Disciplinary measures taken by the Central Bank of Iran has to some degree improved the balance sheets of banks, head of the CBI Department for Health Assessment said.
“Regular monitoring of the CBI and its disciplinary measures has helped curb the growth of bank balance sheets,” Aliakbar Miremadi was quoted as saying by the CBI website.
Earlier restrictions banned lenders from allowing more than 2% growth in their balance sheets.
“That paved the way for accelerating money supply growth,” Miremadi said.
Banks are under mounting censure for unbridled issuance of money due to weak balance sheets that by extension increases their reliance on the CBI for funds.
He noted that banks failing to control their balance sheets as per CBI rules are penalized. Penalties include increasing their reserve requirement and sending CEOs of dysfunctional banks to the CBI “disciplinary board”.
Reserve requirements guarantee deposits and serve as a tool to control money circulation, inflation and money supply growth. The CBI sets the reserve requirement ratio of banks.
According to Miremadi, unruly banks will have to increase their reserve requirement with the CBI. The central bank normally sets this rate between 10% and 13%, based on a bank’s law abidance.
The regulator reduces the reserve requirement for well-performing banks from 13 to 10%. Cut in bank reserve requirements is one disciplinary tool to control lenders.
Impact on Money Supply
Monetary experts say overexpansion of broad money is partly linked to weak balance sheets of banks. Monetary data published by the CBI show a shift with regard to factors influencing expansion of the monetary base.
Data suggest that growth in the monetary base is driven to a great extent by the lenders’ mounting debt to the central bank.
Total bank debts to the CBI reached 1,859.7 trillion rials ($6 billion) by end of the calendar month to Feb.19.
The monetary base stood near 5,807.5 trillion rials ($18.7 billion), up 33.2% y/y. It climbed by 26.6% in the course of 11 months.
While foreign debts of the CBI was a determining factor in expansion of the monetary base in most previous monetary reports, new data show it is now fueled largely by the incremental rise in the debt of banks to the CBI.
Banks debt to the CBI contributed 15 percentage points to the monetary base growth in 11 months. In short, such debt to the CBI was responsible for 690 trillion rials ($2.2b) growth in the monetary base.
The CBI had earlier announced plans to monitor the balance sheets at regular three-month intervals. Investment in non-bank activities, increase in bank costs, expanding branches and buying fixed assets are among the activities that the regulator has demanded banks restrain from.
The regulator, however, said expansion of balance sheets as a result of capital increase and purchasing government bonds are acceptable.
As per a CBI bylaw, monthly growth of specialized lenders’ assets must not exceed 2.5%. Likewise, commercial banks are not allowed to increase assets in their books beyond 2%.
Miremadi said banks are regularly assessed and those that are “financially fit” are allowed to expand their balance sheets beyond the set levels.
The rating is based on the CAMELS system, which appraise lenders in terms of capital adequacy, borrowing from central banks, non-performing loans and the likes.
CAMELS is a recognized international rating system that bank supervisory authorities use to rate financial institutions according to six factors represented by its acronym.
The CAMELS acronym stands for "Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity."
The rating system is on a scale of one to five, with one being the best rating and five the worst. A lower rating indicates a more financially stable, less at-risk bank.
