Suggested Central Bank for Gulf Cooperation Council (GCC) Assignment

Suggested Central Bank for Gulf Cooperation Council (GCC) - Assignment Example The similar nature of their economic structure implies that they have common sources of strengths and weakness in their financial systems. They are heavily dependent on their natural resources which are in the process of being depleted. Hence the GCC nations have made diversification of their economic activities as a long-term policy objective. Their financial sector has a central role to play in this strategy of economic diversification. The financial sector is like an intermediary contributing to the economic development of the GCC countries through creation of profits and employment. It also helps in efficient allocation of the financial resources. Hence to tap this potential, the GCC countries have decided to develop a central bank known as Central Bank for Gulf Cooperation Council to help in the domestic regulatory and supervisory framework by participating in the financial institutions and through grants and subsidies. The GCC economies are facing a lot of political turmoil and this can have negative consequences in the financial markets and in the foreign direct investment in these countries. In this report we will analyses the role to be played by the proposed Central Bank for Gulf Cooperation Council towards the economy in these countries. Discussion The real GDP of the economies of GCC grew at a yearly average rate of 4.7% between 2000 and 2010. Compare to this the OECD have only attained an annual growth rate of 1.5%. But it is less than the average growth rate of the BRIC countries which is 8% year-on-year. Figure 1: Real GDP Growth Rate Source: World Bank WDI, IMF projection The Central Bank of GCC has to protect their financial structure form global financial crisis. The Central Bank needs to capitalize their banks so that they can meet the minimum capital adequacy ratio and a comfortable leverage ratio as per the international standard. Still there exists a risk of a possible worsening of the asset quality of the banks due to a worsening of balan ce sheets. Such risk gets increased for economies which have high credit growth rates just prior to any crisis (Strom, Rasmussen and Robinson, 2011). The GCC banks have indicated some weakness in regard with the operational aspects of the GCC banks and hence the Central bank needs to frame policy which removes this weakness. It was seen that a few GCC countries have witnessed a rapid growth in the credit during the oil boom period just prior to the financial crisis. This showed that this rise in the available bank liquidity and increase in the lending rates was associated with higher oil prices (Accenture, 2011). This gave rise to the risk and high liquidity volatility in their banks. It has been seen in the international market that the rapid growth in credit in times of high growth rate results in degrading the asset quality as the situation worsens. Here it was seen that with sharp fall in the oil prices have led to slowdown in the growth rate and also have degraded the asset qua lity of the banks and in turn puts a strain in the liquidity position of the banks. Hence the Central bank of GCC needs to evaluate their policy measures so that the effect of oil prices doesn’t have significant impact on their financial sector. The Central Bank of GCC also needs to take into account the bank’