Sweeping overhaul of liquidity rules planned

Abu Dhabi: UAE banks may follow the looser Central Bank guidelines on regulatory capital announced on August 30 rather than the tougher targets set by the government last year, the Ministry of Finance said.

Banks in the UAE must achieve a Tier 1 capital-adequacy ratio of 7 per cent by September 30, the Central Bank said in a circular on August 30.

That target is lower than an 11 per cent benchmark set for local banks by the Ministry of Finance last year when it lent money to them under a Dh70 billion liquidity-support programme. Capital ratios are a measure of bank's ability to withstand losses.

"The Central Bank of the UAE sets the regulatory requirements for all the banks in the country, including the capital-adequacy target, Younis Haji Al Khoury, the undersecretary in the Ministry of Finance, said in an e-mailed statement. The ministry's objective in setting the 11 per cent benchmark was to "build a capital buffer in addition to the Central Bank's capital-adequacy requirements to protect against unforeseen losses," Al Khoury said

The Central Bank's decision on capital adequacy is driven "by a desire to spur lending, but I am not sure it will actually have that much of an impact," Raj Madha, the Dubai-based director for equity research at investment bank EFG-Hermes Holding SAE, said. "Lending isn't currently constrained by regulatory minimums, as most of the banks are significantly above the Tier 1 ratio anyway, and if they wanted to lend they could."

Tier 1 capital consists of items such as common stock, retained earnings and perpetual preferred stock. Tier 2 includes undisclosed reserves, general loss reserves and subordinated debt and provides further protection against losses.

If a local bank's Tier 1 capital falls below 11 per cent, the Ministry of Fin-ance "will review the capital position of the bank and consequently might take actions if needed to ensure that the national banks' Tier 1 capital level stays above the Central Bank's regulatory requirements," Al Khoury said.

The Central Bank's downward revision of the minimum capital-adequacy requirement for banks may lead to a reassessment of local lenders' credit ratings, Fitch Ratings said on September 2.

The Central Bank has asked lenders operating in the country to achieve a Tier 1 capital-adequacy ratio of eight per cent by June 30 next year. The banks also need to achieve an overall capital- adequacy ratio, including Tier 1 and Tier 2, of 11 per cent by September 30 and 12 per cent by June 30 next year.

Manama (Reuters) The Central Bank of Bahrain (CBB) plans a sweeping overhaul of liquidity rules, designed to make banks more robust after troubles at two Saudi-linked banks cast doubt on the country's regulatory system.

The proposed changes will force banks to increase the amount of liquid assets held, to submit to rigid checks and limit the so-called mismatches that could starve a bank of funding in stressful markets, according to documents on the CBB website.

The CBB in July assumed control of Saad Group's Awal Bank and The International Banking Corporation (TIBC), a unit of Ahmad Hamad Algosaibi & Bros, citing a substantial shortfall in their assets compared with their liabilities.

The CBB has released little information on the scope of the threat to its banking system after news broke in May on the troubles at Saad and Algosaibi and the financial irregularities that were subsequently alleged in legal cases filed by different parties.

In an interview with the Financial Times in June, its governor Rashid Al Maraj said the CBB would establish how the two banks' liquidity situation could have deteriorated so suddenly while the banks' reports did not show any signs of stress.

The CBB in July launched a consultation process with banks over a host of new regulations, including liquidity management at conventional banks.

It currently does not have separate, specific rules on liquidity management.