Bank capital increase deadlines a red herring

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.

15 Responses to Bank capital increase deadlines a red herring

  1. […] [Click here to read Mark DeWeaver's take on the banks' new capital requirements.] […]

  2. […] [Click here to read Mark DeWeaver's take on the banks' new capital requirements.] […]

  3. pimp97 October 28, 2010 at 8:48 am #

    so what about the dinar are they going to revalue it on sunday are what.

  4. James Wall October 29, 2010 at 6:28 am #

    I’ve invested in some dinars and have heard that the currency exchange will between Iraq and the US will go up! I was wanting your input on how much and possibly when the dinar should reach a price closer to the US dollar…

  5. James Wall October 29, 2010 at 6:29 am #

    I’ve invested in some dinars and have heard that the currency exchange will between Iraq and the US will go up! I was wanting your input on how much and possibly when the dinar should reach a price closer to the US dollar!

  6. DeWeaver October 29, 2010 at 12:34 pm #

    I don’t expect the dinar to appreciate that much until there is a significant increase in Iraqi oil exports. Even then, it’s hard to see it reaching anything remotely like parity with the USD.

  7. DeWeaver October 29, 2010 at 12:35 pm #

    I doubt it.

  8. Rooster October 30, 2010 at 4:55 pm #

    The Dinar is to make a move come December this year. That is what is rumored in Baghdad amongst the people. It is also rumored to jump to $.50 before January 2011. These are just rumors but they are backed by the facts as well. Oil fields that have been contracted over to companies such as Exon Mobil and BP are already in the first couple months producing double the production of what the areas were producing before the contract.
    China, Japan, and South Korea are together combined set to invest over $700 Billion into the country of Iraq. Energy contracts, oil, housing. You name it, its being invested.
    Make no doubt about it people…this is your chance to get on board with something that will dwarf the likings of Microsofts stock.
    You just might have to be patient.
    And beware the misleadings and misdirection tricks…they will be coming…

  9. […] Bank capital increase deadlines a red herring 10/28/10 […]

  10. matt p November 1, 2010 at 2:44 pm #

    so Mr. Deweaver if someone owns 1 million dinar what do you speculate the dinar to be worth in dollars once they hit the world market. Also what are your thoughts on the CBI removing three zeros from the dinar? and finally when do you expect this all to happen?

  11. mattp November 2, 2010 at 7:05 am #

    So Mr. Rooster what you are saying is that the one million dinar might possible be worth 500K american? or will that million be one thousand and be worth 500 dollars amercian. If possible please clarify

  12. DeWeaver November 2, 2010 at 8:00 am #

    I expect the dinar to appreciate gradually as Iraq’s oil exports increase over the next 5-10 years. I can easily imagine a scenario in which it eventually hits ID 600 = USD 1 but of course there’s really no way to predict this. As for removing the zeros, I don’t see why this needs to be done at all and if they do it I don’t know why it would make any difference. It seems to me the exchange rate would simply adjust from ID 1170 = USD 1 to ID 1.17 = USD 1, leaving the USD value of your ID holdings unchanged.

  13. lagitana November 3, 2010 at 4:17 pm #

    Mr. DeWeaver, clearly you see the Dinar as a medium/long term invenstment. What would you suggest as a viable shorter term investment for the individual in today’s Iraq?

  14. DeWeaver November 4, 2010 at 7:31 am #

    I think Iraqi stocks look good in the short term–though it’s important to stay very diversified. There is a lot of company specific risk and very little information available.

  15. Str8 November 9, 2010 at 10:12 pm #

    I tend to believe that regarding dinars will not change but slow down end of january to spring and growing around Ramadan 2011 or close to that date knowing that from 2004 keep saying they will form the government around until 7 March 2011 to start as a government and few months for let say trial.Most of all I think they will never do something around christians holidays(Christmas or Easter)and to change that fast from the 166th place in the world as a doing bussines after Haiti and others it is hard even with world bank help and 70 trilions oil value but to buy and wait calm.

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