FSC freezes credit risk weighting
Published:Wednesday | April 6, 2011 | 12:00 AM
Says dealers capital structure has weakened, JSDA hits back with suggestions of overkill
Sabrina Gordon, Business Reporter
The Financial Services Commission (FSC) has placed a freeze on the incremental increases in credit risk weighting of Jamaican government-issued foreign currency bonds held by securities dealers, saying their capital structures were too weak to handle it.
Under the programme, dealers weight the GOJ indexed bond on their balance sheets in increments of 12.5 per cent — reaching 100 per cent coverage in eight quarters or two years, based on stipulations under the IMF standby agreement.
The FSC did not respond to request for comment. Anya Schnoor, president of the Jamaica Securities Dealer Association (JSDA), punted on queries regarding the current position of the sector and which companies are most at risk, redirecting the query to the regulator; but she was also highly critical of the new requirement, suggesting it was akin to overkill.
Schnoor said via email that the new weighting effectively means that for every US$1 million bank or securities dealer has on its balance sheet in GOJ foreign currency debt, the institution would be required to have US$100,000 in capital — that is, US$1m times the 10 per cent risk charge — as at the end of June 2012.
"The JSDA is of the view that this capital charge is unwarranted and, in fact, we cannot find any other country in the world that has implemented a similar risk weighting on its 'own' sovereign debt," she said.
"We are also of the opinion that until the Bank of Jamaica has removed US dollar currency restrictions on securities dealers, which prevents dealers from diversifying out of GOJ debt, this capital regime should be suspended."
At March 2011, the Ministry of Finance estimated the value of its outstanding indexed bonds at J$79.6 billion, or US$927.8 million.
The phasing in of the weightings began in June 2010, and has reached 37.5 per cent of the target.
On Monday, April 4, in a circular to securities dealers, the FSC said it was putting the programme on hold, otherwise dealers were certain to breach regulatory requirements on capital.
"Recently submitted data for the quarter ending 2010 December 31 has revealed a decline in regulatory capital positions. Analysis of monthly data filed after 2010 December 31 also indicate further declines are likely to result from the implementation of the next 12.5 per cent incremental credit risk weight," the FSC circular said.
"This view is also supported by information received by the FSC through its consultation with its licensees. Based on the foregoing, the FSC has taken a decision to temporarily suspend the implementation of the fourth 12.5 per cent incremental credit risk weight, and maintain risk weightings at the current 37.5 per cent level."
The regulator said it would be conducting further analysis and stress tests, and advise dealers thereafter on how it plans to proceeds. No timeline for the assessment was given, but dealers were urged to discuss concerns with Sonia Nicholson, acting senior director of securities; and Laurence Crossley and Gayon Knight, who were also both identified as acting manager of securities.
Schnoor says the JSDA continues to have collaborative talks with the FSC, and discussions with the Ministry of Finance, Bank of Jamaica and the IMF on the reforms of the industry, adding that the dealers were committed to implementation of policy changes that were "relevant" for the industry its customers.