Business | Banking

Central bank chief seeks tougher norms

Institutions may reduce loan to deposit ratio

  • By Nadia Saleem, Staff Reporter
  • Published: 00:00 May 26, 2010
  • Gulf News

Dubai: In the next few months, banks in the smaller economies in the region will reduce their loan to deposit ratios and investment banks will be regulated in a much harsher way, according to the UAE Central Bank Governor.

"Banking regulations will probably be amended in the coming few months…. will steer their banking system towards lowering the growth rate of loans and advances plus investments versus stable deposits," Sultan Bin Nasser Al Suwaidi, UAE Central Bank Governor, said at the closing of the Menasa Forum on Monday.

After the financial crisis when banks were hit by defaults as investments suffered and billions were booked in provisions, lending institutions pulled back their reins. Though liquidity has somewhat returned, loans are available at a higher cost.

New restrictions

"The present global financial crisis will impact globalisation of financial services, as many restrictions will be put in place in many countries including the G7 countries, which might open a window of opportunity for countries in our region or the wider area," Al Suwaidi said.

On Monday the London interbank offered rate (Libor), the rate at which banks lend money to each other, rose to its highest level for the three-month dollar rate since last July.

For European banks, short-term borrowing costs are rising, which could lead institutions to cut back on new loans and ask existing borrowers to pay ahead of maturity dates.

Last week the US Senate approved a reform bill which proposes the biggest overhaul of financial regulations since the Great Depression. If passed, the bill includes a new consumer-protection watchdog housed at the Federal Reserve to prevent lending abuse including mortgage, auto and credit card.

The agency will also monitor financial firms' lending policies.

Additionally, the legislation will impose tougher restrictions on financial instruments such as derivatives.

Investment flow

While regulations are getting tougher around the globe, Al Suwaidi said the cross-border flow of investment within the region in large projects, especially from sovereign wealth fund source countries, should be considered to create jobs.

"Any help by the World Bank in improving and unifying investment laws in addition to watching their implementation, will go a long way to achieving this important regional objective," he said.

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