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Assessing Banking Sector Vulnerabilities in the Gulf Cooperation Council in the Wake of COVID-19

Prepared by an IMF staff team led by Abdullah AlHassan, and comprising Imen Benmohamed, Aidyn Bibolov, Giovanni Ugazio, and Tian Zhang

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Copyright ©2022 International Monetary Fund

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Names: AlHassan, Abdullah, author. | Benmohamed, Imen, author. | Bibolov, Aidyn, author. | Ugazio, Giovanni, author. | Zhang, Tian, 1991-, author. | International Monetary Fund. Middle East and Central Asia Department, issuing body. | International Monetary Fund, publisher.

Title: Assessing banking sector vulnerabilities in the Gulf Cooperation Council in the wake of COVID-19 / prepared by an IMF staf team led by Abdullah AlHassan, and comprising Imen Benmohamed, Aidyn Bibolov, Giovanni Ugazio, and Tian Zhang.

Other titles: Departmental paper (International Monetary Fund).

Description: Washington, DC : International Monetary Fund, 2022. | March 2022. | DP/2022/003. | Departmental paper series. | Includes bibliographical references.

Identifiers: ISBN 9798400200496 (paper)

Subjects: LCSH: Banks and banking -- Middle East | COVID-19 (Disease) | Petroleum industry and trade -- Middle East

Classification: LCC HG1496.A44 2022

The Gulf Cooperation Council region faced a significant economic toll from the COVID-19 pandemic and oil price shocks in 2020. Policymakers responded to the pandemic with decisive and broad measures to support households and businesses and mitigate the long-term impact on the economy. Financial vulnerabilities have been generally contained, reflecting ongoing policy support and the rebound in economic activity and oil prices, as well as banks entering the COVID-19 crisis with strong capital, liquidity, and profitability. The banking systems remained well-capitalized, but profitability and asset quality were adversely affected. Ongoing COVID-19 policy support could also obscure deterioration in asset quality. Policymakers need to continue to strike a balance between supporting recovery and mitigating risks to financial stability, including ensuring that banks’ buffers are adequate to withstand prolonged pandemic and withdrawal of COVID-related policy support measures. Addressing data gaps would help policymakers to further assess vulnerabilities and mitigate sectoral risks.

The authors are grateful to Daniel Kanda and Zeine Zeidane for the overall guidance. Special thanks also go to Nordine Abidi, Zulma Barrail, Timothy Callen, Ender Emre, Burcu Hacibedel, Tristan Hennig, Yevgeniya Korniyenko, Moheb Malak, Justin Matz, and Fabian Valencia for very helpful comments and suggestions. We thank Esther George for production assistance.

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  • 1. Introduction

  • 2. Balance Sheet Interlinkages and Vulnerabilities Buildup

    • A. Sectoral Interconnectedness

    • B. Sovereign-Bank-Real Economy Nexus

  • 3. Risk and Vulnerability Assessment of Banks

    • A. Credit Cycle Analysis

    • B. Impact of COVID-19 on the Banking Sector

    • C. Bank Assets Quality and Macroeconomic Environment

  • 4. Policy Priorities

  • Annex 1. Source Data for Balance Sheet Analysis and Credit Cycle Analysis

  • Annex 2. Balance Sheet Exposures, end-2020

  • Annex 3. Determinants of Banks’ Holding of Government Securities: Econometric Analysis

  • Annex 4. Monetary and Financial Measures to Mitigate Pandemic Efect

  • References


  • Figure 1. Commercial Bank Assets

  • Figure 2. Gross Cross-sectoral Balance Sheet Exposures in GCC Countries

  • Figure 3. Balance Sheet Linkages

  • Figure 4. Exposure in Foreign Exchange

  • Figure 5. A Stylized Illustration of the Sovereign-Bank-Real Economy Nexus

  • Figure 6. Sovereign Exposure Channel

  • Figure 7. GCC Government Debt

  • Figure 8. Banks’ Holding of Government Securities

  • Figure 9. Ratio of Banks’ Holding of Government Securities to Credit to the Private Sector

  • Figure 10. Banks’ Holding of Government Securities around Periods of Sharp Decline in Oil Prices

  • Figure 11. Corporate Sector Performance

  • Figure 12. Foreign Funding Exposure of GCC Banks

  • Figure 13. Financial Cycle in GCC Countries

  • Figure 14. Credit and Non-Oil Growth

  • Figure 15. Selected Financial Soundness Indicators

  • Figure 16. Net Income and Provisions

  • Figure 17. GCC Policy Rates and Federal Fund Rate

  • Figure 18. Monetary and Financial COVID-19 Policy Measures

  • Figure 19. Sectoral Distribution of Bank Credit to Private Sector


  • Table 1. Balance Sheet Exposures, 2020

  • Table 2. Provisions as a Percent of Nonperforming Loans

  • Table 3. Monetary and Financial Policy Measures in Response to the COVID-19

  • Table 4. Determinants of Bank NPL Ratios

  • Table 5. Monetary and Financial Policy Road Map

Assessing Banking Sector Vulnerabilities in the Gulf Cooperation Council in the Wake of COVID-19
Author: Abdullah Al-Hassan, Imen Benmohamed, Aidyn Bibolov, Giovanni Ugazio, and Ms. Tian Zhang