Financial intermediaries act as “the circulatory system” for the economy as the body, the former vice chairman of Citigroup Inc said here in Tehran, “so an interruption in the function of these intermediaries can endanger the economy as a whole.”
Hamid Biglari, who now works as Citigroup’s head of the emerging markets section headed to the Central Bank of Iran this week to give a lecture on ‘learning from the experience of the international financial crisis’.
In his lecture, Biglari brought up his own observations of the characteristics of a healthy banking system, and depicted a general picture of the banking crisis in the last 40 years, the PR office of the CBI reported.
Characterizing a healthy financial system as the main pre-requisite for a healthy economy, Biglari presented historical evidence of restrictions made by weak and fragile banking systems and their negative effects on the improvement of transition economies.
Whenever there are signs of financial tension in the banking system or there seems to be a need for policy intervention by the central bank, it means that a crisis has been formed in the banking system, said Biglari, who went on to identify nearly 150 major banking crises that have happened across the world during 1970-2010.
He provided statistics indicating that about half of these crises happened between 1988 and 1998, adding that 20% of these occurred during the recent global economic downturn, which started around 2008.
“Banking crises do not happen frequently, though,” said Biglari, adding that some countries have experienced only one crisis during the last 40 years.
He identified four causes for creation of a banking crisis, including: rapid expansion of loans and increased toxic assets; excessive concentration of assets; the risk of increased interest and high exchange rates; and a mismatch of the maturity of assets and liabilities.
As solutions to deal with the banking crisis, he referred to four popular policies, namely: providing the cash flow for the banking system in emergency conditions; restoring the trust of creditors and depositors to banks; reforming the banking structure to restore the banks’ ability in repaying their debts; and clearing the bad debts held by the banking system.
Preventive Measures
To prevent the occurrence of crisis in the banking system, two types of measures can be taken, according to the Citigroup official.
The first measure includes establishing an efficient financial intermediary system, like establishing efficient capital markets and promoting the supervisory mechanism over the banking system to identify and solve possible problems in early stages, Biglari said.
The next measure considers planning for inevitable future banking crisis, like creating legal and institutional foundations for revision of the banking system’s functions and establishing a fund to insure the deposits among other things, according to Biglari.
“Rather than being stuck on regulations, the banking system needs to be more effective,” he commented.
The banking system needs to act fast in the process of decision-making, he also asserted, saying that long-term plans need to be thought out for financial and corporate structures.
Citigroup Inc. is an American multinational banking and financial services corporation headquartered in Manhattan, New York City. Citigroup was formed from one of the world’s largest mergers in history by combining the banking giant Citicorp and financial conglomerate Travelers Group in October 1998.
Citigroup has the world’s largest financial services network, spanning 140 countries with approximately 16,000 offices worldwide and holding over 200 million customer accounts in as many countries.
