Closing the door on liquidity and loan exceptions... on the negotiating table

If it is decided to return once again to the regulatory liquidity ratios applied by banks before they were exceptionally lowered as part of the stimulus package launched by the Central Bank of Kuwait in late March last year, to prevent the spillover effects of the geopolitical shock that erupted in the region on February 28 last year from energy markets to banking systems, what is the time period required, both temporally and accounting-wise, for you to reorganize your positions?

This question, posed by the Central Bank to some banks, may appear to some outsiders as classical, or more precisely, routine, aimed at reassurance as is customary in regulatory oversight, especially given the forward-looking perspective, particularly after nearly five months have passed since the launch of the stimulus package.

However, for monetary policymakers and regulatory authorities, the scope of the question and its answer appears much deeper, especially since its implementation is laden with accounting details and represents a true reflection of financial safety indicators, liquidity, and capital adequacy, particularly for banks that utilized the package. This included lowering liquidity standards such as the liquidity coverage ratio and the net stable funding ratio, reducing the regulatory liquidity ratio, raising the maximum limits for cumulative gaps in the liquidity system, as well as increasing the maximum limits for granting financing and releasing part of the countercyclical capital buffer within the capital base, with the aim of granting banks greater flexibility to meet market requirements and contribute to supporting economic activity.

In light of this, the importance of the regulatory question regarding the actual ability of banks that used the package out of genuine necessity rather than luxury to return to the limits prior to its launch increases. This is because such a move analytically points to two possible scenarios: the first is that the Central Bank is studying a return of banks to the usual liquidity ratios they were committed to applying before the outbreak of the war in the region.

The second scenario relates to growing optimistic expectations about the diminishing regulatory and banking need to keep the door open for exceptions, and that local banks have demonstrated significant capacity to confront the crisis with sufficient preventive buffers to overcome the challenges of the geopolitical burden independently, driven by financial safety, liquidity, and capital adequacy indicators capable of absorbing losses without exceptional margins.

The credibility of these two scenarios is reinforced by the fact that, according to several banks, they did not resort at all to using the prudential regulatory adjustments mandated for liquidity and financing requirements and the capital adequacy ratio. Others used them on a very narrow scale and only once, quickly reverting to previous limits. This confirms that the local banking sector succeeded in managing its operations and financing the economy with high efficiency amid a turbulent external environment, without relying on temporary cushions.

Perhaps what helped Kuwaiti banks, which constitute the majority, in not using the Central Bank’s package—which focuses on expanding the margin for using their funding sources—is their strong buffers reflecting the solidity of their financial positions. This is driven by the superiority of their financial safety indicators, including liquidity and capital adequacy ratios, over global averages and regulatory requirements with comfortable margins, reflecting the robustness of their financial positions and their continuous ability to face various challenges.

Banking-wise, all local banks have been able to enhance their sustainable capacity to meet their obligations and continue providing their banking services with high efficiency and reliability over the past five months.

This resilience is reinforced by what the Central Bank affirmed in previous statements: that the strength of the banking sector is the result of prudent, long-term hedging policies implemented over the past years, and actions taken to ensure the continued sustainability of local banking activity. This has enhanced the flexibility of Kuwaiti banks to support various economic activities and maintain banking stability, without needing to resort to exceptions regarding liquidity and financing limits.

The fact that Kuwaiti banks did not utilize the stimulus packages launched by monetary authorities during crises is not a historical first. This likely underscores the solidity of Kuwaiti banks, the soundness of their financial indicators, their liquidity strength, and their capital efficiency.

This is evident in the package introduced during the coronavirus pandemic, launched on April 20, 2020, with the aim of helping the banking sector navigate the circumstances and continue providing more loans and financing to support vital economic sectors, projects adding value to the economy, and individuals and small, medium, and large enterprises affected by the crisis, without interruption. Throughout the pandemic, there was no evidence that any local bank used the additional regulatory liquidity buffer to continue providing the required financing, despite the partial and full economic lockdowns that occurred.

In this context, it is worth noting that during the “Corona” period, the use of granted facilities was linked to the non-distribution of dividends. However, the March 2026 package did not adhere to this condition, reflecting the inherent capacity of Kuwaiti banks to overcome exceptional challenges in both instances without relying on additional liquidity margins.

It is also noteworthy that the effectiveness period of the “Corona” package lasted approximately six months, before being suspended as normal life resumed at the end of 2020.