Will provide them with a special additional liquidity facility linked to the current accounts.
The United Arab Emirates’ central bank said it “stands behind” the country’s local and foreign banks, which face losses from Dubai World’s possible default, and offered them access to more money under a new facility.
The central bank will make available to banks “a special additional liquidity facility linked to the current accounts” at the central bank that can be drawn upon at a cost of 50 basis points above the three-month Emirates inter-bank offered rate, the Abu Dhabi-based regulator said in an e-mailed statement today.
Dubai World, a state-owned holding company struggling with $59 billion of debt and other liabilities, said November 25 it would seek a “standstill” agreement with creditors. The news led to a slump in financial markets around the world and raised prospects of rising loan write-offs for UAE and foreign banks.
“This is a very re-assuring move by the central bank in order to limit the risk of any run on Dubai-based banks,” said John Sfakianakis, chief economist at Banque Saudi Fransi in Riyadh. It will alleviate any “liquidity concerns by foreign banks about the banking system, mostly those based in Dubai,” he said.
The UAE’s banking system is “more sound and liquid than a year ago” and local banks’ sale of medium-term notes and commercial paper in foreign markets has declined by 25 per cent over the period, the central bank said. Foreign interbank deposits make up only 5 per cent of overall interbank deposits, the central bank said in the statement.
