Mohammad Reza Farzin, the governor of the Central Bank of Iran, says the regulator plans to dissolve several troubled banks by the middle of the current fiscal year (Sept 21) as part of efforts to restructure the banking sector, prevent the rampant increase in liquidity and ultimately inflation.
One of the main economic problems has been excessive lending and money creation by some banks, Farzin said in a recent TV interview. "We will not allow these banks to continue," he stressed, adding that "those banks that cannot fix their problems will be dissolved."
The senior banker, however, did not name the troubled banks on their way out, but noted that the central bank has prepared a list of such lenders and sent to the government, and that the process of dissolution has already begun for some of them.
"If we want to restore financial and monetary stability through non-inflationary methods, banks have to increase their capital. But banks that do not have enough capital and bloated balance sheets should realize that if they cannot solve their problems they will be shuttered."
Regarding loans, Farzin said the central bank is trying to strengthen and boost lending. "Of course, if we want to control liquidity, we have to control the type of bank facilities and the key is to strengthen CBI oversight."
"The central bank is the guarantor of people's deposits that will be closed. All their money will be returned," he was quoted as saying.
Per law, if a bank is dissolved, the CBI is responsible for the deposits without any excuse.
It remains to be seen how this rule will be implemented and which banks may merge with other institutions after dissolution.
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.
It has been reported that the exponential growth in the monetary base is driven largely by the lenders’ mounting debt to the central bank.
"If we want financial and monetary stability through non-inflationary methods, banks have to increase their capital. Those that do not have enough capital and are stuck with bloated balance sheets should know that if they cannot solve their problems they will be shuttered"
Fiat money is an inflationary phenomenon that has drawn increasing attention towards the Iranian economy in recent years. One reason being that banks lacking a balance in their income and expenses have increased liquidity and by extension caused chronic inflation by borrowing from the central bank and temporarily concealing the imbalances.
In recent years the CBI’s general approach had been to manage and control dysfunctional banks in variety of ways, such as setting a limit on balance sheet growth and thereby preventing their closure. Now there is reason to believe that that policy has been consigned to history.
Last year the CBI announced penalties for managing directors and members of the board of directors of unruly lenders. Those rated unhealthy as per CBI benchmarks face tougher measures like the obligation to increase their legal reserve requirements.
Reserve requirements guarantee deposits and serve as a tool for controlling money circulation, inflation and money supply growth. The CBI determines the reserve requirement ratio.
In late August, the Money and Credit Council, the top monetary and banking decision-making body, allowed the CBI to increase the reserve requirement of lenders up to 15% from the maximum 13% in the past.
The ratio ranges from a minimum 10% to 15% and the regulator can cut the reserve requirement for disciplined lenders to as low as 10%.
Moreover, dysfunctional banks are required to place 15% of their funds in the CBI as legal reserve. This is seen as a tool to better control performance.
Over the years investment in non-banking activities, increase in bank expenses, expanding branches and buying fixed assets are among activities lenders have been warned to abstain from. Expanding balance sheets via capital increase and purchasing government bonds are exceptions.
Financial reports of banks in the fiscal year to March 2022, show the majority are struggling with capital adequacy ratios (CARs) below global financial norms.
Out of a total of 23 banks, CAR of eight was below zero, six had a ratio between 0-4%, and four between 4-8%.
Only five banks had a capital adequacy ratio above 8%, according to data published by the semi-official Fars News Agency.
Also known as capital-to-risk weighted assets ratio (CRAR), CAR is used largely to protect depositors and promote the stability and efficiency of financial systems. It is calculated by dividing a bank's capital by its risk-weighted assets.
Minimum capital adequacy ratios are critical in ensuring that banks have enough cushion to absorb a reasonable amount of losses before they become insolvent and consequently lose deposits.
Currently, the minimum ratio of capital to risk-weighted assets is 8% under Basel II and 10.5% under Basel III. In Iran a minority of banks have CARs compatible with Basel III levels.
