25 May 2016
DOHA: The macroprudential framework of GCC economies needs to be strengthened to protect the financial system from potential systemic risk, an IMF working paper released yesterday said.
The oil-exporting GCC economies are heavily reliant on the extraction sector for their fiscal revenues. Their export earnings are translating into increased vulnerabilities to oil prices shocks, the IMF document that discusses the experience of Arab countries in implementing the policies noted.
Arab countries have made important strides toward strengthening the stability of their financial systems.Since the global financial crisis, they have sharpened prudential regulation by tightening capital and liquidity requirements and are in the process of implementing Basel III standards on capital, liquidity, and leverage.
A number of central banks have established a separate financial stability office/unit and set up an early warning system, in addition to conducting periodic stress testing of banks. Many countries in the Arab region, particularly the GCC, were ahead of others around the world in implementing some measures now widely accepted as macroprudential tools. These measures include the loan-to-deposit ratio, regulations on personal lending such as debt service to income ratio and limits on loan tenor, and limits on concentration, including on real estate exposure.
However, there is a need to strengthen the regulatory capacity to monitor and assess systemic risks. Arab countries have to strengthen their capacities for monitoring time-varying, and cross-sectoral, risks.
Effective early warning systems and regular assessments of systemic risks are integral parts of macroprudential policies. Macro stress testing would help the regulators to align the macroprudential toolkit with the changing nature of financial risks.
Better monitoring of systemic risks and addressing financial vulnerabilities could be achieved through several steps, including developing a financial stability risk map.
The document 'Macroprudential policy and financial stability in the Arab region', co-authored by Ananthakrishnan Prasad, Heba Abdel Monem, and Pilar Garcia Martinez suggested the concerned regulatory authorities should work on identifying systemic risks through, for example, "financial stability risk map."
This map includes all the risk elements crucial for financial stability, including credit growth, financial activities, and interconnectedness. In addition to market risk, the map would also identify liquidity risk, contagion risk, real estate exposure risk and other risks related to linkages between different components of the financial sector, structural indicators and financial infrastructure.
There is an urgent need to address the challenges related to Basel III implementation. While a number of Arab countries are ahead in implementing Basel III requirements, others are in the early stages of applying these standards. Further efforts are needed to enable Arab countries to implement Basel III regulations.
The Arab regulatory authorities should work on addressing the challenges they are likely face to cope with the Basel III framework, especially with regard to liquidity standards.
On the potential vulnerabilities in credit, the IMF document said the majority of the Arab world's bank domestic credit is concentrated in the private sector, except for Qatar, Algeria, Yemen, and Lebanon which have a high percentage in the public sector.
Private sector credit distribution also varies within the GCC and Arab oil importing countries. Bahrain, Egypt, Morocco, and Tunisia have a high percentage of their private credit for trade, industry, and finance sectors.
However, banks in the GCC countries and Mauritania have a large share of the credit portfolio in personal consumption loans. For many GCC banks' credit is also concentrated in the real estate sector. Furthermore, many GCC countries face borrower concentration risk in their credit portfolio.
DOHA: The macroprudential framework of GCC economies needs to be strengthened to protect the financial system from potential systemic risk, an IMF working paper released yesterday said.
The oil-exporting GCC economies are heavily reliant on the extraction sector for their fiscal revenues. Their export earnings are translating into increased vulnerabilities to oil prices shocks, the IMF document that discusses the experience of Arab countries in implementing the policies noted.
Arab countries have made important strides toward strengthening the stability of their financial systems.Since the global financial crisis, they have sharpened prudential regulation by tightening capital and liquidity requirements and are in the process of implementing Basel III standards on capital, liquidity, and leverage.
A number of central banks have established a separate financial stability office/unit and set up an early warning system, in addition to conducting periodic stress testing of banks. Many countries in the Arab region, particularly the GCC, were ahead of others around the world in implementing some measures now widely accepted as macroprudential tools. These measures include the loan-to-deposit ratio, regulations on personal lending such as debt service to income ratio and limits on loan tenor, and limits on concentration, including on real estate exposure.
However, there is a need to strengthen the regulatory capacity to monitor and assess systemic risks. Arab countries have to strengthen their capacities for monitoring time-varying, and cross-sectoral, risks.
Effective early warning systems and regular assessments of systemic risks are integral parts of macroprudential policies. Macro stress testing would help the regulators to align the macroprudential toolkit with the changing nature of financial risks.
Better monitoring of systemic risks and addressing financial vulnerabilities could be achieved through several steps, including developing a financial stability risk map.
The document 'Macroprudential policy and financial stability in the Arab region', co-authored by Ananthakrishnan Prasad, Heba Abdel Monem, and Pilar Garcia Martinez suggested the concerned regulatory authorities should work on identifying systemic risks through, for example, "financial stability risk map."
This map includes all the risk elements crucial for financial stability, including credit growth, financial activities, and interconnectedness. In addition to market risk, the map would also identify liquidity risk, contagion risk, real estate exposure risk and other risks related to linkages between different components of the financial sector, structural indicators and financial infrastructure.
There is an urgent need to address the challenges related to Basel III implementation. While a number of Arab countries are ahead in implementing Basel III requirements, others are in the early stages of applying these standards. Further efforts are needed to enable Arab countries to implement Basel III regulations.
The Arab regulatory authorities should work on addressing the challenges they are likely face to cope with the Basel III framework, especially with regard to liquidity standards.
On the potential vulnerabilities in credit, the IMF document said the majority of the Arab world's bank domestic credit is concentrated in the private sector, except for Qatar, Algeria, Yemen, and Lebanon which have a high percentage in the public sector.
Private sector credit distribution also varies within the GCC and Arab oil importing countries. Bahrain, Egypt, Morocco, and Tunisia have a high percentage of their private credit for trade, industry, and finance sectors.
However, banks in the GCC countries and Mauritania have a large share of the credit portfolio in personal consumption loans. For many GCC banks' credit is also concentrated in the real estate sector. Furthermore, many GCC countries face borrower concentration risk in their credit portfolio.
© The Peninsula 2016
