Macro prudential Supervision
The macroprudential policy is defined as the policy under which systemic risk is identified, monitored and controlled to mitigate the accumulation of these risks and enhance the ability of the financial system to withstand shocks using a set of tools based on a group of key indicators. Systemic risks mean the risks of developments that threaten the stability of the financial system as a whole and consequently the broader economy.
In light of the Central Bank of Jordan's continued efforts to enhance the stability of the financial and banking sector in the kingdom as well as to analyze the sources of systemic risks to control them, the Financial Stability Department was established at the Central Bank of Jordan in 2013. It is responsible for issuing the annual financial stability report in order to focus on the main developments on both the financial and economic sectors, and the main highlighted topics are following.
Stress testing 
Stress testing is an important tool used by the banks to measure their ability to withstand the shocks and high risks that they might encounter. Stress tests aim at assessing the financial position of the bank within the severe yet possible scenarios. Stress tests are forward looking in risk assessment using procedures that exceed statistical methods based on historical data. They help the board of directors and senior executive management to understand the circumstances of the bank in times of crisis. Stress tests are an essential part of risk management. However, they cannot cover alone all the weaknesses in the bank. They instead work within an integrated risk management policy to enhance the safety and soundness of banks and strengthen the financial system as a whole.
Stress tests are also of the basics that banks should consider in the capital planning process to achieve capital that adapts with the bank’s strategy and risks structure. They should be also considered in Internal Capital Adequacy Assessment Process (ICAAP) in which the bank is responsible for developing this process under the supervision of the board of directors and the senior executive management through studying the risk the bank is facing and capital levels needed to face these risks. Therefore, it is the responsibility of both the board of directors and the senior executive management to set the acceptable risks levels through assessing various risks and defining the required and needed capital to face these risks. Hence, the stress tests are an important part of capital management, since the strict environment and the severe scenarios of stress tests work on defining the bank capital adequacy through difficult situations. Stress tests must have an important role in improving the bank’s management of its liquidity as they are a basic tool in defining, measuring, controlling and adjusting the liquidity risks. It is through these tests that the bank liquidity and the adequacy of the liquidity margin in severe circumstances, either on bank level or the market level as a whole, are assessed.
CBJ has issued Stress Testing Instructions No. (46/2009) dated 30/9/2009. Ever since, stress testing topic witnessed significant developments especially after the global financial crisis. In this regard, Basel Committee on Banking Supervision (BCBS) released in 2009 the main principles of stress testing and the follow- up of their implementation. The BCBS released another paper in 2012 on reviewing the implementation of these principles by the regulatory authorities.
In addition, the International Monetary Fund developed comprehensive methodologies for conducting these tests. Hence, the regulatory authorities all over the world and related international institutions started focusing on the necessity of the application of those principles. In light of these developments, the central bank has issued a draft of new instructions on stress testing and sent it to the banks to get their feedback in preparation to finally issuing them. The details of tests that have been conducted so far can be identified within the financial stability reports published on the official website of the Central Bank of Jordan.
Household Debt
The loans extended to individuals play a key role in improving the quality of their lives through enabling them to obtain their housing and consumption needs, which reflects positively on increasing their spending and consumption ability, and, hence, stimulate economic growth. Because this sector is very wide and diversified, the banks' considerate interest to finance it helps the diversification of the banks' use of assets and, hence, reduces the risk exposures and enhances profitability. However, the rise in the household debt in relation to individuals’ income and wealth will have negative effects on the economic and financial stability in any country, as it leads to reducing the ability of individuals to pay their debt, and hence, increase the default rates in banks and other financing institutions. Furthermore, the rise in this ratio limits the spending and consumption ability of individuals that in turn impact the economic growth negatively.
The excessive real estate financing was one of the key reasons for the global financial crisis in 2007. It led to significant increases in house prices and gave the banks an untrue sense of safety when they lent money to their customers. This in turn led to a housing bubble and increased (the indirect) exposure of banks to this market. Banks also expanded the credit to household sector who were restrained by financial obligations that exceeded the income available at their disposal, and; therefore, they were unable to repay their debt, even after selling their mortgaged properties. Hence, such gives he rise of the importance for the regulatory authorities to identify and monitor these risks, choose the appropriate tools to reduce their accumulation, and strengthen the financial system's ability to address them. Some of the most important tools that are used to reduce the accumulation of these risks: Countercyclical Capital Buffer (CCB), setting a ceiling for Loan to Value (LTV), and setting a ceiling for the ratio of (DTI) Debt to Income or Debt Burden Ratio (DBR). The two tools LTV and DTI are the most common, followed by liquidity and capital measures, and can be used as being of the sectorial tools that are utilized to target the risks arising from specific sectors of the economy without affecting the wider economy. The details of the results of measuring the household debt and assessing its risks on the banking sector can be identified within the financial stability reports published on the official website of the Central Bank of Jordan.
Banks' exposure to the real estate sector
The real estate sector is an important driver of the economic growth, and is considered one of the most important real investment components since an important part of the savings of Jordanians go to this sector. It is characterized by directly affecting the movement of the various economic sectors. It also provides job opportunities for operational labor, and creates an upswing of support services, in addition to developing infrastructure sectors. More attention has been given to the dangers of the real estate sector and funds granted to it after the global financial crisis in 2007 and the subsequent effects that affected most economies of the world including Jordan. The real estate market in Jordan has witnessed during the last two decades successive leaps which appeared mainly because of the political and economic developments in the region that led to abnormal growth of the population in Jordan as a result of having large numbers of Arab brothers coming, mainly, from Iraq and Syria. The details of the results of the study of banks' exposure to the real estate sector can be identified within the financial stability reports published on the official website of the Central Bank of Jordan.