Dubai
The UAE Central Bank is preparing local lenders for new Basel III banking supervision standards by requiring them to hold 10 per cent of their liabilities in liquid assets starting next year, according to new regulations posted on the regulator’s website.
The Central Bank said “high quality liquid assets” that qualify for the new requirement include cash, certificates of deposit, and highly rated local government bonds.
The ratio takes effect in January, but will be supplanted at the end of 2014 by a more complex ‘liquidity coverage ratio’, according to the central bank document. This ratio, the LCR, is one of two that local banks are expected to adhere to as part of their Basel III compliance. The other is the Net Stable Funding Ratio, or NSFR.
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 LCR comes into effect” in January of 2015. Once that happens, the interim ratio will no longer apply.
“What they’re 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 Malek, a banking analyst at EFG Hermes in Dubai, said.
Comparison to regional peers
Many banks in the UAE already satisfy the interim ratio, according to a note yesterday from Dubai’s Arqaam Capital. Arqaam estimated, however, 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.
“It’s going to be a challenge not only in the UAE but everywhere maintaining the LCR,” Malek said. “But they have until 2015, so that will factor into banks’ long-term balance sheet growth strategy.”
Banks were also directed to comply with a ‘Uses to Stable Resources Ratio’ by next June that aims to prepare them for the introduction of the NSFR in 2018. While the LCR stress-tests banks’ liquidity in the short term, the NSFR “aims to ensure that the banks have sufficient long-term funding beyond the LCR’s 30-day time horizon,” according to a set of guidelines accompanying the regulation.
Increasing resilience
“Both the LCR and NSFR measures address the fragilities identified by previous crises and attempt to increase the resilience of banks to liquidity shocks,” Arqaam’s note said. “...Although these measures have been highlighted among the most challenging aspects of the new capital and liquidity framework, we don’t see the region vulnerable to a liquidity crisis such as the one experienced in Ireland.”
The 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.”
The Central Bank stepped in to help local lenders during the financial crisis, providing liquidity support and lower interest rates on borrowings.
