment grade corporate foreign.
3. Strengthen monitoring and analysis of Ongoing. In 2015, BoJ and the National Housing Trust (NHT)
housing and equities prices. (BoJ) signed an MoU on the compilation of a housing price index for
Jamaica. Under this agreement, the NHT provides transactions
and data to compile a quarterly aggregate housing price
index, and the BoJ produces a housing price index and two
sub-indices for the two largest housing markets within Jamaica
(i.e., St Catherine and Kingston & St Andrew). A rolling-window
hedonic price model for housing is utilized to construct and
update the housing price indices. BoJ has been producing this
index since 2016.
4. Enhance analysis of insurance risk Ongoing. In 2004, the FSC was a newly formed regulatory
concentration and reinsurance coverage. body for the insurance industry. In 2005 the FSC implemented
(FSC) a plan to improve its regulatory capacity, with the hiring of a

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view)
senior staff specializing in the review of reinsurance treaties
and reinsurance regulation and hiring in 2006 a consultant to
train the staff and to advise on the regulation of reinsurance
programs of the companies. The consultants also included two
on-site examinations as part of their training program.
Current practices: The general insurance companies have been

instructed to file copies of their reinsurance treaties annually for
review by the FSC. The FSC currently reviews the reinsurance
treaties of general insurance companies and a report of the
assessment is submitted to our Board of Commissioners. All
general insurers were instructed to file its Reinsurance Risk
Management Plan/Procedure to the FSC. Annually the FSC
conducts on-site examinations which includes the assessment
of the companies’ reinsurance programs.
5. Develop and test crisis management National Financial Crisis Management Plan
plans. The inter-agency cooperation and coordination work on crisis
preparedness and crisis management falls under the Financial
Regulatory Committee (FRC), a statutory committee
established under the Section 34 BB of the BoJ Act. In 2015 the
FRC approved and now maintains a National Financial Crisis
Management Plan (the NFCM Plan) which includes a
compendium of supporting policies, procedures and
guidelines. The Guide to Intervention for Financial Entities
(Crisis Intervention Matrix) also provides guidance on the
actions to be taken by each member of the financial system
safety net in crises. Updates are made to operationalize the
NFCM Plan and ensure consistency/ alignment with the
reforms currently being undertaken. The NFCM Plan and other
elements of the framework have not yet been
tested/simulated. Jamaica has not had a financial crisis since
the 1990s.
In process. Special Resolution Regime

FRC agreed to the development of a national crisis
management plan and resolution framework for financial
institutions and the Committee published a consultation paper
recommending the introduction of a special resolution regime
(SRR) in February 2017. The SRR proposes a framework for the
resolution of financial institutions (FIs) in line with international
standards, that facilitates the orderly resolution of non-viable
FIs. The proposed regime includes a specialized insolvency
limb and an administrative limb.
BoJ and other FRC stakeholders submitted SRR proposals to

Cabinet that were approved in October 2017. A Technical
Working Group is drafting instructions for legislative measures
to introduce the SRR. Under the proposed regime, BoJ would
become the Resolution Authority. The legislative framework is
to be tabled in 2019.

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view)
6. Strengthen coordination across In process. The Omnibus Banking Bill which was commenced
supervisory agencies and close as the Banking Services Act, 2014 (BSA), consolidated into one
remaining legal gaps (including through standalone Act, the disparate primary statutes which
passage of an Omnibus Banking bill) to previously governed the different deposit-taking subsectors
permit comprehensive consolidated under BoJ’s regulatory purview. The BSA is the primary
supervision and more effective legislative tool supporting enhancements to Jamaica’s
supervision of conglomerates. regulatory and supervisory framework, including the legislative
(BoJ/FSC/JDIC/MOFPS) framework to support Consolidated Supervision. BoJ is to
license and supervise FHCs; it will be responsible for, inter alia,
ensuring the groups are adequately capitalized on a
consolidated basis, and subject to effective governance and
risk management frameworks.
Effective implementation of consolidated supervision will

require enhanced consultation between BoJ and other
regulatory agencies. Additional legislative measures are in
process: (i) the Banking Services (Capital Adequacy)
Regulations; and (ii) the Banking Services (Financial
Holding Companies) (License Application) Rules.
On March 2016, the FSC submitted its proposal to the MOFPS

for legislative amendments to enable group-wide supervision
of financial groups that do not include a deposit-taking
institution.
7. Give supervisory agencies more Pending. The budget of the BoJ’s Financial Institution
resources and budgetary flexibility. Supervisory Division (FISD) forms a part of the broader BoJ
(BoJ/FSC) budget, primarily funded through revenues from central
banking operations (Section 9 of BoJ Act). If funds are
inadequate, the Bank is entitled to funding from the
Government’s Consolidated Fund. The annual budget for
supervision is determined by the Bank’s senior management
and approved by the Board, based on estimates based on past
year expenses. FISD’s budget includes allocations for training,
technology and travel expenses as well as other resource
needs. The division’s budgetary requests have generally been
fully met. Supervisory staff are also allocated funds to
participate in international meetings of significant relevance
including supervisory colleges.
The BoJ is subject to public sector wage guidelines, subjected

to prolonged periods of wage increase constraints. These have
constraint BoJ’s ability to attract and retain qualified staff,
particularly at and above the level of senior examiner. FISD has
suffered a high rate of attrition, typically losing staff to
overseas regulators and the financial industry, with challenges
to effectively carry out its supervisory responsibilities. To
counter this problem, the Division engaged into external
recruitment at a sufficiently high-level to offer competitive
remuneration and used contracts (as opposed to permanent
appointments).

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view)
The FSC’s surplus and reserves have grown between 2005-
2017. In 2008, the rate charged on the assets of securities
dealers was increased. Also in 2008, the fee charged on
general insurance companies also increased. Resource
constraints are also important.
8. Further codify the legal and operational The BSA was passed by Parliament in 2014 and brought into
independence of supervisory agencies. effect in 2015. The BSA introduced several provisions aimed at
(BoJ/FSC) supporting the operational independence of the BoJ. For
example, the process for the appointment of the Governor
(who is also the Supervisor) was changed so that it is
Governor-General, on the advice of the Cabinet of Ministers,
who is empowered to make such appointments (Section 6A of
the BoJ Act). The Act also established a Supervisory Committee
with critical supervisory powers, which previously rested with
the Minister of Finance. Some of the powers include, for
example, the granting and revocation of licenses;
determinations on the fitness and propriety of directors,
officers, key employees and substantial shareholders of
licensees; and the variation of prudential capital adequacy
requirements. In addition, the Supervisor, on his own, can take
prompt corrective action with respect to licensees.
These reforms aimed at removing the scope for government

interference in the supervisory process. The BSA brought
about operational independence on supervisory functions
carried by the BoJ but not independence overall. The BoJ’s
Board, responsible for the general strategic and administrative
oversight of the Ban, including the Supervisory Division, has a
majority of members appointed by MoF.
The Supervisory Division is also subject to the operational
oversight of the Committee of Bank Supervisors (COBS). COBS
is chaired by the Governor and is also comprises the Deputy
Governor (as Deputy Supervisor of Banks), FISD’s Division Chief
and the respective department heads within the Division as well
as legal counsel with direct responsibility for supervision.
In relation to the FSC, no action was taken.
Addressing development and infrastructure priorities:
9. Overhaul creditor rights and the The Credit Reporting Act was passed in 2010 and provides the
insolvency regime and introduce a credit enabling framework for a privately-run credit bureau sector.
bureau. (BoJ) Under the Act, BoJ is the designated Supervising Authority and
is charged with maintaining a general review of the practice of
credit bureaus in Jamaica. Since implementation of the CRA in
2011, three credit bureaus have been licensed by the MoF
based on recommendations from the BoJ, and continued the
exchange of information with credit information providers
(CIPs).
The Insolvency Act 2014, which took effect in January 2015,

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view)
inter alia, established an orderly process which provides
insolvent debtors with an opportunity for rehabilitation, having
due regard to the protection of the rights of creditors and
other stakeholders, and ensuring the fair allocation of the costs
of insolvency.
The passage of the Security Interests in Personal Property Act

(SIPPA) 2013 took effect in January 2014, and allows persons
(whether natural or corporate) to offer personal property as
collateral, facilitating the reduction of transactions costs
involved in borrowing. The SIPPA gives certainty to security
interests over assets within the scope of the legislation. The
framework provides that the order of priority for such security
interests be governed by the registration date. The framework
limits the risk of competing claims over the same collateral.
SIPPA provides for a registry on which creditors or their duly
authorized agents may register their interests in collateral by
filing a simple notice.
10. Ensure that the new regulatory regime Currently, credit unions are to provide information on their
for credit unions is carefully balanced to operations to BoJ. This was a preliminary step towards placing
minimize risks without stifling credit these institutions under the supervisory oversight of the BoJ.
unions’ impressive outreach. (BoJ)
A Cabinet submission was completed by Ministry of Finance
and the Public Service (MOFPS) and submitted to the Cabinet
in April 2017 based on the advice of the Chief Parliamentary
Council (CPC) that the framework proposals for the BoJ (Credit
Unions) regulations reside in principal as opposed to
subsidiary legislation. Based on the resulting cabinet decision,
MOFPS prepared and sent drafting instructions to the CPC for
the proposed credit union special provisions legislation. The
preliminary draft of the Credit Union Bill was received from the
CPC on 17 July 2017 and has been reviewed by MOFPS, BoJ
and JDIC.
Further drafting instructions were sent by MOFPS and a

second draft of the Credit Union Bill was received by MOFPS
from the CPC on 16 January 2018 and circulated to
stakeholders including BoJ, JDIC and the Ministry of
Commerce, Agriculture and Fisheries (MICAF) for review and
feedback. Comments on the second draft of the Credit Union
Bill have been received from the Credit Union League, FSC,
from BoJ and MOFPS. A meeting was held between the
League, BoJ and MOFPS on 18 April 2018, after which, further
drafting instructions were sent to CPC. A third draft was
submitted to the BoJ on 18 May 2018 and is currently being
reviewed. BoJ continues preparation for the commencement of
the regulatory regime. In the interim, oversight responsibility
for the credit union sector remains vested with the
Department of Co-operatives and Friendly Societies as the
statutory oversight agency, while an industry self-regulatory

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view)
role is assumed by the Credit Union League.
11. Pass legislation to enable FSC to begin Completed. The Pensions (Superannuation Funds and
registering and regulating pension Retirement Schemes) (Registration, Licensing and Reporting)
funds; equalize the income tax Regulations came into force on March 13, 2006. The income
treatment of approved retirement tax treatment of approved retirement schemes was covered in
schemes with that of superannuation the Income Tax (Amendment) Act 2008 as well as the Pensions
funds. (FSC) (Superannuation Funds and Retirement Schemes) (Validation
and Amendment) Act 2013.
12. Expedite introduction of a sound legal Jamaica’s legal framework for payment and settlement
framework for payment and settlement systems include the enactment of the Payments Clearing and
systems; introduce an RTGS system. Settlement Act, 2010 and the Government Securities
(BoJ) Dematerialization Act, repealed in 2012 and replaced by the
Public Debt Management Act (PDMA) and the implementation
in 2013 of the Guidelines for Electronic Retail Payment Services
(Guidelines). The Guidelines are currently being updated.
RTGS was implemented in February 2009.

13. Establish a CSD for fixed income In process. JamClear®-CSD was implemented in May 2009,
securities. (BoJ) replacing the paper-based issue of GoJ and BoJ fixed income
securities. With the introduction of JamClear®-CSD, all new
issues of BoJ and GOJ securities are dematerialized to
eliminate the need for paper certificates, thereby mitigating
the risks associated with the trading, clearing and settlement
of paper-based securities. The electronic system provides the
authentic record of ownership of BoJ and GOJ securities. It
brings significant efficiencies to the processes for issue,
management and redemption to the domestic fixed-income
securities market. JamClear®-CSD reduces settlement risk and
improves the liquidity and efficiency of the secondary markets,
with potential savings on public debt service. JamClear®-CSD
is seamlessly integrated with JamClear®-RTGS to allow for
Delivery versus Payment (DVP) settlement.
Source: Authorities.
Developmental Module
FSAP Development Module Implementation Status and measures taken (Authorities’

Recommendation view)
Overall
14. Develop an umbrella financial inclusion The National Financial Inclusion Strategy (NFIS) was launched
strategy, covering key areas, MSME on 29 March 2017. The National Financial Inclusion Council
finance, housing finance, payments, held its inaugural meeting on that date.
rural finance, and financial consumer
protection and literacy (BoJ and other
key stakeholders)
MSME Finance

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15. Encourage the development of financial In keeping with the NFIS, which was launched on 29 March
instruments for MSMEs, by developing 2017, to date there are simultaneous projects being conducted
the legal and regulatory framework and by the Ministry of Industry Commerce Agriculture and
infrastructure: (i) factoring; (ii) leasing, Fisheries (MICAF) and the Development Bank of Jamaica (DBJ)
and (iii) venture capital (DBJ/MoFPS) to promote factoring, and receivables financing. In April 2017,
MICAF completed its review of the secured transactions
regime. In September 2017, a feasibility assessment on
factoring was completed by DBJ. DBJ continues to pursue the
development of the venture capital ecosystem, through the
development of proposals for tax reform to incentivize venture
capitalists.
16. Review and revamp the PCG scheme to DBJ is the project lead for the Access to Finance project with
provide adequate incentives for lenders the World Bank, which was approved in January 2018 by the
to participate (DBJ/MoFPS) World Bank’s Board. Under that project, work will be done to
strengthen the institutional arrangements for the Credit
Enhancement Fund.
GOJ has also entered into an agreement with the Inter-
American Development Bank to recapitalize the credit
enhancement fund over a 4-year period.
It should be noted that in November 2016, BoJ revised its risk
weighting for loans supported by the partial credit guarantee
having regard to the existing governance framework.
17. Ensure an adequate regulatory and Deposit-taking institutions are subject to the supervisory
supervisory framework for different framework established under the Banking Services Act.
lenders to guarantee a level playing field
for financial institutions providing the
Policy to enhance regulatory framework for money lending
same activities (MoFPS/BoJ)
institutions was approved by Cabinet in 2013. The legislation
has been drafted and is being reviewed. Once finalized, the
legislation will be tabled in Parliament, which is expected in FY
2018/2019. The draft legislation includes provisions for
designation of a regulatory authority, licensing, fit and proper
requirements for officers, record keeping and reporting
requirements, offences and penalties and transparency in
lending practices and other consumer protection matters.
For the Credit Union (Special Provisions) Bill, a third draft bill
was sent to BoJ in May 2018, as part of stakeholder
consultation. Comments are to be provided.
18. Simplify documentation requirements Financial Inclusion
for MSMEs and consider adopting To clarify, this recommendation has informed the NFIS. The
measures in prudential regulations to NFIS speaks to two action items for BoJ:
incentivize lending to MSMEs (BoJ) (a) Evaluate, design and implement a policy framework
for opening transaction accounts with graded KYC
requirements for MSMEs;
(b) Review and enhance the prudential framework
regarding provisioning for SIPPA registered collateral.

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In relation to item (a) BoJ provided its policy proposals for

graded KYC/CDD requirements to be accommodated as part
of the risk-based framework for AML/CFT under the Proceeds
of Crime Act in May 2017. This action item has been merged
with another work-stream on AML/CFT.
For item (b) On 28 February 2018, BoJ published its

consultation paper on Problem Asset Management and
Provisioning Requirements. There has been ongoing
consultation with stakeholders and IFC.
Prudential Requirements
At the year-end 2016, in keeping with the provisions of the
Banking Services (Deposit-Taking Institutions) (Capital
Adequacy) Regulations, 2015, Bank of Jamaica approved a
reduction in capital requirements for development banks. Bank
of Jamaica recommended that loans (or portions thereof) with
guaranteed coverage by credit guarantee schemes (subject to
conditions) should be risk-weighted twenty per cent, with
uncovered portions remaining one hundred per cent risk-
weighted. The application of the twenty per cent risk-
weighting is limited to loans extended in Jamaican currency.
The application of a reduced risk-weighting to loans (or

portions thereof) with guaranteed coverage by credit
guarantee schemes would include the following implications:
a. Incentivized lending, enabling creditors to increase
financing levels to MSMEs;
b. Regulatory capital relief, as lowering the risk-weighting
will lead to reduced regulatory capital requirements for
exposures covered by the guarantees; and
c. Jamaica’s financial inclusion aims are promoted in
manner that is consistent with the existing framework of
prudential regulatory requirements.
The approval for capital relief with respect to exposures

guaranteed under this framework will remain effective for a
period of three years, at the end of which, Bank of Jamaica will
conduct an assessment to determine if there is a basis for the
continued application of the reduced risk-weighting.
19. Consolidate public programs for MSME This work-stream is ongoing.
finance to improve efficiency and
effectiveness (MoFPS/ MoIIC)
Housing Finance

JAMAICA

20. Design a comprehensive national The proposed Housing Policy was submitted to Cabinet in
housing policy strategy (MoFPS/ April 2018, following extensive stakeholder consultation
MoTWH) (Ministry of Economic Growth and Job Creation).
21. Establish uniform regulatory and Work on a database for housing financial indicators.
supervisory framework for housing
finance lending (BoJ/MOFP/MoTWH)
22. Develop the legal and regulatory Under the NFIS, work began on mortgage insurance.
framework for long term funding However, following the feasibility assessment on mortgage
instruments (FSC/BoJ/MoFPS) insurance as part of the Access to Finance project, this
component was dropped from the Access to Finance
project.
23. Design a specific policy to introduce NHT continues to create innovative housing micro-finance
subsidies and incentives for low income products targeted to the lower-income contributors. This
and informal borrowers access to work began in 2016 and continues in partnership with
housing finance (MoFPS/ MoTWH) credit unions.
Rural/Agriculture Finance
24. Include agriculture finance as a key area There are 8 action items related to Agriculture Finance.
in the overall financial inclusion strategy, Work is ongoing.
including specific financial instruments,
public policies and institutional
framework (MoFPS/MoA)
25. Review the potential of warehouse This is also part of the NFIS and will inform the work-
receipts financing, including the stream for receivables financing/factoring products.
appropriate legislation, regulatory and
supervisory oversight (MoA)
26. Develop micro-insurance regulations In 2010 the FSC initiated the process to seek Technical
and guidelines (FSC) Assistance (“TA”) from the World Bank to provide support
in developing an appropriate legal and regulatory
framework for the supervision of micro-insurance business.
A Memorandum of Understanding between the FSC and the

World Bank to provide TA on microinsurance business was
finalized and signed by the representatives of both
organization in February 2013. The TA project in Jamaica

JAMAICA

regarding microinsurance business involves three

components: 1
(I) diagnostic study on the microinsurance landscape
to determine the policy, regulatory and supervisory
actions (a regulatory roadmap) for microinsurance
development;
(II) support for the implementation of the regulatory
road map by supervisory entities for
microinsurance; and
(III) cross-country knowledge generation and
dissemination to advance regional and global
learning in the field of microinsurance policy,
regulation and supervision.
Since the signing of that agreement, the FSC made a number of
achievements including the following:
1. On November 4, 2013 the FSC in collaboration with the
Multilateral Investment Fund, a member of the Inter-
American Development Bank A2ii hosted a
Microinsurance Workshop at the Jamaica Pegasus
Hotel, under the theme “Microinsurance: Exploring a
New Frontier”. The workshop was attended by 135
participants.
2. Following the workshop, members of the Project Team
started their interviews of the various stakeholders,
which was a prime requirement of the diagnostic study.
These stakeholders included the FSC, the insurance
industry, the Bank of Jamaica, Credit Unions and other
key players. The diagnostic study was completed in
December 2013.
3. The second microinsurance Workshop was on July 4,
2014. The FSC in collaboration with (A2ii) presented the
Jamaica Microinsurance Country Diagnostic Report,
under the theme, Exploring a New Frontier-Unveiling
the Results”.
4. An outside broadcast was held on November 7, 2014 in
Sam Sharpe Square, St. James that attracted over 400
persons.
5. In December 2014 a Microinsurance Framework was
drafted for providing a “roadmap” to guide the process
of developing microinsurance in Jamaica.
6. On July 29, 2015, an Insurance Inclusive Committee (IIC)
was established with stakeholders from the insurance
and cooperative industry to help chart the map to
develop microinsurance. The IIC was charged with the
responsibility to:
1
Information adapted from the Terms for Reference conducting the diagnostic study in Jamaica.

JAMAICA

a) Develop Consultation (with stakeholders) on

Microinsurance Regulatory Reforms
b) Create Market Conduct Initiatives
c) Identify Microinsurance capacity issues within
Jamaica and how to fill this capacity.
d) Research and help establish a long-term business
case for Microinsurance to assist with buy in from
the various financial sectors.
e) Provide Public Education
f) Identify and facilitate steps to improve the
microinsurance supply landscape
g) Establish a Monitoring and Evaluation Framework
for microinsurance at the country level.
7. During October 2015 A2ii conducted a mid-evaluation
to assess the results of the project to-date and make
recommendations for improvements where applicable.
The project was extended until 2016.
8. In May 2016 the FSC conducted another workshop and
a live Radio Broadcast on microinsurance entitled
““Microinsurance, Through Financial Inclusion: The
Way Forward”.
9. A microinsurance policy framework was issued in March
2017. The policy was updated and issued in September
2017.
10. In March 2018 the proposed amendments to the
Insurance Act to facilitate the Microinsurance
framework were submitted to the Ministry of Finance.
Since then, we are currently working on the
development of the Regulations and Guidelines for
microinsurance. The FSC has been engaged in a project
with the IADB to develop the microinsurance
regulations and guidelines. The project should end in
November 2018.
Payments and Remittances
27. Increase the usage of retail electronic BoJ has prepared concept papers on a national payment
payments through: (i) deepening the switch and Access Policy under the NFIS and circulated
payment infrastructure in rural areas, these for stakeholder comments.
(ii) revising the existing access criteria For the period October 2016 – November 2017, BoJ
for the ACH; (iii) use the Centralised provided technical assistance to the Ministry of Labour and
Treasury Management System for Social Security and PATH in work for a pilot for the
distributing Government welfare and transmission of welfare payments using ERPS products.
pension payments (BoJ/MoFPS) Education fairs were held in November 2017.
BoJ is preparing a policy paper on paying Government
welfare payments is being prepared for June 2018 for the
National Payments Council.
28. Develop and implement a policy Please see comments on AML/CFT risk based framework.
framework for opening of “no frill” Work is also advancing on a review of the supervisory

JAMAICA

accounts in banks for deepening guidance issued by financial regulators given the passage
financial usage (BoJ) of the National Identification Registration Act (NIRA) that
will be informed by the work on the National Risk
Assessment using the World Bank NRA Tool. Training on
the tool and the Financial Inclusion module began in
October.
2016 and continued May 2017. The NIDS working group
commenced its work in March 2018.
29. Prohibit exclusivity arrangements with 1. An exclusivity arrangement exists between only one (of
respect to remittance companies, non- fourteen) overseas remittance provider, who has this
bank electronic payment service arrangement with one Primary Agent, which is by mutual
providers and banks. and review the agreement. BoJ does not think that this one arrangement
regulatory framework for the affects the competition that exists among the 6 Primary
appointment of agents (BoJ) Agents providing service on behalf of 14 overseas
providers across 453 locations in the island.
2. We do not see the need to review the regulatory

framework for agents in the context of the “licensing
process being onerous”. We have Fit and Proper
requirements for all relevant persons in the industry. With
the AML global concerns re Money Service Businesses, and
the resultant de-risking, we would not recommend
lowering the fit and proper standard for sub-agents.
The remittance model in Jamaica is to approve sub-agents

to provide service on behalf of the Primary Agents. At
present, there are 202 such sub-agents. As with the
primary agents, these sub-agents are subject to fit and
proper requirements.
In terms of agents for DTIs, there is new legislation in

effect. There is a review of the Electronic Retail Payment
System (ERPS) Guidelines, which will address matters
including exclusivity arrangements.
Credit Reporting

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30. Establish oversight framework for credit Credit bureaus are supervised by the BoJ’s credit oversight
reporting BoJ ST Adopt measures to unit.
encourage credit bureaus to compete in
services and not in data, and conduct
An oversight structure was established in 2013 and a further
onsite examinations to verify full data
build out of this structure is being contemplated by BoJ.
provision to the credit bureaus (BoJ)
Bank of Jamaica is currently seeking a Consultant to provide
technical assistance for a review of the existing legislation
governing credit reporting to propose legislative
amendments. A Terms of Reference has been developed and
the Consultant is expected to undertake a comprehensive
review of existing legislation dealing with credit information
sharing, with the aim of encouraging increased participation
of data providers and further entrenching best practices
within the credit reporting eco-system.
31. Enhance the consumer protection This will be addressed as part of the concept paper on
framework for credit consumer protection and legislative review of the Credit
bureaus (BoJ) Reporting Act.
Consumer Protection & Financial Literacy

32. Create a high-level task force to A national financial literacy action plan and interim strategy
supervise development of a was developed with the assistance of IADB. Ministry of
comprehensive national plan on Education, Youth and Information (MOEYI) approved it on 30
financial consumer protection and May 2018.
financial literacy
(MOFPS/BoJ/FSC/MoIIC/CAC/FTC/JDIC)
33. Consider establishing an independent A concept paper on financial services consumer protection is
statutory financial ombudsman (MOFPS/ being prepared for June.
BoJ/FSC)
34. Create standard and simple disclosure This has been accommodated under The Banking Services
for consumer financial services (BoJ) (Deposit Taking Institutions) (Customer Related Matters) Code
of Conduct, 2016.
35. Conduct regular surveys of consumer This is to be triennially from date of NFIS launch.
finance (Statistical Institute)

JAMAICA
Appendix III. Stress Testing Matrix (STeM)

Domain Framework
TD by Bank of Jamaica TD by FSAP Team
1. Institutional Institutions The 11 banks comprising the universe of Commercial banks, Building
perimeter included Societies and Merchant Banks.
Market share About [100] percent of total banking sector assets (excluding Credit
Unions).
Data Effective date: June 2017. Effective date: June 2017.

Data: Data: Supervisory data
Scope of consolidation: Data was also complemented with public
Projection of sources including: International Financial
consolidated ratios based Statistics (IFS), IMF Global Assumptions
on solo estimates. (GAS), and IMF WEO.
Scope of consolidation: Individual Deposit
Taking Institution.
Stress testing The FSAP team conducted its own TD
process macroprudential stress test based on the
WEO forecast (baseline) and an adverse
scenario calibrated on the financial crises
in 1996/97 and 2008/09.
For exposures, stressed NPL ratios,
stressed coverage ratios, and a stressed
transition matrix for performing exposures
is projected.
2. Channels of Methodology • IMF balance sheet stress test framework
risk (customized for Jamaica FSAP, and
propagation includes interbank and liquidity modules).
Liquidity module specified to include both
a basic liquidity scenario with
“proportional withdrawals” as well as a
more complex “flight to safety” scenario.
Stress test June 2018 to June 2019 for solvency
horizon purposes; up to 5 days for liquidity shock
purposes.
3. Tail shocks Scenario The main macroeconomic variables
analysis considered for the scenario are Jamaica’s
real GDP growth, the exchange rate, short
term interest rate, inflation and
unemployment.
Baseline: All variables follow the IMF

WEO baseline projections (as of Q1 2018).
Adverse: Jamaica’s real GDP growth

would fall by 0.5 percentage point in FY
2018/19, and hover at zero for the
following two fiscal years. Cumulative
three-year growth would be 5 percentage
points lower than the baseline. Important
reforms, particularly around public-sector
transformation would stall, and
confidence in the reform program would

JAMAICA
Domain Framework
begin to erode. Investors would begin
demanding higher yields from the
government. Unemployment would
reverse course, and rise cumulatively by
an estimated [2] percentage points.
Demand for FX would ramp up, and the
currency would begin to depreciate by
[10] percent per year. Inflation volatility
would increase materially, and repeated
breaches of the central bank inflation
target band would prompt them to hike
rates by up to 300 basis points.
Severely Adverse: Jamaica would be hit

by a massive natural disaster which would
result in losses representing ½ standard
deviation more than the historical average
along three dimensions: material physical
damage representing 8 percent of GDP;
the number of people affected would
exceed 190 thousand, or just around
7 percent of the island’s inhabitants; and
more than 30 deaths. Real GDP growth
would drop by [4] percentage points in
the first year (i.e. almost 6 percentage
points lower than the baseline), and
would be permanently lower by 2
percentage points thereafter. The primary
balance would revert to a deficit of
around [2] percent of GDP, a swing of 9
percentage points from the baseline and
debt would breach crisis levels witnessed
previously (i.e. more than 145 percent of
GDP). Interest rates would spike by 800
basis points, led by a flight to safety.
Sensitivity All shocks occur over three years and
analysis include:
Interest rate hikes by 300 bps; In the
severely adverse case interest rate hikes
would reach 800 basis points (to account
for risk premium and government
distress).
Jamaican dollar depreciates against USD

by up to 45 percent; 60 percent in severely
adverse scenario.
Counterparty concentration risk: the top

borrower of each bank defaults, with [x]
percent recovery; In severely adverse case,
all 5 top borrowers would default.
Industry concentration risk: NPLs would

reach their historical peaks (Agriculture
22 percent; Manufacturing 16 percent;
Construction 30 percent; Trade and

JAMAICA
Domain Framework
Tourism 22 percent; Non-bank financial
institutions 13 percent; Mortgages and
personal loans 12 percent). Recovery
would be minimal, and provisioning would
fall to 50 percent of new NPLs. In severely
adverse case, NPL would increase by
100 percent across the entire loan book.
Liquidity: Two liquidity stress tests are

considered.
• DTIs would undergo a proportional
withdrawals of demand deposits of
15 percent per day (domestic
currency), and 10 percent per day
(foreign currency) for up to 5 days.
Time deposits would witness
3 percent withdrawals per day.
Assumptions around liquid asset
availability are tiered into 3 groups:
Large deposit center banks would
have access to 95 percent of their
existing liquid asset base, while
smaller banks would only have access
to 75 percent. Entities which are
mainly securities dealers and Fund
managers but also operate banking
subsidiaries would only have access
to 60 percent of the pre-shock liquid
assets.
• A more complex “flight to safety”
scenario would begin with the same
assumptions as the proportional
withdrawals scenario. An entity by
entity dynamic discount factor
(initially based on each DTI’s pre-
shock balance sheet
strength/weakness) would also
increase the calls by depositors and
counterparties (including repo and in-
group position unwinding). Moreover,
given the already shallow state of
secondary market trading in
Government bond, the scenario
assumes that such instruments are
treated as 100 percent illiquid during
the shock horizon.
4. Risks and Positions/risk • Credit losses.

buffers factors • Losses from securities in the banking and trading books.
assessed • FX risk.
• Counterparty concentration risk (consistency will be ensured with
network analysis stress test).
• Industry concentration risk.

JAMAICA
Domain Framework
• Liquidity risk from calls on deposits and other non-deposit short
term liabilities e.g. repo and same group position unwinding
(consistent will be ensured with network analysis stress test).
Behavioral Dynamic balance sheets

adjustments Balance sheets evolve with key macroeconomic aggregates
adjusting for credit demand effects.
5. Regulatory Calibration of Credit risk projections are
Changes in NPLs provisioning rates are
and market- risk based on loan loss based on response functions calibrated to
provision ratios and non- Jamaica past crises during 1990s and
based parameters performing exposures. 2008, while the macroeconomic outcomes
standards and expected from a severe natural disaster
parameters shock are calibrated using analysis in IMF
WP/17/235; IDB Policy Brief IDB-PB-208
and IMF Policy Paper “Small States’
Resilience to Natural Disasters and
Climate Change.”
Regulatory Minimum capital requirements were based on Jamaica-specific
standards regulatory minimums.
6. Reporting Output Evolution of Capital adequacy, liquidity, and probability of failure, for
format for presentation the aggregate banking system, and individual banks.
Contribution of key drivers to aggregate net profits and aggregate
results CET1 capital ratios.
Number of banks and share of total assets below hurdle rates.
Capital shortfall in terms of nominal GDP.

JAMAICA
Appendix IV. Insurance: Overall Stress Testing Approach

1. Central to the insurance sector stress test is a bottom-up exercise for which the IMF team, in
cooperation with the Jamaican authorities, provides scenario specifications and an Excel reporting
template to selected undertakings (see section II). In this bottom-up exercise, participating
companies calculate the impact of the stress scenario on their balance sheet and ultimately their
coverage of the solvency capital requirement.
2. The stress test broadly follows the same principles as the DCAT exercise currently prescribed
for the life insurance sector which should similarly also be applied by general insurers for this
exercise.
3. The reference date for the stress test exercise should be December 31, 2017.
4. The stress test should be run at the highest level of consolidation which includes all
insurance activities of domestic as well as foreign subsidiaries and branches. Banking and other non-
insurance activities should be excluded. The scope of consolidation should be as of the reference
date—entities acquired after that date should not be included in the exercise. If some entities within
the group do not contribute materially to the overall risk profile of the group, these can be excluded
from the stress test exercise after consultation with FSC.
I. Scenarios
5. To test the resilience of the Jamaican financial sector, three scenarios have been developed:
- Baseline: in line with the October 2017 World Economic Outlook projections for Jamaica and
other relevant countries,
- Adverse scenario 1: global repricing of risk premia,
- Adverse scenario 2: domestic natural catastrophe causing a short and severe economic
recession in combination with price corrections on financial markets.

JAMAICA
Jamaica. Narrative for the Scenarios
Baseline: The October 2017 World Economic Outlook projects the annual real GDP growth rate to
converge towards 2.8 percent over the next five years, consumer prices to increase at rates between 5
and 5.5 percent each year, and unemployment to steadily decline.
2017 2018 2019 2020 2021 2022
1.7 2.3 2.7 2.8 2.8 2.8

Real GDP growth
percent percent percent percent percent percent
Inflation (change in 3.4 5.2 5.5 5.5 5.5 5.4

consumer prices) percent percent percent percent percent percent
12.2 11.6 11.0 10.5 10.0 9.5

Unemployment rate
percent percent percent percent percent percent
Adverse scenario 1: This scenario comprises a global repricing of risk premia. While shocks on financial
markets are observed both in advanced and emerging economies, a higher level of risk aversion results in
higher declines in asset prices in emerging economies and a sharper increase in credit spreads of non-
investment grade debt. Inflationary pressures are assumed to decrease in this scenario so that central
banks would pursue a slightly more accommodative monetary policy.
Adverse scenario 2: This scenario assumes a major natural catastrophe, similar to hurricane Gilbert which
hit Jamaica in September 1988. Following the event during the storm season of 2018, the real GDP is
assumed to decline sharply (annual growth for 2018: -2 percent), followed by a steady recovery in line
with the baseline projections for 2019-22. Domestic financial markets are assumed to react to the
catastrophe with a sharp decline in equity and property prices, and also credit spreads of the domestic
sovereign and domestic corporates are assumed to increase.
1. The scenarios for the purpose of the insurance sector stress test assume that all market
shocks are assumed to occur at the beginning of the first year (instantaneous shock). 1 Naturally, the
focus of the scenario specification for the insurance sector lies on financial market variables:
- Shocks to risk-free interest rates: separate for relevant currencies;
- Shocks to corporate bond spreads: separate per rating class;
- Shocks to equity prices: separate for relevant countries;
- Shocks to property prices: separate for domestic and foreign real estate holdings;
- Shocks to foreign exchange rates: changes of relevant FX rates.
1
It is further assumed that asset prices do not recover after the instantaneous shock.

JAMAICA
Jamaica. Insurance Sector Stress Testing: Scenarios and Assumptions

Adverse scenario Adverse scenario
(change compared to the reference date)
1 2
Risk-free interest rates Jamaica -100bp -150bp
(parallel shift of the interest United States -50bp 0bp
rate term structure) 2 Other advanced economies -50bp 0bp
Other emerging and -100bp 0bp
developing economies
Sovereign bond spreads Jamaica +300bp +450bp
United States 0bp 0bp
Other advanced economies +50bp 0bp
Other emerging and +300bp 0bp
Corporate bond spreads AAA +30bp +40bp
(Jamaica) AA +55bp +75bp
A +100bp +140bp
BBB +190bp +270bp
BB or lower +300bp +400bp
Unrated +300bp +400bp
Corporate bond spreads AAA +20bp 0bp
(Other) AA +40bp 0bp
A +65bp 0bp
BBB +120bp 0bp
BB or lower +200bp 0bp
Unrated +200bp 0bp
Currencies Change of JMD against major -10 percent -15 percent
currencies 3
Equity Jamaica -27 percent -35 percent
United States -15 percent 0 percent
Other advanced economies -15 percent 0 percent
Other emerging and -27 percent 0 percent
Real Estate Jamaica -15 percent -20 percent
United States -10 percent 0 percent
Other advanced economies -10 percent 0 percent
Other emerging and -15 percent 0 percent
2
The shock to risk-free interest rates should apply to all fixed-income investments as well as to any liabilities whose
value is determined by market interest rates. In addition to the shock to the risk-free interest rate, further shocks
might need to be applied, e.g. the sovereign bond spread shock – the yield for Jamaican sovereign bonds in adverse
scenario 1 is therefore assumed to increase by (-100) + 300 = 200 bps.
3
Negative values denote a depreciation of the domestic currency.

JAMAICA
9. Additional assumptions should be made for the two adverse scenarios:
- Adverse scenario 1:
o New business in year 1 to decline by 10 percent (life), compared against 2017; in

years 2 to 5, new business growth rates back in line with baseline projections (but
starting from the lower levels caused by the decline in year 1);
o Lapse rates in life insurance in year 1 to increase by 10 percent against baseline

projection, lapse rates for years 2 to 5 in line with baseline projections.
- Adverse scenario 2:
o A hurricane event mirroring Hurricane Gilbert (1988) in terms of size, strength and
routing: Claims from this scenario should be estimated based on exposures as of the
reference date. Reinsurance recoverables as well as reinstatement costs for
reinsurance should also be taken into account. In the reporting template, insurance
undertakings should provide the reinsurance recoveries from the participant’s top 5
reinsurers (on a group basis).
o New business in year 1 to decline by 30 percent (life) and 10 percent (general

insurance), compared against 2017; in years 2 to 5, new business growth rates back
in line with baseline projections (but starting from the lower levels caused by the
decline in year 1);
o Lapse rates in life insurance in year 1 to increase by 25 percent against baseline

projection, lapse rates for years 2 to 5 in line with baseline projections.
II. Methodological approaches
10. The main output of the stress test calculations will be the effect on available capital and the
resulting coverage of the capital requirements, i.e. the MCCSR for life insurers and the MCT for
general insurers. As a hurdle rate, a coverage of 150 percent is foreseen for life insurers and 250
percent for general insurers. Internal models, if approved by the supervisor, can be used for the
performance of the stress test calculations. Management actions should only be included in the
calculations as far as they relate to non-discretionary rules already in place at the reference date.
11. The impact of the stress event should be assessed under national GAAP.
III. Presentation of results
12. In line with the IMF’s practice in publishing its findings from stress tests, no individual
company results will be published. Results will be presented in an aggregated format for groups of
companies, e.g. life and non-life insurers. Besides aggregated numbers, also the dispersion of results
will be shown, taking into account the small sample size in this exercise. The Jamaican authorities
will clear all documents before publication and thereby ensure that no individual company results
can be derived from the aggregated information.
JAMAICA
Appendix V. Network Analysis

The FSAP team applied two approaches to examine network analysis, based on market data:
1. Interconnectedness inferred from RTGS data. Payments among RTGS participants during
2017 are used to infer direct connectedness among the 26 participants. The RTGS dataset
differentiates among seven different (very broad) categories. Three of them contribute with
about 95 percent of all payments: Transfers in JDM (45.01 percent), intraday repos with the
central bank (31.53 percent), and long-term repos (18.56 percent). The graphs corresponding
to each category and their aggregation during 2017 are displayed using a circular layout
(alphabetically ordered); arrows display the direction of the payments (from sender to
receiver), with the width and color of each arrow representing its contribution to total
payments; the diameter of each node represents the contribution (i.e., importance) of the
corresponding participant as sender of payments.
2. Interconnectedness inferred from stock market data. In order to filter the correlations
that are most informative, two methodologies are implemented. The asset graph discards
correlations that may be deemed as weak, preserving meaningful ones; in this case, the
threshold is set to ±0.3. The second methodology is the minimal spanning tree. In the
minimal spanning tree correlations are transformed into distances, and only the most
important linkage for each node is displayed (without cycles), so it is regarded as the
skeleton that better describes the system under analysis.

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IMF Country Report No.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

International Monetary Fund

© 2018 International Monetary Fund

Approved By This report is based on the work of the Financial

EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS ______________________________________ 5

TABLE OF MAIN RECOMMENDATIONS ________________________________________________________ 7

MACROFINANCIAL SETTING ____________________________________________________________________ 8

RISKS AND VULNERABILITIES __________________________________________________________________ 9

OVERSIGHT FRAMEWORK ____________________________________________________________________ 14

CRISIS READINESS, MANAGEMENT, AND RESOLUTION ____________________________________ 21

CREDITOR INFRASTRUCTURE _________________________________________________________________ 22

2 INTERNATIONAL MONETARY FUND

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EXECUTIVE SUMMARY AND KEY RECOMMENDATIONS

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TABLE OF MAIN RECOMMENDATIONS

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6. The financial sector is dominated by complex financial conglomerates that operate in

RISKS AND VULNERABILITIES

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A. Financial Conglomerates and Interconnectedness

10 INTERNATIONAL MONETARY FUND

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C. Non-Bank Financial Institutions

12 INTERNATIONAL MONETARY FUND

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35. In addressing financial groups risks, consolidated risk-based supervision remains a

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enforcement powers, information sharing and cooperation powers, a rather comprehensive

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48. From a financial stability perspective, FX investment opportunities should be

18 INTERNATIONAL MONETARY FUND

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Cooperative and Credit Union Supervision

20 INTERNATIONAL MONETARY FUND

CRISIS READINESS, MANAGEMENT, AND RESOLUTION

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Box 1. The World Bank FSAP Development Module, 2015

24 INTERNATIONAL MONETARY FUND

Box 2. Insurance and Pension Funds FX Investment Limit Regulation1

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Figure 1. Jamaica: Macrofinancial Developments, 2006–17

…trend nominal exchange rate depreciation and FX

Source: Bank of Jamaica and Staff calculations.

26 INTERNATIONAL MONETARY FUND

2017, Structure in the Assets' Side

2017, Structure in the Liabilities' Side

90 Other borrowed funds, 9 Other borrowed funds, 9 Other borrowed funds, 9

Source: Bank of Jamaica and IMF staff calculations.

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