Bank Rating System Under Review

EghtesadOnline: The new rating system for Iranian banks based on which each bank will be ranked is currently under review in the Central Bank of Iran, the director of the Association of Private Banks and Credit Institutions said.

News ID: ۷۷۶۴۱۵

22 May 2017

"One of the expectations and demands of the association from CBI is that not only a rating system be devised for the banks, but they should also be divided into different categories based on various factors," Kourosh Parvizian also told IBENA.

Last year, CBI's deputy for supervisory affairs, Farshad Heydari, announced that a rating process for Iranian banks will commence in late October and lenders will be classified into four main groups of "no risk", "low-risk", "average risk" and "high risk". He added that "there is no need for the ratings to be publicized".

Parvizian said it is very important for banks to be divided into categories based on various criteria so people can refer to the banks based on the services they need at the time, Financial Tribune reported.

For instance, he pointed to development banks active in industries or agriculture, saying “clients and beneficiaries of development banks can specifically refer to these banks”.

“People must not become confused and refer to any place that has the moniker of a bank to receive banking services,” he added.

Banks must receive their operation licenses based on their rating and that should define their area of expertise, according to the official who emphasized that “not every institution that carries the name of a bank must be able to offer all banking services”.

Parvizian, who is also the chief executive of Parsian Bank, noted that the listing process of companies on the stock market can be replicated in the banking system.

“Banks and institutions can receive a license from CBI for each activity and should they wish to add another activity, they should obtain another license so that for instance, not all banks will be able to engage in foreign exchange activities,” he said.

On what constitutes a good touchstone based on which the central bank would issue licenses to banks to engage in international ties, the official pointed out to international banking standards, namely capital adequacy ratio or adherence to Basel III standards.

Basel III (or the Third Basel Accord) agreed upon by the members of the Basel Committee on Banking Supervision in 2010-11, 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 2007–8 to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.

The head of the association for private banks also said CBI can offer licenses to banks “only to operate in a certain region or location”. On absorbing deposits, CBI will be able to grant licenses to banks based on capital adequacy ratio and similar factors, especially in light of the fact that it has specific supervisory criteria to control such factors.

Parvizian concluded by saying that banks can be rated and categorized based on loan allocations, foreign exchange activities and financing services because this would improve the performance of the money market and customers can receive better services.