* Central bank backtracks on risk-limiting rules
* Follows strong protests by commercial banks
* Complaints about lack of prior consultation
* Compromise expected later this year
* Controversy linked to political complexities
By Martin Dokoupil and David French and Stanley Carvalho
ABU DHABI/DUBAI, Jan 30 Controversy over rules
to limit banking risk in the United Arab Emirates shows how hard
it can be to regulate financial systems when banks and key
companies are closely tied to the state.
Three times over the past year, the UAE central bank has
imposed regulations on the commercial banking sector of the
world's third biggest oil exporter, only to back off from
enforcing them after meeting stiff opposition from banks.
The incidents raise questions over how much leverage the
regulator can exert in its efforts to prevent another
boom-and-bust cycle in Dubai's property market, after a crash in
2008-2010 triggered a corporate debt crisis in the emirate.
In the latest climb-down, the central bank confirmed last
week that it would not enforce limits on residential mortgage
loans that it had set three weeks earlier. Instead, it will
introduce rules for the mortgage market in six to nine months'
time, after consultations with commercial banks.
Last year the central bank also announced rules limiting
banks' exposure to state-linked borrowers, and another set of
regulations requiring them to hold a certain proportion of their
assets in the form of liquid instruments. Both initiatives were
suspended in December pending discussions with banks.
"They made a good effort and were pushed back, as one would
expect they would be," a London-based investor in Gulf debt said
of the central bank's move on the mortgage caps, speaking on
condition of anonymity because of the matter's sensitivity.
"It was an aggressive move on their part...It will probably
never be implemented on the terms they proposed."
In some ways, UAE banks are stronger and have been more
prudent than their counterparts in Europe and the United States.
They survived the Dubai property crash and the global financial
crisis without major failures; UAE banks had core capital worth
17.2 percent of risk-weighted assets in September, well above
banks in many Western countries, central bank data shows.
The banks say they do not question the central bank's good
intentions - the mortgage caps, for example, aimed to curb
banks' exposure to speculators in the property market by
restricting the sizes of loans relative to property values.
"It's the intention of the central bank to ensure the health
of the economy, the health of real estate developers and the
banking system," said Abdulaziz al-Ghurair, chairman of the
Emirates Banks Association, a lobby group, and chief executive
of Mashreq, Dubai's second biggest bank.
But the banks complained that the central bank's regulatory
initiatives threatened to slow their business, force them into
loss-making trades and entangle them in red tape.
"The UAE believes in a free economy and a regulation-less
economy - as little as possible," said Ghurair.
"Some regulation is important but we don't want the central
bank to write a uniform mortgage policy in detail - a 50-page
policy - and tell the banks, 'here is what you need to do'."
The banks may find it easier to drive their points home
because significant chunks of most of them are owned by the
governments of individual emirates in the seven-member UAE
federation, and since royal family members sit on their boards.
For example, the chairman of Dubai's largest bank Emirates
NBD, 56-percent owned by sovereign wealth fund
Investment Corp of Dubai, is Sheikh Ahmed Bin Saeed al-Maktoum,
the uncle of Dubai's ruler and head of the emirate's Supreme
Royals and merchant families form the top echelons of the
UAE's government, meaning that if necessary they can take issues
straight to the top, where UAE President Sheikh Khalifa bin
Zayed al-Nahayan, Abu Dhabi's ruler, has the final say on laws.
"Legally, the central bank is an institution which is
reasonably tuned in, but they are not a major actor
politically," the London-based investor said.
Several UAE-based bankers and analysts said they believed a
difference in focus between Abu Dhabi, which is rich in oil and
fiscally conservative, and Dubai, which lacks oil and depends
more on freewheeling private business for growth, may also have
played a part in the controversy over the mortgage caps.
The central bank announced the mortgage caps just weeks
after Dubai unveiled a raft of ambitious economic projects,
including plans to build the world's largest shopping mall and
100 hotels - projects which recalled the flamboyant approach
that got the emirate into debt trouble in 2008-2010.
Abu Dhabi is the strongest partner in the UAE government and
bailed out Dubai with $10 billion of aid in 2009. The mortgage
cap initiative may have been intended as a shot across Dubai's
bows, warning it that Abu Dhabi does not want to have to conduct
another bailout down the road.
"When it comes to strategic policy decisions, there are
different opinions between the two emirates but, on balance, Abu
Dhabi has a stronger say given its stronger fiscal position,"
said Apostolos Bantis, emerging markets credit analyst at
Commerzbank in London.
"These conflicts of interest will continue as growth
dynamics for each of the emirates are different."
The central bank does not publicly discuss its decisions and
did not respond to calls and questions from Reuters. Central
bank governor Sultan Nasser al-Suweidi is a veteran in his post,
holding it since 1991. Last November, top Abu Dhabi banker
Khalifa Mohammed al-Kindi became the new chairman.
Commercial banks complained they were not consulted ahead of
time about the central bank's regulatory initiatives, and were
not given enough time to comply with them.
They were originally given only five months, for example, to
reduce their exposure to state borrowers below new ceilings; if
they had complied, they could have been forced into loss-making
fire sales of loans that would have cost them money while
starving state companies of fresh financing.
But some bankers believe that in the complex world of UAE
politics and policy-making, the suddenness of the central bank's
moves was well-calculated.
If it had consulted banks before announcing its rules, it
might have been overwhelmed by lobbying; by taking an extreme
position at the outset, it has room to compromise with the banks
while still sending them a message and tightening regulation
Banks may not sharply cut their exposure to state borrowers,
for example, but they will certainly think twice about raising
it further if they know the central bank could revive its effort
to regulate the area sometime in the future.
"My view is that the originally proposed central bank caps
were too aggressive for the current environment," Bantis said of
the mortgage rules. "Although there is a need to set up some
formalised regulation, this should be done in a smoother