Why Central Bank can’t Control Money Markets

Many of these unauthorized institutions have repeatedly violated the interest rate cap. Yet the regulator has failed to take any disciplinary measures amid fears that millions of depositors may panic over whether they will lose their money. Thus, the CBI has cautiously applied a discouragement policy, aiming to push customers to withdraw their money from such institutions.

This policy has not borne fruit due to the attractiveness of the interest rates offered by these bodies.

In his latest soft confrontation, Farshad Heidari, the CBI’s deputy for supervisory affairs, said Oct. 1 that each financial institution can attract only as much resources as the CBI determines. He argued that banks with higher reserve requirements can absorb more resources in the form of fixed savings accounts and other forms of savings.

“Any bank that does not comply with the interest rate cap approved by the Money and Credit Council will be disciplined through any means available to the regulator, including the reserve requirement tool. So it would be beneficial to the banks to avoid attracting resources by offering higher deposit rates than the approved cap,” he warned. Heidari also expressed hope that the new regulatory measures, which will be communicated to financial institutions later in November, could improve healthy competition in the monetary market.

Yet it remains unclear how feasible the CBI’s latest plan really is. One issue is how the regulator plans to supervise millions of electronic transactions as large sums of money are transferred into savings accounts at credit and finance institutions daily. Leading economic newspaper Donya-e Eqtesad suggested Oct. 2 that the regulator should either sign an agreement with the offending institution giving it a timeline to correct its wrongdoings, or set a deposit rate cap for such bodies. Otherwise, it is unlikely that they would comply with the deposit limit to be announced.

In fact, the CBI itself has confessed that it is facing a dilemma when it comes to disciplining the unlicensed institutions. According to Farhad Khaalati, the director of the office for supervising non-bank institutions at the Central Bank, the credit and finance institutions do not hold reserve requirements with the CBI.

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