Kuwait Times

Published Date: October 27, 2008
By Shakir Reshamwala, Staff Writer

KUWAIT: The government yesterday evening reassured depositors that Gulf Bank is strong and stable. The announcement came after the Central Bank stepped in to prop up the state's second largest lender after revealing that the bank had incurred significant "losses" from trading in derivatives and immediately suspended its shares on the bourse. The Central Bank said in a statement that Gulf Bank's losses will not affect the company's financial position and that it "backs the bank and fully guarantees its dep
osits".

Finance Minister Mustafa Al-Shamali told the press yesterday evening that "both the Central Bank and Gulf Bank have assured shareholders and clients that the bank's financial status is strong and these were merely preventive measures that were misinterpreted this morning." He declared Gulf Bank "is still able to do business and it will be supported by the Central Bank". The government is reportedly pumping KD 1.5 billion to shore up the banking sector.

Despite the government guarantee, hundreds of anxious depositors rushed to withdraw money from the bank's branches yesterday. ATMs at many branches stopped operating after running out of cash, while tellers at some branches set limits on withdrawals. The bank's website worked intermittently, and it was not known how much money was pulled online.

Neither the Central Bank nor Gulf Bank indicated the scope or timeframe of the bank's losses. But the National Bank of Kuwait, the country's biggest bank, put the losses at KD 150-KD 200 million, Chief Executive Ibrahim Dabdoub said. Another banking official with access to the information who did not want to be identified also estimated the bank's losses at up to KD 200 million ($749 million). KD 200 million constitutes around 4 percent of Gulf Bank's worth.

Gulf Bank ran into problems after some customers incurred financial losses as a result of dealing through the bank in derivatives - instruments in which investors bet on future prices. The loss occurred as result of the significant decline in the exchange rate of the euro against dollar. The customers in question were then unwilling or unable to fulfill their obligations to cover their losses, said Gulf Bank, adding that it would bear the loss until a deal is reached.

The loss to be incurred by the Bank as a result of the above-mentioned dealings will have no major effects on the soundness of the Bank's financial position, and will not affect its ability to continue business. These losses do not raise concerns at all," CEO Louis Myers commented in a statement. "We are working closely with the authorities with regard to this situation, and continue to support our customers during this time. We appreciate the decisive leadership and support of the Central Bank of Kuwait
on this issue.

Meanwhile, the government formed a task force to handle the impact of the global financial crisis on the state and moved to guarantee bank deposits. "The Cabinet has assigned the governor of the Central Bank to lead a professional and specialized working team with executive powers to follow up and deal with the impact of the global financial crisis on Kuwait's economic and financial situations," a Cabinet statement said, adding the government is committed to "guarantee all deposits in the national banks".
The Central Bank also said the government will urgently submit a draft law to the National Assembly to guarantee deposits in local banks.

The Central Bank ordered a probe into the Gulf Bank deals to determine their sizes and who was responsible for conducting them away from Central Bank supervision. The Central Bank also decided to appoint a "supervisor" to monitor the bank's management of treasury, dealings in forex and stock markets in order to strengthen internal controls.

It is the first time that a Kuwaiti bank is known to have been affected by the global financial crisis. Gulf Bank general manager Fawzi Al-Thanayan told reporters outside the stock exchange that the controversial deal was in favor of a customer and not the bank itself. "The bank's operations will continue," he said, and assured clients that their deposits are "safe and guaranteed". He said the full extent of losses would not be known until today, when the bank closes its currency positions abroad.

Kuwait is the second Gulf state to decide to guarantee bank deposits after the United Arab Emirates took a similar step earlier this month. The decision to stop trading in the shares of Gulf Bank sent a shockwave through the bourse, which closed down almost 3.5 percent and brought its year-to-date losses to over 19 percent. The Central Bank order said trading in Gulf Bank shares would be suspended pending an investigation into the derivatives deals that caused the losses. - With material from news agencies