Did the U.S. Federal Reserve Policy Harm the Stability of GCC Banks?

Abstract

This study analyzes the performance and risk management practices of the top public banks in the countries of the Gulf Cooperation Council (GCC) during a period of significant turmoil following several bank failures in the US. Our analysis identifies leaders and laggards in a peer group of 10 GCC banks. High performing banks maintain a sustainable managerial style of their capital ratio, liquidity and profitability during a period of rising interest rate whereas laggards fail to cope with the interest rate challenges they face. Our examination of the unrealized losses that banks suffered as a result of the sharp rise in interest rates supports the IMF warnings that banks in the Middle East may mask their losses and receive regulatory forbearance to carry them forward. The size of the unrealized losses, which in some cases represent 3% of capital, raises questions about the banks’ risk controls and established limits and the regulatory oversight of the Central Banks in the region.