Will the Banks Get More Time?

The Central Bank of Iraq’s June 30 deadline for private-sector banks to raise capital to IQD 150 billion is fast approaching. Yet of the 21 ISX-listed lenders only three—North Bank (BNOR), United Bank (BUND), and Kurdistan Bank (BKUI)—have reached the target so far.
Rabee Securities’ most recent bank sector report found that as of June 15 another five—Bank of Baghdad (BBOB), Iraqi Middle East Bank (BIME), Al Mansour Bank (BMNS), Elaf Islamic Bank (BELF), and Dijlah and Furat Bank (BDFD)—will be in compliance once their planned capital increases are completed. This leaves another 13 banks with no clear plan to raise the required funds.
Ordinarily, institutions that fail to meet capital adequacy standards risk being taken over by the government and put into receivership. This was the fate of Warka Bank, for example. But such a penalty seems unwarranted in this case.
IQD 150 billion is, after all, an arbitrary goal. If anything, Iraqi banks typically have too much capital relative to the size of their loan books. The fact that they have not yet satisfied the central bank’s requirement does not imply that they are at risk of failure.
The obvious choice for the central bank is simply to give them more time, just as it did at the end of 2010. That was the original deadline for the CBI’s initial bank-capital target of IQD 100 billion. When a number of banks fell short of this number, they were all given an extra six months.
There’s really no reason this time should be different.