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Global Bond Market Shocks Test Financial Institutions’ Resilience

A stress test conducted by the Bank of Jamaica has revealed that local financial institutions, including Deposit-Taking Institutions (DTIs) and securities dealers, remain resilient to global bond market shocks.

Scenario Simulations

The test simulated two scenarios:

• A 125 basis point increase in interest rates, resulting in a 15% decline in stock market performance.
• An equity price decline of 15%, resulting in losses for financial institutions with exposure to equities.

Results

The analysis found that both sectors were generally resilient to the contemplated increases in Government of Jamaica (GOJ) bond yields. The results are as follows:

Capital Adequacy Ratio (CAR)

• DTIs: declined marginally by 0.8 percentage points
• Securities dealers: decreased by 2.0 percentage points

The resilience was largely due to the sectors’ strong levels of capitalization.

Credit Risk Stress Test

The credit risk stress test found that DTIs remain generally resilient to anticipated shocks to Non-Performing Loans (NPLs). The sector’s post-shock CAR declined marginally by 0.2 percentage points, remaining above the prudential minimum of 10.0%.

Key Findings

• DTIs and securities dealers’ sectors remain resilient to contemplated increases in GOJ bond yields.
• Both sectors have strong levels of capitalization, which contributed to their resilience.
• Equity price decline had a limited impact on DTIs and securities dealers due to their low exposure to equities.
• Credit risk stress test found that DTIs remain generally resilient to anticipated shocks to NPLs.

Conclusion

The Bank of Jamaica’s stress testing exercise demonstrates the robustness of local financial institutions to global bond market shocks. The results provide confidence in the sector’s ability to withstand potential risks and maintain stability in the financial system.