Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Financial Sector Assessment Program (FSAP) [1] with Jordan on March 17, 2023 without convening formal discussions. [2] The Financial System Stability Assessment (FSSA) report was completed on February 23, 2023. The report is based on the work of joint IMF/World Bank FSAP missions to Jordan during June and October 2022.
Jordan's financial sector, dominated by banks, has withstood several large external shocks (Global Financial Crisis, Arab Spring, war in Syria and influx of refugees, and COVID-19) since the latest FSAP that was conducted in 2008-09 in part thanks to measures implemented by the authorities to enhance the system's resilience and oversight. At the current juncture, global growth headwinds, high energy and food prices, and higher interest rates are putting pressure on corporate and household sector balance sheets.
The FSAP's systemic risk analysis found that Jordan's banking sector appeared broadly resilient. Banks would be able to withstand a large global stagflationary shock, if it were to occur, given high levels of systemwide regulatory capital and robust earnings. While contagion risk among banks is limited, credit concentration risk is substantial and banks' exposures to the sovereign are large. Nonfinancial corporations' debt at risk could increase significantly in an adverse scenario. Banks have ample liquidity, however, and can manage significant liquidity pressures.
The challenging external risk environment highlights the need to further strengthen the financial stability framework. The authorities have introduced key elements of the Basel III, IFRS 9, and domestic systemically important bank (D-SIB) frameworks and have upgraded the financial integrity framework. The FSAP recommended that the banking supervision approach be more risk-based and forward-looking. Pillar 2 supervisory assessments should be developed for more risk-sensitive capital requirements. The macroprudential framework needs stronger decision-making and a more refined strategy. Several data gaps should be filled to implement stress tests on a globally consolidated basis, run systemic foreign currency liquidity analyses, and perform more granular analyses of household and corporate sector vulnerabilities to guide the calibration of borrower-based macroprudential tools. The sovereign-bank nexus needs to be analyzed further and related prudential policies for enhancing system resilience could be considered. Risk-based Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT) supervision should also be improved. The resolution framework should be further enhanced, including by creating a multi-agency crisis management committee.
[1] The Financial Sector Assessment Program (FSAP), established in 1999, is a comprehensive and in-depth assessment of a country's financial sector. FSAPs provide input for Article IV consultations and thus enhance Fund surveillance. FSAPs are mandatory for the 47 jurisdictions with systemically important financial sectors and otherwise conducted upon request from member countries. The key findings of an FSAP are summarized in a Financial System Stability Assessment (FSSA).
[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
