At least half of banks in Iran should either be closed or merged over the next six years, according to one of the country’s top bankers.
Speaking at the opening session of the Europe-Iran Forum (EIF) in Zurich on October 3, Parviz Aghili said Iran’s banking industry is clogged with toxic loans and needs modernization. Aghili, a former HSBC banker, said he favors a multi-step program to eventually bring Iran’s banking industry into line with the new Basel III global standards.
Currently, Iran's banks are not required to conform with Basel's international standards, but its central bank may eventually require it.
Aghili, the chief executive of Middle East Bank, estimated that a full re-organization of the Iranian banking sector’s roughly $700 billion balance sheet would cost $180 billion to $200 billion.
“And we cannot afford it,” he said.
Therefore, Aghili suggested, “Management would get three years to improve their balance sheets. After that, banks whose trading book assets remain less than 6 percent of total risk-weighted assets would be “completely shut down,” he said.
By contrast, banks whose ratios range from 6 percent to 10 percent could merge and seek new capital to survive, with dividends forbidden until they have stocked their balance sheets with adequate capital.
“Over the course of six years, we would get -- at least out of the 35 banks we have -- about 13 to somewhere around half of them surviving,” Aghili told more than 200 people at EIF, an annual event to promote closer economic ties.
“The government has to be gutsy, whether we like it or not, and shut down some of those banks,” he said. “They are really not in acceptable shape.”
For the past three years, EIF has enabled noted European and Iranian business leaders to forge new relationships, share strategic insights, and lay the foundations for future trade and investment in Iran. Following previous events in London, Geneva, and Zurich, EIF has branded itself as a key to "business diplomacy" between Iran and the international community, according to its website.
The Zurich conference comes just before the mid-October deadline for U.S. President Donald Trump to recertify whether Iran is compliant with its 2015 agreement with world powers.
Under the deal, Tehran agreed to curb its nuclear program in exchange for lifting most of the economic sanctions that had crippled its economy. Trump has called the deal “an embarrassment” and suggested he could scuttle it, but Iran expects Washington to stick to the agreement.
During the sanctions era, Iran’s banks struggled with bad debt exacerbated by the hamstrung economy and exposure to a property market downturn.
Meanwhile, Iranian banks recently have faced new restrictions in the region.
Strengthening banks that continue to struggle to raise international capital will be crucial as energy-rich Iran seeks to step up major cross-border exchange and deal-making.
An industry restructuring that avoids chaotic bank collapses is critical to ensuring international partners do not lose faith, said Jorn Fredsgaard Sorensen of Denmark’s EKF export credit agency, which helps Danish companies do business with Iran.
“Seen from abroad, we would become very insecure if that was to happen,” Sorenson told forum participants. “There’s cleanup to be made but in an orderly way.”