GCC countries classified as 'Interventionist' towards their banking sectors, says S&P

This is according to a new report published today which explains how Standard & Poor's Ratings Services factors external support into its credit ratings on private-sector banks in the Gulf.

External support plays a key role in rating banks in the Gulf region and worldwide, according to the report, "Key Role Of External Support In Rating Gulf Banks." Standard & Poor's Rating Services classifies all six GCC countries as being "interventionist" toward their banking sector. Bahrain is a specific case, as this classification does not apply to wholesale banks registered in Bahrain but operating mainly (if not only) outside the kingdom.

"We believe that for the six GCC countries the capacity, willingness, and track record of support is stronger than in most other regions," said credit analyst Emmanuel Volland. "Banking sectors in the Gulf are relatively small, in absolute and relative terms, meaning that the cost of bailing out even the largest banks would be manageable."

Governments' capacity to provide support is undoubtedly very strong, as illustrated by their large net external asset positions and central banks' wide foreign reserves and liquidity. Finally, unlike in the European Union, these countries do not have constraining regulatory barriers that could limit their direct intervention.

The fact that most banks operate only in their domestic markets suggests that the propensity of governments to support these banks would be higher than if they were operating on a wider geographic spectrum. Standard & Poor's believes the current trend toward geographic diversification could somewhat reduce, in the longer term, governments' incentives to support banks headquartered on their territory but more active internationally.

For systems assessed as "interventionist", defined as those systems where the government or the regulator is highly likely to intervene directly and rescue a bank before it fails, Standard & Poor's analytical approach is to uplift ratings on systemically important private-sector banks above the stand-alone ratings. This uplift typically is one notch, although it can be higher in some circumstances, depending on the clarity surrounding the nature and the extent of the expected support to be provided by the government to the bank.

Apart from privately owned banks, Standard & Poor's Ratings Services has assigned ratings to several GCC banks owned by their respective governments. In this case, the likelihood of support in case of distress is expected to be particularly high, also triggering uplifts over stand-alone ratings--so far, up to two notches for the Gulf region.