UAE halts foreign banks waivers on state-linked lending – Many regional Gulf and Asian lenders to be significantly impacted 

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DUBAI, Jan 20, (RYTRS): The United Arab Emirates (UAE) central bank has removed waivers given to foreign banks allowing them to use their group’s capital reserves to calculate lending to the government and state-owned entities, sources aware of the matter told Reuters. The change, related to 2012 legislation to counter dangers to the Gulf state’s banking system from lenders accumulating large exposures to single borrowers, means foreign banks can only use the reserves of their locally-registered units to calculate lending limits.

Large international banks should be unaffected by the move, as they register the loans made in the UAE in central processing centres outside the country. However, the sources said many regional Gulf and Asian banks, which traditionally booked UAE business within local units and predominantly lend to government entities and large companies, would be significantly impacted. One, at a bank affected by the move, said his organisation had stopped nearly all lending to clients as it evaluated the move’s implications.

The UAE central bank did not respond to a request for comment. The 2012 rules were brought in after Dubai state-linked entities needed to restructure tens of billions of dollars of debt — a move which forced banks to set aside large amounts of cash as provisions. According to the circular outlining the ruling, the exposure to the government and government-linked companies of branches of foreign banks in the UAE must not exceed 30 percent of the local capital base.

Most local units are thinly capitalised so to keep the capital cost to the group to a minimum: under the 1980 UAE banking law, foreign banks must allocate capital funds to the local unit worth 40 million dirhams ($10.9 million). But the 2012 circular also said the central bank may give certain exemptions to the rules. For banks which received such waivers, these were not renewed as of Dec. 31, sources aware of the move said. It is unclear how many banks were given waivers.

“The central bank wants to understand their exposure to UAE customers and to tighten regulations at a time when it is looking closely at the issue because of the economy,” said a second source, noting the pressure being felt in the local banking market from reduced liquidity and a slowdown in economic growth due to lower oil prices. Possible options for affected banks include switching the booking of new business to their home jurisdiction or a third country, or opening an office in the emirate’s financial free zone, the Dubai International Financial Centre, the first source added.

However, those banks with branches — around 26 according to central bank data — would not be able to switch their headquarters to the free zone as they are administered by different regulators. Some banks might not be able to use their home jurisdictions either due to cumbersome or prohibitive regulations about booking foreign assets

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