Here is the converted article text in markdown format:

Credit Shock Impacts Provisioning for NPLs and Loss in Interest Income

A recent analysis by the Bank of Jamaica has revealed that a 125 basis point increase in domestic bond yields would result in a significant increase in Non-Performing Loans (NPLs) and loss in interest income.

Empirical Evidence

According to the report, empirical evidence suggests that a 1% increase in interest rates would lead to a 1.8% increase in NPLs. Based on this assumption, the Bank of Jamaica’s stress testing shocks indicate that an increase in domestic bond yields by 125 basis points would result in a 20% increase in NPLs.

Aggregate Stress Test Results

The aggregate stress test results show the combined impact of interest rate, credit, liquidity, and equity risk shocks on the capital adequacy ratio (CAR) of financial institutions. The analysis reveals that both sectors, including Deposit-Taking Institutions (DTIs) and securities dealers, were generally resilient to the contemplated increases in Government of Jamaica (GOJ) bond yields.

Market Risk Stress Test Results

The market risk stress test results indicate that DTIs and securities dealers remained robust to the contemplated shocks, mainly due to their strong levels of capitalization. The analysis also reveals that the sectors’ post-shock CARs declined marginally by 0.8 percentage point and 2.0 percentage points, respectively.

Credit Risk Stress Test Results

The credit risk stress test results show that DTIs remained generally resilient to the anticipated shocks to NPLs. The sector’s post-shock CAR declined marginally by 0.2 percentage point, remaining above the prudential minimum of 10.0%.

Liquidity Stress Test Results

The liquidity stress test results indicate that a 20% reduction in liquid assets would result in a significant impact on financial institutions’ capital adequacy ratios.

Conclusion

=====

The Bank of Jamaica’s stress testing analysis provides valuable insights into the potential impacts of credit, interest rate, and liquidity shocks on financial institutions. The findings suggest that both sectors were generally resilient to the contemplated increases in GOJ bond yields, but highlight the need for continued vigilance and prudent risk management practices by financial institutions.

Stress Testing Shocks

Figures

Figure 1.6 Market Risk Stress Test Results

[Insert figure]

Figure 1.7 Credit Risk Stress Test Results

[Insert figure]