An echo of Libor controversy in UAE’s money markets |
Gulf Times - 18 July, 2012
The decision by Barclays to quit the UAE’s interbank rate-setting panel underlines the global impact of the Libor scandal, by raising questions over whether the UAE lending benchmark needs to be reformed.
Barclays has said it wants to leave the panel of banks which sets the Emirates interbank offered rate (Eibor), industry sources told Reuters this week. That follows the British bank’s admission that it manipulated the London interbank offered rate (Libor), for which it was fined over $ 450mn by US and British regulators.
UAE authorities have not accused anyone of manipulating Eibor, which is used as a basis to price loans and other financial instruments in the Gulf’s top financial centre.
But privately, commercial bankers and officials concede Eibor may suffer from some of the same weaknesses as Libor.
“Eibor is not representing where the market is,” said a senior UAE banker, speaking anonymously because of the sensitivity of the matter. “People are lending at rates which are not the same as what it costs them, and it is not representing the rate of deposits, which pay higher than Eibor.”
A senior treasury manager at an Abu Dhabi-based bank agreed: “Eibor doesn’t work here.”
US and British regulators are expected to push for reforms to the Libor system. But any change to Eibor is likely to be slower, partly because there appears to be little consensus among UAE monetary authorities and banks over how to fix it.
“Unless there are changes in other jurisdictions on how Libor or Euribor will be constructed, there is no need to make any decision in a rush,” said a source at the UAE central bank, who declined to be identified. “We are just waiting and watching.”
The UAE central bank did not respond to requests for public comment.
Eibor closely resembles Libor; it is set by a panel of 12 banks which quote indicative interbank lending rates in UAE dirham for tenors from one week to one year. To calculate Eibor in each tenor, the two highest and two lowest quotes are discarded before an average is taken.
However, Eibor has run into differences of opinion between the authorities and commercial bankers over where the rates should be. The authorities have often appeared to want lower rates to help fuel loan growth and economic expansion; commercial bankers have tended to demand higher rates to make their lending more profitable.
“Those borrowers, especially merchants and businessmen, are complaining about high interest margins on their banking facilities...therefore, I would urge you to reduce interest rate margins on loans,” UAE central bank governor Sultan Nasser al-Suweidi told bank chief executives in May 2011.
Such moral suasion by the authorities has seemed to have an effect in the last couple of years; the spread of one-month Eibor above one-month US dollar Libor has eased from around 1.5 percentage points in mid-2010 to about 70 basis points now. Economic theory says there should be little difference in the two rates because the UAE dirham is pegged to the US dollar, eliminating currency risk in lending.
To support their case for lower rates, authorities can point to the fact that Eibor has not only tended to be considerably higher than Libor but has also exceeded benchmark interbank rates elsewhere in the region.
For example, three-month Eibor, at 1.44875%, is way above Saudi Arabia’s equivalent rate of 0.94625%, even though inflation and corporate lending growth are much higher in Saudi Arabia, and the Saudi riyal is also pegged to the dollar.
Commercial bankers, however, argue that other factors, such as counterparty risk and levels of excess liquidity in the money market, justify higher Eibor - and some suggest that low lending rates may be partially responsible for the sluggish growth of corporate lending in the UAE, by hurting banks’ profitability.
“Eibor is way too low in an economy like the UAE,” said a treasury official at a Dubai-based bank. “Some (smaller) banks pay 3% on a one-year deposit but one-year Eibor is at 1.875%. It is not justifiable for banks to have a lower lending rate.”
Bank lending in the UAE grew just 2.5% from a year earlier in May, according to central bank data.
Discontent with Eibor levels has perhaps inevitably led to talk in the money market of banks “gaming” their Eibor quotes for their own advantage.
One Dubai-based banker admitted that determining Eibor quotes wasn’t an exact science, especially for tenors above one month, which is the most commonly used rate in the UAE.
“We make it up, what we think should be the rate,” the banker said of tenors above a month.
The gap between Eibor quotes which individual banks offer is vast. For the one-month rate, for instance, National Bank of Abu Dhabi, Abu Dhabi’s largest lender, submitted 0.45% on Monday but Abu Dhabi Commercial Bank, the emirate’s third-largest by market value, quoted 1.54%.
Eibor can sometimes be unexpectedly volatile; after staying almost flat for nine months, the one-month rate suddenly slid 7 bps this month. Dollar Libor has barely moved this month.
“A few weeks back, a couple of banks lowered their Eibor submissions a bit and in the last few days others have followed. It’s a clustering effect, so once a couple do it then the rest follow,” said Nick Stadtmiller, head of fixed income research at Emirates NBD.
Scepticism about the accuracy of Eibor has led some banks to abandon its use as a pricing benchmark for some of their products in favour of their own internally set base rates. Emirates NBD, Dubai’s largest bank, has used such a rate for some products since August 2010.
The last time that authorities attempted to reform Eibor was in 2009. In September that year they removed two foreign banks - Lloyds Banking Group and Royal Bank of Scotland from the rate-setting panel, replacing them with four local lenders: First Gulf Bank, Mashreq, RAK Bank and Union National Bank. A month later, Barclays was added to the panel, expanding it to 12 banks.
In theory, some potential reforms which analysts have suggested for Libor could also be introduced for Eibor. For example, the composition of the rate-setting panel could be adjusted again to make it more representative, or Eibor could be based on actual traded rates rather than indicative quotes.
However, because of the complexity of the problem and the difficulty of making any changes that would please all parties, commercial bankers do not expect the UAE central bank to make any formal changes in Eibor policy for the foreseeable future.
“There is no easy solution,” said another Abu Dhabi-based banker.
“It calls for honesty and integrity among those involved in setting the rates not to rig or manipulate them. Sooner or later, wrongdoings will come to light.”