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    CBUAE Announces Relief Measures to Address Impact of COVID-19

    CBUAE has announced a number of measures to support the economy amid COVID-19 outbreak and these measures will enter into force with immediate effect. CBUAE launched a comprehensive Targeted Economic Support Scheme (TESS) for retail and corporate customers affected by COVID-19. CBUAE is allowing banks to free-up their regulatory capital buffers to boost lending capacity and support the economy. Additionally, CBUAE, the Financial Services Regulatory Authority (FSRA), and the Dubai FSA have issued a joint guidance for banks and finance companies in relation to the application of IFRS 9, in light of the current circumstances caused by COVID-19. The guidance has been issued for public consultation and it is expected to be finalized by April 08, 2020.

    The UAE banking system is adequately capitalized and banks maintain significant voluntary capital buffers in addition to the minimum prudential requirements. For banks participating in the TESS program, CBUAE has granted an extension of the capital buffer relief till December 31, 2021. The purpose of the targeted scheme is to facilitate provision of temporary relief from the payments of principal and interest on outstanding loans for all affected private-sector companies and retail customers in UAE. Banks and finance companies participating in the TESS program will be able to extend to their customers’ deferrals of principal and interest until December 31, 2020.

    Under this, all banks will be allowed to tap into up to 60% of the capital conservation buffer while banks designated as systemically important by CBUAE will be able to use 100% of their additional capital buffer for systemic importance. CBUAE is also reducing the amount of capital banks must hold for their loans to SMEs by 15% to 25%. This change, which is broadly in line with the minimum standards set by BCBS, will facilitate further access to financing for SMEs. To ease its macro-prudential stance, CBUAE will increase the loan-to-value (LTV) ratios applicable to mortgage loans for first-time home buyers by 5 percentage points and will revise the existing limit, which sets maximum exposure that banks can have to the real estate sector. 

    To mitigate the repercussions of COVID-19 pandemic, CBUAE has decided to reduce—from 14% to 7%—the reserve requirements for demand deposits for all banks. Banks participating in the TESS program will be able to use a third of their current regulatory liquidity buffers. Banks will have the flexibility to maintain a minimum liquidity capital ratio (LCR) of 70% and a minimum Eligible Liquid Assets Ratio (ELAR) of 7%. This liquidity can be used to compensate for the effect of posting collateral required by the TESS program. Furthermore, the planned implementation of certain Basel III capital standards will be postponed to March 31, 2021 for all banks.

    The joint guidance issued for banks and finance companies on the implementation of IFRS 9 enables banks and finance companies to employ the flexibility embedded in the framework, while effectively ensuring compliance and consistency. CBUAE has issued a new requirement for all banks to apply a prudential filter to the IFRS 9 expected loss provisions. The prudential filter aims to minimize the effect of IFRS 9 provisions on regulatory capital, in view of the expected volatility due to the COVID-19 crisis. Any increase in the provisioning compared to December 31, 2019 will be partially added back to regulatory capital. IFRS 9 provisions will be gradually phased-in during the five-year period ending December 31, 2024. Banks will be required to disclose the effect of the application of the filter in their financial statements and Pillar 3 reports. This requirement is fully consistent with the BCBS guidance that was issued on April 03, 2020.


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    Keywords: Middle East and Africa, UAE, Banking, Securities, COVID-19, IFRS 9, Basel III, Capital Buffers, Regulatory Capital, Systemic Risk, SME, Credit Risk, Liquidity Buffer, LCR, ECL, Dubai FSA, CBUAE

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