UAE Central Bank Governor Sultan bin Nasser Al Suwaidi has stressed the need to strengthen banking supervision in order to tackle the systemic risk in domestic systematically important banks, or D-SIBs, and other financial institutions.
Al Suwaidi asked financial regulators to work on a framework to identify D-SIBs in the region. He was addressing a conference on financial stability, which is being jointly organised by the Basel Committee on Banking Supervision (BCBS), the Financial Stability Institute and the Arab Monetary Fund here on Tuesday.
The two-day conference is discussing a new framework for monitoring the domestic important banks so that in case of financial crisis, their negative impact on the economy is minimised.
The BCBS issued the draft of rules on the assessment methodology for global systemically important banks, or G-SIBs, and their additional loss absorbency requirements in November 2011, which was okayed by G-20 leaders at their meeting.
The G-20 leaders also asked the BDBS and the Financial Stability Board to work on modalities to extend expeditiously the G-SIFI framework to D-SIBs.
Sharing his views on the topic, Al Suwaidi said that the framework should take into account the size of the bank based on simple indicators such as total assets and the bank’s reliance on specific sectors, like the real estate sector and the GRE, and others; the interconnectedness between banks as indicated by deposits from and loans to.
Other elements, the governor suggested, should include the degree of complexity, even though this does not play a significant role in the UAE, as banks do not trade or invest in sophisticated financial products.
Also, cross-border activities by banks in the region can’t be used to determine if they qualify as D-SIBs, as these activities are insignificant, the governor said. Al Suwaidi said that the BCBS assessment framework suggests that local regulators are entrusted with the task to set up their own methodology for the process of identifying which banks to be considered as D-SIBs.
“Central banks in our region could develop a peer-group approach for this exercise so they could learn from each other,” he said.
“The assessment framework also suggests there will be a mix of qualitative and quantitative judgments for each D-SIB,” he added.
“It is a positive development that national regulators are given the authority to decide on the appropriate level of additional CET1, consistent with each bank’s systemic importance,” the governor said.
As local debt markets are at an infancy stage in many countries in the region, this would make it difficult for potential D-SIBs to hold high-quality liquid debt instruments as “preemptive” liquidity buffers against early signs of stress.
Al Suwaidi said: “there is a need to find an appropriate way to deal with this issue, until debt markets in the region witness significant improvements.”
From : Khalij