During the last meeting of the Money and Credit Council on Tuesday, new directives were approved with the aim of raising the capital adequacy ratio of banks, coordinated with international standards.
According to the Central Bank of Iran, this decision has taken by the financial sector’s authority who deal with banking sectors’ capital base development in line with the newest international directives and regulations.
The new rules attempt to promote the strength of banks in order to accelerate the improvement of worldwide relations in accordance with the banking reform standards.
The new guidelines will replace the old ones which had been approved by the Money and Credit Council in 2003 and remained intact.
After international guidelines witnessed major changes in the aftermath of the international economy crisis and considering the restrictions of law, the need for replacing the law was felt more acute.
Banks have 5 years to upgrade themselves as per the latest rulings and regulations, in accordance with the directive.
The Central bank of Iran notified Basel III principals on corporate governance to Iranian private banks and credit institutions in May, as part of the regulator’s directive to incorporate international standards.
Basel III, the 3rd Basel Accord, is an inclusive set of reform measures, developed by the Basel Committee on Banking Supervision, to improve the regulation, supervision and risk management of the banking sector. The third part of the Basel Accords was formed I response to the weaknesses in financial standard revealed by the financial crisis of 2007–8 to develop bank capital requirements by enhancing bank liquidity and diminishing bank leverage.
Last October, the CBI issued a directive to plump up banks’ capital cushions, as Iranian banks were engaging with low CAR and conforming to international standards.
In order to improve the capital adequacy ratio of banks, Iranian government took two important steps:
– The recapitalization of eight public-sector banks
– Settling payment arrears to the banking system
After increasing the government capital to public-sector banks by 242 trillion Rials ($6.4 billion), the capital adequacy ratio of banks increased remarkably. However, most of them still are having issues with the ratio.
According to last year’s report, the average capital adequacy ratio of banks in Iran is approximately 5%. Considering the fact that minimum capital requirement for banks in order to maintain the minimum capital ratios of regulatory capital over risk-weighted assets is 8% under Basel II and 13% under Basel III, Iranian banks’ capital adequacy ratio is much lower than the global standards.