Banks in the United Arab Emirates will be required to comply with four so-called “liquidity ratios” to help them withstand market disruptions and avoid a cluster of debt payments, according to new central bank rules.
Lenders will be required to hold 10 percent of their liabilities in “high-quality liquid assets” from Jan. 1 to meet a new liquid assets ratio, according to the liquidity regulations issued by the central bank July 12 and posted on its website today. The assets include cash, central bank certificates of deposits, U.A.E. federal government bonds, reserves and other account balances at the central bank, the regulator said. They could also include debt of local governments and public entities. The ratio will be replaced by a new liquidity coverage ratio from Jan. 1, 2015, it said.
“A minimum level of liquid assets should be held at banks to ensure its ability to sustain a short-term liquidity stress, both bank specific and market-wide,” the central bank said. It will set up a liquidity task force to ensure a smooth implementation of these rules by the required dates, it said.
The U.A.E. government in 2008 pledged $33 billion to support the country’s banks on worries frozen credit markets would squeeze liquidity after the global credit crisis. To help reduce risks facing lenders, the central bank also announced new guidelines governing retail lending last year and exposure to governments and state-related companies in April this year.
The U.A.E. has the biggest banking market in the six-nation Gulf Cooperation Council, which includes Saudi Arabia, Kuwait and Qatar. Twenty-three local banks and 28 foreign lenders operate in the country, including local units of Citigroup Inc., HSBC Holdings Plc. and Standard Chartered Plc.
Two of the four ratios that banks need to comply with are interim measures until the Basel III liquidity coverage ratio and the net stable funding ratio come into effect, it said.
The liquidity coverage ratio, or LCR, which will be implemented from 2015, is taken from Basel III requirements and “represents a 30-day stress scenario with combined assumptions covering both bank specific and market-wise stresses that the bank should be able to survive using a stock of high-quality liquid assets,” the statement said. “The LCR requires that banks should always be able to cover the net cash outflow with eligible liquid assets at the minimum LCR determined by the central bank.”
These measures are a result of lessons learnt during the credit crisis when banks relied on short-term funds to finance longer-term activities, Jaap Meijer, the Dubai-based director of equity research at Arqaam Capital Ltd., said in an e-mail today.
“U.A.E. banks have the lowest liquidity coverage ratios in the GCC due to their high undrawn loan commitments, higher interbank borrowings and relatively small holdings of liquid investments,” Meijer said. Emirates NBD PJSC, the U.A.E.’s biggest bank by assets, began addressing its liquidity shortage with a $1 billion bond and inflow of deposits in the first quarter, Meijer said. The LCR ratio at National Bank of Abu Dhabi PJSC improved helped by a 33 percent increase in government deposits this year, he said.
Banks must also comply with a “uses to stable resource ratio” from June 1, an amended version of the advances to stable resources ratio that has been in effect since July 1986, according to the central bank. This prepares them for the implementation of the net stable funding ratio under Basel III, it said.
Banks will have to comply with a net stable funding ratio from Jan. 1, 2018, which ensures that long-term assets of the banks’ balance sheets are funded using a sufficient amount of stable liabilities, according to the statement.
Most banks should be able to meet the liquidity coverage ratio, but complying with the net stable funding ratio is slightly more challenging due to the high reliance on corporate and government deposits within U.A.E., Meijer said. Most U.A.E. banks will be able to meet the 10 percent liquid assets ratio, he said.