The Root Cause of a Pain
The banking system is criticized for drawing its resources on side business trading. This criticism hardly investigates the underlying cause; for instance, the cause for banks’ tendency toward the real estate sector. Such business conduct has roots in macro policies.
The banking system is criticized for drawing its resources on side business trading. This criticism hardly investigates the underlying cause; for instance, the cause for banks' tendency toward the real estate sector. Such business conduct has roots in macro policies. Persistence of inefficient monetary policies in the past, like obligatory determination of interest rates for deposits and facilities, as well as mandatory payment of facilities, which were not spent in the respective targets, increased the money supply so much that the economists called it a money supply tsunami. In order to provide a broader perspective of the situation, the problems associated with the economic and banking sanctions, and the inappropriate execution of targeted subsidies reform plan's first phase have to be added to this policy, and chronologically reach to the time, when the country's economy was in a condition, which due to a series of incidents particularly in industries, depended on
importing raw materials and was exposed to critical problems. In such a difficult situation, the wandering money supply raided capital, gold, foreign exchange, and real estate markets, and produced waves of instability. Altogether, the real estate sector attracted all investors, whether banks or else, due to adversity of different economic sectors.
Banks are allowed to invest in corporations within the regulations framework. In order to perform Article 34 of the country's monetary and banking Law, the Central Bank defined the investment regulations and had it approved by the Money and Credit Council in 2007with the purpose of preventing sheer side business trading. According to this regulation investing in corporations is subject to certain restrictions. Following these restrictions and at the Central Bank's discernment, banks are allowed to invest only in those corporations, activities of which are explicitly acknowledged in the regulation, such as currency exchange, leasing, insurance, credit rating, banking IT administration, and banking related corporations, , for a maximum of 49% of the investee. This amount has been set to 20% for other companies, shares of which are purchased by banks for the purpose of profitability. Other controlling restrictions which are related to the capital bases of banks have also been regarded. For example, banks are not permitted to invest either directly or indirectly higher than a total of 40% of their base capitals in securities, including corporations' shares. Considering the above mentioned accounts, the author believes that by coplying with the international banking standards, the set of Central Bank's precautionary regulations have been defined so that banking activities could be directed onto the right track where risks would be controllable. But what actually takes place is that inappropriate economic conditions and unfavorable circumstances of business environment, which might happen due to unfitting monetary policies, somehow boost some markets' appeal, like real estate, and allure investors.
What should be done?
If unfitting monetary policies, like obligatory determination of interest rates and placing banks under pressure to carry out such obligations to provide depositors' and shareholders' expected interests are recognized as the source for deviation in banking activity, they have to be revised. Besides, in order to implement fitting and efficient monetary policies, particularly for interest rates of deposits and facilities, the Central Bank has to abandon the passive position in decision making, and actively pursue its independence. If the institutions under the Central Bank's supervision are believed to be culpable, the respective regulatory flaws and deficiencies, which lead banks to other markets, are to be identified and corrective measures to be taken. In such cases, the transfer of legally prescribed shares of the corporations, which have been possibly established before the notification of the investment policy, has to be investigated.