Hghlghts of the Macroprudental Report for June 2018 October 2018 FINANCIAL STABILITY DEPARTMENT
Preface Bank of Jamaca frequently conducts assessments of the reslence and strength of the fnancal system. These fnancal system stablty assessments nform the Bank s macro-prudental polcy decson makng. Ths report provdes hghlghts of those assessments for the reportng quarter. The document s organzed accordng to fve objectve assessment areas, the analyss of whch utlzes leadng and concdent ndcators relevant to the specfc type of vulnerablty. The am of the report s to: 1. Convey Bank of Jamaca s fnancal system stablty assessment. 2. Make clear the lnk between the Bank s assessment and any polcy acton taken. 3. Provde nformaton on matters related to fnancal system stablty. Table of Contents Overvew:... 8 Objectve 1: Mtgate and prevent excessve credt growth and leverage... 8 Objectve 2: Mtgate and prevent excessve maturty msmatches and market llqudty... 8 Objectve 3: Lmt drect and ndrect exposure concentratons... 9 Objectve 4: Lmt the mpact of nterconnectedness and systemc mportance... 9 Objectve 5: Strengthen the reslence of the fnancal system... 10
Overvew: Durng the June 2018 quarter, rsks to fnancal stablty remaned low. The reducton n the Government of Jamaca s debt and the accommodatve monetary polcy stance nfluenced a contnued downward trend n domestc nterest rates and strong holdngs of lqud assets by banks. Aganst ths backdrop, the fnancal system demonstrated contnued expanson of domestc credt durng the quarter. Concdent ndcators of systemc rsk assocated wth the fnancal cycle, have not sgnalled excesses. Fnancal nsttutons have not demonstrated any sgnfcant extenson n ther fnancal leverage. In addton, despte the steady uptck n prvate sector debt levels, household and non-fnancal corporate enttes overall debt-burden are assessed as sustanable. 1.1 These credt developments occurred aganst the backdrop of a more favourable credt envronment for borrowers. Based on Bank of Jamaca s Credt Condtons Survey, there has been a steady easng of lendng condtons snce 2015, reflected n ncreases n the allowable maxmum loanto-value and maxmum debt servce ratos. 1.2 In dentfyng the fnancal cycle, the credt-to- GDP gap ndcators demonstrated persstence n the expansonary phase n Jamaca s credt envronment. The total credt-to-gdp gap ndcator ncreased to 2.5 per cent for the June quarter of 2018 (see Chart 1.0). Chart 1.0 Evoluton of Credt-to-GDP Gap Indcators Objectve 1: Mtgate and prevent excessve credt growth and leverage 1.0 Total credt ncludng corporate bond ssues ncreased by 7.0 per cent for the revew quarter, njectng approxmately $59.5 bllon addtonal prvate sector debt fnancng n the system compared to the prevous quarter. 1 Ths resulted n an annual percentage growth of 25.7 per cent compared to the 19.5 per cent annual growth recorded n the frst quarter of 2018. Notably, prvate sector credt also experenced a substantal ncrease, wth $31.1 bllon n addtonal credt extended relatve to the prevous quarter. Prvate sector credt also recorded an annual pont-to-pont growth rate of 23.4 per cent for June 2018 n comparson to 19.7 per cent annual growth for March 2018. Objectve 2: Mtgate and prevent excessve maturty msmatches and market llqudty 2.0 For the June 2018 quarter, the rato of average lqud assets to average prescrbed labltes for DTIs showed mprovement for the June 2018 quarter relatve to June 2017. When assessed relatve to labltes due wthn 30 days, there was a margnal reducton n lqudty coverage across the DTIs and Non Depost Takng Fnancal Insttutons (NDTFI) sectors. 1 Prvate Sector Credt s comprsed of depost-takng nsttutons (DTIs ) loans and advances to the prvate sector excludng credt to overseas resdents and other fnancal nsttutons. Total DTI Credt used to calculate the credt-to-gdp gap, s comprsed of prvate sector credt plus corporate securtes held by DTIs plus publc sector credt. The credt-to-gdp gap ndcators measure the devaton of credt-to- GDP varables relatve to long-term trends to sgnal excessve credt rsk accumulaton.
2.1 For the DTI sector, ths outturn resulted from sharper growth n long-term assets relatve to longterm labltes. Smlarly, the deteroraton n lqudty transformaton metrcs across the general nsurance and securtes dealers sub-sectors was due to a greater than proportonal growth n short-term labltes relatve to lqud assets (see Chart 2.0). Chart 3.0 Household and NFC Debt Ratos 3 Chart 2.0 Lqudty Transformaton 2 Objectve 3: Lmt drect and ndrect exposure concentratons 3.0 Whle there was contnued expanson n domestc credt, the concentraton n credt exposure to households compared to non-fnancal corporates remaned relatvely unchanged for DTIs for the revew quarter. In addton, debt sustanablty measures such as debt to GDP and net fnancal poston to GDP, were relatvely unchanged. Objectve 4: Lmt the mpact of nterconnectedness and systemc mportance 4.0 Regardng measures of systemc mportance, the number of domestc systemcally mportant fnancal nsttutons (D-SIFIs) remaned at three for the June 2018 quarter relatve to the prevous quarter. At end-june 2018, total SIFI assets as a share of the total assets decreased margnally from 65.7 per cent n the March 2018 quarter to 65.6 per cent (Chart 4.0). 4 Chart 4.0 Total Assets of SIFI Groups to Total System Assets 2 () Lqudty Transformaton = short term labltes [ 30 days] / lqud assets. Lqud assets nclude hgh qualty lqud assets, such as cash and equvalents, short-term nvestments and government securtes wth a 0% rsk weght. 3 Debt servce rato measures the amount of ncome used for nterest payments and amortzatons and takes account of the maturty profle of outstandng loans along wth the average nterest rate per quarter. 4 The D-SIFI framework currently used by the Bank follows the methodology outlned n Brämer and Gscher (2012), whch assesses the sgnfcance of bankng groups based on four key categores: (1) sze, (2) nterconnectedness, (3) nonsubsttutablty and (4) complexty. The score for bankng group for perod j s computed as follows: A j (LFC j + DFC j ) (LH j + LNFC j + LGG j + LCS j ) (TS j + IS j ) SCORE j = n + ( n A j ( LFC j + n ) + ( n DFC j ) ( LH j + n LNFC j + n LG j + n ) + ( n LCS j ) ( TS j + n ) IS j ) where, A represents total resdent assets, LFC represents loans to fnancal corporatons, DFC represents deposts from fnancal corporatons, LH represents loans to households, LNFC represents loans to non-fnancal corporatons, LGG represents loans to the general government, LCS represents loans to communty servce and non-proft organzatons, TS represents tradng securtes and IS represents nvestment securtes.
Objectve 5: Strengthen the reslence of the fnancal system 5.0 The performance of composte ndcators of macro-fnancal condtons was largely smlar to that of the prevous revew quarter. The macro-fnancal ndex was 13.0 ponts at end-june 2018 relatve to 12.0 ponts at end-march 2018, largely reflectng an ncrease n exchange rate volatlty (Chart 5.0). 5 The outturn of the macro compostes was largely nfluenced by stronger global GDP growth coupled wth declnng domestc nterest rates, and low nflaton. Chart 5.0 Macro-Fnancal Index for Bankng Sector 5.1 A macroeconomc stress-testng model was used to assess the reslence of the bankng sector to macroeconomc shocks. The macro-stress test results showed that the commercal bankng sector remaned reslent to adverse shocks to the real economy and fnancal markets. Ths reslence was due to ther strong captal poston as well as the sector s ablty to generate nterest ncome under all the stress scenaros examned. 5 The Aggregate Fnancal Stablty Index aggregates mcroeconomc, macroeconomc and nternatonal factors to form a sngle measure of fnancal stablty. A hgher value ndcates ncreased fnancal stablty whle a lower value ndcates deteroraton n fnancal sector stablty.