Thursday, May 19, 2005

Four banks penalised for over-financing - Gulf News

Abu Dhabi: The UAE Central Bank announced yesterday it was punishing four national banks for violating its rules by over-financing investors to buy shares in recent public offerings. It accused four unnamed banks of making loans that exceeded their capital, reserves and deposits by a whopping Dh228.84 billion, and said they would be punished by loss of the interest they earned on the excessive amounts they lent.

"The board of directors of the Central Bank decided to deprive the violating banks of interest generated on the violation amounts by deducting such amounts from the banks' accounts maintained with the Central Bank," a bank statement said.

"The report revealed that all banks have abided by the said circular except for four national banks whose financings exceeded their capital, reserves and customer deposits by Dh228.840 billion."

Earlier this month, the Central Bank had warned UAE banks against ignoring regulations governing the practice, following reports that many investors had heavily leveraged themselves to participate in the recent initial public offerings (IPOs).

After the warning, the Central Bank launched an investigation and reviewed a report on the violations regarding loans extended to finance share purchases. "The board of directors of the Central Bank places full responsibility on the chief executive officers of violating banks and warns them from repeating the violation in order to maintain good governance at banks and to maintain the good international reputation of the country's banking system gained from the World Bank, IMF and other international organisations."

The board decided to act quickly and punish the violating banks to ensure equal opportunities to all banks in lending, so small investors are not harmed through high financing costs.

UAE bankers say massive lending helped inflate demand for the last big IPO in the Gulf state, a $135 million (Dh497 million) share offering by Aabar Petroleum Investments, which was 808 times oversubscribed, attracting $107 billion (about Dh394 billion) much higher than the UAE GDP.

---UNQUOTE; Emphasis added---

If the Central Bank is serious, its actions are timid. The penalty is not much different than telling a student that because they cheated they will get the grade they would have earned if they had not cheated; in other words, there's no downside to cheating.

And why weren't the penalties stated upfront rather than after the fact?

And who were the banks? Why aren't they named? (The report in the Khaleej Times is equally uninformative.) Doesn't the public have the right to know what banks engage in risky behavior?


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