Central Bank assets cut to assist lenders
The UAE Central Bank reversed years of resource-building policy and slashed assets in 2008 to support the local banking sector against the devastating effects of the global financial distress, according to a key Kuwaiti bank.
After a sharp growth during 2003-2007, the Central Bank's assets plunged by nearly a third at the end of 2008 and the decline was mainly a result of a decision to infuse funds into the domestic banking sector to shore up liquidity shortages after the eruption of the crisis, the National Bank of Kuwait (NBK) said.
It noted that over the past few years, the Central Bank's total assets have increased sharply commensurate with the accumulation of foreign currency generated by the UAE's huge oil revenues, as well as speculative inflows in anticipation of a revaluation of the dirham against the US dollar.
Its figures showed that between 2003 and 2007, the Central Bank's assets leaped by nearly 51 per cent per year, the highest ever annual growth mainly due to a surge in the country's oil export earnings.
NBK said almost all of these assets have been stored in foreign government securities or deposit accounts abroad, adding they were low risk but earned the bank some Dh3.8 billion in 2007.
Most of the subsequent profits were transferred to the government or kept in permanent deposit at the Central Bank, it said.
"This pattern changed in 2008 when, as the financial crisis hit, the Central Bank began to focus more on shoring up liquidity in the domestic banking system. Between end-2007 and end-2008, the Central Bank's overall balance sheet shrunk by about one-third to Dh194bn, reversing much of the expansion seen in 2007," NBK said in a study about the UAE banking sector.
"To a large extent, this fall was the counterpart to the withdrawal of funds by foreigners who had invested in the UAE. But there was also a major change in the composition of the Central Bank's assets. Foreign currency deposits and holdings of foreign securities fell sharply – by 55 and 70 per cent respectively – and were partially replaced by purchases of domestic assets, notably debt originally issued by the Ministry of Finance."
The Central Bank balance sheet showed its total assets plunged further to Dh179.4bn in January before rebounding to nearly Dh192bn in February and Dh201.4bn in March. Foreign assets dived from Dh285.09bn at the end of 2007 to one of their lowest levels of Dh88.4bn in March.
"This was presumably a means of providing funds to local financial institutions.
The large rise in other funds is also a reflection of efforts to support domestic liquidity. It largely comprises the Central Bank's loans to local banks secured against certificates of deposit," NBK said.
"Significant though these shifts have been, it is important to note that they do not equate to changes in the UAE's income. Nor do they reflect any change in overall strategy regarding the country's huge total stock of foreign assets, the bulk of which are managed by the Abu Dhabi Investment Authority (Adia). Rather, they reflect the immediate liquidity needs of the local banking system and the relative merits of deploying those funds at home and/or abroad."
But the report noted that the response of UAE banks to a Dh50bn liquidity support facility announced by the Central Bank in September was relatively weak, citing the balance sheet which showed their take-up of that facility stood at only Dh4.5bn at the end of 2008.
"On one level, the lack of interest in the scheme sounds encouraging. But rather than a sign of reassurance, it is more likely to reflect the somewhat unfavourable terms attached to the loans [banks had to pay 150bps over the repo rate up to the value of their reserves, and more for larger amounts], the risk associated with borrowing against bank reserves, or an unwillingness to be associated with distress borrowing," the report said.
"The overall data suggest that banking sector activity remains constrained. Until there are more concrete signs of improvement, the authorities will want to ensure that policy remains extremely supportive of prospects for economic recovery."
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