Gulf governments have been urged to follow the EU and introduce stress tests of regional banks' capacity to withstand financial shocks. But to ensure the reliability of the results, disclosure and transparency within the public and private sectors would have to improve first, analysts say.
"Stress tests would be welcomed but critical to their success would be having correct systemic inputs to make sure the assumptions going into stress-testing were sensible," said Raj Madha, a senior banking analyst at Rasmala Investment Bank. "We need fuller disclosure for stress testing to be independently verifiable." Stress tests usually involve assessing the ability of lenders to survive damaging knocks to the financial system, such as a rise in unemployment. Because of the region's large expatriate workforce, GCC financial regulators could gauge the impact on banks of a rise in the number of workers returning home.
It could also assess the effect on lenders' balance sheets of any losses connected to the banking industry's big corporate customers. Analysts see stress tests as an important tool in assessing banks' financial stability and in helping to restore confidence in the region's banking system. The region's banks have been impacted by exposure to companies such as Dubai World and the Saad and Al Gosaibi groups. And bad loans from the property market downturn have restricted lending.
Despite these problems, the GCC lags developed markets in checking for weaknesses within the banking sector. Results of stress tests in the EU's financial sector are expected on July 23, after the bloc increased the number of banks involved in the exercise from last year. The checks are aimed at easing anxiety about the financial health of European lenders. Concerns linger about their exposure to the sovereign debt troubles of countries such as Greece, Spain and Portugal.
The US was one of the first countries to adopt stress tests after the financial crisis last year, with results showing 10 of the nation's 19 largest banks needed a total of about US$75 billion (Dh275.47bn) in extra capital to cover losses if the recession worsened. The IMF has already called for GCC regulators to carry out regular stress testing of banks' asset quality to better understand the stability of the financial sector.
"GCC countries should conduct periodic reviews of banks' asset quality, as well as stress testing, to determine whether the level of capital support is sufficient," said a March report by the IMF's Middle East and Central Asia department. While the Kuwaiti government last year asked the country's banks to conduct their own stress tests semi-annually, the IMF has urged the region's regulators to conduct official independent assessments.