DUBAI/KUWAIT (Reuters) - Kuwait passed a law to guarantee bank deposits on Wednesday even as Gulf central banks offered reassurances about the health of their banking systems, saying there was no need to provide more assistance to lenders.
The government-sponsored bill came after the central bank stepped in to save the country’s fifth-biggest lender, Gulf Bank (GBKK.KW), this week following steep derivatives losses.
The news sent shockwaves through Gulf bourses, sending stocks into a tailspin and investor confidence to new lows.
Kuwait’s central bank governor said on Wednesday he was confident the lender’s troubles would not spread to other banks.
“I‘m not worried at all about the others,” Sheikh Salem Abdul-Aziz al-Sabah said. “The risk even with Gulf Bank now has been minimised and very shortly it will be restructured.”
The new law covers some 23 billion dinars ($87 billion) held in deposits in Kuwaiti banks and covers all types of deposits, a parliament member said.
Any losses would be covered by the state’s general reserves fund which is managed by its sovereign wealth fund, the Kuwait Investment Authority, according to the bill obtained by Reuters.
Like the rest of the world, the region’s banking sector has been thrust into turmoil amid the global financial crisis, with central banks forced to inject liquidity into the system to ease tight credit conditions.
Saudia Arabian central bank Governor Hamad Saud al-Sayyari said the world’s top oil exporter had no need to merge its banks in response to the global financial crisis, dampening speculation that such a move may be at hand.
“They don’t need any assistance, they are highly liquid and have good capitalisation,” Sayyari told reporters on the sidelines of a meeting of Middle East and Asian central bankers in the Gulf Arab trading hub of Dubai on Wednesday.
When asked by Reuters if there was a need for Saudi banks to merge to cope with the credit crunch, he said: “No, no there is no need.”
Sayyari also said that Saudi foreign investments are “very safe” and have not been affected by the global crisis.
Qatari central bank Governor Sheikh Abdullah bin Saud al-Thani echoed that confidence, saying the world’s top liquefied gas exporter had no need to take policy steps in the face of the global turmoil now, but stood ready if needed.
“The central bank has lots of instruments in the open market and we can utilise them whenever needed,” he told reporters, adding Qatari banks are “solid, highly capitalised and liquid.”
“There is nothing that needs to be done,” he said, declining to specify which instruments Qatar might use.
The Saudi Arabian Monetary Agency (SAMA), or central bank, has poured about $3 billion in U.S. dollar liquidity into bank deposits. To cope with the global crisis, the kingdom this month made a rare benchmark interest rate cut in addition to pouring billions into banks to ease tight liquidity conditions.
The Supreme Economic Council, the top Saudi economic body, has also offered guarantees for bank deposits.
Fears of global recession have sparked a rout on Gulf markets. Saudi Arabia, the world’s largest oil exporter, saw its bourse tumble to its lowest level in at least two years earlier this week. The largest Arab bourse is down 49 percent this year.
Qatar -- whose sovereign wealth fund has promised to buy up to 20 percent of listed banks’ capital to boost confidence in the market -- has been more modest in its approach, opting not to trim interest rates when other Gulf states cut earlier this month.
The U.S. Federal Reserve is expected to cut interest rates on Wednesday, a measure Japan, the European Central Bank and Britain are forecast to follow by the end of next week to bolster economies facing recession.
Gulf Arab economies which, with the exception of Kuwait, all peg their currencies to the greenback, are also expected to track U.S. interest rate cuts to maintain their exchange rates despite the fact that they face high inflation and growth.
“We will manage our monetary policy in accordance with our domestic needs,” Sayyari said when asked about interest rate cuts.
On Monday, United Arab Emirates central bank Governor Sultan Nasser al-Suweidi said a liquidity crunch in the country’s banking sector was stabilising.
Gulf Arab stock markets rallied on Wednesday, tracking rises in global markets on expectations of a U.S. interest rate cut.
Additional reporting by Daliah Merzaban and Luke Pachymuthu in Dubai and Ulf Laessing in Kuwait; Writing by Amran Abocar