Will a 'Bad Bank' Provide A Solution To Kuwait's Financial Woes? (Registration required)

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On May 14th, the Central Bank of Kuwait, the Kuwait Investment Authority (KIA) and a number of private companies entered into discussions to establish a fund, or a “bad bank”, to purchase toxic assets from the country's investment companies’ balance sheets. This could be the latest new tool in Kuwait’s tool box, and such plans come less than a week after the central bank proposed a third round of stress tests. While details have yet to be released – and there is still reportedly some concern about who and how it might be administered, this could be a step in the process of rescuing Kuwait’s financial sector, though only if it is done transparently.

Following the rescue of Gulf Bank and the default of Global Investment House of one of its bonds last fall, the government has been rolling out new measures in the face of weaker risk appetite in the GCC and globally. On the financial side, it has provided capital to banks, guaranteed deposits etc. It has continued monetary easing and plans to maintain spending though the details of allocation are uncertain. The political stalemate in the Kuwait has not helped these responses and uncertainty about the exposure of corporations and investment companies, as well as the fear of asset ,market losses have kept banks unwilling to lend. The default shed light on the vulnerabilities in other Kuwaiti institutions, underscored by a wave of banking downgrades in the GCC and in Kuwait’s overall banking system, towards the end of 2008 and start of 2009. Moreover, delays in reporting financial results led to trade of many financial and non-financial corporations in spring 2009. Although trading in most resumed after Q4 results were released, reports suggest that the same thing led authorities to stop trading today in 26 companies.

With Kuwait’s financial system was hard hit by the crisis, increasing the calls for the involvement of the KIA and political pressure for more intervention. However, despite the pressure on its financial institutions, Kuwait’s current NPL rate is relatively low (1.7%), lower than many of its neighbors and has been declining. Defaults rose briefly in mid 2008 after many individuals hoped that the government would pay off their debts but are still relatively low. But as noted below investment companies are vulnerable both to investment losses and to difficulty in attracting new funds as some local investors become more risk averse - the stock of GCC investment fund assets under management fell sharply since mid 2008 on investment losses and withdrawals.