CBO cautions banks over securities lending

July 24: Banks in the Sultanate have been cautioned about their exposure to the stock market in the form of lending for the purchase of or against listed securities.

“As the stock markets remain volatile, banks need to take care while taking market exposures and remain conscious of falling knives and bubbles”, the Central Bank of Oman said as part of its 2016 stress testing exercise for banks.

Despite a lack of large direct exposure, the depressed stock prices may indicate looming stress and challenging operating conditions for the business sector which may affect the quality of the banks’ corporate lending portfolio, the bank noted.

Modest equity positions of banks ensured insulation from any adverse movement in stock market. Indirect exposures, however, require monitoring.

According to the apex bank, the financial index beta, which shows the volatility, remained in the ‘above-one’ zone since the onset of global financial crisis.

“This shows that the investment in financial sector stocks is considered riskier than that of the average market and investors expect higher returns on investment in this sector”, pointed out the bank.

Despite turbulent times, the banks remained largely insulated from severe shocks because of their modest exposures, of less than RO 140 million in the stock market which constitutes about 0.5 per cent of their total risk weighted assets or about three per cent of their regulatory capital.

“This small exposure means that even big swings in the equity prices may not affect banks’ profitability or solvency”, said the report.

The MSM 30 index remained overall