The Central Bank of the United Arab Emirates announced that, effective 28 October, 2020, it will introduce new regulations regarding reserve requirements for licensed financial institutions that accept deposits.
The introduction of these regulations represents the second step towards implementing the new dirham monetary framework announced earlier this year.
With the introduction of these new regulations, the maintenance of reserve requirement balances will be more flexible, as the reserve maintenance period will be extended from 7 to 14 days to facilitate short-term liquidity management.
Moreover, licensed financial institutions that accept deposits will be permitted to withdraw their reserve balances held in the central bank on any day at a rate of up to 100% for purposes of daily settlement or to deal with any fluctuations in money market rates for one night; Ensuring that it meets the requirements of a daily average over a 14-day standby maintenance period.
In the event that non-compliance with the requirement to maintain an average reserve appears within a 14-day period, a periodic monetary penalty rate of 400 basis points above the central bank base rate is imposed.
The reserve requirement level for demand and time deposits shall remain at its current rates of 7 per cent and 1 per cent, respectively, in accordance with Notice No. 1759/2020 of April 6, 2020.
Commenting on the launch of the new regulations, Abdul Hamid Muhammad Saeed Al-Ahmadi, Governor of the United Arab Emirates Bank, said: “Reserve requirements represent a basic monetary policy tool used by the Central Bank to manage liquidity in the banking sector.
These new regulations will provide banks operating in the United Arab Emirates with the ability to manage their daily liquidity in a more flexible and efficient manner.
In addition, the extension of the reserve maintenance period from 7 to 14 days will provide an incentive for banks to take advantage of the new average reserve calculation mechanism. "