UPDATE 1-Kuwait to guarantee deposits after Gulf Bank losses

Sun Oct 26, 2008 3:15am EDT

(Adds details, background)

KUWAIT Oct 26 (Reuters) - Kuwait's government plans to guarantee deposits at local banks after the central bank was forced to step in to support Gulf Bank (GBKK.KW), which was hit by derivatives trading losses.

Kuwaiti banking shares fell after the surprise announcement that came just a week after the central bank had said no such guarantees were necessary as lenders were in solid shape despite the global financial crisis.

The central bank said on the bourse website it had halted trading in the lender and would appoint a supervisor for several of the bank's activities after some clients had refused to cover their losses from derivatives trading, leaving the bank to foot the costs.

The losses had resulted from a fall of the euro against the dollar, the central bank said.

"The loss this bank will suffer as a result... will not have a substantial impact on the financial status of the bank and will not affect its capability to continue its activities," the central bank said in the statement.

It appointed a supervisor to Gulf Bank's treasury and foreign exchange and financial markets trading businesses to ensure adherence to risk management procedures.

Gulf Bank suffered two straight quarters of falling profit profit, reflecting bad debt charges and the impact of poor markets on its investment portfolio. (Reporting by Ulf Laessing; Editing by Lin Noueihed & Jan Dahinten)