Bank watcher JDIC widening its net - Wants new laws to protect creditors, rescue failed banks
The Jamaica Deposit Insurance Corporation, JDIC, is looking to new laws to more effectively deliver on its mandate to ensure that depositors get back their money in the event of bank failures.
It is also moving to better protect creditors, noting that they are the backbone of the financial system.
At the same time, the state-run body that was set up 22 years ago is keeping an eye on several changes in the financial sector, even as it prepares again to add credit unions to its list of regulated institutions. The list currently encompasses eight commercial banks, two building societies, and one merchant bank.
CEO Antoinette McKain says the culture and risk profile of new overseas parent companies of Jamaican banks, financial technology, bank depositor information systems, bank windup procedures, bank valuation methodologies, and information rollout for mobile money systems and agency banking are receiving more focus from the deposit insurance agency.
The ultimate aim is to increase JDIC’s ability to understand, measure and plan for risks within the system, while encouraging a greater level of public confidence to maintain financial sector stability.
The agency that works closely and shares information with ultimate bank supervisor Bank of Jamaica, BOJ, as well as the Financial Services Commission, FSC, which regulates investment schemes and pension funds, expects a year end tabling of new legislation to resolve troubled banks administratively without resorting to winding-up procedures.
“The new legislation will speak to administrative resolution – putting shareholder rights into abeyance to deal with (insolvency), work it out, and compensate persons who suffer loss in the system. The JDIC has been working very comprehensively with the regulators on those issues,” McKain told the Financial Gleaner in an interview.
She notes that under the Insolvency Act of 2014, the JDIC has the power to liquidate banks if they are failing, but is of the view that the insolvency law is “debtor-driven” and is not the most appropriate for resolving bank crises.
Declaring that in the event of bank failures, there will be no bailouts, the JDIC CEO says the new law is expected, among other things, to provide a clearer framework for non-liquidation resolutions, including purchase and assumptions, where troubled banks sell their liabilities and have another institution assume its assets to back those liabilities.
“This is a very important tool in resolving banks without a call on the public purse. Deposits would be moving somewhere else and matching liabilities moving with it,” McKain explained.
She notes that the changing ownership of some Jamaican banks, due to takeovers by overseas companies, forces JDIC to seek to better understand the culture of the new parent companies.
“For example, we never generally had to deal with South American regulators,” she said, alluding to the recent transfer of ownership of CIBC First Caribbean to a Colombian company.
“Is their culture lighter? Are they more risk-takers? Culture matters. Sagicor is now owned (ultimately) by a Canadian hedge fund. How are hedge funds regulated in Canada? If something bad goes wrong in the parent country, the contagion can still come here. The environment is changing. You have to understand the risks that emanate from those changes. It is not just a matter of liquidity and regulations here (in Jamaica),” she said.
On the matter of credit unions being brought under the JDIC umbrella, McKain says this could happen anywhere between the latter part of this year and next year, with a maximum of 20 credit unions joining up. There are now 25 credit unions in Jamaica.
“A lot of lobbying has been done over the years to ensure that their structures, and how they are perceived, were not watered down. The credit unions’ mandate is different from the banks’ mandate. They are beginning to act more and more like banks. Pretty much, they are ready to come into the scheme,” she said.
And as the JDIC widens its coverage net, it is working with the FSC on protection for customers of investment firms, insurance companies and, later on, pension funds. Noting that this proposal dates back to 2009, when it was shelved in the face of International Monetary Fund stipulations, McKain says it is again being contemplated that the JDIC would manage deposit insurance for these investments, although the ability to set up and manage such schemes now rests with the FSC.
A decision to implement the proposal would mean the payment of premiums by those entities, similar to that now being paid by the 11 insurable institutions to the Deposit Insurance Fund, DIF, which exists to compensate depositors of the insured institutions.
But the JDIC CEO says the current thinking is that payment of premiums at the current levels could be onerous for investment houses.
“There is a compensation fund now in existence for what is called malfeasance among securities firms. We are looking at starting from there and not to impose an undue burden to start up those kinds of systems,” McKain said.
The DIF held $20.4 billion at the end of December 2019, a level said to show a 12.2 per cent growth over 2018. Premiums paid into the fund by the covered institutions have been set at a rate of 15 basis points or 15 per cent of one per cent of all insurable deposits for almost 20 years. There appears to be at present no contemplation of increasing the premiums, despite record profits by some commercial banks.
Recommendations have, however, been made by the JDIC to the Ministry of Finance, under which the agency falls, to review the $600,000 per account deposit insurance coverage limit, which is said to cover 97 per cent of all deposits in banks, building societies and merchant banks. McKain declined to disclose what the recommendations are.
The average size of bank accounts is said to be $240,000, while the credit union accounts have on average $40,000.
“The premium is derived from considerations of how fast we want to grow the fund, prevailing interest rates, and premium levels globally, especially in the Caribbean,” says McKain, who has headed the JDIC since 2007 and was previously legal counsel at the BOJ.
“Premiums are a tax on profits. In Trinidad it is 20 basis points. We wouldn’t necessarily want to go there. At 15 basis points, it is a little more competitive for our banks,” she said.