Analysts and economists are scratching their heads in an effort to understand how the Central Bank can implement its new rules on bank exposures to government lending, with most regarding a "mop-up fund" to absorb excess debts as unworkable.
Six months ago, the Central Bank said banks must not let their exposures to governments and their commercial entities exceed their strongest capital.
The deadline to comply was passed on Sunday, but several big banks including Emirates NBD and National Bank of Abu Dhabi are currently in breach of the rules and have still received no guidance from the Central Bank on how to respond.
On Wednesday, The National reported that two Dubai-based banks were privately trying to build support for a fund administered by a state entity such as the Central Bank to take excess loan exposures off their books.
But credit analysts say that while this may be an easy get-out for the banks, it has little chance of seeing the light of day.
"This plan makes little sense and won't go anywhere," said one credit analyst at a major international investment bank, who asked not to be identified.
A federal government fund to absorb the debts of big lenders would just transfer the loans from state-owned lenders to the state itself."We are not talking about bad loans here - it's simply too much exposure - so shifting the exposure from banks to government is like shifting cash from one pocket to another."
There was "no credibility" to the idea of a federal mop-up fund, said Jaap Meijer, a financial analyst at Arqaam Capital.
Part of the problem is that many European banks who would be obvious buyers for government exposures do not have the capital to do so. In fact, many have been sellers recently.
Since the Government would be required to capitalise such a fund, it would in effect resemble a bailout to adhere to a policy that the Central Bank had itself implemented.However, there is another option to finance such a vehicle, said Raj Madha, an independent equity analyst.
Banks could capitalise the fund themselves through equity - in effect paying for their own exposure reduction by taking a writedown on the debt value.
"This would be no panacea of course," he said. "The banks would likely have to write down the loans before they swapped them for equity ... and in economic terms, they would still retain the risk of the workout portfolio facing further restructuring."
"The whole point about a [debt] workout fund is that you don't really know when they'll be repaid," he said. "If the Government was to give lots of capital [the fund] to buy the debt at face value, effectively that's injecting lots of capital into the banks for free."
Banks would probably rather book a penalty from the Central Bank than try to sell at fire-sale prices - if they were able to sell them at all, Mr Madha added.
