AT least one commercial bank has expressed concerned that the implementation of the Basel III Accord will negatively impact Jamaicans living overseas with a mortgage in Jamaica. The bank requested to be kept unnamed for this story.

The Basel Accord is a set of agreements on banking regulations concerning capital risk, market risk, and operational risk. The Basel III Accord specifically broadens the risk coverage and risk sensitivity that was present in the Basel Accord.

Previously, deposit-taking institutions in Jamaica were required to maintain a capital adequacy ratio set out in the Banking Services Act (2014) and the Banking Services (Deposit Taking Institutions) (Capital Adequacy) Regulations (2015), which were generally aligned to the Basel I Accord.

The capital adequacy ratio (CAR) is a measurement of a bank’s available capital expressed as a percentage of a bank’s risk-weighted credit exposures.

The reforms set out in the Basel III framework now include additional capital charges for credit risk, market risk and operational risk to better represent the risk exposures of financial institutions and to improve the resilience of financial institutions to shocks.

This means that banks with a heavy portfolio of loans among a group deemed risky may have a challenge maintaining that required ratio.

Among these risky groups are persons in the diaspora who maintain mainly mortgages with banks locally.

These mortgages are to attract a higher capital charge, which should be even higher under the Basel III Accord.

In a statement shared with the Jamaica Observer, the BOJ disclosed “one way in which the risk sensitivity of the Basel III framework can be illustrated is in the treatment of different types of mortgages. For example, when a mortgage is disbursed in a currency that is different from the local currency or when a mortgagee’s income is denominated in a currency that is different from the local currency, the framework ascribes a higher capital charge to take into consideration any currency mismatches between the currency of the obligation [mortgage] and the currency earned by the borrower [mortgagor].”

The local bank pointed out that the Basel III Accord could impact negatively on a country with a diaspora about the same size or greater than its population and where the Government is constantly trying to woo the diaspora for investments and to improve their participation in the local economy.

Notwithstanding, the central bank highlighted that in cases where a mortgaged property is to be used for investment purposes, where the owner(s) does not intend to occupy the property, the risks associated with these mortgages is deemed to be higher than owner-occupied properties and as such, these mortgages are ascribed a higher capital charge.

To that end, the BOJ said “financial institutions must therefore hold higher levels of regulatory capital that are in line with their risk profiles. These treatments will be consistent whether or not the borrower resides in Jamaica.”

“In implementing the Basel III framework, Bank of Jamaica has therefore committed to ensuring that financial institutions hold and maintain levels of regulatory capital that are commensurate with their risk profiles, as part of its mandate to promote the safety, soundness and resilience of the financial system,” the statement closed.

The Basel III reforms are designed to prevent a recurrence of the types of stress events which caused the global financial crisis beginning in 2008.