Without Reforms, Iranian Banking Crisis Looms

The huge government debt is putting excessive pressure on the banking system, which has additionally suffered from a liquidity squeeze. Yet, thanks to the sluggish economy and high interest rates, the total value of deposits in Iranian banks increased by 23.9% to 12.1 quadrillion rials ($323.7 billion) in the review year, the English-language Financial Tribune reported July 11. The rise in deposits shows that the Iranian public still trusts banks, even as many CFIs have collapsed.

Banks generally become insolvent once they are unable to pay their debts for two main reasons: when their liabilities may be worth less than their assets — which is not the case in Iran — or when banks cannot pay debts, even though their assets may be worth more than their liabilities. The latter, known as cash flow insolvency or a lack of liquidity, may be looming if the CBI continues to delay implementation of reforms and if the government remains unable to settle its hefty debt to banks.

In his June 10 interview, Hatami said Iranian banks are not in a good state, but that the situation is under control. He insisted that banking reforms must be implemented immediately; if not, the industry will face a potential cash flow crisis in the coming years.

Iranian banks need access to cheap financial resources available in multinational banks. To that end, they ought to have transparent and globally standardized balance sheets and statements that can facilitate comparisons of their status. This time-consuming process has already begun, but it could take months for it to become the norm.

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