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Basel cannot work in Gulf until UAE acts on insolvency

Dubai at night

GlobalCapital's exclusive article last week on the United Arab Emirates’ shortfall in bankruptcy rules (“UAE urged to act on Basel III bankruptcy baffler”) has highlighted a Basel III compliance problem that is holding back the whole Gulf region, say bankers. But while the UAE has so far been lax in its response, it should take the lead and spur its neighbours to follow suit.

Like other Gulf states, the UAE’s rules have no concept of subordination in bankruptcy. This means that “Basel III compliant” bonds and sukuk issued by local banks are open to interpretation by the UAE central bank on bankruptcy – either they will be treated equally with other debt or the deals will be completely written off.

That creates a lot of uncertainty for prospective investors, but if the subordinated paper were to be deemed parri passu with other debt then it also means it would not be Basel III-compliant – defeating the objective of the issuing banks. There is a similar lack of clarity in Qatar and Saudi Arabia, say bankers, as well as further afield in places like mainland China.

This restricts regulatory harmonisation, bond issuance and, ultimately, bank growth. But little has been done in any of these countries to address the problem and, worse still, it is far from clear where the responsibility to do so lies.

The UAE central bank’s former Basel expert, Wolfgang Gerken, left earlier this year to join HSBC in Dubai as regional head of stress testing. That left the task in limbo, said bankers, although Hannes Keller is said to have recently taken on the job.

But that is only a small step, since it is really beyond the purview of central banks to sort out this problem on their own. Lawyers say the Gulf states need amendments to insolvency regulation, or in some cases the creation of the insolvency legislation in the first place, and a joining up of the companies law with the banking regulations under Basel III. 

All of this needs a higher level of coordination than bank regulators can provide.

So far, the only UAE bank to have issued Basel III compliant paper with explicit disclosures on writing down to zero is Abu Dhabi Commercial Bank. Abu Dhabi Islamic Bank and Dubai Islamic Bank did not include these provisions in their original sukuk programmes, but ADIB recently slipped similar disclosures in with an Irish Stock Exchange refiling, at the same time as opening the possibility of tier two issuance. The bank is said to be waiting to see how the central bank acts when another institution comes to market first, however.  

Investors in the region suspect the status quo will continue for the foreseeable future – with trading advantages for those in know. The opaque legal environment means there is a definite case of home ground advantage when negotiating with international creditors in a default.

There is a growing sense of frustration with the situation, however, and one that the UAE would do much better to tackle head on. As a rejuvenated trading hub and with Dubai calling itself the “centre of Islamic economy”, it is surely time to make a big pitch for banking transparency and accountability. By waking up to the need for Basel III compliance and doing something to fix a difficult challenge, the UAE would not only stand out in the region but become a beacon for better banking regulation.

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