A sizeable and complex financial sector dominated by large intra- and interconnected financial conglomerate groups with cross-border linkages has prompted calls from the International Monetary Fund (IMF) for improved supervision and data collection methods for the institutions.
Last Friday the IMF, in reporting on the results of Jamaica’s 2018 Financial System Stability Assessment (FSSA), welcomed progress on the crisis preparedness and resolution management frameworks for institutions in banking, insurance, pension fund management, and collective investment fund management.
The directors, however, cautioned that given the increased interconnectedness of the financial sector and associated risks of contagion – the spreading of a harmful idea or practice – priority should be given to intensified oversight and consolidated risk-based supervision, especially of “systemically important groups with connections”.
Since the 2006 FSSA the Jamaican authorities have considerably strengthened macroeconomic policies, including under IMF-supported programmes. But decades of high fiscal deficits, combined with the financial sector crisis of the late 1990s, has led to rapid government debt accumulation and financial dollarisation, the IMF explained.
The directors added that the high public borrowing needs, in turn, have crowded out private credit and stifled economic growth, resulting in the IMF’s Financial Sector Assessment Program stress tests indicating that highly interconnected financial conglomerates make the financial sector particularly vulnerable to contagion.
“Vulnerabilities arise from concentrated ownership, related party and large group exposures, and off balance sheet positions. Also, several conglomerates operate in multiple jurisdictions with different oversight practices.
“Sizable public debt holdings by all segments of the groups and across financial institutions mean that the stability of the financial system is closely bound to discipline in public finance, sustainability of the macroeconomic outlook, and debt dynamics,” the IMF said