GCC countries far from adopting resolution regimes for conventional and Islamic banks
Banks in the Gulf routinely adopt many of the best practices and international regulations when they come into force, but governments in the region are taking their time to implement resolution regimes, according to S&P Global Ratings in a report titled, Recovery and Resolution Regimes In The Gulf Cooperation Council: More Questions Than Answers.
In response to the 2008 global financial crisis, the G7 finance ministers agreed to use all available tools to support some systemically important financial institutions and prevent their failures.
As part of their post-crisis reform, and to minimise the need for government intervention and related costs for tax payers, regulators have enhanced their monitoring and supervision methodologies, revamped on-site examination processes, and, in many countries, expanded their toolkit to process orderly resolutions of systemically important banks. Although GCC countries—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates—have taken many of these steps, they are still far from the implementation of resolution regimes for both conventional and Islamic banks.
"In our opinion, such implementation would require a significant change in mentality and the governments' approach toward their banking systems," said Dr. Mohamed Damak, S&P Global Ratings Head of Islamic Finance. “That said, we currently consider the governments in most GCC countries as highly supportive toward their banking systems. For instance, Qatar recently provided substantial support to its banking system following significant outflows of external funding in the wake of sanctions from a few Arab countries.”
He added it is likely that the implementation of recovery and resolution regimes in the GCC is just a matter of time. How much longer before this happens, however, is still a question. “In our view, the introduction of recovery and resolution regimes could provide regulators with an additional tool to help their banking industries' financial stability.”
For Islamic banks, implementing an effective recovery and resolution regime is complex for the following reasons: banks conduct some of their operations in a debt-like format; covering losses other than those incurred on the specific underlying assets is not possible according to Shari'ah principles; a lack of clarity on the type of instruments that can be bailed-in; and asset transfer could be problematic.
"The effective introduction of recovery and resolution regimes for Islamic banks would hinge on clarifying which instruments will absorb losses other than in the event of default," concluded Damak. If a GCC country implements an effective recovery and resolution regime, we would review our assessment of its propensity to support its banking system and reassess the impact on our ratings on the affected banks.