The UAE’s banking system continues to remain strong enough to weather global macro-financial risks. That was what the 2018 stress tests on the country’s banking sector revealed. It should come as a huge relief in these times of economy headwinds around the world. The policy tightening in the US, trade tensions between the US and China, the potential volatility around Brexit, elevated private and public sector debt in several countries, fluctuations in the commodity prices and heightened geopolitical risks in the region were among the turbulence that buffeted the sector.
The Central Bank of UAE keeps a constant watch on risks that could affect the sector. The latest stress tests on systemically important banks and the banking system are evidence of the regulator’s keenness to protect the sector from external and internal shocks. The tests required participating banks to cover risks such as credit risk, including sovereign and bank exposures; market risk in the trading book and available for sale debt securities and liquidity risks. The overall strength of banks and the system to withstand a common set of adverse shocks were assessed. The tests also helped explore potential systemic risks from the hypothetical adverse scenario in the real estate market, sustained decline in oil prices and rising interest rates environment on funding.
The resilience of banks and the sector was evaluated under a common macroeconomic baseline, whereas the adverse scenario reflects stressed economic and financial conditions, addressing potential threats to financial stability in the UAE such as downward repricing risk of real estate assets; persistent decline in the oil price; and rising funding costs in the banking sector with the potential spillover to the real economy. On all key yardsticks such as capital adequacy, asset quality and liquidity, systemically important banks and the banking system showed strong resilience to simulated scenarios.
The results showed that the UAE banking system continues to be adequately capitalised with capital ratios well above minimum regulatory requirements last year. All five large banks were able to maintain 30 days’ liquidity coverage ratio well above 100 per cent. All of it points to the intrinsic institutional strength of the banking system and its ability to withstand potential risks from macroeconomic and geopolitical dynamics.
The overall asset quality of banks and credit risks faced are within the risk tolerance limits and exposure limits. So, from a systemic risk perspective, the UAE banks are well fortified to meet all potential internal risks. Nevertheless, the central bank has called on banks to remain vigilant to counter potential risks, ensuring that necessary prudential and risk mitigation actions are in place.