Evaluation of Developments in the Iran’s Banking System in the 2010s and Its Implications for Banking Reform

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Khoshkhooy Mahdi

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Journal Paper

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Journal: Strategic Studies of the Islamic Revolution Year:2024 | Volume:2 | Issue:3 Page(s): 1-45

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Title

Evaluation of Developments in the Iran’s Banking System in the 2010s and Its Implications for Banking Reform

Author(s)

Khoshkhooy Mahdi | Issue Writer Certificate

Keywords

Banking Crisis

Banking Imbalance

fictitious assets

Capital Adequacy

bank insolvency

Banking Supervision

Abstract

The Iranian banking system faced various imbalances in the 2010s, most notably a deep asset-liability mismatch. Based on the findings of this study, even according to the official financial statements of banks, it can be said that from the middle of this decade, the banking system—centered around private banks—effectively became insolvent, and by the end of the decade, its capital was completely depleted and turned negative. The evaluation in this study shows that the total imbalance of banks (comprising both hidden and visible imbalances plus the capital required to meet the minimum Capital Adequacy ratio) under the assumption of an 8% Capital Adequacy ratio, increased from approximately 600 trillion tomans at the end of 2016 to over 2,220 trillion tomans by the end of 2021. The establishment of private banking under weak monetary-banking governance infrastructure (particularly the lack of appropriate monetary policy and Banking Supervision), the exacerbation of Dutch disease, and the stabilization of the exchange rate in the second half of the 2000s due to a surge in oil revenues can be considered the main factors leading to the formation of the Banking Crisis in the 2000s and its continuation into the 2010s. On the other hand, the flawed monetary policies of the 11th administration in Iran since the 1979 revolution, followed by the increased rescheduling of loans, overvaluation of bank assets, passive tolerance of unhealthy and insolvent banks due to weak Banking Supervision, and the policy of exchange rate stabilization, are assessed as the most significant factors exacerbating the crisis in the 2010s. To properly and decisively address this crisis and resolve the actual imbalances, the establishment of a powerful and independent banking supervisory authority is deemed essential.

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