What Banking System Challenges Cannot Be Disclosed?

Es'hagh Jahangiri, the First Vice President, said at the second Iran Economy Conference: "Banks and the banking network are facing problems that sometimes cannot be disclosed. Pension funds, poverty, and the welfare of the people are also issues that the country's economy is facing." The discussion of the crises in Iran's banking system or the inability to disclose them is not new. Recently, the Research Center of the Parliament expressed concern about the banking system's situation and proposed a plan to increase the capital of state banks and suggested ways to increase the actual capital of banks and reduce their risks. The former Minister of Economic Affairs and Finance had also stated on the sidelines of the farewell and introduction ceremony of the deputies of the Ministry of Economic Affairs and Finance: "The country's banking system is in a historical condition; it has never faced such circumstances before." This official added that the non-performing loans and the banking system's claims from the government are each 100 trillion tomans. He further reported that half of the banking resources are locked. A significant portion of the costs of these crises, both what can be disclosed and what cannot, is covered by oil revenues and also from the Iranian people's resources, which exacerbates poverty and inequality. The importance of the banking system in Iran relates to the fact that in the absence of an advanced capital market, the primary burden of financing Iran's economic units is provided through the banking system. Recently, Valiollah Seif, the Governor of the Central Bank, stated in a meeting with the CEOs of state, private banks, and credit institutions: "90% of the financing burden falls on the banking system." One consequence of this is that if the banking system crisis, which has so far been concealed by using public resources, erupts, the non-banking and real sectors of the Iranian economy—whether production or distribution units—will also be at risk. The Central Bank Governor also identified the lack of balance in "income-expense, assets-liabilities, and liquidity" as three major challenges. However, he did not mention the reasons for these imbalances, which are mainly political or related to policymaking. What banking system challenges cannot be disclosed? Economic researchers consider one of the significant reasons for the global economic and financial crisis that first manifested in the U.S. in 2008 and swept through the Western economy to be the evasion of laws and the failure to adhere to recognized banking laws and standards. For this reason, global institutions like the World Bank and the International Monetary Fund strive to enforce uniform regulations and oversight to prevent circumvention of the banking system's rules. This effort has become much more extensive in the years following the global financial crisis of 2008-2009. The non-compliance of financial institutions and banks with the rules and regulations recognized as banking standards uniformly and the acceptance of Central Bank oversight makes any economy susceptible to high economic risk and chain bankruptcies. In this context, the term "compliance with uniform regulations" has gained more usage in the literature of banking economics, especially after the global financial crisis of 2008-2009. This term refers to the fact that if banks do not comply with regulations regarding transparency, information disclosure, and equality before uniform and specific regulations, market equilibrium will be disrupted, and the risk of economic collapse will threaten. The increase in high economic risk and the possibility of bankruptcy means increased financial costs for banks and leads to reduced economic growth and capital formation. Although the technical and specific economic reasons for the crisis in Iran's banking system are not hidden, the duality of Iran's banking system—composed of formal and informal sectors—and the lack of authority of the Central Bank and the non-compliance of unaccountable institutions linked to power factions and their law evasion are considered the main reasons for the problems in Iran's banking system. This situation has also made Iran's banking system susceptible to money laundering and rent-seeking. Therefore, the root of these financial crises in Iran's banking system ultimately lies in the exploitation of the banking system by power factions within the government, which, as Jahangiri stated, cannot be disclosed. In support of this, the head of the General Inspection Organization recently stated that there are more than 100 trillion tomans in overdue bank debts without necessary guarantees and collateral in the country. This volume of overdue debt, especially without guarantees, is astonishing and indicates the extensive influence of these power factions over the banking system. These power factions are composed of individuals who usually hold multiple managerial, security, judicial, and military positions simultaneously and are supported by security institutions and high-ranking officials, effectively holding the banking system hostage. However, the problem is not only that the inappropriate structure of the government's budget also facilitates the power factions and consequently contributes to the banking crisis. The position of power factions in the government budget has recently become a significant issue concerning the national budget, the banking system crisis, and the government's debt to banks. There is no doubt that the government itself is one of the largest debtors of the banking system and a cause of its crisis. The government is trying to reduce this debt by issuing bonds, but issuing bonds means paying debt with more debt. On the other hand, given its budget deficit, the government must reconsider its priorities. However, due to political weakness, the government is unable to resolve the budget deficit issue, and the related debts will naturally continue. The reasons for the government's budget deficit include rent-seeking expenditures within the framework of religious and political institutions linked to power factions. The consequences of the disarray in Iran's banking system from an international perspective Despite the implementation of the JCPOA, reputable international banks still show no willingness to cooperate extensively with Iran's banking system for various reasons. One significant reason for this is the lack of transparency and widespread corruption in Iran's banking system. The condition for expanding cooperation between international commercial banks and Iran's banking system is the compliance of Iranian banks with global regulations and standards, such as financial account transparency and combating money laundering and rent-seeking. Since global banks are unwilling to open their doors to Iran's financial and credit systems, they risk being exploited and facing hefty fines. Currently, Iranian banks are susceptible to becoming a conduit for the entry of tainted money into the global banking system due to the reasons mentioned. Iran's economic and banking system has conditions that make it susceptible to money laundering. The lack of cooperation from reputable international banks with Iran's banking system has significant visible and hidden costs for the Iranian economy.