Oct 2016 Financial News

BOJ reserve hike might affect profit incrementally — Vaughn White

Oct 17, 2016

The Bank of Jamaica (BOJ), which has taken the advice of the International Monetary Fund (IMF) to curb the appetite of local banks for forex assets, has moved cash reserve limits from nine per cent to 10 per cent. The change became effective on October 3.

At the end of September 2016, foreign currency cash reserves held by the central bank for deposit-taking insitutions was US$273.55 million (which includes both UK pounds and Canadian dollars converted).

The IMF, which discussed the issue of rising dollarisation of accounts in its 13th review of the Extended Fund Facility arrangement with Jamaica, noted that banks were, in particular, moving investments into foreign exchange-denominated assets .

Gary Vaughn White, vice president of treasury at Scotia Group Jamaica told the Jamaica Observer that “given that no interest is paid by the BOJ on FC cash reserves, there may be some impact on profitability of the incremental amounts”.

Up to the end of last month, the rates were zero per cent for US dollars and UK pounds, and 0.07 per cent for Canadian dollars. Effective 3 October 2016, foreign currency cash reserves will not be remunerated, the BOJ told the Caribbean Business Report.

In general, any impact on profit might be less problematic for commercial banks than for merchant banks and building societies.

Based on data submitted to the Bank of Jamaica (BOJ) by supervised institutions up to 5 August 2016, while the pre-tax profit margin for all sectors was 31 per cent, within this, commercial banks reflected a margin of 33.3 per cent for July, merchant banks 2.4 per cent and building societies 23 per cent.

The commercial banks have $1.014 trillion in total assets, while merchant banks had $33. 9 billion in assets as at July, and building societies held $263.9 billion in assets.

In its 13th review of the Extended Fund Facility arrangement with Jamaica, the fund noted that as at June 2016, more than 45 per cent of deposits in the institutions were denominated in US dollars. This is accompanied by dollarisation of investment portfolios, the fund said.

The fund said that high dollarisation has economic costs reducing the effectiveness of monetary policy, constraining central bank capacity to act as a lender of last resort, exacerbating the ‘fear of floating’, making greater exchange rate flexibility costly, and could potentially fuel liquidity and currency mismatch risks in the financial system, as stated in its review.

“To address rising dollarisation and speculative FX pressures in the financial system, the authorities should explore the feasibility of introducing prudential limits on the FX net open position of financial institutions,” the IMF asserted in its discussion.

Source:
BY AVIA COLLINDER
collindera@jamaicaobserver.com
Business reporter 
Jamaica Observer
Sunday October 16, 2016    

http://www.jamaicaobserver.com/business/BOJ-reserve-hike-might-affect-profit-incrementally-----Vaughn-White-------_77034