Economy, Business And Markets

Banks Capital Buffers to Increase 4%

Banks Capital Buffers to Increase 4% Banks Capital Buffers to Increase 4%

As part of the plan to modernize the banking system, the capital adequacy ratio of banks will be increased to 12% from the current 8%, said the CEO of Bank Tejarat.

"Based on the existing capital adequacy rules, CAR has currently been set at 8%, but as per the regulations of the Third Basel Accord, the ratio will be increased to 12%," Mohammad Ebrahim Moqaddam said in an interview with the Persian-language weekly Tejarat Farda, a sister publication of the Financial Tribune.

Basel III (or the Third Basel Accord) is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. The third installment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08 and is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.

"The lower the ratio, the more restricted the scope of the banks' operations, which will also add to their risks," Moqaddam added. "Therefore to maintain monetary stability and credit status in local and international deals and transactions, it is important that the banks have a big enough buffer proportional to their assets and debts."

The CEO noted that because a number of government-owned banks have been privatized and because the volume of bank assets and debts has risen substantially as a result of the increase in money supply in the past few decades, a suitable level of capital is crucial.

 Moqaddam said a number of reasons, namely the importance of improving the status of banks among their international peers, establish banking channels with the world, the need to attain a better rating for banks, the necessity of adhering to Basel standards and putting in place a liquidity cushion against possible economic shocks, further underscore the need to increase the capital buffer of banks.

On the practice of managing the economy by funding from banks in recent years, Moqaddam said the banks have continued to provide lending to different sectors of the economy through Qarzol-Hasaneh deposits (microcredit) , time deposits (short-term and long-term) and certificates of deposit.

"It is obvious that as a result of the dire economic conditions and lack of commitment by borrowers, the credits were used to also restructure some of the debts," he said.

Iran's banks are saddled with almost $30 billion in troubled credit. The  government under Hassan Rouhani, since taking office in 2013, has been struggling to recover the debts, apparently without success.