Financial Stability Report


 Full Report - PDF File  النسخة العربية
 

Executive Summary

·   Future financial stability will require management of systemic risks, as these can cause instability despite stability at the micro level

·   Despite there being areas for improvement, stress testing indicates that the health of Jordan’s financial system is fairly strong

·   Future efforts towards financial stability require strong macroprudential policy, in which systemic risks are managed and manipulated with policy instruments

Key Findings

Domestic Development and Outlook

·   Jordan has faced numerous shocks in the last five years, such as the global financial crisis, the decrease in Egyptian gas exports, and the influx of Syrian refugees

·   According to the Central Bank of Jordan (CBJ), Jordan maintains tight fiscal and monetary policies, high levels of capital, and low exposure to high-risk investment instruments

·   Main export partners for Jordan are Iraq, US, KSA, India, Indonesia, and UAE and main import partners are KSA, China, Italy, US, UAE, Germany, and Turkey

·   While GDP growth rate for 2012 was 2.8%, lower than the IMF estimate of 3%, GDP is expected to grow and peak at 4.5% from 2015-2018

·   Inflation rate for 2012 was 7.2%, which was higher than IMF estimate, but inflation is expected to decrease to 3.2% by 2017

·   Budget deficit in 2012 was 8.25% of GDP

 

Jordanian Banking Sector

The Report contains extensive and historical data on many aspects of the banking sector in Jordan. Only the highlights have been included in this summary.

·   An important lesson learned from the global financial crisis is that financial stability at the micro-level of the banking system is insufficient to achieve stability at the macro-level because of the presence of systemic risks

·   Total assets for financial system in 2012 was JD 41.6 billion, most of which was held in banks indicating that banks are considered the bulk of the financial system in Jordan. The assets of licensed banks stood at 177% of GDP in 2012

·   There are 26 licensed banks in Jordan with the five largest banks holding 55.3% of assets, indicating fairly high levels of concentration

·   47% of equity in banks is held by non-Jordanians. This rate is one of the highest in the region because Jordan does not have investment restriction

·   Credit portfolio is the largest component of banks’ assets, with lending preferring households over corporate sector. This is largely because loans are seen to increase household spending ability and consumption which plays a key role in stimulating economic growth. Preferring households over the corporate sector also helps banks diversify their use of assets, reduces the risk exposures and enhances profitability

·   Credit extended to SMEs is especially low, consisting of only 10% of total credit granted

·   Jordanian banks hold 23% of government or government-guaranteed debt, due to reasonable returns with low risks

·   29% of deposits are held in foreign currency. These deposits are considered unstable because many mature in the short-term, often in a month

·   60% of total assets in Jordan’s banking system are held locally. The other 40% is held mostly in Arab Bank’s subsidiaries in the region

·   High-liquidity assets represented 49% of total assets in 2012, which is considered a comfortable level. It is important to note, however, that the liquidity surplus is concentrated in large banks, and small and medium banks have liquidity levels closer to the minimum requirement

·   Asset quality is high in Jordan, as only 7.7% of loans are considered non-preforming. Bad loans are found at such low levels because most clients who were unstable defaulted during the 2009-2011 financial crisis

·   The Basel III conference set new regulatory requirements on banks, namely it began requiring capital adequacy rates of 12% which will reflect positively on enhancing financial stability in the country as high capital adequacy rates strengthen banks’ capital base

·   Money exchange sector has grown and developed remarkably in the last years, resulting in increased regulatory attention from the government

 

Stress Testing:  Stress testing reveals that individually and collectively, Jordanian banks are able to withstand various shocks

 

·   In the case of doubled credit losses, the average capital adequacy ratio drops from 19% to 15.8%, above 12% minimum

·   In the scenario of 50% depreciation of JD compared to foreign currencies, the average capital adequacy ratio drops from 19% to 16.5%, above 12% minimum

·   On shocks associated with concentration, if largest borrowers at individual banks default, capital adequacy ratio will drop below 12% in only 4 out of 26 banks

 

Household Debt

·   Prior to the creation of the Financial Stability Department of the CBJ in 2013, there was no entity charged with monitoring household debt

·   Household debt-to-GDP ratio was 31.7% for 2012, a level significantly lower than in Europe and other developed countries

·   CBJ issued instructions to banks in 2012, “Treating Customers Fairly,” which aimed to restrict excessive borrowing by small borrowers to decrease indebtedness

·   A Credit Information Company is to be created in 2014, to help banks more precisely evaluate ability of consumers to repay debt

Recommended Actions and Initiatives

Macroprudential Policy: Enact policies where systemic risk is identified, monitored, and controlled to mitigate the accumulation of these risks and enhance the ability of the financial system to withstand shocks. Specifically, during booms in the financial cycle, macroprudential policy instruments should be activated, and during busts they must be released

 

Systemic Risks

The document provides an overview of the different types of systemic risks and suggests monitoring and mitigation tools. Highlights of the risks and suggested mitigation tools are provided hereafter.

·   Excessive credit growth: enact countercyclical capital buffer and ensure dynamic provisions

·   Financial market exposure to bubbles: impose a cap on loan-to-value ratio, increase risk-weights, and raise levels of capital according to results of stress tests

·   High exposure of over-indebted household sector: set a cap ratio of household debt to income, increase risk-weights, and raise levels of capital according to results of stress tests

·   High exposure to government debt: increase risk-weights and raise levels of capital according to results of stress tests

·   Reliance on non-stable funding sources: reduce non-core liabilities when calculating loan-to-debt ratio and raise required reserves and liquidity levels

 

Monitor Policy Interactions

·   Monitor the interactions of various policies with the macroprudential policy including monetary, fiscal and competition

 

Report Name

Date

Timeline

Financial Stability Report

2012

None

Author

Supporting Donor

Central Bank of Jordan

Not Relevant

Sector

Lead Ministry

Financial Market Regulation

Prime Ministry

Key Topics

Assets – Banking sector – Capital Adequacy Ratio – Credit portfolio – Debt – Depreciation – Economic shocks – Equity – Financial stability – High Liquidity – Household debt – Macroprudential policy – SMEs – Stress Testing – Systemic Risks

 

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