x Abu Dhabi, UAETuesday 16 January 2018

Banking reform establishes new safeguards

New regulations to regulate investment banks and other financial services companies are welcome.

The financial crisis that gripped markets in 2008 - and still ripples through the world economy - offered stern lessons for governments keen to make sure their countries were protected against financial contagion.

As The National reported yesterday, the UAE is preparing for the biggest shake-up of the banking and financial sectors in the last three decades. A new banking law announced last month by the Central Bank is now being fleshed out with an updated draft expected by the end of the year, with implementation next year at the earliest.

At the heart of this change is a new government agency, in essence a watchdog, which will have oversight of financial services in the country. This role, which involves making sure consumers are protected from fraud and that financial services companies operate smoothly and legally, was previously part of the remit of the Central Bank. Now it will be taken over by a new regulator called the Financial Services Authority. This new FSA will also oversee the equity and debt capital markets.

So why the change? One reason is that the world of banks and finance looks very different from how it did 30 years ago, when the existing banking law was set down. As the financial crisis showed, retail banks used by ordinary customers for their mortgages and savings were too closely entwined with investment banks, which conducted more risky business with other companies. The crisis has pushed regulators to establish silos that create some separation between the two banking sectors.

The new UAE system means that it will be for the Central Bank to act as the prudential regulator, making sure that commercial banks follow the rules and maintain sufficient capital relative to their loan commitments. The new FSA will regulate investment banks and other financial services companies.

This change is welcome. The stability of the financial system can seem like an abstract concept, but it has a real effect on the savings of ordinary people, their ability to access loans and the amount of money businesses can borrow. The "twin peaks" model, establishing two parallel regulators, will follow the best practices of countries that have best weathered the financial crisis. That will help to put the UAE on course for the future.