The Central Bank of Kuwait (CBK) might be feeling a little hard done by compared to how other GCC states are dealing with the fallout from the global financial markets. It’s renowned, not always approvingly, as the region’s most cautious and conservative regulator. Yet since summer, its governor Sheikh Salem Abdel-Aziz al-Sabah has been forced to reverse its 18-month anti-inflation drive, which began after the country abandoned the US dollar exchange rate peg in May 2007. The problems emerging at Gulf Bank in late October led al-Sabah to confront the Gulf’s first potential run on a bank with an institution-specific government bailout.

Gulf Bank’s revelation in late October that it had lost some 200 million Kuwaiti dinars ($739 million) through foreign exchange derivatives trading on the account of a single customer (although local bankers say other parties were involved) galvanized the CBK to decisive action before contagion spread. The financial sector was already jittery, and bearish investor sentiment had been pushing the Kuwait Stock Market (KSE) to record lows in the preceding weeks.

The regulator issued a statement claiming that the losses would not “affect Gulf Bank’s activities [nor] its ability to continue providing its normal banking services.” Police vans still had to be deployed outside Gulf Bank’s head office in the capital, Kuwait City, as savers rushed to withdraw deposits. CBK had to guarantee all customer deposits held with local banks, and the legislation to do so was passed with unprecedented swiftness by the National Assembly (parliament) on Oct. 29. “The cabinet reassures the safety of the banking system in Kuwait… and will take all the measures needed to strengthen the trust in our banking apparatus and its ability to compete with international banks,” the government explained in a statement to the official Kuwait News Agency (Kuna).

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