Europe accounts for 37% of Qatari banks’ cross border funded liabilities, says QCB

Qatar’s banking sector “depends heavily” on Europe on the liability side, as the region accounts for 37% of the cross border funded liabilities, a QCB report has shown. Around half of the liabilities to foreign financial institutions (9.6% of the total liabilities) are from European banks. In this context, QCB noted that any tightness in the foreign interbank market arise from uncertainties including Brexit may negatively impact the domestic liquidity position.Banking sector exposure through cross border transactions are geographically diversified to a certain extent, according to QCB’s 8th Financial Stability Review.During 2016, both assets and liability exposure to outside Qatar have increased; however the asset exposures remained within the regulatory caps. Considering the fact that around 49% of the earning assets are with ‘Other Mena’ region and ‘Europe’ vulnerabilities due to geopolitical and economic uncertainties from these region can impact the value of banking sector assets. Nonetheless, the impact will be limited, since these exposures contribute just above 10% of the total assets of the sector.Britain’s exit from the EU or Brexit will have wide range of implication to global economy including the GCC economies, the report said. The impact on GCC economies can be either direct through exchange rate channel or indirectly through investment channel. A weak pound directly influences the trade and financial sector through valuation effect (positive if higher trade deficit in pound or high net liability for the financial sector). Local investment to UK may improve as UK assets become cheaper. However, existing investment may post losses because of valuation effect. As noted by IMF report, Brexit may cause protracted period of heightened uncertainty leading to financial market volatility. Possibility of liquidity drying up in the international financial market can also cause some disturbance in liquidity front if the domestic banking sector depends heavily on foreign funds. In this background, QCB has examined the impact of Brexit on the Qatar’s banking sector and noted that at the aggregate level, Europe accounted for 6.5% of total assets of the domestic banking sector. “Thus the impact on the domestic banking sector on asset revaluation will be limited,” QCB said. The net exposure of the banking sector to Europe is negative (higher liabilities over assets), which may benefit the banking sector due to appreciation of Qatari riyal against the pound and euro.The vulnerabilities from asset side exposure are low as the investment of the domestic banks is marginal in the European market.Since a major share of funding from foreign financial institutions as at end-2016 are from Europe, in the eventuality of liquidity dry up in from the international interbank market, the funded liquidity of domestic banks may experience some stress, the report said. Stressing the banks’ balance sheet by assuming a dry up 50% of the foreign funds from European market indicate that liquid assets of the domestic banks may reduce by 2.4% of the domestic banks total liability, QCB said.