CBUAE unveils new regulations to improve banking operational flexibility

UAE’s apex bank, the Central Bank of the UAE (CBUAE) is all set to introduce new regulations regarding reserve requirements for deposit-taking licensed financial institutions.

Effective from 28 October 2020, financial institutions will be allowed to maintain more flexible reserve requirements whereby the length of the reserve maintenance period will be extended from 7 to 14 days to facilitate short-term liquidity management.

The introduction of these regulations represents the second step towards the implementation of the new Dirham Monetary Framework announced earlier this year.

As part of the new regulations, deposit-taking licensed financial institutions will not be allowed to draw up to 100 percent of their reserve balances held with the Central Bank of the UAE for daily settlement purposes or to deal with any swings on the overnight money market rates.

These institutions would have to ensure that they meet the daily average requirements over a 14-day reserve maintenance period as they will be held liable to pay a periodic financial penalty rate shall be levied equal to 400 basis points above the CBUAE’s Base Rate in case they are unable to maintain the average reserve requirements over the 14-day period.

“Reserve requirements represent a fundamental monetary policy tool used by the CBUAE for management of the banking sector liquidity. The launch of these new regulations will provide banks operating in the UAE the prospect to manage their day-to-day liquidity in a more flexible and efficient manner. In addition, the extension of the length of the reserve maintenance period from 7 to 14 days will provide an incentive for banks to take advantage of the new reserve averaging mechanism.”

In accordance with the Notice No.1759/2020 dated 6 April 2020, the level of reserve requirements for demand and time deposits shall remain at its existing ratios of 7 percent and 1 percent.