Gulf Banks Face Concentration Risks, IMF Study Says

SUMMARY

While banks in the GCC countries are generally well capitalized, it is difficult for them to have a truly diversified credit portfolio given the structure of their economies, which exposes them to risks that require a greater amount of scrutiny, a new IMF study finds.

 
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  • Region’s dependence on oil prevents banks from diversifying portfolios
  • Banks should undergo stress tests to show large exposures, ownership linkages
  • Banks need to focus on maintaining high capital buffers in face of risk
  • With the recent plunge in the price of oil, the region’s banks face heightened risks, which could extend to the broader economy, according to Assessing Concentration Risks in GCC Banks. IMF staff provided the study to the October annual meeting of GCC finance ministers and central bank governors in Kuwait.

    The GCC member states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

    Three of the study’s authors—Mariana Colacelli and Andre Oliveira Santos of the IMF’s Middle East and Central Asia Department and Suliman Rashid S. Aljabrin of the IMF’s Monetary and Capital Markets Department—spoke to the IMF Survey about their research. (The other three authors of the study are Pierpaolo Grippa, Ananthakrishnan Prasad, and In Wong Song.)

    IMF Survey: What is the main finding of your study?

    Santos: The main finding of our study is that concentration matters for GCC countries. If a bank’s loans are heavily concentrated with a few borrowers or in a certain economic sector, there are higher risks if these borrowers or sectors get into trouble.

    In GCC bank portfolios, we have found that two types of concentrations are important: economic concentration and “single name” concentration—that is, individual borrowers holding large loans. This latter type is significant because if one large single borrower fails, it can put the bank in a difficult position. This risk can have implications for economic activity, fiscal policy, and even the diversification of economic activity in GCC countries.

    IMF Survey : What are the unique features of the GCC economies that make the banking system more vulnerable to risk?

    Colacelli: The region’s economic structure, with its large dependence on oil, makes it unique. This factor constrains the ability of the banking sectors to truly diversify their portfolios. As we reviewed the region in detail, we found that even the non-oil sectors were significantly linked to oil.

    Close to 80 percent of government revenue in this region comes from oil, and that government revenue affects government spending. That spending, in turn, affects the non-oil sector of the economy. In addition, the geographic distribution of credit portfolios is quite local. Banks that we studied had exposures...

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