Plan for new bank capital requirement

The central bank is working on a new system to set capital requirements for banks so they will remain compatible with the latest Basel III regulations on banks worldwide although they already control a “solid” capital base. But the central bank said the absence of a formal bond market in the UAE constitutes a hurdle for the implementation of Basel III, adding that it had just conducted a survey among banks about this issue.

In its second quarter bulletin released on Sunday, the central bank said the 51 banks operating in the UAE generally control an adequacy ratio that far exceeds the Basel III Tier 1 requirement of a minimum seven per cent for all banks, with their combined Tier 1 adequacy reaching 16.4 per cent at the end of June.

Their general capital adequacy stood at 21 per cent at the end of the second quarter, slightly up from 20.7 per cent at the end of the second quarter.

The report said the high adequacy level shows banks in the UAE, the largest Arab economy after Saudi Arabia, enjoy a “solid and strong” capital base that allows them to “ease the burden of allocating more loan loss provisions.”

“Tier 1 adequacy for UAE banks is estimated at 16.4 per cent……this means they enjoy an adequacy that surpasses international requirements… in this respect, the central bank is currently working on a new system which will determine the capital requirement for banks in the country.”

“It should be noted that the central bank conducted a survey among banks to know their opinion about the liquidity tools available for them…it showed that one of the most serious challenges to the enforcement of Basel III is the absence of an active market for government and high-classification corporate bonds which are defined by Basel III and known as Eligible Liquid Assets.”

Basel III is a new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. 

The third of the Basel Accords was developed in a response to the deficiencies in financial regulation revealed by the global financial crisis. Basel III strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage.

Basel III will require banks to hold 4.5 per cent of common equity (up from two per cent in Basel II) and six per cent of Tier I capital (up from four per cent in Basel II) of risk-weighted assets (RWA). Basel III also introduces additional capital buffers, (i) a mandatory capital conservation buffer of 2.5 per cent and (ii) a discretionary countercyclical buffer, which allows national regulators to require up to another 2.5 per cent of capital during periods of high credit growth.

In addition, Basel III introduces a minimum three per cent leverage ratio and two required liquidity ratios. The report showed the combined capital of the UAE’s 23 national banks and 28 foreign units stood at Dh268.9 billion at the end of June while assets totalled Dh1,707bn.

Deposits were put at Dh1,126bn and loans at around Dh1,056.4bn, with real estate mortgage credit swelling to nearly Dh240.6bn at the end of the second quarter from Dh234.5bn at the end of the first quarter. Personal loans edged up to Dh248bn from Dh247.9bn.

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