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BOJ to tackle ‘too big to fail’ financial firms, assumes super regulator role in November

Published:Friday | May 8, 2015 | 4:57 PM
Governor of the Bank of Jamaica, Brian Wynter, will head the new financial stability commitee.
Janice Holness, executive director, Financial Services Commission. *** Local Caption *** File<\n>Janice Holness, executive director, Financial Services Commission, will continue to oversee non-banking firms.

Some Financial Services Commission (FSC)-regulated companies may face higher capital requirements after November when the Bank of Jamaica (BOJ) steps into its enhanced role as super regulator.

However, the central bank says it will in no way interfere or assume operational control of the FSC, whose oversight portfolio spans pension funds, securities dealers and insurance companies.

Instead, macroprudential rules will be implemented through a new Financial Stability Committee that will be headed by the BOJ governor, but will also include the BOJ deputy governor in charge of banking, heads of the FSC and Jamaica Deposit Insurance Corporation (JDIC), and the financial secretary of the Ministry of Finance.

The committee will oversee a financial system with combined value of J$2.2 trillion by assets.

One of the group's immediate tasks will be tackling 'too big to fail' institutions, including plans for breaking up such institutions that are in distress. Large institutions whose failure could bring down the entire system will be required to have a transition plan in place to reduce fall-out, otherwise known as a living will.

responsibility of committee

The committee will not monitor individual regulated firms, but the financial system as a whole, said BOJ's financial stability experts in discussion with the Financial Gleaner. That job, they said, would include outreach to central banks in other regional jurisdictions for collaboration on the monitoring of institutions with operations across various geographic markets.

The most recent Jamaica-IMF Letter of Intent says BOJ will assume overall responsibility for financial stability on November 1, 2015.

The transition will be preceded with amendments to the Bank of Jamaica Act, due for tabling in July, to vest the central bank with the authority of 'Financial Stability Regulator'.

The BOJ, currently headed by Governor Brian Wynter, has direct oversight of the banking system - also referred to as deposit-taking institutions - whose value at December 2014 topped $1.08 trillion by assets.

Like the BOJ, the FSC, which is run by Janice Holness, will continue to apply its own monitoring tools for the firms it oversees. The agency was created back in 2001 to tighten regulation of the non-deposit-taking financial sector. It merged the functions of the Office of the Superintendent of Insurance and the Securities Exchange Commission into a more powerful oversight body created in the aftermath of the mid-1990s banking and financial sector crash.

The former securities commission at one time was located on the BOJ building at Nethersole Place on the Kingston waterfront, but never had a reporting relationship with the central bank. Wynter himself was the founding executive director of the FSC. He left the agency at the end of 2007 to take up a job at CARTAC in Barbados, but returned to Jamaica when he was offered the position of central bank chief in late 2009. He had previously been a deputy governor of the BOJ for four years up to 1999.

Today, the FSC regulates securities dealers who are valued at $542.6 billion by assets and otherwise have $797 billion of funds under management, pension funds that manage $331 billion of assets, and an insurance market valued at $318 billion by assets.

In the years surrounding the financial crash, the banking system as a whole comprised 46 companies valued at $196 billion by assets at the end of 1999, according to the earliest data available on the BOJ's website. The Jamaican Government eventually spent $140 billion on bailout programmes, and is still trying to this day to recover portions of that investment by liquidating confiscated assets.

The creation of BOJ as super regulator over the entire system is meant to avoid another 1990s-style collapse.

The number of meetings of the new Financial Stability Committee has not been set out in legislation, but the BOJ says it plans to convene "at least once a quarter". The secretariat for the committee will be at the BOJ.

calibration of macroprudential tools

One of the first order of business will be the calibration of macroprudential tools for systemic monitoring of the financial sector as a whole, including what the BOJ describes as ' countercyclical capital buffers'. It means that a central bank may require firms to increase their capital within a boom cycle, on the assumption that this is a period in which dealers are taking a lot of risk, in order to prepare them for a bust.

"We ensure that they increase their capital buffer to get ready for the down swing. When the down swing comes they can release that buffer," said one BOJ official.

The rule currently applies to BOJ-regulated institutions, but will later be expanded to the entire financial sector.

BOJ's current assessment of market conditions is one of normality - neither boom nor bust - but the central bank said that some FSC-regulated entities may still be required to increase their level of capital, "not with regard to the boom-bust cycle, but with regards to the retail repo model," he said.

The repo business model has been deemed high-risk - as short-term assets used to back investments of different maturity profiles that create a mismatch of liabilities - and dealers are being encouraged to transition to unit trusts and other collective schemes, so that it is individual investors and not the securities firms' balance sheets that bear the risk

At last assessment, the repo market was valued at $411 billion by the FSC, virtually undiminished at September 2014. Up to that point, the unit trust market had doubled within a year to $94 billion from $54 billion at September 2013, while mutual fund investments climbed from US$149 million to US$185 million in the same period.

The central bank is also concerned about 'systemically important financial institutions', or SIFIs, that may be too big to fail, and says the Financial Stability Committee will be ensuring that plans are developed for companies such as Scotia Group Jamaica and National Commercial Bank Jamaica in the event that they falter, including the possibility of merging the failing institution with another in order to stabilise it.

Additionally, the committee will be looking at "how they would break up the institution to ensure that all the functioning parts resume as soon as possible, even if it's with another institution," said the BOJ official.

"These are institutions which are important either because of their size or how connected they are to other situations because of certain products they offer, which may not be easily substitutable," the official said.

As for its planned regional outreach, BOJ aims to close supervisory gaps with other jurisdictions to reduce opportunities for arbitrage, especially for companies that route business through branches in other markets.

Under that system, while the risk may reside on the Jamaican company's balance sheet, the activity occurs offshore and is outside the ambit of Jamaican regulators, the central banker indicated.

"The system builds up risk because the risk is from Jamaica but they are routing it through Trinidad," he said, citing an example.

BOJ hopes to encourage other central banks in the Caribbean to implement similar oversight rules, and says a memorandum of understanding to that end is under consideration.

"There are committees regionally which are currently set up and running. The objective is to reach towards doing just that, ensuring that the standards are similar across countries," the Jamaican central bank said.