Economy, Business And Markets

In Banks We Trust

In Banks We TrustIn Banks We Trust

Banks are traditionally considered as a place of confidence and their whole business revolves around it. You expect your bank to take good care of your money and while taking reasonable risk, you want it to provide you with a reasonable rate of return. That is the general idea, until that confidence is breached. Then, well quite naturally, there will be a run on the bank and if it cannot manage that run… Well, we all know how that ends.

Sometimes there are legitimate causes for concern, like the run on British lender Northern Rock which was instigated by its high exposure to toxic assets. Afterwards, television pictures showed very long queues outside the bank as depositors rushed to withdraw their deposits.

Then there are times when things might get out of control, due to false reports. That could have been the case for Iranian lender Eghtesad Novin Bank.

The bank came under gossip fire on Wednesday, after rumors circulated in the media on the bank’s CEO flying out of the country. There was also talk of fraud. The news allegedly came from Intelligence Minister Mahmoud Alavi, saying Hassan Motamedi had unexpectedly left Iran.

Both VEVAK – Ministry of Intelligence of the Islamic Republic of Iran – and the lender’s CEO denied the rumors within 48 hours. VEVAK announced that it will crack down on those who circulated the rumors.

“The target was definitely not Eghtesad Novin, but the entire banking system,” Motamedi said on National TV.

The plausibility and consequence of the debacle becomes explicable when the banking system’s recent history of fraud and corruption is put into the perspective. In 2011, news broke out of $2.6 billion that was embezzled from the banking system, with the cooperation of many major commercial bank CEOs. The scandal was dubbed “the most unprecedented financial corruption case in the history” of Iran by a judicial official. With the memory of that case looming, and ongoing investigations into the banking system and the former administration’s top officials, the impact and influence of such rumors becomes clearer.

The issue further presses the need to combat fraud in the Iranian banking system. Reputation takes a lifetime to build, but only seconds to destroy. That is why banking officials and the justice system should fight corruption at every turn and show no leniency towards offenders. They should also continue upgrading banking infrastructure. Better e-banking systems not only speed up transactions, but also help the central bank monitor the system more efficiently.

The issue also makes a case for providing more transparency regarding investigations into corruption. If information on ongoing investigations, legal cases and the identity of people involved were made public, such false rumors would unravel rapidly.

Of course,banks should address their financial state as the central bank is directing them to do, thus alleviating the banking system’s vulnerability to such attacks. But fighting fraud and providing a scoop of the events to the public goes a long way in securing public confidence. After all, in banks we trust.