Abstract: (395 Views)
Statistical evidence from the Iranian economy indicates that the banking system has been significantly affected by macroeconomic cycles induced by exogenous real external shocks in the form of terms of trade or sanction shocks. This has exacerbated the endemic problems facing banks such as adverse selection and moral hazard. Banking system balance sheet has been further deteriorated by illegal and illicit practices and concentration of risk through “connected” lending and illegal lending processes.The absence of effective monitoring and regulatory mechanisms by the supervisory authorities has contributed to persistence and deepening of the balance sheet imbalances. As a result, the high ratios of non-performing and rescheduled loans have become structural features of the banking system.while accumulation of illiquid assets in holding companies owned by the banks and real estate has acquisition expanded. In addition, buildup of banks’ claims on the government has grown and cash flow problems and balance-sheet pressures have mounted. Taken together, these factors not obly have led to deterioration of the banking system balance-sheet soundness indicators but also has severely constrained the banking system’s capacity to perform its role in provision of credit and finance. The objective of this article is to review in the light of the relevant theoretical literature the prevalent challenges faced by the banking system in Iran, which aside from the above mentioned impediments, it is also subject to price control and weak monitoring. This paper will overeview the empirical evidence pertaining to risk accumulation and credit crunch in the Iranian banking system and its impact on the real sector.
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