Economy booms, but IMF calls for caution

20/04/2012 07:53 AST

Stricter regulation and supervision of Saudi Arabian banks’ large loan exposures to big corporate groups are necessary despite decent overall capitalization, the International Monetary Fund has said.

Lenders in the world’s top oil exporter are able to withstand severe temporary shocks, with the aggregate solvency ratio remaining above 8 percent for most scenarios, Reuters quoted an IMF study as saying.

“However, the system could be vulnerable to a prolonged and deep oil price decline, especially if it were accompanied by a slowdown in domestic economic activity,” IMF staff said in the report.

“Although this would leave the banking system insolvent, the cost of recapitalization would be modest in macroeconomic terms,” it said.

A concern cited by the IMF was bank lending to large corporate groups prominent in the Saudi economy.

“This calls for stronger regulation and supervision of large exposures and related party lending,” the Fund said.

It recommends that large exposures of up to 50 percent of banks’ own funds should be no longer allowed capping it at, for example, 25 percent. One such exposure currently stands at 38 percent of capital, the IMF said.

A strong supervision of bank lending to Saudi Arabia’s small and medium size firms (SMEs) would be crucial as expansion of housing finance and SME lending advances, it added.


Agencies

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