Jamaica: Reserve Requirements, GFC

In fall 2008, during the Global Financial Crisis (GFC), investors sold Jamaican-dollar assets in favor of foreign currency assets seen as safe stores of value amid uncertainty and following the downgrades of Jamaican national debt by the three major ratings agencies (BOJ 2010). The sales of Jamaican-dollar assets created “extraordinary foreign exchange needs” for Jamaican financial and non-financial businesses (BOJ 2008c). Around the same time, the maturation of Bank of Jamaica (BOJ) and Government of Jamaica (GOJ) securities yielded further Jamaican-dollar liquidity to bondholders. The BOJ sought to discourage those bondholders from swapping Jamaican dollars for foreign currencies, which would have put further pressure on the value of the Jamaican dollar. To do so, the BOJ raised reserve requirements for banks’ holdings of Jamaican-dollar assets on three occasions. It is not clear why the BOJ raised requirements for foreign currency liabilities on one of those occasions. To see daily exchange rates over time, see Figure 3.

Sources: Yahoo Finance 2008a; Yahoo Finance 2008b.

On November 18, 2008, the BOJ announced that it would offer a special, short-term certificate of deposit to primary dealers and commercial banks before the reserve requirement changes took effect. The deposit paid 20.5% per year and absorbed JMD 5 billion before the 15-day notice period ended and higher domestic currency requirements took effect (BOJ 2008a; Latibeaudiere 2008). The Jamaican dollar fell against the US dollar by 1.4% the following week (Yahoo Finance 2008b).

The BOJ took three additional measures to bolster the currency before raising reserve requirements. On October 15, 2008, it began lending US dollars to banks exposed to margin calls on Government of Jamaica bonds, which all three major ratings agencies downgraded in fall 2008 (BOJ 2008b; BOJ 2010). The BOJ also noted another direct intervention in the foreign exchange market—the sale of foreign currency directly to the public sector.

Sections 28 and 29 of the Bank of Jamaica Act required the BOJ to set, respectively, the cash reserve and liquid-assets requirements. The act, however, constrained the maximum and minimum values each requirement could take and the timing of increases in requirements. The cash reserve requirement could vary from 5% to 25%, while the liquid-assets requirement could vary from 15% to 50%. The BOJ could not raise the cash requirement by more than 200 bps per 30 days, and the central bank had to give regulated institutions at least 15 days’ notice before the increase took effect. For the liquid-assets requirement, the same notice grace period applied, but increases could be as much as 500 bps per 30 days (Bank of Jamaica Act 1960).

The Banking Act (2004) required that cash reserves remain on deposit at the BOJ. Liquid assets included funds held off-site; each bank calculated the cash reserve requirement by averaging its liabilities at the close of each Wednesday. In 2009, one bank failed to comply with the increased requirements, and the BOJ used a tool not specified in the Bank of Jamaica Act—a “special monitoring programme”—to resolve the issue (BOJ 2010, 70). Under the Bank of Jamaica Act (1960), banks that did not report their holdings correctly could be guilty of an offense resulting in an initial fine of no more than JMD 150,000 and JMD 5,000 per day.

The BOJ was controlled by a board of directors consisting of the governor, the senior deputy governor, the secretary, and six other directors appointed by the Minister of Finance (MOF). This board controlled the policy of the BOJ.

The Bank of Jamaica Act required the BOJ to publish any changes to reserve requirements in the official government gazette (Bank of Jamaica Act 1960).

The BOJ issued news releases to announce changes to reserve requirements. The governor of the BOJ also spoke about the crisis before quarterly monetary policy briefings (Latibeaudiere 2008).

In the news release for December 2008, the BOJ said that increases in reserve requirements would “remove” the buildup of liquidity in the banking system and “preserve order in financial markets” (BOJ 2008c). While the central bank said it intended to increase reserve requirements by another 3 percentage points in the future, it also characterized increased reserve requirements as “temporary” (BOJ 2008c).

Banks could satisfy the cash reserve solely with deposits held at the BOJ.

Banks could satisfy the liquid-assets requirement with cash reserves, plus:

• Legal tender held outside the BOJ
• Callable loans
• Government of Jamaica Treasury bills
• Local registered stock, a government liability^FNLocal registered stock were long-term securities issued by the Jamaican government with a remaining period to maturity of nine months or less. By contrast, Treasury bills were short-term government instruments with a 90-day maturity. The liquid assets holdings of the commercial banks generally consisted of cash reserves, Treasury bills, and local registered stock issued by the government (Brown 1991).
• Time deposits at the BOJ
• Net balances due from other financial institutions, if positive.

Reserve requirements for foreign currency liabilities could be satisfied with assets denominated in US dollars, Canadian dollars, or British pounds sterling (BOJ 2010). Available documents did not describe the nature of assets the BOJ allowed.

The MOF, after consulting the BOJ governor, could make other assets eligible for the liquid-assets requirement (Banking Act 2004).

Reserve requirements likely covered time, demand, and savings deposits; funds borrowed from other institutions; and the interest accrued and payable on these liabilities (Anderson-Reid 2011).

The BOJ’s required reserves consisted of the cash reserve requirement (CRR) and the liquid-assets, or non-cash, requirement (LAR). To calculate the CRR required in a given month, the BOJ used a four-week averaging period that ended on the third Wednesday of the previous month.^FNIf the previous month had five Wednesdays, then the averaging period ended on the fourth Wednesday of the previous month (Tyrell 2008). The LAR was an additional fraction of deposits or other eligible liabilities required to be held as risk-free liquid assets, typically in the form of bank notes and coins or GOJ or BOJ securities with maturities less than one year (Tyrell 2008).

Reserve requirements applied to “deposit-taking institutions” with a ratio of residential mortgage loans to savings deposits of less than 40% (BOJ 2009, 25). These institutions were commercial banks, governed by the Banking Act (2004); merchant banks; or other non-banks, all governed by the Financial Institutions Act (2004). Together, these institutions held 79% of Jamaica’s deposits (BOJ 2010). Building societies with a ratio of mortgages to deposits that met or exceeded 40% held the other 21% of deposits. They paid cash reserve and liquid-assets requirements of, respectively, 1% and 5% (BOJ 2019). The BOJ did not revise reserve requirements on building societies during this period.

Changes to the domestic currency cash reserve and liquid-assets requirements followed the collapse of Lehman Brothers during the GFC. For Jamaica, the increases followed a large volume of foreign exchange transactions that pressured the Jamaican dollar (BOJ 2008c). It is unclear why changes to foreign currency reserve requirements trailed domestic currency changes.

Deposit/Savings/Term Rates

The BOJ did not differentiate between different types of liabilities.

Local/Foreign Currency Rates

On December 3, 2008, the BOJ raised the cash reserve requirement for domestic currency liabilities from 9% to 11% and the liquid-assets requirement from 23% to 25%; it left the reserve requirements for foreign currency liabilities unchanged (BOJ 2008c). On January 2, 2009, 30 days later, the BOJ raised the cash reserve requirement for domestic currency liabilities to 13% and liquid-assets requirement to 27%; it raised the cash reserve requirement for foreign currency liabilities from 9% to 11% and the liquid-assets requirement from 23% to 25%. On February 6, 35 days later, the BOJ raised the cash reserve requirement for domestic currency liabilities to 14% and the liquid-assets requirement to 28%; it left the reserve requirements for foreign currency liabilities unchanged (BOJ 2010). These changes extended a gap between domestic and foreign currency requirements.

To track reserve requirement changes over time, see Figure 4.

Source: BOJ 1984.

Marginal/Countercyclical Requirement

The BOJ did not have a marginal requirement, though it had the power to institute one (Bank of Jamaica Act 1960).

The BOJ did not remunerate cash reserves, including excess reserves (Marks 2022). However, banks could use interest-bearing time deposits at the BOJ to satisfy the liquid-assets requirement (see Figure 5) (Banking Act 2004). These accounts were used more in 2008 than after the BOJ raised reserve requirements.

Sources: Author’s analysis; BOJ 2021.

Documents surveyed did not suggest that the BOJ imposed other requirements.

The BOJ approached increased reserve requirements as part of monetary policy tightening (BOJ 2009). They did not try to counteract their crisis actions with other tools.

The BOJ did not fix an end date or end conditions on its reserve-requirement increases. It lowered requirements after many of its other crisis facilities ended (BOJ 2010). In March 2010, it lowered the cash and liquid assets requirements for foreign currency liabilities to pre-crisis levels. In July 2010, it lowered the domestic reserve requirements to 12% for cash and 26% for liquid assets, leaving them above pre-GFC levels (BOJ 1984).