The Central Bank is under pressure to break the regulatory impasse in its negotiations with the financial industry after eight months with little to show for its latest efforts.
Rules tightening mortgage critera and banks' exposure to government entities were postponed during the past year after resistance from the sector, while rules intended to help to sustain bank liquidity and transition payment cards to chip and PIN security systems were also delayed.
The banks might argue that they are in a comfortable position, having been encouraged to build up large capital buffers since the global financial crisis, but the IMF said in a report on the UAE economy last month that regulation to protect against future asset bubbles was vital.
"The implementation of planned prudential regulations will help mitigate the risk of a build-up of banking sector vulnerabilities," the IMF said.
"Swift implementation of the planned new prudential regulations for mortgage lending and loan concentration would mitigate the risk of rapid credit expansion and undue loan concentration to the real estate and GRE [government-related entities] sectors in the future."
The Central Bank and the Ministry of Finance spent more than Dh136 billion of public funding cleaning up banks' balance sheets caused by the financial crisis of 2008 and 2009.
The problems with bad debts, which banks have struggled with, have now eased allowing them to put aside increasingly less as provision for missed payments and lend more, according to research from the investment bank EFG Hermes.
"Overall, the provisioning overhang, which has lasted for more than four years, is beginning to lift gradually," analysts wrote in a research note. That has given the Central Bank breathing room to redraw regulations.
But new lending during the first five months of this year has grown by more than during all of last year, according to the latest data from the Central Bank.
A new Financial Services Law currently under review, the Central Bank's biggest operational shake-up since its creation in 1980, is expected to split the regulatory functions in two utilising a so-called "Twin Peaks" system.
While the Central Bank will continue its traditional role ensuring the stability of the financial system, the Securities and Commodities Authority will take charge of operational matters.
Having a separate macro-prudential regulator would free up resources to speed the completion of the Central Bank's financial stability laws.
The Central Bank has negotiated with banks for more than a year over its exposure limits, intended to cap lending to government agencies and their commercial holding companies, such as Investment Corporation of Dubai or Abu Dhabi's Mubadala Development Company.
National Bank of Abu Dhabi, Emirates NBD and Noor Islamic Bank have all stated that they are in breach of the limit. In some cases, their exposure is almost double their total levels of capital.
The UAE Banks Federation, the industry lobby group, last month submitted a final proposal excluding bonds and sukuk and requesting five years to comply, whereby the original legislation gave six months.
The lobby group is also pushing for the establishment of a "means and purpose" test.
"This is the single most important part of the regulations," said Tirad Mahmoud, the chief executive of Abu Dhabi Islamic Bank, which is not currently in breach of the proposed rule.
"We want to see if this recommendation has been perceived as a good solution," he said. With an ability to distinguish between entities that are financially dependent on the government and those that are standalone companies, the levels of excess exposures will shrink and "the grace periods that some of the banks have asked for are not needed in their entirety", Mr Mahmoud said.
The Central Bank postponed implementation of the rules in December, but said it had approved amended exposure ratios at a board meeting this month. It has not disclosed the new limits, but made no mention of the UAE Banks Federation's alternative proposals.
At the same time as it tackles the sector's exposure to government debt, the Central Bank's cap on leverage for mortgage buyers has been resisted by the financial services sector.
The original plan proposed eight months ago would have imposed a mandatory 50 per cent downpayment on expatriates buying property for the first time, rising to 60 per cent for subsequent purchases.
The banks' federation said in March it had submitted alternative proposals to the Central Bank, which it expects will finalise the law in the second half of this year.
In the meantime, average prices of villas sold in Dubai have risen by 50 per cent in the 12 months to last month, according to data from Knight Frank.
But property agents have argued that the Central Bank is not targeting the major cause behind the rise in property prices this year, citing statistics indicating that cash buyers have accounted for some 80 per cent of property purchases so far in 2013.