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A Kinder, Gentler CBI?
Posted on 28 November 2012. Tags: Banks, CBI, Sinan al-Shabibi
On October 16, Prime Minister Maliki removed the head of the central bank, Sinan al-Shabibi, accusing him of mismanagement and currency manipulation. (There’s more on this story here, here, and here.) This move was widely seen as a power grab by the prime minister and a grave threat to the CBI’s independence. Nevertheless, his removal may actually prove to be a positive development for the listed banks.
In recent years, the CBI has implemented two prudential supervision policies that seem to me to have been entirely misguided—(1) requiring all private-sector banks to meet arbitrary capital targets and (2) imposing an impossibly burdensome anti-money laundering (AML) regime.
While capital adequacy is normally measured as a ratio of capital to risk-weighted assets, the CBI has instead imposed absolute levels of capital (IQD 150 billion by the middle of 2012, IQD 250 billion by the middle of 2013) regardless of the size of the banks’ loan books. Given that most of the banks have more cash than loans, there is really no justification for this on prudential grounds. The policy is rather an attempt to force the banks to lend more and to coerce the smaller banks into merging with one another. It is, in other words, an attempt to replace market forces with central planning.
In some cases the CBI’s insistence on capital increases also appears to have led to increases in the quantity of capital at the expense of its quality. Some majority shareholders are said to have used personal lines of credit from their banks to pay for their own rights shares. The problem with this, of course, is that if those shareholders are unable to repay their loans the banks will take a loss and the new capital will have to be written off.
Similarly, the CBI’s AML policy, introduced last February, had numerous unintended consequences. Rather than blocking illicit currency flows, the new rules instead produced a market for Iraqi government-certified manifests, which anyone who needed dollars could use to prove that he was engaged in a legitimate transaction. Instead of stopping dollar sales to Iran and Syria, the CBI did little more than create an opportunity for officials with access to the right government seals to make a quick profit stamping phony documents. In the end the CBI had no choice but to issue new instructions (at the beginning of October) reinstating the original regulations.
Don’t get me wrong. I happen to think, as do most outside observers, that Shabibi is entirely innocent. But prudential supervision during his tenure has been unduly strict, even to the point, in the case of the AML regulations, of being downright Quixotic.
The interesting question for the commercial banks at this point is thus whether or not the next CBI head might take a more lenient line. Will we get a kinder, gentler central bank or more of the same?
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Posted on 28 November 2012. Tags: Banks, CBI, Sinan al-Shabibi
On October 16, Prime Minister Maliki removed the head of the central bank, Sinan al-Shabibi, accusing him of mismanagement and currency manipulation. (There’s more on this story here, here, and here.) This move was widely seen as a power grab by the prime minister and a grave threat to the CBI’s independence. Nevertheless, his removal may actually prove to be a positive development for the listed banks.
In recent years, the CBI has implemented two prudential supervision policies that seem to me to have been entirely misguided—(1) requiring all private-sector banks to meet arbitrary capital targets and (2) imposing an impossibly burdensome anti-money laundering (AML) regime.
While capital adequacy is normally measured as a ratio of capital to risk-weighted assets, the CBI has instead imposed absolute levels of capital (IQD 150 billion by the middle of 2012, IQD 250 billion by the middle of 2013) regardless of the size of the banks’ loan books. Given that most of the banks have more cash than loans, there is really no justification for this on prudential grounds. The policy is rather an attempt to force the banks to lend more and to coerce the smaller banks into merging with one another. It is, in other words, an attempt to replace market forces with central planning.
In some cases the CBI’s insistence on capital increases also appears to have led to increases in the quantity of capital at the expense of its quality. Some majority shareholders are said to have used personal lines of credit from their banks to pay for their own rights shares. The problem with this, of course, is that if those shareholders are unable to repay their loans the banks will take a loss and the new capital will have to be written off.
Similarly, the CBI’s AML policy, introduced last February, had numerous unintended consequences. Rather than blocking illicit currency flows, the new rules instead produced a market for Iraqi government-certified manifests, which anyone who needed dollars could use to prove that he was engaged in a legitimate transaction. Instead of stopping dollar sales to Iran and Syria, the CBI did little more than create an opportunity for officials with access to the right government seals to make a quick profit stamping phony documents. In the end the CBI had no choice but to issue new instructions (at the beginning of October) reinstating the original regulations.
Don’t get me wrong. I happen to think, as do most outside observers, that Shabibi is entirely innocent. But prudential supervision during his tenure has been unduly strict, even to the point, in the case of the AML regulations, of being downright Quixotic.
The interesting question for the commercial banks at this point is thus whether or not the next CBI head might take a more lenient line. Will we get a kinder, gentler central bank or more of the same?
[You must be registered and logged in to see this link.]
