Apart from losses by a handful of banks and other financial institutions in the six-nation Gulf Co-operation Council (GCC), the banking sector has remained relatively safe from the devastating repercussions of the crisis that has jolted giant banks worldwide, NCB Capital said in a study.
It noted that the number of GCC financial establishments that has been hit by the financial crisis has been limited, citing such institution as Kuwait’s Gulf Finance House, which incurred the maximum loss of around $ 1.4 billion (Dh5.1bn) on a derivatives deal.
Bahrain’s Arab Banking Corporation booked losses of nearly $ 200 million on investments linked to Lehman Brothers and Washington Mutual. In the UAE, the Abu Dhabi Commercial Bank and investment bank Shuaa Capital wrote down around $ 174m in losses on investments made in US banks.
"Banks and financial institutions in the GCC had limited exposure to toxic assets of western financial institutions, which has shielded them from painful write-downs," said NCB Capital, an affiliate of the National Commercial Bank (NCB), the largest bank in Saudi Arabia by assets.
"Apart from the losses incurred by these institutions, the GCC financial sector as a whole remained relatively insulated from the crisis. The slow pace of economic reforms in the GCC economies over the years limited their exposure to western financial institutions. In recent years, the robust performance of the regional economy naturally reduced the appetite for risky investments elsewhere," it said.
The report said the "generally conservative" stance of the GCC regulators now appears vindicated by the resilience of the region’s financial service providers.
Much of the caution by regional governments has been prompted by past experiences – among them most notably the volatile oil prices and their pronounced macroeconomic implications, besides the relatively closed nature of the non-oil economies until recently, the report said. "While GCC regulators have broadly mirrored the process of deregulation elsewhere, they have tended to do this in a measured fashion," it said. "The gradual opening of the GCC financial sector to foreign players and restriction on the activities of domestic banks through prudent regulatory requirements helped in keeping the regional financial system safe and stable." According to the report, the UAE, Bahrain and Qatar have the most open financial sectors as their total banking assets exceed the size of their gross domestic product. It gave no figures but the combined assets in the UAE’s 52 banks stood around around Dh1.456 trillion at the end of June. Its GDP was estimated at nearly Dh934bn in 2008, accounting for 64 per cent of the banks’ assets. "Further, a conservative regulatory approach, inclusive of the macro as well as micro-prudential elements by the monetary authorities, prevented the regional banks from the excesses that were characteristic of the western financial institutions. Monetary authorities in the GCC economies are vested with the responsibility for monetary policy as well as banking supervision," it said. "The relatively small size of the sector and the limited geographic focus of banks allowed the region’s central bankers to oversee and regulate them closely. Additionally, the lack of exotic derivatives instruments that led to the fall of some of the western financial institutions as well as the absence of a shadow banking system in the regional financial landscape provided the regulatory authorities a clear cut objective to focus on the health of domestic banks." The report said this view is supported by a statutory segregation between commercial banking and other types of financial sector activity. It added that such policies ensured individual banks and financial institutions in the region were well capitalised at all time and prevented loopholes that could threaten the overall stability of the system. "Nonetheless, record capital outflows, falling stock prices and increased funding costs due to a freeze in credit markets late last year have tested the health of the regional financial system, especially in the more open economies," it said. The GCC authorities responded with emergency measures, although most of the steps were pre-emptive. The measures ranged from providing emergency lending facilities to ensure the smooth functioning of the overnight money markets to reducing reserve requirements and policy rates to make credit available at cheaper rates to local banks. The UAE authorities decided to guarantee bank deposits to avoid panic. "These measures have successfully prevented the failure of GCC financial institutions to date. The incoming results of the GCC corporate sector suggest that regional companies have weathered the turbulence of the past year with relative success and are beginning to slowly come back to health," it said.
