UAE cbank issues debt exposure rules
Dubai, November 18, 2013
The central bank of the United Arab Emirates on Monday issued regulations that cap bank lending to state governments and related entities, a step towards preventing another boom-and-bust cycle in the economy.
Property prices and bank lending soared before the global financial crisis, then crashed by more than 50 percent in 2008-2010. Some state-linked property developers and conglomerates had to restructure their debt, hurting the banks which lent to them.
The new rules aim to limit risk for the banks by restricting how much they can lend to the governments of the seven emirates in the UAE and related entities. Banks have five years to comply with the rules after they complained that being forced to cut such lending quickly would hurt their balance sheets.
Each bank cannot lend more than 25 percent of its capital to a single state-linked non-commercial entity, and cannot lend more than 100 percent of its capital to all such entities plus the governments of the emirates combined. An identical curb has been imposed for lending to commercial state-linked entities.
Among other rules, banks can lend amounts worth no more than 30 percent of their capital to each other, and no more than 10 percent to each individual affiliate. Lending to major shareholders in banks is also restricted.
UAE commercial banks operating outside the country will have to limit overseas lending to 30 percent of their capital.
Lending to the UAE federal government, which accounts for only a small fraction of official spending in the country, is not restricted in the rules. The UAE is working on a long-delayed public debt law that would let the federal government issue bonds and Treasury bills.
Banks will have to cut their excess lending by 20 percent every year until they reach the total exposure ceiling. The regulations will become effective one month after they appear in the official gazette, a statement on the official WAM news agency said without specifying when publication would happen.
Last month, the central bank imposed curbs on residential mortgage lending as another step to prevent the property market and economy from overheating. - Reuters