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Central Bank seeks report on banks' market exposure

Banking industry sources yesterday confirmed the receipt of a circular dated May 7 which has asked all banks operating in the country to give full details of their loans outstandings and guarantees given to both institutional and individual investors.

From now on, the banks, financial institutions, brokerages and those finance companies operating under the Central Bank licence, are required to file a quarterly report on their direct and indirect exposure to stock market in the form of investments, loans to the investors or guarantees to individual investors, investor groups, institutional investors and funds.

The Central Bank is understood to have issued the circular in the context of the deep correction the UAE markets have been going through during the past few months.

While the DFM Index has lost more than 53 per cent since the beginning of this year, the index which peaked at 1204 in October is over 58 per cent down at 504.

“A number of banks, financial institutions and brokers have lost money during the recent crash as many of them were offering unofficial margin trading and leverage to speculators. In the falling market, the margin calls also added to the steep decline,” said the General Manager of a Dubai-based broking company.

The Central Bank is understood to be worried about the banks' direct and indirect exposure to the market and the quarterly reporting demand is a precursor to a new permanent reporting structure that is expected to come into effect in the near future.

The detailed questionnaire has asked banks to provide all details of loans and guarantees provided to brokers, fund managers, investment companies, individual investors and all details of banks' own account transactions.

“This is the first time the Central Bank has asked for such detailed report on banks' stock market linked loan portfolios. Clearly the apex bank is not happy about the way the banks have been funding stock market investments,” said a banker.

Meanwhile, Emirates Securities and Commodities Authority (ESCA), the market watchdog, held a meeting with the representatives of banks and investment funds operating in the country yesterday.

The fund managers mooted the idea of setting up market making mechanism which will be funded and managed by a local banks and funds.

ESCA management is understood to have welcomed the idea and some announcement is expected soon.

Last week, a meeting of fund managers called by the National Bank of Abu Dhabi, had also recommended the formation of a market making mechanism in the country.