The UAE will look to help its banks meet liquidity requirements by issuing Federal Government bonds, possibly by 2018, according to an official at the Finance Ministry.
In an attempt to comply with Basel III requirements, UAE banks, such as Emirates NBD and the National Bank of Abu Dhabi, will be encouraged to buy some of the dirham-dominated debt.
Under Basel III global banking standards, banks will need to hold a set amount of equity capital, compared to the risk-weighted assets they have, which will stand at six per cent when brought into motion in 2018.
While the premise is that banks will need to raise new equity capital, by issuing sovereign bonds, UAE banks could be offered a way out by reducing their holdings of risky assets, and replacing them with the bonds.
Furthermore, considering most of the major UAE banks are part-state owned, buying the Federal Government bonds will allow them to comply with the global regulations, while investing in their own government, thus not actually moving away with the funds in question.
Younis al-Khouri, from the Ministry of Finance, says: “The purpose of issuing bonds is to meet the requirements of Basel III, since the central bank needs to accommodate Basel’s requests that the country’s banks maintain certain portions of sovereign bonds, in which case the unavailability of bonds will make the requirement difficult to fulfil.”
Another plus to the move is that issuing longer-term bonds will, by default, generate higher liquidity, which could finance federal government development projects. However, the counter argument to this is that it will, in turn, expose the UAE’s debt and financial arm to external influences.
Dubai, for instance, had issued government bonds prior to 2009; however the debt crisis which followed was further propelled by investors selling back their debts fearing the bonds were not a safe investment as originally believed.