Paper outlines expanded powers for BOJ

• Public to weigh in by December

The Bank of Jamaica (BOJ) has invited comments in December on its discussion paper on proposals to vest it with institutional responsibility for the stability of Jamaica's financial system.

The proposed legislation will effectively expand the central bank's authority as primary overseer and regulator of the entire financial system.

Here is a summary of the main elements of the proposed amend-ments to the Bank of Jamaica Act contained in the discussion paper titled 'Institutional Arrangements for Safeguarding Financial Stability'.

First, the BOJ Act would be amended to include the specific objective of ensuring the stability of the financial system. This includes macro-prudential oversight of financial institutions, in addition to its current mandate for the direct prudential supervision of individual institutions and subsectors within the deposit-taking system.

Financial institutions here include those that currently fall under the regulatory oversight of the BOJ or Financial Services Commission, including deposit-taking institutions, securities dealers, insurance companies, cooperatives, collective investment schemes and pension funds.

New oversight

It would also allow for the BOJ to designate any other type of financial institution to be subject to this type of oversight.

Macro-prudential oversight involves the detection of risks to financial stability and taking effective measures to mitigate and control those risks. Oversight would be effected by the BOJ principally through the exchange of information among financial regulatory authorities.

Second, the establishment of a financial stability committee responsible for coordinating the activities pursuant to the objective of financial system stability.

The task of the committee would include, among other things, producing forward-looking financial stability assessments, and consulting with financial-sector stakeholders to obtain their input in assisting the committee's understanding of developments that may impact on the sector's stability.

The composition of the committee is expected to include non-BOJ staff, and provisions made to ensure that members are subject to confidentiality requirements relating to their work and indemnified with respect to their activities as committee members.

Third, the powers of the BOJ would be expanded to allow for the provision of emergency liquidity assistance to financial institutions in the event of a threat to systemic stability and in accordance with criteria of systemic importance, solvency and collateral sufficiency.

Thus, the BOJ, in anticipation of severe or unusual disruption in the operation of a financial market or the financial system, could issue its own securities or buy and sell securities, obligations, bills of exchange or promissory notes to the extent determined necessary for promoting systemwide stability.

It would also have the power to make secured loans, guarantees or other credit facilities to financial institutions upon such terms and conditions as it sees fit.

The central bank would also be able to enter into cross-border institutional arrangements to ensure coordination of actions that may be taken with regard to financial institutions situated overseas that may be the parent, subsidiary or a branch of a Jamaican financial institution.

It would be able to accept upon such terms and conditions as it sees fit, collateral denominated in a foreign currency or located in a foreign jurisdiction with regard to the provision of emergency liquidity assistance to Jamaican financial institutions. Fourth, the BOJ would have the power to co-opt a regulatory authority to perform an inspection of any financial institution under the jurisdiction of that supervisory body. Inspections would be undertaken if the BOJ determines that the institution's financial condition or conduct poses or could pose a significant risk to the stability of the financial system.

Fifth, the BOJ would have the power to require any regulatory authority or government agency to provide any information in their possession which is necessary in the discharge of its financial stability function.

However, the BOJ suggested that special arrangements may need to be made with the Statistical Institute of Jamaica to facilitate the collection and organisation of information over which it may have primary responsibility for compiling.

The BOJ would also have the power to require legal entities who carry out international transactions to provide information which the central bank determines relevant to establish Jamaica's international investment position, without those entities being entitled to invoke bank or other secrecy privileges.

Sixth, the BOJ would have the power to instruct the relevant regulatory authority to issue prescriptive rules, standards and codes - applicable to any financial institution or class - pertinent to macro-prudential oversight and the maintenance of financial stability.

Such rules, standards or codes would address gaps and imbalances in the financial system that could threaten stability. The setting of rules, standards and codes may include, for example, countercyclical capital buffers and loan-loss provisioning, liquidity requirements, time varying loan-to-value or loan-to-income limits, collateral-valuation rules, foreign-currency mismatch limits, more stringent risk weightings, leverage ratio ceilings, corporate governance and risk-management guidelines, and restrictions on activities of payment and settlement systems.

The BOJ would be able to impose administrative penalties on any institution for delay in complying with directives, rules, standards and codes it has issued.

Seventh, the BOJ would have the mandate to establish and update a central database containing micro-prudential and macro-prudential information to be available for the relevant financial regulatory authorities represented on the stability committee.

Eighth, the BOJ would be required to publish a financial stability report within three months after the end of its financial year to support its accountability on matters relating to the stability of the financial system as a whole.

A reasonable timeframe - which has not been defined - would be allowed before sensitive or confidential financial stability action by the central bank is announced or publicly discussed.

The BOJ would be prohibited from disclosing any information obtained in carrying out its financial stability mandate except in aggregate form, such that the person or legal entity to which the information refers would not be identified.

According to the discussion paper, incorporated in the amendments are suggestions based on comments from the attorney general's chambers, Ministry of Finance, Financial Services Commission, Jamaica Deposit Insurance Corporation, Jamaica Securities Dealers' Association, and individual financial institutions.

mcpherse.thompson@gleanerjm.com