Markets, much like individuals and governments, are not as self-policing as everyone might hope. Institutions should be strengthened to reinforce the best tendencies of human nature, but auditors must also be present to guard against the worst. New regulations for the UAE banking sector appear to bear both these lessons in mind.
The new rules are aimed at strengthening an institution critical to the long-term health of the economy, the Central Bank, and its ability to monitor the performance of the country's financial institutions. As we reported yesterday, the nation's banks will now be required to declare loans earlier and set aside provisions for bad ones sooner under new guidelines, which conform to international standards.
Previously, there was no universal reporting standard for banks other than that they provide an accounting of their outstanding loans at year's end. Now banks have to do so every quarter, and must use a uniform set of metrics and templates.
The more complete portrait of the country's economy provided by frequent and comprehensive reporting will help the Central Bank to develop more informed policies. This, in turn, should give foreign investors more confidence in the local market.
The new regulations arrive two months after Dubai World's settlement with its creditors, which also worked to buttress confidence in the UAE's economy. But there is considerable work that remains. As the Institute of International Finance reported earlier this month about the UAE, "further institutional reforms, notably on disclosure, corporate governance, and debt resolution frameworks remain a priority". They also reported that "the UAE banking system is significantly exposed to the construction and highly speculative real estate sector".
It will take a considerable amount of time to unwind these debts. In the short term, stricter reporting requirements may make banks more cautious about lending at a time when many businesses need funds. But ultimately holding banks to a higher standard will encourage better lending practices and improve the economy's prospects for the longer term.