“(The) Central Bank of the UAE ….stands behind UAE banks and branches of foreign banks operating in the UAE,” said a central bank statement. The bank said that it has issued a notice to all banks in the country about the new “special additional liquidity facility”, which it said would be linked to their current accounts at the central bank, at the rate of 50 basis points above the three-month Emirates Interbank Offered Rates or EIBOR.
The statement came days after the government of Dubai announced its intention to seek a six-month delay in debt payments for its flagship Dubai World conglomerate, saying the restructuring plan was aimed at ensuring the group’s long-term success.
The new facility would be in addition to emergency funding facilities the central bank and the federal finance ministry had announced late last year to help fend off the impact of the global credit crisis. The central bank had set up a $13.6 billion emergency bank lending facility in November 2008, followed by the finance ministry, which injected two tranches of $6.8 billion each into bank deposits from a $19 billion rescue facility.
The central bank said on Sunday that the country’s retail commercial banking system has a strong and stable deposit base and has weathered the global financial crisis better than any other.
“The UAE banking system is more sound and liquid than a year ago, with foreign interbank deposits and Medium Terms Notes, or MTNs, and Euro Commercial Papers or ECPs, issued by UAE banks stand reduced by 25 per cent,” the statement said in an apparent attempt to boost confidence in the country’s financial industry.
“From the consolidated balance-sheet of banks, interbank deposits of the UAE banking system constitute 10.3 per cent of the liabilities side, with foreign interbank deposits constituting five per cent per cent only,” it said.
A senior banker said the move appears to be a “wise precautionary measure”, which would give a strong signal to the market that the central bank stands behind the banking system. “The banking system at present is quite strong with substantial liquidity circulating in the system”, he said.
“Since the central bank is bank’s last resort, its policy announcement that it stands behind UAE banks and branches of foreign banks is a very strong message to the businesses, at a time when they really need reassurance,” said Dr Qaiser Anis, a chartered accountant based in Abu Dhabi.
The move is not only calculated but very timely as well, he said. Government had also guaranteed bank deposits for three years, starting from September last year, so there is nothing to worry about the financial system, the chartered accountant said.
Bankers said the central bank wants to ensure that late last week’s volatility in the global markets do not spill over into the UAE.
“This will support the liquidity and soundness of the banking system in the UAE and especially in Dubai. The central bank is sending a strong message to everyone that they are providing ample liquidity and the guarantee to banks in the UAE,” said John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole Group in Riyadh.
Stock markets in Asia fell for a second day on Friday as investors dumped shares in banks and construction firms seen as exposed to Dubai. However, European shares, which fell in early trading on Friday, regained their poise later in the day.
Shares on Wall Street, which was closed on Thursday for the US Thanksgiving holiday, opened lower but firmed up early in Friday’s trading session. The New York Stock Exchange fell initially by 2.7 per cent from Wednesday’s close, while the Nasdaq was down by 2.3per cent.
Credit-rating agency Standard & Poor’s placed four Dubai-based banks on its “credit watch” list late on Thursday, shortly after cutting the debt ratings for several Dubai government-owned and related companies. S&P said it was concerned about the banks’ high exposure to Dubai World.
Markets recoiled after the Department of Finance announced on Wednesday that Dubai World would be seeking to postpone its debt payments until May 30, 2010. Dubai World owes $59 billion in debts.
Its property subsidiary Nakheel is due to repay a $3.52 billion Islamic bond in December. Bank of America-Merrill Lynch estimated that Dubai entities will owe total debt payments of $3.8 billion this year, $12.3 billion in 2010, $19.0 billion in 2011 and $18.0 billion in 2012.
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