Jamaica: FINSAC Blanket Guarantee, 1997

The Jamaican financial sector experienced sustained runs in late 1996, as large numbers of depositors withdrew their savings from local institutions and placed them in branches of foreign banks. After measures extended on an individual basis proved to be ineffective, the government took a more comprehensive approach. It established FINSAC to respond to solvency and liquidity throughout the Jamaican financial sector (Kirkpatrick and Tennant 2002; Minister of Finance 1997a; 1997b).

FINSAC developed several objectives to pursue that mandate. The first listed responsibility was “to protect the investments of policyholders, depositors, and pensioners” (FINSAC n.d.). As such, the government announced a blanket guarantee of depositors’ funds, policyholders’ funds, and pensioners’ funds in deposit-taking financial institutions, life insurance policy providers, and pension funds registered under the Banking, Financial Institutions, and Insurance Acts on February 7, 1997 (Bonnick 1998; Chen-Young 1998; IMF n.d.). 

On March 27, 1997, the Minister of Finance issued a statement reinforcing the importance of government support of life insurance companies, given the interlocking nature of the insurance sector and the banking sector (Minister of Finance 1997a).

In early 1997, the government moved away from the individualized approach taken in the early 1990s in favor of a more comprehensive plan. The government announced FINSAC on January 29, 1997, to handle the rehabilitation of the financial sector^FFor a discussion focused specifically on FINSAC, see Runkel (2021).. On February 7, 1997, the Prime Minister announced the blanket guarantee, administered by FINSAC, to complement its other crisis response efforts (Bonnick 1998; FINSAC n.d.; Minister of Finance 1997a; Ministry of Finance 1998).

The government established FINSAC with a mandate to promote solvency and liquidity in the financial sector. FINSAC had three phases to support troubled financial institutions. It first sought to negotiate a rehabilitation plan with the leadership of the institution. FINSAC directly acquired or closed institutions for which rehabilitation was not feasible. In those cases, a second phase of FINSAC operations involved the attempted rehabilitation of institutions through asset management and portfolio restructuring, as well as leadership changes as necessary. The third and final phase involved the divestment of assets acquired by FINSAC, and the winding down of FINSAC operations. In this phase, FINSAC exercised the guarantee and transferred deposits or other insured liabilities to sound institutions (Bonnick 1998; FINSAC n.d.). This manifested in the assignment of deposit liabilities of five failing merchant banks and the transfer of lump-sum type policies of three insurance companies (FINSAC 1998a; 1998b; 1999; Ministry of Finance 1998).

The Constitution of Jamaica gave the Prime Minister the power to appoint ministers who acted as the principal instruments of policy. The Ministry of Finance was responsible for Jamaican fiscal and economic policy as well as allocating public revenues. The Ministry of Finance created FINSAC as a limited liability company registered using the Companies Act (Constitution of Jamaica 2011; Ministry of Finance 1998; Ministry of Finance 2022).

FINSAC served as a vehicle for government support of the financial sector and the executive arm of the Ministry of Finance & Planning. FINSAC worked closely with various agencies (see Governance) (Minister of Finance 1997b).

The Minister of Finance appointed a 10-member board of directors tasked with guiding the operations of FINSAC, including the blanket guarantee. The appointed directors consisted of the financial secretary of the Ministry of Finance, central bank officials, former private bank executives, academics, and union leaders. As an organization, FINSAC served as the executive arm of the Ministry of Finance and Planning (Minister of Finance 1997a; 1997b; Ministry of Finance 1998).

FINSAC worked closely with the Bank of Jamaica, the Superintendent of Insurance, and the Securities Commission to streamline operations in the financial sector (Minister of Finance 1997a).

The Minister of Finance announced FINSAC in a statement on January 29, 1997 (Ministry of Finance 1998, 1). The Prime Minister first announced the blanket guarantee to Parliament on February 7, 1997 (Bonnick 1998; Ministry of Finance 1998).

Spokesmen for the government said that the financial rehabilitation measures should not be seen as bailouts. The Minister of Finance made a statement to the media on March 14, 1997, to clarify the measures being taken to rehabilitate the financial sector (Dow Jones 1997; Minister of Finance 1997a). The Minister said, “Notwithstanding the situation, it is government’s policy to do what is necessary to protect investments of our citizens,” further stating that this was the reason the government created FINSAC (Minister of Finance 1997a). FINSAC operations were regularly communicated to the public through annual reports (Rattray 1999).

The government funded FINSAC’s rehabilitation efforts, including the blanket guarantee. The Ministry of Finance provided FINSAC with JMD 6.3 billion of initial funding. The government borrowed domestically to fund necessary measures (Minister of Finance 1997a; 1997b).

Following the original government provision, FINSAC also raised funds by issuing FINSAC notes that were fully guaranteed by the government. Bonds could be issued quickly without approaching Parliament for approval to raise government debt ceilings (Bonnick 1998; Kirkpatrick and Tennant 2002). FINSAC issued JMD 75 billion worth of paper to fund its various intervention measures. The government officially took over the responsibility for bond payouts in 2001 (Chen-Young 1998; World Bank 2004).

FINSAC extended the blanket guarantee to all institutions registered under the Banking, Financial Institution, and Insurance Acts (Chen-Young 1998, 1). These included deposit-taking institutions, life insurance policy providers, and pension funds (Chen-Young 1998; IMF n.d.).

The blanket guarantee protected depositors’ funds in licensed deposit-taking institutions, pension funds managed by authorized institutions, and policyholders’ funds in insurance companies. The 1999 FINSAC Annual Report stated that the blanket guarantee protected JMD 68 billion in deposits, JMD 19 billion in pension fund value, and JMD 174 billion in individual insurance policies. This amounted to JMD 262.1 billion in protected liabilities (Bonnick 1998; Rattray 1999).

Jamaican authorities did not impose any fees in connection with the blanket guarantee.

FINSAC exercised the blanket guarantee when it liquidated a failing financial institution and wound down its operations. For the eight instances in which FINSAC closed deeply troubled financial institutions, FINSAC took on the liabilities of that institution that were covered by the blanket guarantee. FINSAC exercised the guarantee by placing matching funds in replacement accounts at a stable institution. This ensured that depositors and pensioners had uninterrupted access to their funds (Bonnick 1998; Kirkpatrick and Tennant 2002).

After taking over the deposit liabilities of two merchant banks, FINSAC required the two banks to receive FINSAC’s permission before paying debts, purchasing or selling assets, paying shareholders or directors, or making any payments outside the normal course of business (FINSAC 1998a; 1998b).  

The government did not originally set an end date for the blanket guarantee but intended for FINSAC to exist for five to seven years. On August 31, 1998, the Deposit Insurance Act created a limited deposit insurance scheme, replacing the blanket guarantee (Deposit Insurance Act 1998; FINSAC n.d.; IADI 2005).

The Deposit Insurance Act established the Jamaica Deposit Insurance Corporation (JDIC) and empowered it to administer the deposit insurance scheme. The JDIC called for every financial institution to apply for the insurance scheme and pay an initial premium. The deposit insurance scheme charged an annual fee calculated based on the characteristics of each individual institution. The scheme initially covered eligible depositors up to JMD 200,000 per account. The government gradually increased the insured amount; it was JMD 1.2 million as of 2020 (Deposit Insurance Act 1998; JDIC n.d.).