Aug 2010 Financial News

No interest in rate reduction, says BOJ

Aug 18, 2010

DON'T expect the central bank to join the call to reduce bank rates any time soon.

Governor of the Bank of Jamaica (BOJ), Brian Wynter believes that the financial sector could be destabilised should the pace of reduction of interest rates be faster than currently obtains in the financial sector.

Wynter last week told the Business Observer that the central bank's role in macroeconomic stability involves ensuring the financial sector remains in tact while any campaign to reduce bank lending rates faster must take into consideration the effect this would have on such stability.

"The central bank and I will not play a role in advocacy with respect to one aspect of a bank's balance sheet. The central bank has to preserve and ensure the preservation of financial stability. This is an important component of macroeconomic stability," said Wynter.

He said that banks are justified in reducing rates at a slow, gradual rate given the economic conditions in which they operate.

One such condition, he said, is the post-Jamaica Debt Exchange (JDX) environment.

The Jamaica Debt Exchange, saw the Government of Jamaica (GOJ) exchange its high interest bearing instruments with those of lower yields and longer maturities. Rates on GOJ instruments reduced from as much as 24 per cent, to 12 per cent at the conclusion of the Exchange in February this year. However, bank rates are still trending around 18 per cent, with special rates for some productive enterprises.

With the JDX, financial institutions which were heavily invested in GOJ instruments experienced shrinking interest rate spreads characterised by the reductions, effectively reducing net interest income. Wynter said this, along with the conditions of lower domestic demand and non-performing loans could potentially cause instability if rates are reduced more quickly.

"The banks are operating within the context of a portfolio of loans that they are seeing an increase in these non-performing loans. Because they are lending to businesses in the very environment of lower demand, that is part of the setting that those institutions are experiencing. On top of that is the experience of the JDX itself," Wynter said. He added that the call by businesses to reduce lending rates has ignored the fact that banks and other financial institutions are themselves businesses and subject to the same concerns of sustainability.

"It is important that we recognise, which we sometimes don't, that investors includes investment banks," said Wynter. "When we talk about risk taking and businesses adjusting their perceptions of risk, that includes the bankers.

"And so in terms of our efforts at the central bank including this economic programme to reverse the cycle of unsustainability and restore a sense of confidence based on a sustainable path of macroeconomic stability, that is aimed as much at the bankers and the owners of banks as it is at any other private sector enterprise."

The Jamaica Chamber of Conference Business and Consumer Confidence Indices, indicate that last month the country saw its highest rise in consumer and business confidence in two years. The Index of Business Confidence rose to 114.0 in the second quarter of 2010, up from 99.0 in the prior quarter. Consumer Confidence rose to 102.1, up from 90.8 in the first quarter. And, according the central bank, increased inflows of foreign investments in the July quarter indicates positive investor sentiments regarding the Jamaican economy.

Myrtle Halsal, deputy governor told the Business Observer that an indication of that confidence is the fact that precautionary balances held by financial institutions, amounting to approximately $370 million dollars has been released into the system.

The Financial Sector Support Fund (FSSF) put in place to rescue banks that would have been affected by the JDX has also remained untouched. The decision regarding what to do with the monies from that Fund is to be the subject of discussion at a meeting with the International Monetary Fund (IMF), with which Jamaica has a US$1.2 billion Stand-By Arrangement, this week.

Wynter however said that while the concerns for a rate reduction are understandable, the credit quality of lenders is also another factor the financial institutions must deal with.

"It is understandable the concern about the pace at which the lower interest rates coming from the banker programme is transmitted to the borrowers from the banks and other financial institutions," he said. "It is a very important issue, the reduction of interest rates by the banking system in the context of the lower level of risk that we are saying exists in the macro-economic environment. And before you start talking to a specific bank about lending at a lower rate, you have to actually make sure you understand what is the credit quality of who they are lending to," said Wynter.

He said failing businesses and the threat of default are important considerations in bank stability. "We have in Jamaica the responsibility of supervising and regulating these very financial institutions, and in that role the Bank of Jamaica is absolutely required to focus on all aspects of a bank," he said.

However, the Credit Bureau, one framework that could facilitate the further reduction of rates through helping institutions to better determine the credit quality of borrowers, is still in its infancy. Responsibility for its implementation has been transferred to the central bank, but Audrey Anderson, senior deputy governor of the BOJ who is in charge of its implementation said the bureau is still a work in progress.

"As you know the Bill is still in the house, but the Bank of Jamaica has been working to come to a final determination on the appropriate regulatory structure that would govern the credit bureau once it comes into being," she said.

"We have been working to put in place the necessary staffing and also doing research to determine the best regulatory approach. In that regard, we have been in discussions with various jurisdictions which have this type of thing in place which will inform our final determination on this," Anderson said. "The expectation is that we should not have too long a period before we are able to put our regulatory apparatus in place once the Bill becomes law."


Source:
ALICIA ROACHE
roachea@jamaicaobserver.com
Business reporter
Jamaica Observer
Wednesday August 18, 2010

http://www.jamaicaobserver.com/business/No-interest-in-rate-reduction-says-BOJ_7884106