Jamaica - Banking and securities



The Bank of Jamaica, the central bank, acts as the government's banker and is authorized to act as agent for the government in the management of the public debt. It also issues and redeems currency, administers Jamaica's external reserves, oversees private banks, and influences the volume and conditions of the supply of credit. Financial institutions in Jamaica in 2002 included 6 commercial banks, 11 merchant banks, 2 development banks, and 59 credit unions. The financial sector accounted for 15% of GDP in 2002. Total bank assets amounted to $5.14 billion in 2001. Commercial banks include the Bank of Nova Scotia, Citibank, Union Bank, CIBC, National Commerce Bank, and Trafalgar Commercial Bank.

Various measures were introduced to restructure the liquidity profile of the banking system. In July 1992, in an attempt to reduce domestic credit and curb inflation, the minimum liquid assets ratio of the commercial banks was raised to 50% (it had been 20% in April 1991). The measure appeared to have been successful and the inflation rate fell until May 1993. However, the first half of 1994 saw a rise in the inflation rate, reflecting the government's price liberalization policies. This was contained by sustained tight monetary and fiscal policy. Reduced interest rates stimulated rapid growth in domestic credit, however, and in 1995 money supply grew by 38.5%.

Economic instability which emerged during 1995-96 brought into focus the relationship between the central bank and the government, and in particular, the destabilizing impact of the government's drawdown of its deposits. The government has since recommended that the central bank be given greater autonomy, and transferred its operational revenue and expenditure accounts from the central bank to commercial banks. It also froze the aggregate balance in the Bank of Jamaica at the September 1995 level in an attempt to minimize any expansionist effect of fiscal operations on money supply.

The lack of confidence in the financial sector was underlined in October 1996, when further rumors of a liquidity crisis lead to a run on Jamaica's fourth largest financial institution, the Citizen's Bank. Despite the bank's relatively healthy assets position, hundreds of depositors were prompted to withdraw their assets over a three-day period. Following the announcement of record losses of $24.6 million at the National Commercial Bank (NCB) group in the nine months prior to June 1996, it was confirmed that the National Security Bank (NSB) and Mutual Security Bank (MSB), both subsidiaries of the NCG group, were to merge their operations, thus creating the island's largest commercial bank.

The extent of the drain upon public finances caused by the precarious state of the financial sector became clear in mid-February 1997, when it was reported that net advances by the Bank of Jamaica to financial institutions had risen by $17.4 million in January alone. Several financial institutions had become dependent upon the government to solve their liquidity problems.

In January 1997, the government established the Financial Sector Adjustment Company (FINSAC) to rescue the ailing financial sector. By 1998, FINSAC had already spent $2.3 billion on the restructuring project, with annual debt financing amounting to approximately $170 million. In order to pay for its operations, FINSAC sold shares in the Canadian Imperial Bank of Commerce, and merged Citizens, Eagle, and Island Victoria commercial banks into one entity called Union Bank. Laws were instituted to improve the solvency of Jamaican banks. The International Monetary Fund reports that in 2001, currency and demand deposits—an aggregate commonly known as M1—were equal to $1.2 billion. In that same year, M2—an aggregate equal to M1 plus savings deposits, small time deposits, and money market mutual funds—was $3.5 billion.

In September 1968 the Jamaican Stock Exchange was incorporated. Jamaica's security market merged with the stock markets in Barbados and Trinidad and Tobago in 1989.

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