Bank Rating System Still Under Review

The plan to rank Iranian banks on the basis of a new rating system is still under review and will be executed when conditions are agreeable, the director general for supervision over banks and credit institutions at the Central Bank of Iran said.

“There are significant differences between credit rating and supervision rating,” Abbas Kamarei also told Mehr News Agency.

He referred to independent rating institutions such as S&P, Moody’s and Fitch that evaluate the creditability of financial entities in fulfilling their commitments and publish risk ratings for the purpose of investment, partnership or guarantees.

The official pointed to the CAMELS supervision rating system, based on which an entity is evaluated by criteria such as financial and credit position, level of conformity to regulations and guidelines, market risk and liquidity.

The system, also referred to as CELS, was originally developed in the US to clarify a bank’s overall condition, but is now implemented outside the US by various banking supervisory regulators.

According to Kamarei, Iran has employed the CAMELS rating system since 2009 “with the aim of supervision and drafting reformative measures”.

He added that the disclosure of these ratings to the public is not normally done in light of various potential risks and therefore the findings will remain confidential.

Last September, CBI’s deputy for supervisory affairs, Farshad Heydari, had announced that a rating process for Iranian banks will be implemented based on which lenders will be classified into four main groups of :without visible risk”, “low-risk”, “average risk” and “high risk”.

Heydari had also said the rating system will be implemented by October.

On the other hand, Kourosh Parvizian, the director of the Association of Private Banks and Credit Institutions, had presented the demands of the association to the central bank, saying that the banks must be divided into different categories based on a variety of factors so people can refer to the banks based on the services they need at the time.

For instance, he had said, banks must receive their operation licenses based on their rating and that should define their area of expertise so that the public would not be confused and refer to each bank to receive particular services.

Kamarei also referred to bank interest rates, saying, “If we are to use a rating system for the banks, we must also take into account the interest rates and accept that there is a logical connection between a bank’s risk and the yield on its deposits.”

It means that where there is a higher risk, a higher yield must also be considered, he elaborated, adding that when the rating system is implemented, a bank with a higher risk might need to pay higher interest compared to a bank with lower risk in the interbank market.

As Kamarei noted, “We have obtained the necessary information from the banks and credit institutions and whenever top officials with the central bank deem it timely, they will make a decision on it.”

He also said that whether the information is made public or not will depend on the “macro policies” of top CBI officials.

“If they consider it necessary and right, they will announce the result of the ratings to the public,” he added.

Last year, Heydari had said, “There is no need for the ratings to be publicized” as they will establish an exclusive linkage between the banks and CBI.

Kamarei ensures that the supervising entity, i.e. the central bank, will carefully consider the results and findings of ratings for drafting inspection programs and devising regulatory measures for banks and credit institutions.

However, he said, disclosing the same results to the public is also not customary among developed countries and they advise against it because one bank’s troubles and crises may have a ripple effect on other banks.