On its review of the financial system’s performance for 2022 as well as current and emerging risks, the Financial Policy Committee (FPC) issues the following statement:
“Amid global supply chain disruptions as well as rising commodity prices, inflation accelerated globally. In an effort to curtail the second-round effects of these price shocks, central banks across the world, including the BOJ, tightened monetary policy during 2022. As a result of the synchronised monetary policy tightening, fixed-income assets devalued, leading to fair value losses on the balance sheets of financial entities which, if left unaddressed, could have adversely affected the capital adequacy ratios for the financial system. In response, however, supervised entities restricted dividend pay-outs as well as injected capital in a few instances in an effort to boost their capital positions.
The Jamaican economy recovered to its pre-pandemic output levels towards the end of 2022. Notably, real economic activity in Jamaica for the year is estimated to have expanded between 4.5 per cent and 5.5 per cent. This occurred within the context of strong recovery in the tourism and manufacturing sectors. The positive economic performance for the year led to improvements in key macroeconomic indicators such as the unemployment rate and public sector indebtedness.
Within the context of the reduction in asset prices and fair value losses, deposit-taking institutions’ (DTIs) assets grew more slowly than the domestic economy, leading to DTIs’ asset base as a percentage of GDP declining relative to end-2021. Non-deposit-taking financial institutions’ (NDTFIs) asset growth also decelerated for the year. Growth in DTI credit to households as well as to the corporate sector decelerated moderately during 2022. The quality of loans to these sectors however improved as banks took active steps to manage their loan portfolios. Profitability in the financial sector fell for 2022 in the context of a reduction in trading income for the year. Financial entities however remained liquid and well-capitalized.
Additionally, although the interbank funding network remained highly interconnected, simulation results point to a low level of spill-over and contagion risks. Despite an increase in inter-bank activity and a rebound in online transactions, there was a notable decline in bank fraud related losses during 2022. Based on observable data to date, the level of fraud in the overall financial system represents a small proportion of the system’s capacity to absorb losses as measured by capital.
Risks to the financial system during 2022 increased notably. Composite indices of the macro-financial environment reflected weakening for the year in the context of higher global and domestic inflation, as well as a weakened stock market. Risks emanating from the global economic environment were elevated due to uncertainty caused by the ongoing war in Ukraine and continued COVID lockdowns in China.
The principal risks to the financial system going forward relate to further inflationary pressures and associated increases in interest rates as well as weakening global growth. Stress tests were carried out on the various financial sub-sectors in order to evaluate their resilience to adverse scenarios involving further increases in interest rates and the spill-over effects of an external recession on the Jamaican economy. The results showed that the financial system remained broadly resilient to these shocks.
The report is available at Financial Policy Report 2022“
Financial Policy Committee
30 March 2023
