Omnibus banking bill frames BOJ as super-regulator ... Heads to Parliament in October

Published: Friday | June 14, 2013 Comments 0

McPherse Thompson, Assistant Editor - Business

Drafting of the omnibus banking legislation to consolidate and strengthen supervision of deposit-taking institutions is be completed by October for tabling in Parliament during the last quarter of the current fiscal year, according to the Bank of Jamaica.

Institutions to be affected by the new legislation include commercial banks, licensees under the Financial Institutions Act, and building societies.

However, the central bank has declined to say which banking groups or financial institutions are left to restructure to ensure conformity with the new law.

One of the objectives of the proposed omnibus stature is to collapse and harmonise deposit-taking legislation into one law; expand the existing consolidated supervisory framework as well as codify a new structure for holding companies of financial conglomerates, the BOJ said.

"While we cannot comment on the circumstances of any individual financial institution, a quick review of their audited statements should provide an indication as to how those groups are currently structured and whether they satisfy the existing criteria set out in the legal framework as well as whether any action on their part will be required to fit within the proposed framework," the central bank said in written responses to Financial Gleaner queries.

National Commercial Bank Jamaica disclosed in regulatory filings at the top of the year that it was in the process of creating a holding company which would become the parent of the bank and its businesses, which include a wealth arm, and a life insurance company.

"The specific timing for this holding-company conversion has not yet been determined, but is currently expected to take place by the end of fiscal year 2013," said the filing by NCB, whose financial year ends in September.

Referencing the pending omnibus bill, NCB said in the filing that the "transition provisions will be incorporated in the law to allow institutions time to comply with the omnibus in this regard."

Other operations such as GraceKennedy Group and Scotia Group Jamaica went through restructuring several years ago.

As to what is left to be done to ensure that the omnibus legislation meets the March 2014 deadline stipulated under the International Monetary Fund (IMF), the BOJ said a consultative document was issued to stakeholders in December 2012 with invitation for comments by early March 2013. That deadline was extended to the end of March.

"Since then, stakeholder comments have been assessed and incorporated in the drafting instructions which are now at the final stages," the central bank said.

"The next step is for the bill to be drafted and we have projected that that exercise will be completed by October 2013 to facilitate the necessary reviews prior to finalisation. It is expected that the omnibus bill will be tabled in the last quarter of 2013."

The central bank said that generally the enhancements proposed to the regulatory framework received positive feedback from the financial sector and there was general appreciation for the supervisory framework to be updated to ensure Jamaica continues to meet international banking standards and other international requirements.

Bill already drafted

A Ministry of Justice official, who spoke on condition of anonymity because he is not authorised to speak about the matter, told the Financial Gleaner last week that the omnibus banking bill has already been drafted.

This was based on an approval in September 2010 by the Cabinet, under the Jamaica Labour Party administration, for the enactment of new legislation and amendments to existing provisions to enhance the supervision of deposit-taking institutions.

However: "Given that the process of preparing the omnibus has spanned political regimes, it is the norm in such circumstances that proposed amendments to legislation be reaffirmed in principle and drafting instructions ratified by the new Cabinet prior to drafting of the bill," the BOJ said.

The BOJ's consultative document said that among the significant new areas being introduced under the statute is supervisory autonomy of the central bank.

Autonomy requires, among other things, that some existing powers be transferred from the minister of finance to the BOJ.

These include: licence approvals, suspensions and revocations; fit and proper determinations; approval of ownership changes; format and timing of prudential returns; publication requirements; exemptions from statutory limits; variations of statutory limits; extension of statutory timeline for sale or disposal of land; approval of branch and representative office establishments; relocations and closures.

Solidifying the bank's role

The bill is meant to give the BOJ wider powers to oversee the entire financial system. It will solidify the bank's role as financial regulator-in-chief policing systemic risk.

According to the IMF staff report on the request for an arrangement under the Extended Fund Facility, large holdings of government securities by the highly interconnected financial institutions make them vulnerable.

A key risk involves the securities dealer sector which grew rapidly in the last decade based primarily upon the so-called 'retail repo' product, where the legal title of the securities remains with the securities dealers.

"Therefore, unlike the case of an outright purchase that transfers legal title of the underlying securities, the risks - concentration, interest rate, and liquidity - of holding the government bonds remain on the securities dealers' balance sheets but are not matched by sufficient capital and liquidity to weather an adverse scenario."

The IMF report said that while the banking system is relatively well capitalised and profitable, the relative size of the securities dealer sector - with assets equivalent to 35 per cent of GDP - and the interlinkages within the financial conglomerates which dominate the financial system, heighten the risk of spillovers.

The enactment of the omnibus banking act will strengthen the powers of the central bank and the FSC, as well as operational capacity to deal with unlawful financial organisations, including Ponzi schemes.

mcpherse.thompson@gleanerjm.com

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