Interbank lending needs details of guarantee

Worries over default have kept banks from lending to each other: details of Government's guarantees could change that, economists say.

A Government plan to release more details about the guarantee it put on bank deposits could help ease stubbornly high lending rates between banks, according to industry officials and economists. The government provided a blanket guarantee for all deposits in October, as the global financial crisis worsened and many depositors began to flee UAE banks. However, the government has yet to spell out precisely which accounts are covered and how investors with money being held could apply to seek restitution.

Obaid Humaid al Tayer, the Minister of State for Financial Affairs, told the Federal National Council (FNC) last week that by next month the Government would provide the legal framework for the guarantee. Officials said that conveying such specifics could make potential savers more comfortable and bring more deposits into the banking system, which having more money to lend would push the interest rates they charge each other lower. The rate at which banks borrow from one-another is known as the Emirates interbank lending rate, known as Eibor, A measure of the availability of cash in the system and a benchmark of interest rates, Eibor remains at a relatively high level, 4.4 per cent last week, or about 120 per cent higher than in June.

"Specific plans to guarantee deposits that go beyond a news headline about it would help ease the pressure," said Sanjay Uppal, the chief financial officer at Emirates NBD, the country's largest bank. The disclosure of the deposit guarantee programmes in other markets, such as Singapore and Hong Kong, has helped ease the crisis, Mr Uppal said. A Government economist, who asked not to be named, said the lack of specifics has among other things hindered banks lending to one another. They worry about how they would be repayed if a borrowing bank were to go bankrupt. The economist said that time is crucial when institutions are facing cash problems.

"Specifics would tell the market what documents are needed and how long it takes to get your money back," he said. "What if a bank failure means you won't get your money for six months? That would mean that banks is out of money for the time and now when cash is king that is very important to any institutions." [e-mail]