Moody’s said that the impact of the bankruptcies of Signature and Silicon Valley banks in the United States is likely to be limited for most of the rated banks in the Gulf Cooperation Council countries. This is mainly due to the structural features of these banks, including their strong commercial franchises and the support they receive from their governments. Also, Gulf banks are not physically exposed to bankrupt US banks, and they are also not subject to large losses from debt securities that they own until maturity. However, the indirect effects of the US banking crisis are still developing.
The agency stated that the banks of the Gulf Cooperation Council countries are closely linked to the sovereign entities. For the most part, the imprint of governments can be found on the balance sheets of these banks, as these entities are among the main borrowers, depositors and shareholders, creating a supportive and interdependent operating environment.
Governments provide lending opportunities to banks in the Gulf Cooperation Council countries, which play a pivotal role in implementing the agenda of diversifying the components of the government economy in the non-oil sectors of the economy, as they represent the bulk of lending activities supported by government spending, especially in Saudi Arabia. All these factors ensure that Gulf banks remain at the core of the region’s economies and will protect them from sudden market shocks.
Gulf banks are funded largely from low-cost, stable customer deposits, which account for about three-quarters of non-equity financial liabilities. Gulf economies are dominated by governments and their related entities and a few large family conglomerates, leading to large deposit concentrations. The average government and public sector deposits amounted to about 30% of the total deposits in Gulf banks in December 2022.
Moreover, Islamic finance is witnessing rapid growth across the GCC banking systems. Deposits in these banks are less expensive than conventional banks and support the profitability of banks, especially in times of high interest rates.
Gulf banks have ample liquidity reserves, and their reliance on risky financing markets is modest. The ratio of their liquid assets to total assets ranges between 22% and 38%, exceeding the liquidity coverage ratio according to Basel III.
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