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Credit Shock Impacts Provisioning, Loss in Interest Income for Jamaican Financial Institutions

The Bank of Jamaica has released its Financial Stability Report for 2023, highlighting the impact of credit shock on provisioning and loss in interest income for domestic financial institutions.

Key Findings

  • A 1% increase in interest rates would result in a 1.8% increase in Non-Performing Loans (NPLs), corresponding to an approximately 20% increase in NPLS given the assumed 125 basis point increase in domestic bond yields.
  • The aggregate stress test revealed that the combined impact of interest rate, credit, liquidity, and equity risk shocks on the capital adequacy ratio would result in a marginal decline in post-shock CAR for both sectors. However, the report noted that the resilience was largely due to strong levels of capitalization.

Liquidity Stress Testing

  • The report found that the assumed 20% withdrawal of deposits would have a significant impact on financial institutions’ liquid assets, leading to reductions in net income and statutory capital.

Contagion Stress Testing

  • The contagion stress test examined the potential for distress from one financial institution to spillover onto other institutions within the financial system. The results showed that both sectors were generally resilient to the contemplated shocks, with DTIs remaining robust due to their low exposure to equities.

Credit Risk Stress Testing

  • The report found that DTIs also remained generally resilient to anticipated shocks to NPLs, with a marginal decline in post-shock CAR of 0.2 percentage point.

Conclusion

The full report can be accessed on the Bank of Jamaica’s website.

Key Takeaways:

  • Credit shock would result in an increase in NPLS and provisioning
  • Interest rate risk results show both sectors generally resilient to contemplated increases in GOJ bond yields
  • Liquidity stress testing reveals significant impact on financial institutions’ liquid assets
  • Contagion stress test shows both sectors generally resilient to contemplated shocks
  • DTIs remain robust due to low exposure to equities

Sources:

  1. Bank of Jamaica, Financial Stability Report 2023
  2. Figures and tables from the report as referenced in text