Over the years private banks are struggling with disparities in the banking system and have resorted to a variety of means to procure funds, Isaac Saeedian, an economist said.
When banks use inappropriate means to get funds it indirectly increases the monetary base and by extension explosion of liquidity not supported by the national economy, Saeedian said.
“For example, some banks created subsidiary companies and provided large loans to them in the past. Simply put, this has created liquidity that has no foundation in the economy,” ISNA quoted him as saying.
He said by addressing these issues and dissolving or merging the troubled banks, the problem of excessive bank withdrawals and injection of colossal volumes of liquidity into the economy can be resolved.
“By reorganizing the structure or merging such banks, we can control and even reduce inflation in the medium term, as excessive liquidity without defective support in the economy is a key factor contributing to [galloping] inflation.”
With a clear vision and commitment to deal with the troubled banks the value of the tanking national currency can also be strengthened, he noted. Iran’s currency, the rial, has crashed to historic lows in the past several months dealing an economic body blow to the livelihood of millions of fixed-wage earners and the manufacturing sector.
Asked about the challenges that may arise if these banks are dissolved, Saeedian said people with savings in those banks will reason for concern.
“As such, merging the banks into one seems to be a better option.”
He added the merger should not happen in one go. “We also should focus on the wellbeing of savers who have money in these banks.”
Saeedian warned that if speedy and effective measures are not taken to deal with the failing banks, and the monetary policymaker does not have full control over banks with imbalances, “we will continue to see the flood of liquidity in the economy and consequently the continuing decline in the national currency.”
Mohammad Reza Farzin, the Central Bank of Iran governor, said last week the regulator plans to dissolve several troubled banks by September as part of efforts to restructure the long ailing banking industry, prevent the rampant increase in liquidity and ultimately tame the chronic inflation.
One of the main economic problems has been excessive lending and money creation by some banks, Farzin told state TV. "We will not allow such banks to continue," he stressed, adding that "lenders who cannot fix their problems will have to go."
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 it to the government, and that the process of dissolution has already begun for some of them.
"If we want to restore financial and monetary discipline through non-inflationary methods, banks have to increase their capital. Banks that do not have enough capital and are saddled with bloated balance sheets should understand that if they cannot solve their problems they will be shuttered."
Regarding loans, Farzin said the CBI is trying to strengthen and boost lending. "If we want to control liquidity we must control banks’ performance 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 to the savers without any excuse. It remains to be seen how this rule will be implemented and which banks may merge.
Monetary experts say overexpansion of broad money is partly linked to weak bank balance sheets. 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.
