Financial Stability of GCC Banks in the COVID-19 Crisis: A Simulation Approach

Stability and sustainability of the biggest banks in any country are extremely important. When big banks become unstable and vulnerable,‎they typically stop lending. The resulting credit squeeze pushes the economy into recession or a slow growth path. The present study‎examines the financial stability and sustainability of the 30 large banks operating in the six Gulf Cooperation Council countries. These‎banks represent 70% of the GCC banking market. Monte Carlo simulation was attempted assuming that key drivers can vary randomly‎by twenty percent on either side of the current values. The conclusions are drawn based on 300 simulation trails of the five-year forecast‎balance and income statement of each bank. Year 2020 is not favorable for the GCC countries because of the COVID-19 pandemic and low‎oil prices, though the future years may be better. The study identifies several banks, which may become financially unsustainable because‎the simulations indicate the possibility of negative profitability, unacceptably low capital ratios and potential for heavy credit losses during‎periods of economic turbulence, which is the current situation due to the COVID-19 pandemic. Through simulation the paper is able to‎throw light on which factors lead to bank instability and weakness.