The presentation reviews the recent Jamaican context as a backdrop for the evolution of capital adequacy standards by the Bank of Jamaica, the regulator of deposit taking institutions (DTI) and financial holding companies of financial conglomerates which contain a DTI.

1. CAPITAL ADEQUACY STANDARDS
THE EVOLUTION AND WHEREWE ARE...
Jide Lewis PhD, CFA, FRM
DivisionChief, FinancialInstitutions
Supervisory Division

2. INTRODUCTION
 Capital adequacy is the statutory minimum reserves of capital which a bank or other
financial institution must have available.
 Capital adequacy standards require financial institutions to maintain a defined level of
risk capital relative to the riskiness of the activities it undertakes.
 Capital adequacy requirements:
• provides a buffer against bank losses;
• protects creditors in the event of bank failures; and
• creates disincentives for excessive risk taking.

3. Fiscal and Primary Balances (%GDP) Debt/GDP*
Real GDP Growth Monthly Inflation (Annual point-to-point)
* Includes Bank ofJamaica, CentralGovernment andexternalguaranteed debt
3
-
2.0
4.0
6.0
8.0
10.0
12.0
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
115.00%
120.00%
125.00%
130.00%
135.00%
140.00%
145.00%
08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16
-150,000
-100,000
-50,000
0
50,000
100,000
150,000
05/06
06/07
07/08
08/09
09/10
10/11
11/12
12/13
13/14
14/15
15/16
Fiscal Balance Primary Balance

4. Net International Reserves and F/X RateGross Reserves Coverage of Imports and Services
Remittances
Source: Bank ofJamaica
Current Account Deficit as a percentage of GDP
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
4
0
500
1,000
1,500
2,000
2,500
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
0
5
10
15
20
25
Jan-11
Jun-11
Nov-11
Apr-12
Sep-12
Feb-13
Jul-13
Dec-13
May-14
Oct-14
Mar-15
Aug-15
Jan-16 60.0
65.0
70.0
75.0
80.0
85.0
90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
0
500
1,000
1,500
2,000
2,500
3,000
2007 2008 2009 2010 2011 2012 2013 2014 2015
NIR (US$MN) End-Point ExchangeRateJ$/US$ (right-axis)

5. DECOMPOSITION OF BANK CAPITAL
31-DEC-11 31-DEC-12 31-DEC-13 31-DEC-14 31-DEC-15 31-DEC-16
Tier 2 Capital 4,677,280 4,679,637 5,208,277 6,560,459 6,736,683 7,721,401
Tier 1 Capital 92,268,783 98,973,735 118,057,369 123,673,704 127,085,411 143,005,847
Less Deductions (15,315,779) (19,605,702) (21,038,689) (19,037,118) (13,246,485) (12,590,932)
(28,000,000)
(8,000,000)
12,000,000
32,000,000
52,000,000
72,000,000
92,000,000
112,000,000
132,000,000
152,000,000
172,000,000

6. HIGH QUALITY CAPITAL
Permanent
No Charges
Legal
subordination

7. INTRODUCTION
 Jamaica's current capital adequacy framework for deposit taking institutions (DTIs) is
applicable on an individual basis to deposit-taking institutions and, in certain aspects, is
more conservative than the Basel standards.
For example:
 In defining regulatory capital – Jamaica's framework requires the exclusion of retained earnings,
although allowed under the Basel Accords.
 Jamaica has also long had a leverage ratio, a ratio the Basel Committee introduced for the first time
under the Basel III capital standard.

9. SHORTCOMINGS OF THE INDIVIDUAL APPROACH
 Facilitation of regulatory arbitrage;
 No consideration of contagion risk across a financial group;
 No contemplation of the adequacy of capital vis-à-vis group-wide risks; and
 No consideration for the different primary risks of insurance entities.

10. CURRENT DEVELOPMENTS
CONSOLIDATED CAPITALADEQUACY:
Scope of Application
Treatmentof InsuranceEntities
Determinationof ConsolidatedCapital Positions
Introduction of Market Risk Exposure
Group-wide CapitalAdequacyAssessment

11. CONSOLIDATED CAPITAL ADEQUACY
 Consolidated capital requirements seek to ensure that risk exposures of financial
conglomerates are backed by adequate high quality, loss absorbing capital.
 This framework includes a:
i. Leverage or primary ratio requirement, and
ii. Risk-based capital adequacy measure.
 The framework also introduces the:
i. Computation of group-wide market (interest rate) risk exposure of the trading book, and
ii. Treatment of the capital adequacy and risk positions of insurance entities.

12. SCOPE OF APPLICATION

13. SCOPE OF APPLICATION
 Sectoral regulatory capital requirements will remain applicable;
 Consolidated capital adequacy ratios shall be computed for each licensee
on the following basis:
a. DTI at the standalone (“solo”) level;
b. DTI operating as an intermediate holding company; and
c. FHC on a consolidated basis

14. SCOPE OF APPLICATION
FHC
DTI (IHC)Unregulated*
Securities
Securities Insurance
Microfinance
Insurance
Securities
Unregulated*Insurance**
Insurance
(1)
(4)(2)
(3)

15. TREATMENT OF INSURANCE
ENTITIES

16. TREATMENT OF INSURANCE ENTITIES
 Capital adequacy for insurance entities are included in the FHC’s group-
wide assessment of risk exposures and capital adequacy determinations at
the FHC and DTI intermediate group levels.
 Risk exposures and capital adequacy requirements will be:
i. Submitted by the FHC to the Bank as will be prescribed;
ii. Validated and authenticated by the FSC or equivalent functional regulators in overseas jurisdictions;
iii. Applicable at the insurance entity level (on a solo basis), on a sectoral basis and at the consolidated
level.

17. TREATMENT OF INSURANCE ENTITIES
 Pursuant to section 75 (1)(a) of the BSA, the FHC is obligated to bear the full
ownership risk of the insurance entity or sector in its group and recognizing
these risks on a group-wide basis.
 FHCs should ensure that insurance companies forming part of financial
groups are adequately capitalized.
 Relevant regulators will determine which insurance specific components of
capital are transferrable by the insurance entity, if necessary.

18. DETERMINATION OF CONSOLIDATED
CAPITAL POSITIONS

19. DETERMINATION OF CONSOLIDATED CAPITAL POSITIONS
 The basis of measuring the numerator and denominator components of the
consolidated capital ratios for FHCs and DTIs on a consolidated basis will be
the same as for standalone DTIs with two exceptions:
 The introduction of interest rate market risk exposure, and
 Capital components, total assets, assets subject to risk adjustments and all other
denominator components are derived from the consolidated statement of financial
position.

20. INTRODUCTION OF MARKET RISK EXPOSURE
 Total Risk = Credit Risk + Market Risk
 Market Risk = General Market Risk + Specific Risk
 General Market Risk = Interest Rate Risk + Currency Risk+ Equity Price Risk
+ Commodity Price Risk
 Specific Risk = Instruments Exposed to Interest Rate Risk and Equity Price
Risk

21. COMPUTING GROUP-WIDE CAPITAL AND PRIMARY RATIO

22. DETERMINATION OF CONSOLIDTED CAPITAL POSITIONS
Primary Ratio (6%)
Consolidated Capital Base
_________________________
Consolidated Total Assets
Table 1: The Formula for Primary Ratio Calculation

23. DETERMINATION OF CONSOLIDTED CAPITAL POSITIONS
Capital Adequacy Ratio (10%)
Consolidated Regulatory Capital
______________________________________________________
[Consolidated risk-weighted on-balance sheet assets +
Aggregate group-wide risk-weighted off-balance sheet assets +
Aggregate group-wide risk-weighted funds management balances +
Aggregate group-wide foreign exchange risk exposures +
Aggregate group-wide market risk exposure]
Table 2: The Formula for the Capital Adequacy Ratio

24. COMPUTING GROUP-WIDE CAPITAL AND RISK-BASED CAR

25. GROUP-WIDE CAPITAL ADEQUACY
ASSESSMENT

26. GROUP-WIDE CAPITAL ADEQUACY ASSESSMENT
1. Calculate the regulatory capital requirement for each consolidated entity or sector in
the group.
2. Calculate the regulatory capital requirement for consolidated unregulated entities in the
group.
3. Compare each group member’s (including the insurance entity’s or sector’s) sectoral
capital level to its sectoral regulatory capital requirement and identify the capital
surplus or deficit present.
4. Evaluate the availability of freely transferable capital across entities, sectors or
jurisdictions.

27. GROUP-WIDE CAPITAL ADEQUACY ASSESSMENT
5. Aggregate the regulatory capital requirements of each consolidated regulated entity and
the capital requirementsfor consolidated unregulated entities.
6. Compare the aggregate regulatory capital requirements to the FHC’s consolidated
regulatory capital level.
7. Determine group-wide (including insurance) capital surplus or deficit.
8. Consider the need for the FHC to source or fund additional capital or provide capital
support for members of the group.

28. THE NEXT STEPS
Basel II and III Implementation December 2020

29. THE NEXT STEPS
 Looking to the future, the Standards must be responsive to continual
financial innovation and developments in risk management practices.
 The Bank of Jamaica will continue to build on its earlier initiatives by
focusing attention on the adoption of supervisory policies and systems that
will enable an inclusive and realistic approach of effecting Basel’s II and III.
Full implementation of the Basel II and III frameworks is expected by end-
December 2019 and end-December 2020 respectively.

30. ROADMAP TO FULL BASEL IMPLEMENTATION

31. QUESTIONS