IMF Reports on 2017 Article IV Consultation with United Arab Emirates

The staff report discusses the ongoing initiatives to upgrade the supervisory and regulatory framework for the financial sector. The introduction and implementation of the Basel III capital and liquidity standards, risk management regulations, corporate governance standards, and new financial products and services are keys to strengthening financial resilience while addressing market development needs.The authorities did not expect that any bank would need to raise additional capital to satisfy the new capital surcharges for systemically important banks. Implementation of the Basel III liquidity standards published in 2015 is ongoing. The liquidity coverage ratio (LCR) is being applied to the three largest banks at 80%, which is set to rise to 100% by 2019. The CBU is planning to develop additional guidance to banks on the implementation of liquidity regulations and strengthen offsite and onsite monitoring of liquidity requirements. To support the CBU’s ongoing efforts, swift approval of the draft Central Bank and Banking Law is essential to enhance central bank independence, strengthen macro-prudential framework, and bolster safety nets. The authorities noted that the draft law reflects best international practices and is being discussed within ministries.

Although banks are adjusting to slower economic growth amid persistently lower oil prices, they remain sound and liquid, with stable and fully provisioned nonperforming loans. However, loans to related parties and concentration risks remain high in some cases. While asset quality at Islamic banks is slightly weaker than at conventional banks, both are adequately capitalized. The CBU’s recent stress tests showed that, except for a few small and medium-sized banks, most of the 21 local banks considered in the exercise would keep capital above the 12% regulatory minimum in an adverse scenario. Two medium-sized banks had stressed LCR slightly below 100%. The authorities noted that differentiated loan-to-value and debt-to-income ratios, along with the requirements for minimum financing for developers put in place after the global financial crisis, limit risk from exposures of banks to real estate. More active liquidity management, as the CBU intends, along with the development of debt markets would promote healthy liquidity and credit conditions. The recently introduced Basel III liquidity requirements are expected to incentivize banks to manage their liquidity more actively. To this end, the development of debt markets would provide banks with new dirham-denominated instruments.

The selected issues report describes the key features of the UAE banking system and financial markets and reviews the CBU framework for managing liquidity. It also proposes steps for moving toward more active management of liquidity. The report discusses the need to upgrade the CBU’s liquidity management framework, along with further steps to develop domestic money and debt markets. More active management of system-wide liquidity, as is already being planned by the CBU, and streamlining the gamut of the CBU’s liquidity management instruments would encourage banks to manage their own liquidity better and develop money markets. These efforts would complement the implementation of the new Basel III-compliant liquidity requirements recently issued by the CBU. The report also highlights that capital market development has become even more important in the new “lower-for-longer” oil price environment to diversify sources of funding for governments and firms and to support economic growth and diversification. The CBU’s reforms could be usefully complemented by governments’ efforts to develop domestic debt markets, including for Islamic instruments.

Related Links

Staff Report (PDF)

Selected Issues Report (PDF)

Keywords: Middle East and Africa, United Arab Emirates, Banking, Article IV, Basel III, Islamic Finance, IMF