Basel III Arrives Early For UAE

The UAE Central Bank is preparing local lenders for the new Basel III banking supervision standards by requiring them to hold 10 per cent of their liabilities in liquid assets starting from January next year.

The central bank said that cash, certificates of deposit and highly rated local government bonds qualify as ‘quality’ liquid assets.

It described the requirement as “an interim measure to ensure banks hold sufficient liquid assets until Basel III LCR comes into effect” in January 2015.

The third set of rules from the Basel Committee on Banking Supervision has tightened the definition of a bank’s Tier 1 capital — the amount a bank must hold as a safety measure for any future crashes.

It also increases the overall amount of capital a bank must have and, for the first time, requires banks to maintain at least 30 days of liquidity. It is this liquidity part that the UAE central bank is rehearsing for.

The central bank has not issued any capital regulations.

The UAE’s regional banks are generally characterised by high financial support from the government, high public spending, less integration with global markets and low exposure to the sovereign debt crisis.

Sheetal Kothari, a research analyst at Frost & Sullivan, said: “The high profitability margins and capital ratios that very well surpass the minimum capital required of 10 per cent under Basel III norms, indicate that UAE banks have a strong liquidity position in the current scenario.

“We estimate that UAE banks would be able to exceed Basel III requirements due by 2019,” added Kothari.

Frost & Sullivan figures estimate that UAE banks had higher average net margins of around 48.4 per cent in 2011 and 46.1 per cent year to date 2012. They also have total capital ratio and tier 1 capital ratio of 22 per cent and 16.6 per cent respectively.

However, the net loans to deposit ratio stands at 89.1 per cent, very close to European and US counterparts.

The UAE central bank has told banks to prepare for a number of liquidity ratios due to come into effect from next year, including the Liquid Assets Ratio (10 per cent of liabilities as liquid assets) and Uses to Stable Resources Ratio (USSR), in preparation for Basel III’s implementation in 2015 and 2018.

Shabbir Malik, of EFC Hermes research division, said: “The Central Bank of UAE has introduced a set of quantitative and qualitative liquidity regulations which it wants UAE banks to adopt.

“The objective of these regulations is to ensure that banks have enough liquidity to withstand a stress in the system without having to fall back on the government for support,” added Malik.

“Based on our calculations UAE banks in our coverage are broadly fine in terms of compliance. Those banks which appear short — ADCB and UNB — can in our opinion make adjustments to their balance sheet and become compliant by the end of this year.”

As well as the liquid assets ratio being implemented from the start of next year, the UAE central bank has also told banks to be ready to meet further ratios throughout 2013.

“The LAR becomes effective on January 2013. The USRR becomes effective June 2013. We have not yet estimated if banks comply with this ratio,” said Malik.