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New liquidity test for Jamaica’s banks

Bank of Jamaica (BOJ) is to issue new guidelines for liquidity management in the island’s banking system, which include a new stress test.

The central bank noted in its just-released annual report that elements of both the Basel II and III capital frameworks will be implemented over the next two to three years, but that the Basel III liquidity coverage ratio (LCR) will be expedited for full implementation during 2019.

The LCR measures a deposit-taking institution’s (DTI) ability to withstand a liquidity stress test lasting 30 days. It assesses the amount of unencumbered high-quality liquid assets (HQLAs) that a bank holds to meet short-term obligations, the report states.

HQLAs include cash, government securities, central bank deposits and qualifying corporate debt. Those holdings should be greater than or equal to the bank’s net cash outflows over the 30-day stress period. The BOJ said it will issue guidelines that set out best practice standards for liquidity management for DTIs.

Buoyant banking sector

To inform the calibration of methodology for computing the LCR, a quantitative impact study will be conducted in Q1 2019 to assess the adequacy of DTIs’ HQLA to cover 30-day foreign currency net cash outflows obligations as per the Basel standards,” the central bank noted.

Industry members asked to comment said they were aware that the LCR was being expedited, but it was too early to give feedback on the measure. One banker commented “the parameters that are to be applied to the industry have not yet been defined”.

Commenting on other stress tests conducted by the central bank last year, BOJ said the one for capital adequacy showed Jamaica’s banking sector remained “relatively buoyant”, and that it would take a reduction of 61% in deposits for the capital adequacy ratio (CAR) to fall below the statutory benchmark of 10%.

However, BOJ also reported that one of the 11 deposit-takers was found to be vulnerable at the stress level of a 50% reduction in deposits but did not it by name.

The central bank also reported that the banks stood resiliently against foreign exchange (FX) risk last year, but one deposit taker was found to be impacted by a hypothetical 50% appreciation in the exchange rate, in the test conducted last September.

“The negative impact on the institution’s CAR was due to the magnitude of its foreign currency long position,” BOJ noted.

Interest rate stress tests also found the sector to be resilient, as their buffer capital was sufficient to absorb the impact of contemplated shocks and were above the prudential minimum benchmark.

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