COVID-19 impact and CBUAE’s response by Aakash Ramchand Dilis

COVID-19 impact and CBUAE’s response

by Aakash Ramchand Dilis

As the COVID-19 virus spreads across the globe, economic consequences will follow, both in the short- and long-term. To soften the coronavirus’ blow to the UAE economy and support UAE lenders, The Central Bank of the UAE (the “CBUAE”) has issued a number of communications, standards and guidelines as part of a relief package, pertaining to the following:

Targeted Economic Support Scheme (“TESS”)

Mortgage Loans Capital Adequacy

Liquidity IFRS9

Expired Emirates ID / Visa Compliance

targeted economic support scheme (TESS)

TESS was introduced as a ‘Zero Cost Facility’ against collateralizing CDs/ICDs, already in place with CBUAE to contain the repercussions of the COVID-19 pandemic, designed to facilitate the provision of temporary relief from payments of principal and/or interest/profit on outstanding loans for all affected private sector corporates, SMEs and individuals.

TESS is summarized as follows:

Effective from 15 March 2020.

Clients entering the TESS program will temporarily cease payments of principal and/or interest/profit. Their facilities may be re-scheduled or restructured, typically without a loss of net present value. In some cases, additional credit lines may be offered. The TESS also states that the IFRS 9 staging for TESS clients will remain unchanged for the duration of the scheme. This is based on the presumption that most of those clients have not experienced a significant increase in credit risk by virtue of their eligibility for the scheme.

Initially, the maturity of TESS was 15 September 2020; however, the same has been extended from 15 September 2020 to 31 December 2020 in a subsequent communication from CBUAE.

mortgage loans

CBUAE issued a notice pertinent to Amendments to Regulations regarding Mortgage Loans, which directed that the Loan to Value (LTV) ratio for real estate was increased for first time buyers by 5%, in order to enhance the affordability of home purchases.

capital adequacy

CBUAE also provided some relief towards banks’ capital adequacy by:

Segregation of retail and corporate SMEs, that attract 75% and 85% RWA respectively.

Keeping the Capital Conservation Buffer (CCB) at 2.5%, but banks are allowed to tap into their capital conservation buffer up to a maximum of 60% without supervisory consequences, effective from 15 March 2020 for a period of 1 year.

Additionally, the planned effective date of the remaining Basel III Capital Standards and related Guidance pertaining to CVA and SA-CCR has been moved from 30 June 2020 to 31 March 2021.

liquidity

In April 2020, CBUAE issued a communication sharing new regulatory thresholds for the following: Reduction in Eligible Liquid assets ratio (“ELAR”) requirement from a minimum of 10% to 7%.

Reduction in Liquidity Coverage Ratio (“LCR”) requirement from a minimum of 100% to 70%.

Reduction in Cash Reserve requirement on demand deposits by 50% to release liquidity into the banking system.

IFRS9

In April 2020, a Joint Guidance (CBUAE, DFSA and UBF) was released that proposes practical solutions to manage the impact of economic uncertainty on Expected Credit Losses, while remaining compliant with globally accepted financial reporting standards (IFRS).

Excerpt of the proposed changes:

expired emirates ID / visa compliance

In April 2020, a spokesperson for the Federal Authority for Identity and Citizenship publicly communicated that “all visas and entry permits expiring on March 1 shall remain valid until the end of December 2020”. This communication of auto renewals has a direct impact on one of compliance related KRIs in any bank, i.e. customers with expired KYCs.

conclusion

UAE’s banking industry understands that no industry or sector is immune to the current COVID pandemic. Therefore, all of the banks have commenced providing appropriate deferral and/or debt forgiveness mechanisms to impacted borrowing customers, whereby principal and interest is are deferred for an appropriate period.

references

https://gulfnews.com/business/banking/covid-19-response-uae-banks-use-60-of-funds-under-central-bank-liquidity-facility-1.71170208

https://www.moodysanalytics.com/regulatory-news/apr-05-20-cbuae-announces-relief-measures-to-address-impact-of-covid-19

https://u.ae/en/information-and-services/justice-safety-and-the-law/handling-the-covid-19-outbreak/economic-support-to-minimise-the-impact-of-covid-19

author Aakash Ramchand Dilis

Aakash Ramchand Dilis a Senior Manager Market Risk and Capital Management at National Bank of Fujairah, Dubai, UAE. Prior to joining NBF, Aakash worked with SAMBA Bank Ltd, Union National Bank, Compono Strategia and Commercial Bank International on various risk management and BASEL implementation roles. He specializes in Risk analytics, IFRS9 ECL, Bottom-up stress testing techniques, quantitative finance and financial risk (Credit and Market) modeling. His research interests are in financial econometric stress testing, risk based pricing and ARMA modeling.

Aakash holds an associate diploma in Actuarial Science, a dual bachelor’s degree in Commerce & IT and a Master’s degree in Business Administration, as well as Leadership and Strategic management certificates from Harvard Business School and Said Business School, Oxford University.