Alvarez & Marsal, a global consulting firm, has confirmed that banks in the UAE are well-equipped to withstand the impacts of regional conflicts due to their robust liquidity, capital flexibility, and regulatory clarity.
During a time of uncertainty both regionally and globally, it is vital to recognize the role of resilience packages as proactive stabilization tools rather than reactive measures. One of their primary objectives is to bolster the stability of the banking system, a fundamental pillar of the economy. This is achieved by ensuring that banks maintain access to liquidity, capital flexibility, and regulatory transparency, allowing them to continue lending without imposing restrictive measures.
Proactive Measures
UAE Banks Show Proactive Response Compared to Global Markets
Central Bank Measures Aim to Avert Credit Contraction Risks
Sam Gedoumal, the General Director of Alvarez & Marsal in the UAE, stated that the repercussions of regional conflicts on the economy and investments are evident locally and globally. He elaborated that the initiatives taken by the UAE Central Bank are designed to mitigate the risk of credit contraction through proactive steps aimed at eliminating the factors that could lead to the withdrawal of available credit facilities. This is crucial as banks strive to maintain regulatory buffers. He cautioned that we are still in the early stages of the economic cycle to fully assess the impact of these measures, but early indicators suggest stability in lending activity, particularly among companies most vulnerable to disruptions, while preserving the fundamental strength of the banking system.
Regarding the potential of these measures to encourage banks to expand lending while managing risk levels, Gedoumal remarked that the package has been intentionally designed to support lending without compromising risk discipline. The facilities related to capital and liquidity aid in broadening lending capacity, yet banks remain accountable and must make individual credit assessments, particularly when classifying loans according to the International Financial Reporting Standard 9 and recognizing significant increases in credit risk.
He added that, in our view, the package encourages selective and structured lending opportunities. Institutions that combine robust credit risk management and safety margins can support both their clients and the economy while maintaining a solid stance with regulators and rating agencies.
Strong Liquidity
On how banks in the UAE manage liquidity amid global fluctuations and its effects on funding costs and profitability, Gedoumal pointed out that UAE banks entered this phase with exceptionally strong liquidity positions, backed by high reserve balances and access to central bank facilities. The temporary measures in liquidity rates allow banks to utilize their resources more efficiently, while appropriate precautionary controls are in place to enhance lending rather than restrict it.
This comprehensive system-wide measure has helped contain funding cost fluctuations, particularly in wholesale markets, thus maintaining profit margins to some extent. However, the duration of the conflict will ultimately determine the extent of its impact.
When discussing the main challenges in risk management and leveraging capital margins to support growth without compromising stability, Gedoumal emphasized that the critical challenge lies in consciously and thoughtfully utilizing resilience and planning a successful exit strategy.
He noted that utilizing safety margins will support current lending operations, and rebuilding these margins will be essential moving forward. The risks extend beyond usage to include the failure to transition models back to regular regulatory treatment, particularly during loan re-evaluations.
It is evident that successfully managed banks integrate their use of safety margins within their internal capital adequacy assessments and recovery plans, alongside capital-related communication strategies, to ensure that short-term support does not lead to medium-term instability.
A Different Approach
Gedoumal added that the response from UAE banks differs from that of banks in countries that have raised interest rates, noting the repercussions of such increases on communities regarding borrowing costs, consumption, and living standards. The rise in interest rates across many sectors has compelled banks to implement stricter lending protocols, resulting in higher borrowing costs and reduced consumption levels.
However, the UAE has adopted a different approach, prioritizing system continuity and economic resilience over adherence to restrictive credit practices that align with economic cycles.
He explained that this approach facilitates more stable borrowing conditions, alleviates pressure on households and businesses, and minimizes the risks of sharp declines in consumption or living standards. It also sends a clear and reassuring message to investors that the authorities in the country are pursuing a proactive strategy, supported by robust capital levels, and are ready to take measures that mitigate tail risks and enhance confidence in the banking system’s ability to absorb shocks without leading to disruptions.
Moreover, Gedoumal emphasized that the transparency surrounding these measures and expectations for their application contributes positively to enhancing the UAE’s reputation as a stable and organized financial hub, even during periods of geopolitical uncertainty.