Banks in the United Arab Emirates will have to hold high-quality liquid assets equal to 10 per cent of their liabilities from January 1 next year, under a rule introduced by the UAE central bank as it prepares the sector to comply with Basel III global standards.
In a notice on its website, the central bank said physical cash, reserve requirements, central bank instruments and UAE federal government bonds would qualify as such assets.
Banks may also be able to count their holdings of publicly traded debt securities issued by local UAE governments and state entities, as long as securities with a credit rating of A or below do not contribute over two percentage points to the ratio.
The rule will extend until the end of 2014, after which it will be replaced by the Basel III Liquidity Coverage Ratio, which will require banks to hold enough liquid instruments to cover a month of severe cash outflows.
The UAE’s new liquidity requirement for 2013 and 2014 appears to cover the main vulnerability that UAE banks will face as Basel III standards are phased in around the world over the next several years.
In some ways, the banks are expected to cope easily. They are comfortably capitalised; their combined Tier 1 capital was 16.7 per cent of risk-weighted assets in March, higher than banks in many other areas of the world. Partly because deposit growth has been outpacing lending growth this year, Basel III leverage ratios may not pose a major problem to UAE banks.
But some banks may struggle to meet liquidity rules. UAE central bank Governor Sultan Nasser al-Suweidi said late last year that the liquidity issue would be a challenge for banks in the Gulf, partly because of the limited choice of liquid instruments available to banks locally.
“We don’t have the same instruments as other advanced economies. So we have to build them in types and quantity, such as sukuk, bonds, Treasuries,” Suweidi said.
One solution to the problem might be for the UAE federal government to issue bonds which local banks could hold to meet liquidity requirements. The UAE’s top advisory council passed a public debt bill in December 2010 to pave the way for such issues.
However, the bill is still awaiting cabinet approval and the presidential signature which it needs to become law. Obaid Humaid al-Tayer, Minister of State for Financial Affairs, told Reuters last month that discussions on the bill were likely to resume after this summer, but that “we are not under pressure to issue any bonds.”