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New rule on banks’ liquid assets issued
Issac John (With input from agencies) / 16 July 2012
Banks in the UAE will have to hold 10 per cent of their liabilities in liquid assets starting next year in line with a new measure introduced by the country’s Central Bank to ensure lenders keep sufficient liquid assets until Basel III comes into effect in January of 2015.
The UAE Central Bank, in a notice on its website, said on Sunday that physical cash, reserve requirements, central bank instruments and UAE federal government bonds would qualify as such “high-quality liquid assets.”
The new move is the most significant initiative by the banking regulator in its efforts to boost stability in the financial sector since its ruling in April on capping lending to governments and their non-commercial entities at 100 per cent of a bank’s capital base, and 25 per cent to individual borrowers.
The regulator said banks may also be able to count their holdings of publicly traded debt securities issued by local UAE governments and state entities, as long as securities with a credit rating of A or below do not contribute over two percentage points to the ratio.
The Central Bank described the 10 per cent liquid assets requirement as an interim measure to ensure banks hold sufficient liquid assets until Basel III Liquidity Coverage Ratio, or LCR, comes into effect.
Once that happens, the interim ratio will no longer apply as LCR requires banks to hold enough liquid instruments to cover a month of severe cash outflows.
“What they are trying to do is ensure banks have liquidity so if there is a bank run or liquidity crisis in the system they’re able to stand on their feet without intervention from the central bank or government,” Shabbir Malik, a banking analyst at EFG Hermes in Dubai, was quoted by Zawya Dow Jones as saying.
Since all UAE banks are comfortably capitalised with a combined Tier 1 capital of 16.7 per cent of risk-weighted assets in March, the new rule is not hard to cope with by the lenders.
Banks in the UAE have one of the highest capital adequacy ratios in the world partly because deposit growth has been outpacing lending growth this year.
The International Monetary Fund, or IMF, has warned that although the UAE banking system did not show any signs of distress as the funding situation of local banks has stabilised, a foreign funding shock could generate some liquidity tightening in the banking sector.
“Stress tests show that the banking system could address moderate external liquidity shocks with its own resources, and that the stock of central bank foreign currency reserves would be sufficient to address even a strong shock scenario,” the IMF said in a report it prepared for consultations with the UAE.
Many banks in the UAE already satisfy the interim ratio, according to Dubai’s Arqaam Capital which estimated that some of the country’s banks compare poorly to other lenders in the region on their current LCRs because of “high undrawn loan commitments, negative interbank positions, and relatively small holdings of liquid investments.”
Regional banks with low LCRs could issue medium-term debt and increase cash positions, Arqaam’s note said.
“This carry trade, however, comes with a cost and expensing it could put pressure on margins.”
The biggest impact, according to the note, would be on National Bank of Abu Dhabi, although the lender has issued medium-term notes and cut loan-to-deposit ratios.
The UAE Central Bank also ordered lenders to put a framework in place for liquidity risk management and have a “forward looking funding strategy” that focuses on diversifying the sources and tenor of funding. Banks must also regularly conduct liquidity stress tests and “maintain an adequate cushion of unencumbered, high quality liquid assets to be held as insurance against a range of liquidity stress scenarios.”
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