Dubai: Banks in the Gulf Co-operation Council are still far from the implementation of resolution regimes discussed during the financial crisis in 2008 for both conventional and Islamic banks despite having implemented many of the recommendations.
G7 finance ministers agreed to take decisive action during the global financial crisis. Using all available tools to minimise the need for government intervention and related costs for taxpayers, regulators enhanced their monitoring and supervision methodologies, revamped on-site examination processes, and, in many countries, expanded their toolkit to process orderly resolutions of and support systemically important financial institutions to prevent their failures.
But “such implementation [by GCC banks] would require a significant change in mentality and the governments’ approach toward their banking systems,” said Dr Mohammad Damak, S&P Global Ratings head of Islamic Finance, in a report.
As such, the ratings agency said 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,” it said in a report.
Dr Damak went on to say, “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, the ratings agency recognises that implementing an effective recovery and resolution regime is complex as “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 Sharia principles; a lack of clarity on the type of instruments that can be bailed-in; and asset transfer could be problematic,” the ratings agency said.
“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,” Dr Damak added.
If a GCC country implements an effective recovery and resolution regime, the ratings agency will review its propensity to support its banking system and reassess the impact of its ratings on affected banks.
“According to Sharia principles, transferring assets with debt-like characteristics from one entity to another is possible only at par [or, with no haircut]. This complicates an effective management-led recovery plan, or resolution, under which selected assets and liabilities should be moved from the failed bank to a viable entity,” the report said.