Thoughts on Iran’s Toxic Banking Assets

Imagine that your bank’s bad loans totalled 15% of its balance sheet. What conclusion would you draw? The bank lacks credit control, customers are dishonest, rates are exorbitant, or the market is plagued by all three problems and more. Yet this is the reported case in Iran today [1]. As a result, the Central Bank is looking into the formation of a “bad bank” asset management company to absorb the troubled transactions. In doing so, I encourage Iran to adapt their path.

The bad bank process may be structured with three very different objectives, but rarely is it structured with all three. The first is to reposition the banks, the second is to sustain the flow of credit to the market, and the third is to help the customers to recover. How does one achieve all three goals: