Featured Product

    CBK Analyzes Financial Sector Stability, Presents Stress Test Results

    July 19, 2020

    CBK published the financial stability report, which assesses risks and vulnerabilities facing the financial system in Kuwait. The report also discusses the role of banks and their performance as financial intermediaries while shedding light on trends in credit distribution and deposit activity. The report uses the year-end data (December 2019) to analyze trends in the profitability and solvency of the banking system and assesses its ability to withstand internal and external shocks within different financial and economic stress scenarios. The report highlights that banking sector in Kuwait has entered this pandemic-driven crisis from a position of considerable strength. With robust capital adequacy, ample liquidity, substantial provisions, and the healthiest asset quality, the banking sector has been a part of the support mechanism for the impending economic recovery.

    The financial stability report also presents results of the stress test exercise on banks under a wide range of micro- and macro-economic scenarios. The stress test results reveal that, under a muted "U" shaped scenario, most banks were able to maintain a Capital Adequacy Ratio above the CBK’s minimum of 10.5% (after allowing for the temporary utilization of the 2.5% capital conservation buffer), with one bank breaching the Basel III minimum ratio (8.0%) by the end of 2020. Greater pressure on capital is expected during 2021, as moratoria expire and defaults materialize. It is worth noting that strong capital bases, abundant liquidity, and ample provisions of banks greatly influenced the stress test results. However, the resilience of the banking system would come under increased pressure in a severe "L" shaped scenario. Nevertheless, CBK is vigilantly monitoring these developments and stands ready to take any action required to ensure the resilience and stability of the banking sector. Overall, the stress test results suggest that most of the banks would maintain their capital adequacy ratio above the regulatory minimum.

    Going forward, it is expected that the banking sector will remain broadly stable, though the degree of resilience will largely hinge on the duration and severity of the crisis and differ across individual banks. Profitability of banks would come under pressure amid challenging economic conditions, compressed net interest income, and the need for greater provisions to cover potential deterioration in asset quality. Banks that choose to avail the capital conservation buffer would not be allowed to pay dividends, in line with the Basel recommendations. In terms of liquidity, levels are expected to remain comfortable and resumption in government debt issuance will offer banks additional opportunities to invest in risk-free government paper. To ease any potential pressure on banking sector liquidity, CBK has relaxed liquidity coverage ratio, net stable funding ratio, required liquidity ratio, and maturity ladder requirements since April 2020. Collectively, these measures will not only release additional liquidity for banks but also enable them to provide necessary credit to affected firms and individuals, thus restricting short-term liquidity problems from truing into solvency issues. It is critical that banks are able to see through the recession with their buffers largely preserved. While enormous financial savings and low public debt offer Kuwait some room to maneuver, the pandemic has intensified the need for economic diversification.

    However, without making tangible progress on requisite reforms, the country will remain vulnerable to oil price volatility, with its attendant risks to financial stability. It is hoped that the COVID-19-induced crisis would prompt a similar introspection at the national level and would pave the way to build a well-diversified, resilient, and sustainable economy going forward. A further detailed assessment of the impact of COVID-19 on financial institutions, local markets, and infrastructure is to be performed in the next time, as the recent changes in the financial soundness indicators of the banking system barely reflect the scale and severity of the crisis.


    Related Links

    Keywords: Middle East and Africa, Kuwait, Banking, COVID-19, Financial Stability Report, Credit Risk, Market Risk, Liquidity Risk, Regulatory Capital, Basel, Stress Testing, CBK

    Featured Experts
    Related Articles

    OSFI Finalizes on Climate Risk Guideline, Issues Other Updates

    The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.

    March 12, 2023 WebPage Regulatory News

    BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending

    BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.

    March 03, 2023 WebPage Regulatory News

    HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks

    The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.

    March 02, 2023 WebPage Regulatory News

    BCBS Report Examines Impact of Basel III Framework for Banks

    The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.

    February 28, 2023 WebPage Regulatory News

    PRA Consults on Prudential Rules for "Simpler-Regime" Firms

    Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.

    February 28, 2023 WebPage Regulatory News

    DNB Publishes Multiple Reporting Updates for Banks

    DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.

    February 28, 2023 WebPage Regulatory News

    NBB Sets Out Climate Risk Expectations, Issues Reporting Updates

    The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting

    February 24, 2023 WebPage Regulatory News

    EBA Updates Address Securitization Standards and DGS Guidelines

    The European Banking Authority (EBA) published the final draft of the regulatory technical standards that set out conditions for assessment of homogeneity of the underlying exposures in simple, transparent, and standardized (STS) securitizations.

    February 21, 2023 WebPage Regulatory News

    FSB Publishes Letter to G20, Sets Out Work Priorities for 2023

    The Financial Stability Board (FSB) published a letter intended for the G20 Finance Ministers and Central Bank Governors, highlighting the work that FSB will take forward under the Indian G20 Presidency in 2023

    February 20, 2023 WebPage Regulatory News

    ISSB Standards May Become Effective from January 2024

    The International Organization of Securities Commissions (IOSCO) welcomed the confirmation statement by the International Sustainability Standards Board (ISSB) setting out its progress in the development of its first sustainability-related corporate disclosure standards.

    February 17, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8792