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Financial System Under Stress: Distance to Default Declines by 32.5% Amid COVID-19 Pandemic

Macropolicy Report Highlights Financial System’s Resilience Amidst COVID-19 Challenges

Kingston, Jamaica - The Bank of Jamaica has released its Macropolicy Report for the June 2020 quarter, providing insights into the financial system’s stability amid the ongoing COVID-19 pandemic.

Distance to Default Declines by 32.5%

The report reveals a significant deterioration in the financial system’s stability, with the distance to default (DTI) for publicly listed domestic financial institutions (DFIs) declining by 32.5% in June 2020 compared to December 2019. The DTI measures the likelihood of default and decreased from 11.7 standard deviations to 7.9 standard deviations.

Factors Contributing to Decline

The decline is attributed to:

  • A decrease in market value of DFIs’ assets
  • An increase in volatility

Impact on Non-DFLI Sectors

The report also highlights the impact of COVID-19 on non-DFLI (NDTFI) sectors, with a distance to default of 7.6 standard deviations as at June 2020 compared to 9.0 standard deviations at December 2019.

  • The NDTFI sector experienced its most significant reduction in distance to default during March 2020

Financial System Resilience Tested

The report notes that the financial system’s resilience was tested by hypothetical COVID-19-related shocks, which showed:

  • Credit risk and associated spillovers form part of the largest risk exposure of the financial system
  • Simulations revealed that a few financial institutions would be further impaired after a second-round propagation of the financial shock

Capital Adequacy Ratios Maintained

According to the report, the aggregate post-shock capital adequacy ratios (CARs) of financial institutions were maintained after the second-round contagion effects, with the exception of five institutions under the adverse scenario.

Recommendations for Mitigating Systemic Risks

The Bank of Jamaica emphasizes the importance of:

  • Advancing work on creating a picture of borrower indebtedness and debt repayment capacity to mitigate systemic risks associated with credit concentrations in specific economic sectors
  • Financial institutions maintaining a prudent flow of credit to sound borrowers while conserving capital

Governor’s Statement

“The COVID-19 pandemic has brought significant challenges to the financial system, but our monitoring and supervisory efforts have ensured that the system remains resilient,” said [Name], Governor of the Bank of Jamaica. “We will continue to work closely with financial institutions to ensure their stability and support economic conditions.”

Full Report Available

The full report is available on the Bank of Jamaica’s website.