UAE pumps $19 bln more emergency funds into banks

Source Reuters

DUBAI (Reuters) - The United Arab Emirates more than doubled its emergency bank funding plan to 120 billion dirhams ($32.67 billion) on Tuesday as Gulf Arab states stepped up moves to combat the global financial crisis.

But the Gulf Arab state left bankers guessing about how it would employ the 70 billion dirhams ($19 billion) of new cash -- the biggest Gulf cash intervention to date -- after the UAE central bank opened a 50 billion dirham emergency lending facility last month.

The UAE prime minister ordered the transfer of funds to the finance ministry to pump into the banking sector to protect against global volatility, state news agency WAM said, without giving details of the mechanism.

The latest moves comes after an unprecedented week of emergency policy initiatives in the Gulf and around the world to revive a financial sector paralysed by fear and threatening to push the global economy into a deep recession.

The UAE government promised earlier this week to protect all national banks from credit risks, to provide sufficient liquidity for interbank lending and to guarantee bank deposits.

In a bid to bolster shares after weeks of declines, it also relaxed share buyback rules on the country's bourses.

Interbank lending rates in the UAE fell for the second day running on Tuesday after the extra funds were announced. Interbank rates in Saudi Arabia, which has also sought to reassure investors that there is sufficient liquidity in the system, edged up after falling on Monday.

"The series of measures the authorities have taken including pumping liquidity, facilitating company share buyback procedures, guaranteeing deposits...has the ability to reinforce confidence in the financial markets," Abdullah al-Turaifi, head of the Securities and Commodities Authority said.

MECHANISM UNCLEAR

Bankers said they expected the new government funds to be deposited with banks to alleviate the tensions that had pushed up interbank lending rates.

"It will probably be in the form of deposits. There are examples of this around the world," said the treasurer at a major UAE bank under the condition of anonymity.

"There is more tension in Dubai than in Abu Dhabi but everybody is affected," he said. "The good news is that they are providing financial assistance, it is earmarked and available for the sector."

The UAE central bank declined to comment and a spokesman for the finance ministry was not immediately available.

If the government places new funds as deposits with banks, it will ease funding tensions and help relax borrowing conditions that threaten to choke off a five-year economic boom in the Gulf Arab region, said a second UAE bank treasurer, who declined to be named.

But if the funds are merely meant to augment the existing 50-billion-dirham borrowing window, it is unlikely to have any impact, he said.

"If there is actual cash coming into the market, we'll see the interbank market settling down," he said.

"If it doesn't come in ... in that case, actual lending and borrowing in the interbank market will not improve."

The ruler of Dubai and UAE Prime Minister Sheikh Mohammed bin Rashid al-Maktoum ordered the central bank and the finance ministry to devise a system by which to pump the new liquidity into the financial sector, WAM said. It gave no more details.