Conflict fears raise $307 billion Gulf deposit risk

Mounting geopolitical tensions across West Asia could place as much as $307 billion in bank deposits across Gulf financial systems at risk of shifting between institutions if hostilities persist, according to a new assessment that underscores growing fragility beneath otherwise stable balance sheets.

S&P Global Ratings said it has not detected material outflows of foreign or domestic funding so far, pointing to continued depositor confidence across core Gulf banking markets. However, the agency warned that a prolonged period of conflict could trigger a “flight to quality”, with funds moving rapidly from smaller or perceived weaker banks to larger, government-linked institutions within the same jurisdictions.

The warning highlights a structural feature of Gulf banking systems, where deposits—often concentrated among corporates, sovereign-linked entities and wealthy individuals—can be highly sensitive to shifts in sentiment. Analysts said the region’s banks remain well-capitalised and supported by strong sovereign backing, but acknowledged that confidence-driven movements could still create liquidity pressures for specific lenders.

Saudi Arabia and the United Arab Emirates account for the bulk of the exposure identified in the report, reflecting the scale of their banking sectors and their role as regional financial hubs. Both markets have seen robust deposit growth in recent years, supported by elevated hydrocarbon revenues, government spending programmes and a steady influx of foreign capital. At the same time, concentration risks remain pronounced, with a significant share of deposits linked to government entities or large corporates.

S&P’s analysis suggests that in a stress scenario, depositors are unlikely to exit the region altogether. Instead, funds would tend to migrate internally towards banks perceived as safer, particularly those with explicit or implicit state backing. This dynamic, often observed in emerging and frontier markets during periods of uncertainty, can amplify disparities between institutions without necessarily destabilising the broader system.

Banking executives across the Gulf have maintained that liquidity buffers remain strong, citing high levels of customer deposits, access to central bank facilities and, in some cases, sizeable holdings of liquid assets. Regulatory frameworks in key jurisdictions have also been strengthened over the past decade, with tighter capital requirements and enhanced supervision contributing to resilience.

Yet the report points to vulnerabilities that could surface if geopolitical risks escalate further. Cross-border capital flows, trade financing and investment activity could all be affected, potentially weakening deposit growth and increasing funding costs. Smaller banks, or those with less diversified funding bases, are considered more exposed to sudden shifts in depositor behaviour.

The prospect of a “flight to quality” is not new for Gulf markets, but the scale of potential movement outlined in the assessment reflects the region’s expanded banking footprint and deeper integration into global financial systems. Analysts note that Gulf banks have increased their international exposure in recent years, both through overseas lending and through attracting foreign deposits, adding another layer of sensitivity to external shocks.

Central banks across the Gulf Cooperation Council have historically acted swiftly to stabilise markets during periods of stress, deploying liquidity support measures and, where necessary, coordinating with governments to reassure depositors. Past episodes have shown that decisive intervention can contain volatility, though the effectiveness of such measures depends on the duration and intensity of underlying shocks.

Market participants said depositor behaviour would likely hinge on perceptions of sovereign strength and policy response. Countries with higher fiscal buffers and clearer backstops for their banking sectors are expected to retain stronger depositor confidence, while those with more limited fiscal space could face greater scrutiny.

At the same time, the broader macroeconomic backdrop remains supportive. Elevated oil prices have bolstered government revenues across major Gulf economies, enabling continued spending on infrastructure, diversification initiatives and social programmes. These factors have underpinned economic growth and, by extension, banking sector performance.

Even so, analysts caution that prolonged geopolitical instability could erode some of these gains. Weaker investor sentiment, reduced capital inflows and disruptions to trade routes could all feed through to banking activity, affecting both asset quality and funding conditions.