MANAMA, (Reuters) – The Central Bank of Bahrain (CBB) has suspended caps on banks’ exposures to the region’s troubled real estate markets, banking sources said, highlighting regulators’ trouble with containing the crisis aftermath.
“There was a regulation that was issued on the first of August and then on the 18th of August it was withdrawn and suspended completely until further notice,” a senior banker at a Bahraini retail bank told Reuters.
Banks in the Gulf Arab region invested heavily in regional property markets during a six-year oil boom, but the bursting of the real estate bubble in the region’s tourism and commercial hub Dubai in 2008 raised concerns about their exposure.
The CBB on Aug.1 introduced a 30 percent cap on the share of real estate financing that Bahrain’s banks can hold in their gross financing portfolio and also capped banks’ real estate investments at 40 percent of their capital base.
“The central bank realized at the eleventh hour that they rushed a little bit that decision and they have decided to reconsider it again to introduce regulations on all sectors,” the banker said.
“I’m sure there was some pressure from certain banks that it was going to be too tough for them to meet that ratio,” the banker said.
A spokeswoman for the CBB declined to comment.
Bankers said banks argued that selling down real estate portfolios during the current bottom of the property market would lead to book value losses.
They also said banks would be in a weak bargaining position as potential buyers were aware banks need to sell due to the regulations.
“They have withdrawn it,” said a second banker.
“Real estate financing would also have been one of the reasons, it would be difficult to reduce your exposure unless you cancel home loans,” he said.
Investment houses in Bahrain’s off-shore banking sector were very profitable during the oil and real estate boom in the region between 2002 and 2008 partly due to higher valuations of real estate in their books.
In particular Islamic banks heavily invested in real estate as they lacked other asset classes. Gulf Finance House, Bahrain’s largest listed Islamic investment house, had some 50 percent of its assets of $2.7 billion in real estate investments and real estate financing at the end of the second quarter.