January 26, 2018

IMF published its staff report and selected issues report in context of the 2017 Article IV consultation with Kuwait. The staff report highlights that the banking sector is sound, with high capitalization, robust profitability, and good asset quality, buttressed by prudent regulation. The banking system is prudently regulated and the Central Bank of Kuwait (CBK) has been proactive in strengthening supervision. Although the banking sector has remained sound, deposit and credit growth have slowed.

The staff report reveals that, as of the second quarter of 2017, banks featured high capitalization (CAR of 18.3%), steady profitability (ROA of 1.1%), low non-performing loans (ratio of 2.4%), and high loan-loss provisioning (over 200% coverage). Banks are under Basel III regulations for capital, liquidity, and leverage and have shown resilience to various stress tests, including credit, liquidity, and market shocks. The staff recommended conducting reverse stress testing as a complementary tool. Moreover, banks have also maintained strong liquidity buffers. With the Basel III liquidity standards still relatively new, the staff concurred with CBK’s prudent policy to maintain its existing five liquidity requirements and encouraged periodic reassessments to maintain an appropriate balance between sound regulation and compliance costs. Directors noted that further strengthening of the related institutional and legal frameworks would make debt management more effective and support the development of capital markets. 

The report states that a comprehensive set of macro-prudential measures is being enforced to minimize systemic risks. To further bolster financial sector resilience, CBK has been assessing options to strengthen the crisis management and resolution frameworks. Staff recommended that efforts should focus on enhancing the existing corrective action framework, establishing a special resolution regime for banks, strengthening the emergency liquidity assistance framework, mandating bank recovery planning, and reforming the current blanket guarantee of deposits. The authorities’ plans to enhance the crisis management and preparedness framework, including by introducing a special resolution regime for banks and a deposit insurance mechanism, would help further strengthen financial sector resilience.The report noted that the anti-money laundering and countering the financing of terrorism (AML/CFT) framework is also being strengthened. 

A key focus area of the selected issues report is the liquidity conditions, regulation, and the central bank liquidity management framework. The episode of tighter liquidity conditions in 2016, continued lower oil prices than pre-2014 levels, tighter fiscal policy, and higher U.S. interest rates have made the tracking of liquidity conditions and the preparedness for potential shifts in it more urgent. The report highlights that CBK should take advantage of this ample liquidity period to further enhance the liquidity risk management framework. The central bank has already been active in adopting the Basel III regulatory liquidity standards to improve banks’ abilities to withstand liquidity stress. The report also mentions that CBK plans to implement the rule on net stable funding ratio, in line with the Basel implementation timeline of January 01, 2018.

 

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Keywords: Middle East and Africa, Kuwait, Banking, Basel III, Stress Testing, Systemic Risk, Liquidity Risk, IMF

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