Dubai: the UAE Central Bank has developed an ‘enhanced’ framework to supervise local banks’ exposure to the real estate sector. These standards take effect from December 30.
There will be a one-year observation period, during which banks will be required to enhance their practices to meet these standards. They cover all types of on-balance-sheet loans and investments, and all off-balance-sheet exposures to the sector. The upgraded framework will include updated definitions, measurement and supervision, facilitating the adoption of best practices in bank real estate financing and risk management.
Banks will continue to play a crucial role in financing real estate and construction, which are vital sectors of the UAE economy. The CBUAE has developed a novel risk-based methodology to enhance monitoring and supervision of bank real estate exposures
Banks must review and improve their internal policies to enhance sound underwriting, valuation and general risk management for their real estate exposures. It was last year that the regulator allowed banks in the UAE to raise their exposure to real estate beyond 20 per cent.
The new methodology also introduces measurement of these exposures, based on credit risk-weighted assets using the regulator’s capital adequacy standards. Banks with higher risk-weighted real estate exposure in their portfolios will be subject to a more extensive supervisory review of their underwriting and risk management practices in this segment.