UAE Central Bank sets out new reserve requirement rules

New regulations being enforced from next Wednesday will allow banks to better manage day-to-day liquidity

The central bank’s new regulations represent the second step towards the implementation of the new Dirham Monetary Framework that was announced in February this year. Ryan Carter / The National

The Central Bank of the UAE has introduced new rules allowing lenders greater flexibility in the level of reserves they hold.

A change to the regulations, covering all licensed deposit-taking financial institutions in the UAE, allow for the reserve maintenance period used to manage short-term liquidity to be extended to 14 days from seven days previously, the regulator said in a statement issued late on Thursday evening. The change will come into effect on Wednesday.

"The launch of these new regulations will provide banks operating in the UAE the prospect to manage their day-to-day liquidity in a more flexible and efficient manner," the central bank's governor, Abdulhamid Saeed, said in the statement.

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"In addition, the extension of the length of the reserve maintenance period from seven to 14 days will provide an incentive for banks to take advantage of the new reserve averaging mechanism,” he added.

The change is part of the new Dirham Monetary Framework first announced in February this year and follows on from an initial step implemented in July where a new Overnight Deposit Facility (ODF) was rolled out allowing banks operating in the UAE to deposit surplus liquidity at the central bank on an overnight basis.

The ODF serves as "the prime facility for managing surplus liquidity" in the country and the central bank will effectively use the overnight lending rate as its base rate, signalling its general monetary policy stance, the regulator said following its introduction in July.

Reserve requirements also provide "a fundamental monetary policy tool used by the CBUAE for management of the banking sector liquidity,” Mr Saeed said in the statement on Thursday.

The central bank said financial institutions will be allowed to draw on up to 100 per cent of their reserve balances with the CBUAE on any given day for daily settlement purposes or to deal with any swings on overnight money market rates.

The banks will have to ensure they meet the daily average requirements over a 14-day reserve maintenance period.

The level of reserve requirements for demand and time deposits are being maintained at their current rates of 7 per cent and 1 per cent, respectively, the regulator said.

If a bank fails to meet average reserve requirements over the 14-day period, they will be hit with a financial penalty equating to about 400 basis points above the base lending rate, the central bank said.