KUWAIT Law and Practice Contributed by: Yousef Al Shereedah, Abdulrahman Al-Roumi and Bashayer Al-Tuwais, International Counsel Bureau – Lawyers and Legal Consultants
Liquidity regulations Before April 2020, the CBK required that banks hold 18% of their Kuwaiti dinar customer depos - its in CBK balances or Kuwaiti government treasury bonds. The liquidity of banks is evaluat - ed using the “maturity ladder approach”, which compares future cash inflows against future cash outflows, reviewing mismatches across various timeframes and comparing them to pre- set limits. The guidelines specify how assets and liabilities should be accounted for when deter - mining liquidity. In 2016, the CBK began phasing in the liquid - ity coverage ratio, starting at 70%, with a yearly increase of 10%, reaching 100% by January 2019 and staying at that level until April 2020. During this period, banks were required to sub - mit liquidity coverage ratio reports daily and monthly, as well as separate reports by major currencies for monitoring purposes. The net sta - ble funding ratio, which became mandatory in January 2018, had to be maintained at 100%. Due to the COVID-19 pandemic, the CBK imple - mented measures in April 2020 to support the economy, reducing the reserve ratio to 15%, the liquidity coverage ratio to 80%, and the net sta - ble funding ratio to 80%. Additionally, the CBK raised the maturity ladder’s negative cumulative gap limit and increased the lending cap from 90% to 100%. These measures stayed in place until the end of 2021. From January 2022, the reserve ratio was adjusted to 16.5%, with the liquidity coverage and net stable funding ratios both at 90%. As of January 2023, these ratios reverted to their original levels of 18% and 100%, respectively. Credit risk regulations • Loan-to-deposit ratio: Between October 2016 and April 2020, Kuwaiti banks were limited
• introduced additional conservation and coun - tercyclical capital buffers; • tightened the eligibility criteria for Tier 2 capi - tal requirements and cancelled Tier 3 capital requirements; • introduced higher ratios (in the form of capital buffers) applicable to Domestic Systemically Important Banks; and • instructed that, except for Domestic Systemi - cally Important Banks, all banks maintain a minimum capital adequacy ratio of 13%, minimum Tier 1 ratio of 11%, and minimum leverage ratio of 3%. Further, the CBK introduced in 2014 the liquid - ity coverage ratio regulations, and in 2015 the net stable funding ratio guidelines, both of which aim to enhance banks’ capacity to endure liquid - ity stress and stabilise their funding structure. Capital adequacy regulations The CBK’s capital adequacy framework demands higher quality capital to enhance banks’ ability to absorb losses. Additional capital requirements have been imposed on Domestic Systemically Important Banks, alongside the introduction of a leverage ratio, which serves as a supplementary safeguard to prevent excessive leverage in the banking system. The CBK’s Basel III guidelines mandate that Tier 1 or Tier 2 capital instruments issued by Kuwaiti banks include provisions for write-offs or conver - sion into common equity when a “trigger event” takes place, such as regulatory intervention or the need for an emergency capital injection. However, while conversion to common equity is possible, the conditions only allow for a write- down following a trigger event.
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