IADI CRC Bank Resolution Workshop and Simulation Exercise, July 17 -21, 2017 Montego Bay, Jamaica

By Antoinette McKain, Chief Executive Officer, Jamaica Deposit Insurance Corporation

I am happy to welcome you to this Bank Resolution Workshop and Simulation Exercise. I would like to especially welcome Mr John Jackson, the Chairman of the Board of Directors of the JDIC and Mrs Myrtle Halsall, JDIC Board member; Mr Noel Nunes, Chairperson of the Caribbean Regional Committee of IADI and Mrs Michelle Rollins Pierre, the General Manager of the Deposit Insurance Corporation of Trinidad and Tobago.

I welcome the officers of other IADI Caribbean Regional Committee member agencies from the Bahamas and the British Virgin Islands. I also welcome Mr Andres Arantes Loes, the Executive Director of the Fundo Garantidor De Creditos, Brazil; and the other officers from IADI member agencies. So to our guests welcome to Jamaica, the land of Marcus Garvey, Bob Marley and home of Reggae Music, Merlene Ottey-Page, the Jamaican Bobsled Team, Usain Bolt, Shelly-Ann Fraser-Pryce.

Mountain View

I would also like to specially thank IADI for its support of this important activity.

I would like to welcome the facilitators of this Workshop and Simulation, subject matter experts from the United States Department of the Treasury’s, Office of Technical Assistance (OTA): Mr Terry Blagg, Ms Vilma Leon York, Mr James Hambric and Mr Robert Schoppe.

This is an opportunity to thank Ms Leon York for her assistance to JDIC in working through the policy and implementation issues for JDIC’s work so far in contributing to the development of proposals for a Special Resolution Regime(SRR) for Jamaican regulated financial institutions. Having worked with so many subject matter experts in this area, I have found Ms Leon York to be one of the most knowledgeable in analysis of policy issues, implications and implementation requisites for laying down SRR frameworks. It has been extremely beneficial to have her on our team.

Thank you to our Financial System Safety Net partner representatives from the Bank of Jamaica(The Central Bank), the Financial Services Commission and the Ministry of Finance and the Public Service for participating.

Last, and importantly, I would like to mention and thank Mrs Eloise Williams Dunkley, Director, Intervention and Resolutions and Ms Sherene LewisBailey, Senior Analyst, Intervention and Resolutions,who participated as facilitators in the various pilot bank closing simulations here in Jamaica, the Dominican Republic and Kenya and who are themselves facilitators, supporting the OTA team. They have held the mantle for the organization in bringing to you this Workshop and Simulation Exercise. I thank all other members of the JDIC staff who made this possible and welcome all JDIC team members present.

This Bank Closing Workshop and SimulationExercise is timely for us here in the Caribbean Region and other member organizations of IADI. This is in particular as countries move towards implementing frameworks for the resolution of financial institutions that align with the Financial Stability Board’sKey Attributes of Effective Resolution Regimes for Financial Institutions, now the gold standard for national financial stability frameworks.

Necessarily, as Governments seek to implement frameworks to achieve timely resolution and orderly exits of failing financial firms in a manner that, prevents/minimizes disruption to financial stability; economic stability and removes the burden of tax payers bearing the cost, the matter of developing sound public policy for this purpose is at the centre of Government decision making. The public policy issues might, at first, appear to be very clear and compelling in the area of how to deal with failing banks, given the wealth of data from the history of bank failures and financial system crises all over the globe.The last significant crisis we know was the global financial crisis of 2007. The catastrophic effects of this are still being felt in many economies.So we know the crippling consequences of multiple bank failures to an economy and the social structures that it supports. Jamaica’s mid-1990’s financial sector crisis has been reliably estimated to cost the country 40 percent of Gross Domestic Product at the time.

However, when there is a period free of catastrophic events, say of about 7- 10 years, public policy issues might not appear to be as clear as before. Industry players begin to query the need for the frameworks or the level and structures of the frameworks that help to prevent bank failures and financial crises. What is also true is that the more time that passes, the less clear the issues and potential consequences appear.

Where resources are constrained, even Government policymakers and other stakeholders are likely to display skepticism. What is known however is that the crisis will occur again. With the vast experience learned from past crises, and with a macro prudential view in regulation and stress testing now an integral part of regulatory tools, we might even be able to know the how and when of failures and crises. The events are becoming more highly predictable. Since we know this, policymakers, at the administrative end of the policymaking spectrum, are charged to prepare for this and ensure that the necessary frameworks are in place with the requisite competencies to effectively prevent, mitigate and minimize the effects to the economy.

So what role can simulations play to ensure that public policy continues to be optimal? There is a progressively growing body of work/thoughts on how simulations can be used to guide public policy to allow for empirical analysis and ensure more optimal results for stakeholders.

Policymakers set objectives to support economic, environmental and social sustainability. So it is assumed that Governments will closely monitor public interest development and put forward public policy solutions, but this tends to be late for various fairly well known reasons. In addition to that, managing complex systems in which heterogeneous agents act according to non linear behaviors can be a difficult task such as those necessarily attached to public policy evaluation in an attempt to define efficient public policy management.Further, oftentimes outcomes of policy are not necessarily provable ex ante and so it becomes difficult to advance effective policies. The design and evaluation of public policies can be very complicated. It is difficult to make effective strategic decisions based on evidence before the fact.

Targeted studies show that simulation techniques can support evidence based decision making at the policy level where these social economic systems are determined by heterogeneous agents who act according to non-linear rules. Simulations can reveal the areas of complexities at each stage of the policy making model and this allows the policymaking stakeholders to give due attention to relevant factors ex ante and foster the required level of collaboration between the various agents.

Simulations are important because they can bring together the relevant agents in collaboration, ex ante, and will help reduce the tendency for adherence to linear rules and traditional methodologies. This gives policymakers (policy proposers/ developers and implementers) the ability to identify the key variables and how they interact to predict and understand results, without having to experience real risk.It allows for evidence based decision making.

Policymakers can take the methodologies further to solve for outcomes. Can we model the optimal outcomes of bank failures, in the context of the available resources? We can monitor and manage the variables in the solution, on an ongoing basis to achieve the desired outcome.

I think the process of bank closing simulation we are conducting here is a first and critical step towards this type of analysis for policymakers concerned with economic outcomes (and by extension social outcomes).

In the context of the vast complexity of our financial markets and systems, can we model the optimal resolution strategies to contain costs within the levels of available resources? In the case of Jamaica that would be somewhere less than 1 percent of GDP, the existing level of the JDIC Deposit Insurance Fund balance.This is important work, for our assessment, as designers and implementers of public policy in the area of financial system stability frameworks for the good of our countries.

Welcome again to this Workshop and Simulation and for our overseas participants welcome to Jamaica.