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BOJ gets proactive in policing risky banks - Central bank recruiting talent, restructuring

Published:Wednesday | July 19, 2017 | 12:00 AMMcPherse Thompson
BOJ Deputy Supervisor of Banks, Maurene Simms.

Bank of Jamaica is adopting a new supervisory method for banks and building societies that will intensify oversight as risk builds up in a financial institution.

The central bank is moving to full implementation of the new risk-based approach to supervision, following a pilot phase that wrapped up in June, replacing the long-standing CAMELS methodology.

BOJ would only say that a medium-size commercial bank was assessed under the pilot.

Newly promoted BOJ Deputy Supervisor of Banks and Financial Institutions, Maurene Simms, says it will allow the central bank to prioritise resources and attack potential problems, proactively. And it comes alongside restructuring of the central bank that was granted expanded powers to police the banking system under reform legislation passed three years ago.

CAMELS is a recognised international rating system that bank supervisory authorities use to assess the safety and soundness of deposit-taking institutions based on six factors: capital adequacy, asset quality, management, earnings, liquidity and sensitivity to risk.

However, assessments under that methodology are predominantly based on lagging indicators and therefore not sufficiently forward- looking. It does not provide adequate early warning signals of undue build-up of risk both at the entity and system levels, Simms said in an interview with the Financial Gleaner.

The risk-based methodology, on the other hand, focuses on identifying the key risks within a deposit-taking institution that can affect its risk profile and how effectively those risks are being managed by the entity, she said.

Executive director of the Jamaica Bankers Association, Richard Murray, said they were in constant dialogue with BOJ.

"We are on board with whatever they put to us and it's just a question of reallocating resources and ensuring that all of these things are complied with as agreed," he said.

The new approach allows for the application of supervisory procedures that are commensurate with the level of risk of the institution, that is, the higher the risk, the greater the intensity of supervisory activity, and the greater the resources applied, Simms explained.

"Importantly, the methodology is forward-looking and provides the supervisor with critical information as to how well, or otherwise, directors and senior managers have identified and are managing the risks inherent in the operations and vitally, how well, or otherwise, senior managers are operating within the board's articulated risk-tolerance levels," she said.

The deputy banking supervisor said the global financial crises highlighted the importance of adequate risk management in financial institutions and led to the recognition by the international standard-setters for banking supervision for the need to be more "contextual" in the supervisory approach rather than uniform.

As such, the Basel Core Principles, the international standards for effective bank supervision, have been revised, she said, to require that supervisors develop and maintain forward-looking assessments of the risk profile of banks and banking groups, proportionate to their current risk profile.

"We have codified some of these key principles in the BSA [Banking Services Act], which mandates the Bank of Jamaica to assess the risk management systems of licensees for effectiveness, implement early intervention strategies where unsafe and unsound practices are identified, and take prompt, corrective action where the viability of a licensee is threatened," Simms said.

Simms' responsibility

With her appointment as deputy supervisor, Simms now has responsibility for the oversight and the strategic direction of the central bank's supervisory division and will act for the supervisor, Brian Wynter, in his absence or incapacity. Wynter is also governor of the central bank.

Asked about the feedback from the pilot project and whether banks and building societies were comfortable with the expected change, Simms said "the industry's response to the planned change in the supervisory methodology has been strongly positive".

She added: "The assessment of an institution's risk profile under the methodology is no different from how institutions are expected to assess and manage risks within their institutions, and will therefore encourage the development of a strong risk-management culture within the industry. Institutions will benefit from risk-focused reporting and the change will reduce regulatory burden for well-managed institutions."

Simms, who has worked in senior positions at the BOJ since about 2005, said they are now in the process of restructuring to align the division to best execute its expanded mandate under the updated legal framework.

The restructuring will also facilitate the effective implementation of the risk-based supervisory methodology to the rest of the sector, she said. "We started with the top line of the structure and we will continue the building out as we advance the implementation of the BSA and the roll-out of supervisory methodology," the central banker added.

Simms said the BOJ continues to have the authority to collect information from credit unions for anti-money laundering and countering financing of terrorism purposes.

However, drafting instructions have been sent to the Chief Parliamentary Counsel and they are hoping the legislative framework will be in place by the end of the year for them to be added to the list of institutions for which the BOJ has supervisory responsibility.

Asked about the challenges she face in her new role as deputy supervisor, Simms said "it's always a challenge to get, with expanding mandates, the resources," referring to the new authorities given to the BOJ under the Banking Services Act.

She explained that over time, experienced supervisory resources have left the bank to take up positions with other regulatory authorities such as the Caribbean Group of Banking Supervisors member countries, the Canadian Regulator Office of the Superintendent of Financial Institutions, as well as the Federal Reserve.

"We have also lost resources to the industry," said Simms. "The bank is ramping up its recruitment and training programmes as the competition for talent intensifies, especially as the economy continues to recover at a faster pace."