How safe is your money?

The Sterling Report

By Toni-Ann Neita

Sunday, January 14, 2018

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At the start of a new year, many people evaluate their life. How am I doing? What am I doing right? What am I doing wrong? What could I do better?

As such it is not uncommon for people to use the start of the year to evaluate their investment portfolios, compare rates across institutions and redistribute funds based on which institution is offering better rates. But what about evaluating the institution itself? Is the financial institution you are investing with safe?

The first thing I would want to know when investing with a financial institution is whether they are regulated or not. In Jamaica the responsibility for the regulation and supervision of financial sector entities is shared between the Bank of Jamaica (BOJ) and the Financial Services Commission (FSC).

The BOJ supervises deposit taking financial institutions, credit bureaus, and money services businesses such as cambios and remittance companies. The FSC supervises non-deposit taking financial institutions. These include securities dealers, insurance, mutual funds, unit trusts and private pensions funds. Ensure that the financial institution that you are dealing with has evidence of a licence or designation from the relevant regulator.

The other thing that is important to know about a financial institution is its capital base. The capital acts as a buffer to absorb losses experienced by the institution and if it is large enough, it will allow the company to continue meeting its obligations to its clients and other creditors. In essence it is the “cushion” for potential losses, and protects financial institutions clients.

However, it is not just enough to look at the absolute value of the total capital that your financial institution maintains. Take a look at the size of its capital base in relation to its assets. This will give a good indication of the strength of the institution relative to its peers.

It is for this reason that regulators usually stipulate that a financial institution keep a specified minimum percentage of its total assets as capital. The greater this percentage, the better it is for the institution and its clients. An institution with a capital base that is six per cent of its assets, is considered to be less financially flexible than an institution with a capital base that is 10 per cent of its assets.

This assessment of capital to assets is known as the Capital Adequacy Ratio (CAR). Regulators in most countries define and monitor CAR to protect depositors and investors, thereby maintaining confidence in, and promoting the stability and efficiency of financial systems.

The CAR requirements in Jamaica are even higher than the Basel standards, which is a set of international banking regulations put forth by the Basel Committee on Bank Supervision, which set out the minimum capital requirements of financial institutions worldwide with the goal of minimising credit risk. The requirement for regulated financial institutions in Jamaica must be no less than 10%.

Two types of capital are usually measured: tier one capital, which can absorb losses without a financial institution being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.

Regulators also make stipulations about the quality of the assets that are held as capital. This is known as the risk-weighted capital adequacy ratio. The objective is to ensure that the institution not only has sufficient capital to withstand changes in the value of its assets, but also to ensure that the capital itself is invested in high-quality instruments that can be readily redeemed if the need arises.

These are just some, but not all the things you should consider when assessing the safety of the financial institution you are doing business with. Knowing that the financial institution you are doing business with is under the watchful eye of a regulator and has adequate capital will help you to rest better at night.


Toni-Ann Elliott (née Neita) is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at:

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