GCC banks are in a good position to meet the enhanced capital requirements as laid down by Basel III. Majority of banks in the GCC have strong capital adequacy ratios with the average ratio for the region at around 15 percent.
The core tier 1 capital of banks from all the gulf countries average at around 14 percent which is greater than the required 8 percent under Basel III. GCC banks have also maintained a healthy loan to deposit ratio of approximately 87 percent as of yearend 2018, Marmore Mena Intelligence noted in its report on ‘GCC banks’ capital buffers’.
The regional banks largely fund themselves through customer deposits, which are short term in nature, as the proportion of long-term facilities to total funding is limited. However, the liquidity mismatch in GCC’s banking sector liquidity has improved substantially in recent months thanks to a higher average oil prices, sovereign debt issuances and modest loan growth. While improving oil prices have generated higher government revenues, these are still far from fiscal break-even for most GCC governments.
The Marmore analysts noted the Gulf debt markets are not as deep or varied as developed markets, and therefore, domestic banks have a limited choice of liquid instruments that can be used locally. GCC governments have therefore started to tap into international markets, which have supported liquidity conditions in these markets as part of the international debt proceeds were deposited in the banking system. GCC bond and sukuk issuance surged by $32bn in Q1 2019, raising outstanding debt in the region to $478bn.
Given the significant role of governments in liquidity creation in the GCC region, a strong collaboration with the ministries of finance, including the exchange of information on government cash flows, will be of immense importance in this respect. GCC central banks need to make use of the full range of liquidity management instruments at its disposal in times of liquidity tightening. Instruments require a thorough review to ensure their terms and pricing are well articulated and encourage interbank market participation. Increased reliance on open-market operations will help encourage the development of interbank markets and allow for an active liquidity management on the part of central banks in the region. Moreover, developing liquidity-forecasting tools will be of key importance in adequately assessing the scope, timing and magnitude of liquidity management operations required to deal with potential liquidity risk among banks
