Action over exposed lender is a positive step, not tip of an iceberg

Comment: Against a backdrop of global government intervention in banking, the action by the Dubai Government in taking over Dubai Bank is not that surprising.

The world has grown accustomed to radical intervention by governments in the banking sector.

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Last Updated: May 17, 2011

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Since the financial crisis in 2008, some of the biggest names in global banking, such as Royal Bank of Scotland, Lloyds, Citicorp and many others, have found themselves with the state on their share registers.

Against this backdrop, the action by the Dubai Government in taking over Dubai Bank is not that surprising. It already had strong sovereign connections, being majority owned by a subsidiary of Dubai Holding, itself owned by Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai.

The move could be regarded as a bit of internal accounting by the emirate's authorities. It gets liabilities off the books of Dubai Holding, which will further accelerate an already advanced restructuring by the conglomerate. It also lightens the financial burden for Emaar Properties, which held a 30 per cent stake.

Presumably, Dubai Bank will come under the umbrella of the Investment Corporation of Dubai (ICD). Although ICD is also talking to bankers about reorganising its debts, it is generally seen as the most financially secure part of Dubai Inc, with solid asset backing.

ICD also contains most of the emirate's banking interests, including Emirates NBD and Dubai Islamic bank. Dubai Bank fits in most naturally there, and could even find a permanent home within one of those entities.

But what did cause surprise was the timing. It has been quite a while since Dubai's authorities officially declared recovery was under way. Perhaps radical action such as this takeover would have been better taken earlier.

That said, most banking experts do not believe this is a "tip of the iceberg" situation. Dubai Bank was uniquely vulnerable because of its property exposure through its relationship with Dubai Holding.

Removing it from that equation is a good thing.