International Economic Regulations

On December 16, 2013, European Central bank president, Mario Draghi, raised serious concerns about the health of Irish banks, urging on a decisive action on their banking system. Following Mr. Draghi's warning, major Irish bank shares fell. In response to correspondence from Ireland's largest opposition party, Mr. Draghi diplomatically warns that the banks' restructuring and reforms are yet to complete and large stock of non-performing loans as well as the viability of all nationalized banks need to be addressed. In other words, Mr. Draghi indirectly talks of closure of some of the banks. He further emphasizes that Irish banks have been benefiting from the support of European Central bank that means if the required changes do not take place, the support will stop and Ireland must eventually leave EU. Regarding the Balance Sheet Assessment undertaken by the Central Bank of Ireland, Mr. Draghi points that the adequacy of provisioning and risk-weighted asset levels have not taken future financial planning into account.
Some recent global developments including the content of the said letter, new Basel accord enforcement, new American banking regulations, application of various stress testing models in Europe and America and other statements by Mr. Draghi all signal crucial changes in the global banking system.
The main philosophy behind international banking regulations is to enable banks to automatically respond to any shock or crisis without governments' interventions. This entails provisions that allow for declaring the bankruptcy of the troubled banks without adequate capital (deposits are protected by governmental insurance schemes). Basel accords are among the international instruments used by regulators to ensure the following: promoting the rights of shareholders, reducing bank investments in areas without continuous ROI (real estate), large and long-term industrial projects or risky businesses such as gold, currency and stocks.
Those long-term investments cannot be liquidated fast enough. Therefore, at the time of crisis when people run on the banks and rush to withdraw their deposits, the banks can face the risk of bankruptcy as the competition to liquidate the long-term assets builds up.

Situation in Iran
In the past few years, the large stock of non-performing loans forced the banks to turn to Central Bank for borrowing. The Central Bank's nonchalance to press for the payback led to over-injection of liquidity into the market resulting in surge in prices. As the rate of interests remained low, the depositors withdrew their money investing in real estate and other assets in order to preserve the value of their original capital. This intensified the inflation. On the other hand, in the absence of an accountable authority to refer to, micro depositors and pensioners living on the interests of their humble deposits witnessed a sudden decline in the value of their deposits reducing it into half in a short span of time .The situation led to transfer of wealth from micro depositors to big capital holders especially those benefiting from the existing rents in the economic system of Iran including cheap loans.
Given the above, unfortunately, many Iranian banks have resorted to investing in areas far beyond their specialty such as real estate and stocks. As these assets are not easily liquidated, in case of any investment failure, banking system beneficiaries as well as the economy will be hurt severely. Therefore, it can be claimed that the chronic inflation does not allow the inefficiency in the management of banking system in Iran to surface. In this respect, depositors' tendency for short-term deposits on the one hand and long-term investments by the banks on the other hands, are the reasons why the banking system in Iran goes in the reverse direction of their counterparts in other parts of the world. Banks, in general, should try to maintain a balance between the deadlines for their deposits and investments. Any imbalance would highly amplify systematic liquidity risk that happens when illiquid assets such as branches, large or long-term investments cannot be liquidated duly. The cascading effect of this situation on other banks creates many sellers but few buyers for illiquid assets resulting in a sudden fall in their prices. This, in turn, can destabilize the banks to the point where they face sudden bankruptcy.
It can also lead to automatic formation of a pyramid of interest rates by some banks. Currently, some banks are paying high interest rates while they do not seem to be able to afford it given their revenue. If the concerned banks cannot afford to pay for the high interest rate on short-term deposits through their investments, they have no other options but to spend the new deposits on their dues. Offering high interest rates temporarily encourages the depositors to flock in providing a limited opportunity for the banks to pay the interests by spending the new deposits. However, as the banks run out of new deposits and the low ROI cannot replace them, they resort into selling their own assets. If the Central Bank refuses to bail out the troubled banks, the rush by the concerned banks to sell their illiquid assets causes a sharp decline in assets prices. Given the seriousness of the situation, the Central Banks may, once again, feel under pressure to inject liquidity in order to bail out these banks. This, in turn, helps the vicious cycle of inflation and incorrect banking management continues.
Bankruptcy and the relevant regulations are among other important points that need to be taken into account. The development of a set of sound regulations on bankruptcy and their proper enforcement can end the operation of those organizations with low efficiency and productivity that continue to consume national resources directly or indirectly. Declaring bankruptcy can release those resources employed inefficiently, putting them, instead, at the disposal of those who are able to use them to generate profits for customers, depositors, shareholders, employees and finally national economy.