GOVERNOR of the Bank of Jamaica Brian Wynter has challenged regional financial regulators and policymakers to seek to resolve problems related to cooperation on a response to issues related to banking enterprises operating in more than one jurisdiction.

The Governor, who was addressing the recently concluded three-day Regional Technical Assistance Conference on Bank Insolvency in the Caribbean: Law and Best Practice, in Montego Bay, reinforced the disclosure by Minister of Finance and the Public Service, Audley Shaw, that the Government was looking into the promulgation of a bank insolvency law for Jamaica.

In the context of globalisation, against the background of vulnerability of Caribbean economies to recent developments, including financial institution failures that occur elsewhere in the Caribbean and the world, the Central Bank Governor declared that the authorities must now give urgent priority to the development of a regional crisis management plan for regulators and policymakers.

Wynter emphasised that the potential for problems in one jurisdiction impacting developments in another regional market was now a matter of critical concern. He said that, against this background, the central banks of Caricom have initiated a regional crisis management plan as a response to crisis situations in banking enterprises operating in more than one jurisdiction in the region.

“The plan is intended to address crises that involve illiquidity situations, or the ensuing insolvency of, at least one member of a banking group. It is also proposed that the plan will address principles underlying preparedness during normal times, systemic risk assessments, crisis identification, how and when to invoke procedures and the adoption of region-wide communication strategies,” he stated.

He explained that the adoption of the provisions of the plan is to be formalised by way of a Memorandum of Understanding (MOU) among the participating central banks. He declared that a number of challenges to making these arrangements a reality have been identified, but remain unaddressed at this time.

In that regard, he raised a number of pertinent issues: “How should the costs of any remedial action to stabilise the financial sectors in participating countries, be shared in cases where there is or may be spillover contagion between jurisdictions? How shall we overcome the legislative and policy hindrances, such as exchange controls, that would restrict or inhibit the flow of funds to a distressed centre in the event of either a private sector crisis resolution or a collective public sector “bail-out”? How will we treat the variations in the different legislative and supervisory arrangements in place in member jurisdictions that may impact on the ability of jurisdictions to fully participate in the regional plan?”

The Governor further opined, “The implementation of a regional crisis management plan should make the banks in the region more capable of absorbing shocks and therefore enable an environment capable of delivering for the businesses and people of the Caribbean the sustained period of stability that is needed in order to foster innovation, creativity and growth in productivity.”

According to Wynter, the recent global crisis is a reminder that banks matter enormously to a country’s economy. However, he cautioned that the purpose of financial sector regulation is not to prevent financial institution failures.

“The primary aim is better seen as providing the framework for the efficient functioning of financial markets with adequate banking services, the protection of depositors and of overall stability of the financial system. It is, therefore, of utmost importance that we continually seek to ensure that our oversight framework allows for the development of strong and resilient financial systems with necessary provisions for the orderly exit of intermediaries whenever this becomes necessary, with minimum disruption to depositors and the local economy,” he said.

In this regard, supervision in Jamaica has been substantially strengthened since the financial sector turmoil the country experienced in the 1990s. He cited the establishment of the Jamaica Deposit Insurance Corporation in 1998 and the creation of the Financial Services Commission in 2001, as two of the more striking aspects of the effort to strengthen the regulatory and supervisory framework of the financial sector.

He observed that the past regulatory and supervisory improvements have placed Jamaica in good stead during the recent turbulence in global and regional financial systems as, generally, the banking sector fundamentals remained strong, against the backdrop of the economic slowdown.

While admitting that it was early days since Jamaica’s historic debt swap, he pointed to the stability of the financial services sector.

“It is still early days, but the system appears to have withstood the recently delivered shock arising from Jamaica’s voluntary Debt Exchange (JDX) transaction. This exchange, which received voluntary participation of almost 100%, involved a reduction of interest income from holdings of domestic government securities of close to 30% in addition to a lengthening of maturities by two years,” Wynter said.

Meanwhile, regional policymakers and regulators are of the view that a regime for making the region’s banks more secure, against the threat of insolvency, is now a critical necessity.

“A factor that was not a significant feature of the earlier turmoil in Jamaica was cross-border reach. The Caribbean Single Market and the prospect of the eventual Caribbean Single Economy involve the removal of certain legal, economic and trade barriers. In the past decade, the Caribbean has seen a significant increase in regional expansion by companies operating in both the real sector and the financial sector,” said Governor Wynter.