Structural Reforms in Banks to Help Ensure Fiscal Stability

EghtesadOnline: The second and final day of the Conference on Monetary and Foreign Exchange Policies came to a close in Tehran on Wednesday after focusing on structural reforms, mostly in the banking system, with the aim of achieving fiscal stability.

News ID: ۷۸۳۰۲۴

23 June 2018

Mohammad Nahavandian, deputy for economic affairs to President Hassan Rouhani, delivered the first keynote speech. He stressed that even as the country is dealing with a variety of issues that require quick responses, it must not lose sight of the big picture.

“Our main challenge is structural reforms and achieving fiscal stability,” he said, especially since stringent sanctions are to be reimposed against Iran as US President Donald Trump on May 8 violated the Joint Comprehensive Plan of Action, the formal name of Iran’s nuclear deal with world powers, to destabilize the country.

The official referred to the banking system as a major challenge and said uncertified credit institutions had derailed the country’s path toward stability. He also denounced “resistance toward structural reforms” but said now that the threat of illegal institutions has been dealt with, policymakers must keep an eye on long-term agendas that lead to fiscal stability, Financial Tribune reported.

Nahavandian was followed by a host of officials and pundits who focused on ways of improving the banking system and detailed some of its biggest structural challenges.

Yousef Padeganeh, a senior risk management executive at UAE’s Commercial Bank International, exclusively discussed IFRS 9, an International Financial Reporting Standard addressing financial instruments.

He delved into some of the details of the standard that came into force in early 2018, such as its new categories, gauges and its ability to better mitigate risk and protect banks’ ledgers.

“The cost of implementing this standard in major banks is around $10 million. In Iran, because the banking systems’ products are still operating early and simple, versions implementing it would be easier,” he said.

Banking Reforms

Amirhossein Amir-Azad, a banking expert who was at the helm of the Central Bank of Iran’s Regulations and Anti-Money Laundering Department until recently, said the way the regulatory entity is run needs to change.

“In spite of all the reforms in the banking system, the structure and governance of our central bank have barely changed in the past 80 years because the performance of the monetary regulator in terms of monetary stability and fiscal health reveals structural weaknesses,” he said.

Amir-Azad traced the root of most banking woes to CBI's structure.

"The regulator is in no way independent, members of its Money and Credit Council—the country’s highest financial decision-making body—are not at all held accountable. It has unnecessary departments such as the one that monitors the stacking of banknotes while they only take up 3% of the country’s liquidity," he said.

Several other banking veterans that joined Amir-Azad as part of a panel discussed the banking reform measures that are currently awaiting parliamentary review after almost two decades of procrastination.

“This delay has not been due to negligence,” Akbar Komijani, vice governor of the central bank, said. “There have been constant concerns that some factions may prevent the reforms."

However, Komijani reassured that if lawmakers don’t make substantial changes to what has been proposed by the government, the reform measures will finally succeed in “not only alleviating the majority of current shortcomings” but will also “bring us much closer to international standards”.

Kamran Nadri, the head of Islamic Banking Department at the Monetary and Banking Research Institute, who has insider knowledge of reform measures undertaken by both the government and the parliament, described what lawmakers expect.

MPs want to broaden the horizons of monetary policy and make them more long-lasting, “make CBI’s monetary policymaking more credible by boosting independence” and “put a stop to the governments’ misuse of money printing” that will also make it more accountable, he added.

Nadri said they also want CBI to publish detailed and orderly statistics and publish forecasts, at least for the foreseeable future, something it does not at present.

The panel was followed by three expert panels. One focused on fiscal stability through the healthy participation of the capital market in financing the country’s needs, in addition to emphasizing the roles played by the insurance industry and ailing pension funds.

Another dealt with the struggle to attain stability in the currency market while the last panel discussed management of bank interest rates.

In parallel with the panels, eight smaller events were held on the sidelines of the conference. They provided an opportunity for eminent academics and pundits to meet with peers and provide analyses and solutions on a range of issues mostly falling within the purview of the banking system.