UAE Central Bank Plans Discount Window, Says Outlook Positive

The discount window will improve liquidity management practices in the country, the central bank said.

The United Arab Emirates central bank aims to develop its monetary policy framework by launching a discount window to enable banks to borrow intra-day and overnight funds, it said on Monday, adding the country’s economic outlook was encouraging.

“This facility will improve liquidity management practices within the UAE and support money markets if there are liquidity shortfalls,” the central bank said in its inaugural financial stability review.

“It will also support the development of collateralised debt markets and long-term capital markets as commercial banks will be inclined to invest in securities that are defined as eligible securities – this process will facilitate the implementation of Basel III liquidity standards,” it said.

The central bank did not say when it planned to launch the window, which will be called “the marginal lending facility” (MLF). Officials were not immediately available for comment.

It said the MLF will be an electronic platform which will be integrated with a domestic Central Securities Depository (CSD) and the UAE Fund Transfer System and will have interfaces with international depositories.

“Banks under the supervision of the Central Bank may sign up to such a facility and will have to maintain eligible collateral with approved CSDs,” it said.

Traders and analysts said the central bank was not under immediate pressure to introduce the new facility because the market was currently flush with funds, but that the MLF could be important in preserving money market stability in future.

During the financial crisis of late 2008, the UAE’s central bank provided Dhs25 billion ($6.8 billion) in special collateralised loans to the banking system.

But a discount window, similar to those used in developed money markets, could allow more flexible management by the central bank.

“We see any broadening and deepening of monetary tools as positive,” said Monica Malik, chief economist at EFG-Hermes in Dubai. “We are currently not seeing any system-wide shortage in liquidity, although it is important to have the tools in place.”

Reflecting the current liquidity surplus, the benchmark three-month Emirates interbank offered rate (EIBOR) was fixed at 1.304 percent on Monday, a level equal to a more-than-eight-year low seen in mid-August.