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Regulatory Framework

Bank of Jamaica

Bank of Jamaica, under the Bank of Jamaica Act, legally has supervisory oversight over institutions governed by the following pieces of legislation:

  1. Commercial Banks which are governed by The Banking Act;
  2. Near bank deposit-taking intermediaries, such as merchant banks, trust companies and finance houses licensed under The Financial Institutions Act;
  3. Building Societies / Institutions operating under The Industrial and Provident Societies Act which either take deposits and/or make loans.

Apart from the institutions operating under The Industrial and Provident Societies Act, the principles for supervision as embodied by law are essentially consistent for commercial banks, licensees under the Financial Institutions Act and building societies, but with some differences in specific operating requirements relevant to the nature of operations in the respective types of businesses. (Supervisory oversight of Industrial & Provident Society also devolve on the Bank of Jamaica.)

SUMMARY OF PROVISIONS IN FINANCIAL LEGISLATION
Key provisions upon which supervision is conducted and specific requirements as contained in:

  • The Banking Act,
  • The Financial Institutions Act,
  • The Building Societies Act, and
  • the Bank of Jamaica (Building Societies) Regulations, 1995

are as follows:

Licensing
Applications for licenses are made to and approved by the Minister of Finance. The assessment process involves the application of 'fit and proper' criteria in relation to shareholders, directors and management.

Regulation of Shareholding in Licensees
To ensure that a licensee is in suitable hands, any agreement for the aquisition of shares in a local licensee by which the person or persons aquiring the shares would obtain 20% or more of the voting power or issued shares of the licensee must be approved by the Minister.

Minimum Capital
Minimum capital requirements in respect of locally incorporated licensees are as follows:

Paid-up Capital Subscribed Capital
Commercial Banks J$60 000 000 J$80 000 000
FIA Licensees J$20 000 000 J$25 000 000
Building Societies J$20 000 000 J$25 000 000

The Minister of Finance may by order subject to affirmative resolution of each House of Parliament of Jamaica vary the minimum requirements.

There is also a concept of 'capital base', which represents permanent or core capital, and provides the basis for limits on credit and other risk exposure, fixed assets and deposit-taking capacity. Capital base means the amount of shareholder's equity and eligible reserves of the licensee calculated in the manner and by the methods that the Minister prescribes and also includes certain debentures.

Compulsory Creation of Reserves from Profits
A minimum of 15% of net profits must be transferred each year to a statutory Reserve Fund, until its balance is equivalent to 50% of the paid-up capital of the licensed institution; thereafter, a minimum of 10% must be transferred until the Reserve Fund equals the Paid-up capital of the institution.

Capital Adequacy Ratio
Deposit-taking capacity is limited in relation to capital base as follows:
Deposit to Capital limits:

Commercial Banks 25:1
FIA Licensees 20:1

The Minister of Finance can vary each of these ratios subject to the affirmative resolution of each House of the Jamaica Parliament and provide the institutions with time to respond to the variation.

There is no similar provision in the Building Society Regulations. These Regulations however provide for a capital adequacy ratio between the capital base of the building society and its risk-base assets and other risk exposures on the other hand in such percentage as the Bank of Jamaica prescribes.

Risk weighted capital guidelines will be stipulated by regulations to be made pursuant to the Banking Act and the Financial Institutions Act.

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Credit Exposure Limits in respect of Banking Act and Financial Institutions Act Licensees
Credit exposure limits (inclusive of guarantees and letters of credits) include the following prohibitions:-

  • the acquisition, dealing in or granting of credit facilities on the security of its own shares or the shares of its holding company or subsidiary. The prohibition does not operate to prohibit any permitted share financing scheme under the Companies Act;

  • the grant of unsecured credit facilities to persons connected with the licensee and to any officer or employee of the licensee or any immediate relative of such officer or employee in excess of any amount equivalent to one year's salary of such officer or employee;

  • except in relation to specified credit facilities, the grant unsecured credit facilities to
    • any firm or corporation which holds 20% or more of the licensee's capital or in which the licensee or a person connected with the licensee has an interest as a partner, or, a shareholder holding or controlling 20% or more of the voting shares;

    • any person who holds or controls 20% or more of the licensee's shares;

    • any person if the credit facilities are guaranteed by a person connected with the licensee who holds or controls 20% or more of the licensee's capital; or

    • any firm or corporation if the credit facilities are guaranteed by a person connected with the licensee who, in relation to that firm or corporation, has an interest as a partner, or, who holds or controls 20% or more of the voting shares;

  • except in relation to specified credit facilities or an order of the Minister of Finance, the grant credit facilities:-

    • to any one person (not being another licensee) if the credit facilities granted exceed in the aggregate 20% of the licensee's capital base and where any portion of such credit facilities is unsecured, that portion shall not exceed 5% of the licensee's capital base;
    • to any group if the credit facilities exceed in the aggregate 40% of the licensee's capital base and where any portion of such credit facilities is unsecured that portion shall not exceed 10% of the bank's capital base;

Credit Exposure Limits in respect of Licensees, which are building societies

Credit exposures limits are reflected in the following prohibitions:-

  • the acquisition or dealing in its own shares or the shares of a holding company or subsidiary of the licensee;

  • the granting credit facilities on the security of its own shares save as is permitted;

  • grant credit facilities on the security of the shares of a holding company or subsidiary of the licensee;

  • the granting of unsecured credit facilities to -

    • any of its directors or managers or an immediate relative of such manager or director in excess of 1% of its capital base;
    • any of its officers or employees or any immediate relative of such officer or employee in excess of any amount equivalent to two year's emoluments of such officer or employee;

  • the granting of unsecured credit facilities in excess of 5% of its capital base or the grant credit facilities on terms and conditions more favourable than the general terms and conditions applicable to borrowers generally to;

  • any person who, or any firm or corporation which holds 20% or more of the licensee's capital or in which such person the society, its manager, director or any immediate relative of such manager or director, has an interest as a partner, or, as the case may be, a shareholder holding or controlling 20% or more of the voting shares; or
    • any person who holds or controls 20% or more of the licensee's capital; or

    • any person if the credit facilities are guaranteed by a manager or director of the licensee or a manager's or director's immediate relative who owns or controls 20% or more of the licensee's capital; or

    • any firm or corporation if the credit facilities are guaranteed by a manager or director of the licensee or a manager's or director's immediate relative who, in relation to that firm or corporation, has an interest as a partner, or, as the case may be, owns or controls 20% or more of the voting shares.

  • The granting of credit facilities to any person if the credit facilities granted exceed in the aggregate 20% of the licensee's capital base but where any portion of such credit facilities is unsecured that portion shall not exceed 10% of the licensee's capital base;

  • to any group if the credit facilities exceed in the aggregate 40% of the licensee's capital base but where any portion of such credit facilities is unsecured that portion shall not exceed 20% of the licensee's capital base.

Investments Limits
Investments in any company or undertaking limited in aggregate to 50% of a licensee's capital base. Any such single shareholdings is limited to 10% of the licensee's capital base.

There are limits on licensee granting credit facilities to or holding investments in companies to which it is connected with persons to which it is connected.

Limits on Fixed Assets
Fixed assets are restricted to 100% of the capital base except with the written approval of the Minister of Finance.

Cash Reserves and Liquid Assets
Minimum Cash Reserves and Liquid Assets are required in relation to 'prescribed liabilities' in the case of banks and FIA licensees and 'deposits and withdrawable shares' in the case of building societies.

Cash Reserves are required to be held with the Bank of Jamaica.
Liquid Assets include the required Cash Reserves, notes and coins, money at call, deposits with other supervised licensees and short-term Government Paper.

Loan Classification and Provisioning Guidelines
Where there is delinquency of principal or interest for three months or more, accrued interest on such loans should cease being taken to profit and loss, until actually realized. Additionally, an appropriate provision for loss must be established in respect of such loans.

Prudential Returns and Publication of Accounts
Regular submission of financial information is required, which includes:

- Monthly returns showing information which includes information on contingent liabilities and past due loan facilities;
- Annual statements of Earnings and Expenditure;
- Audited financial statements in respect of the licensed institution, its parent, subsidiary and affiliated companies, where relevant.

Additionally, each licensee is required to publish in a daily newspaper (and also exhibit in its offices throughout the year) a copy of its audited financial statements.

The Bank of Jamaica may publish in a daily newspaper information on the assets and liabilities of the licensees.

Examination of Institutions
Bank of Jamaica is required to examine, at least once a year, the affairs of the licensee to ensure that the various statutory requirements are being complied with and to determine whether the institution is in a sound financial position. The results of such examination are to be provided to the Minister of Finance.

Auditors
Bank of Jamaica is entitled to require any auditor of a licensee to, among other things, perform such audit procedures as it may specify. The Bank of Jamaica may order a special audit of a licensee using an auditor other than the licensee's auditor.

Sanction Powers
Where the Minister of Finance, after consultation with the Supervisor of Banks and Financial Institutions (the Governor of the Bank of Jamaica) believes that a licensee is or appears likely to become unable to meet its obligations or that:-

  • a final judgment has been obtained against the licensee and has remained unsatisfied for at least one month; or

  • the licensee:

    • has given false or misleading information in its application for a license; or

    • has continued to take deposits in violation of a direction; or
    • has given false statements concerning the affairs of the licensee; or
    • refuses or neglects to make returns or to produce books, records or documents to an authorized officer; or
    • refuses to permit inspection by authorized persons; or
  • has failed to commence banking business within six months of the date of the granting of a license or the coming into effect of Financial Institutions (Amendment) Act, 1997; or

  • is contravening or has contravened any cease and desist order or any direction issued by the Supervisor; or

  • the value of the licensee's assets is substantially less than the amount of its liabilities; or

  • the licensee has ceased to carry on business of taking deposits; or

  • a receiver has been appointed in respect of a licensee

he may, assume temporary management of the licensee, suspend or revoke the license, present to the court a petition for the winding up of the licensee, or initiate a reconstruction of the licensee.

Where the Minister is of the opinion that a licensee has ceased to be viable he may vest the shares and subordinate debt of the licensee in himself for the purpose of effecting a restructuring of the licensee or to wind up the institution.

In the case of a proprietary building society, the Minister may vest the capital shares and the subordinate debt of the society in himself and in the case of a mutual building society all the voting and decision making powers attaching to shares of any class issued by the society or in respect of the subordinated debt and the control of property, rights assets and liabilities of the society.

The minister is obliged to make compensation to persons who held the shares, capital shares or subordinate debt in the institutions prior to the vesting of the shares in himself.

 

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