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Bank capital increase deadlines a red herring

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Bank capital increase deadlines a red herring

Post  Shilo on Mon Oct 18, 2010 5:52 pm

Bank capital increase deadlines a red herring

Posted on 18 October 2010. Tags: Banking & Finance, CBI, ISX
On October 6, the Central Bank of Iraq (CBI) announced new deadlines for the private sector banks to reach the capital targets it set for them last March. According to the CBI’s original timetable, the banks had until the end of this year to bring their capital up to ID 100 bn (US$ 85 mn), until the end of next year to get to ID 150 bn (US$ 128 mn), and until the end of 2012 to reach ID 250 bn (US$ 213). The new announcement keeps the amounts the same but moves up the deadlines by six months—to June 30 of 2011, 2012, and 2013.
This reprieve is understandable as many banks were clearly not going to be able to reach this year’s target by the end of December. Indeed six more months may not even be enough given the difficulty of raising money under the existing securities law, which does not allow for underwriting and requires all new shares to be issued at par (ID 1). At a minimum, you would think these capital increase requirements would be postponed at least until the new securities law can be passed, which obviously won’t be any time soon given that a new government has yet to be formed.
In any case, it’s not really clear why the CBI’s targets are necessary in the first place. Presumably the central bank’s goal is to force the banks to lend more, or, alternatively, to sell themselves to foreign institutions that would be more active lenders. But most banks have more than enough capital to support the tiny amount of lending they do, which means that if they could profitably grow their lending businesses they would already be doing so. And simply bringing in foreign investors may make little difference—loan-deposit ratios at the existing foreign-invested banks are well below those at many of their locally-owned counterparts. (See my September 7 post for more on this.)
It seems to me that there’s actually no need for the CBI to specify any capital increase timetable at all, which implies that it is free to extend its deadlines repeatedly. Indeed the specter of bank capital increases that has been hanging over the stock market all year may turn out to have been something of a red herring. As long as the banks are having difficulty raising capital, the central bank seems willing to give them more time. And once conditions become more favorable, meeting the CBI’s targets shouldn’t really be much of a problem given the relatively small amounts of money involved.

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