Economic and financial context
From the Selected Issues document, chapter 2:
The paper aims at analyzing the financial stability implications of lower oil prices and higher short-term interest rates for the UAE. The paper focuses on the effects of lower oil prices and higher short-term interest rates on liquidity and solvency. To capture its different dimensions,4 liquidity is described by three indicators: the inverse of the loan-to-deposit ratio, the interbank loans-to-interbank deposits ratio, and the liquid assets-to-customer deposits and short-term debt ratio. Their determinants are analyzed with a view to assess the impact of lower oil prices, higher short-term interest rates, and other bank-specific characteristics. Solvency is proxied by probabilities of default under adverse macroeconomic scenarios. They are obtained with a forward intensity model, which is flexible enough to incorporate not only defaults but also exits of firms from mergers and acquisitions. Finally, the paper provides policy recommendations to mitigate the adverse effects of lower oil prices and higher short-term interest rates on the banking system.
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