Qatar banks cut interconnectedness risk by distributing exposure: QCB

QCBMajor Qatari lenders appear to have “distributed their exposure” to many banks, thereby reducing the interconnectedness risk, shows a Qatar Central Bank review.  The banking sector’s interconnectedness is mostly reflected through their activities in the domestic interbank market, the QCB said and noted an “active market reflect the depth of the development” of the market, while it leads to “vulnerabilities” if one, or more, of the market participants exposure is high compared to others.

During 2017, daily average volumes (QR2.75bn) remained more or less at the same level compared to last year.However, across the months, the volume of transactions varied.  Prior to the blockade, until May 31, 2017, the daily average volume was around QR2.4bn, which increased to QR4.4bn during the period from June to August 2017, the QCB said in its 9th Financial Stability Review. Thereafter it declined to QR1.9bn until December 31, 2017.

Using the data on average borrowing and lending between the banks in the domestic interbank market, the QCB said it tried to “map their interconnectedness” during 2017. “In the event of poor liquidity management by a fewer banks, higher interconnectedness of these banks in the interbank market may pose some vulnerabilities. Thus developments in the interconnectedness, the depth, concentration and volume need to be examined to identify the risk, if any,” the QCB review showed.

The increase in volume and depth in interbank market enables banks to manage their daily liquidity to optimise returns and improve profitability. The transactions handled by the domestic interbank market are comparatively low and there by limits the risk from interconnectedness. However, as observed by the QCB, at times of stress, banks depends heavily on the interbank market. For instance, during the period June to August 2017 the volume in the domestic market increased.  Under normal circumstances, the QCB pointed out, a “high interconnectedness in the network improves access to liquidity; during a stressed situation however; the interconnectedness can amplify shocks and engender sudden disruptions if not monitored and managed well.”

To examine this carefully, the interconnectedness of the overnight market during 2017 was mapped, QCB said. Following well-defined measures of the network structure, the central bank has examined the topology of the domestic interbank structure of Qatari bank. The network map suggested that the interbank market diversified during 2017, the review said.  “Major lenders appear to have distributed their exposure to many banks thereby reducing the interconnectedness risk. Other significant lender banks have distributed their exposure across many nodes implying that the risk is less concentrated.

“The measures of characteristics of the network topology also suggested the same. The distribution of ‘in-degree’ as well as ‘out-degree’ is normal in nature. On an average, banks have their liabilities/exposures stemming from more than seven banks, limiting the contagion risk,” the QCB noted.

Sources and photo-credits: Gulf Times