BOJ pours cold water on new Basel rules

Avia Collinder, Business Reporter

The Bank of Jamaica (BOJ) indicated this week that it does not foresee a time when new policy suggestions emanating from Europe regarding more stringent regulations for risk management - dubbed Basel IV - might be applied locally.

Jamaica's regulatory structure is already quite conservative and the island is also well advanced in its plans to complete changes under Basel III, the central bank said.

Regulators and banks have fast-tracked the implementation of Basel III which raises the levels of capital that banks around the world must hold as a safeguard against another financial crisis.

But there are strong signals that the sector is already moving beyond this to the emergence of 'Basel 4', according to KPMG analysts, who said this month that the new requirements being touted could see the UK's eight largest banks having to hold £50 billion more capital.

The suggested changes coming from Basel are, according to KPMG, for banks to meet a higher minimum leverage ratio; restrictions on the use of internal models to calculate capital requirements; and additional significant disclosure by banks.

Basel III itself is a comprehensive set of reform measures in banking prudential regulation developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector post-crisis.

Current changes adequate

In response to the discussions, the BOJ indicates that changes already under way in the local system are more than adequate.

"Jamaica's current capital adequacy framework is quite comprehensive and, in certain aspects, are more conservative than the current Basel standards (eg, in the definition of regulatory capital whereby Jamaica's framework requires the exclusion of retained earnings, although allowed under Basel II and III)," BOJ wrote in response to Financial Gleaner queries.

"In fact, the backstop leverage ratio introduced under Basel III was codified in Jamaica's Capital Adequacy Regulations from as far back as 2004 and was utilised as a prudential requirement before then," the central bank said.

"Nonetheless, adoption of Basel II and III will result in further improvements in the loss-absorbing capacity of our DTIs, which will redound to further strengthening of the resilience of the system - particularly with its introduction of countercyclical capital buffers, enhanced requirements for systemically important financial institutions (SIFIs) and the new liquidity standards."

The Bank of Jamaica is undertaking a comprehensive assessment of our supervisory framework against the revised Basel Core Principles for Banking Supervision issued in September 2012.

This self-assessment process will result in major changes to Jamaica's supervisory architecture for the deposit-taking system, as are already being reflected in the omnibus banking reform documents that outline the amendments being proposed for new legislation.

"Introduction of the Basel Capital Adequacy standards - Basel II and Basel III - in Jamaica will therefore form a key aspect of the financial regulatory reform, and development of this programme is anticipated to be intensified in early 2015," the BOJ said.

"Until then, priority is to be given to full implementation and roll-out of consolidated supervision, which is a necessary prerequisite to implementation of the capital-adequacy standards."

avia.collinder@gleanerjm.com