Spectrum Bank’s guardianship: Will people’s deposits be lost after the Central Bank’s intervention?
The decision by the Central Bank of Iraq to place Al-Taif Islamic Bank for Investment and Finance under guardianship and appoint a guardian to manage it for 18 months due to the presence of “serious violations” that affected its financial position and the depositors’ funds, according to a letter from the bank that was circulated, has led to concerns, especially from the bank’s customers, about their deposited funds.
Immediately, gatherings took place in front of bank branches, where the crowds demanded their deposits. The sudden panic led to a number of depositors gathering in front of branches (such as the Karrada branch) and even in some governorates to demand their money and deposits for fear of losing them.
What is the reality of the crisis, and is there a fear of people losing their deposits and rights, as happened in Lebanon, for example?
Experts point out that imposing guardianship is a legal step stipulated by banking laws, and its main objective is to intervene to protect depositors’ funds and stabilize the bank’s financial position when a serious administrative or financial defect is detected, and it does not necessarily mean declaring final bankruptcy.
Is there a fear of a scenario similar to the Lebanese crisis? Legal experts agree that comparing Iraq to the Lebanese model is structurally and banking-wise inaccurate for fundamental reasons. In the Lebanese crisis, the collapse resulted from the complete entanglement of the banking sector with a crisis of financial sovereignty and statehood, and a massive deficit that permeated the entire system. In Iraq, however, the intervention is limited to a single private bank (or specific banks) found to have deficiencies or violations related to its individual management. The central bank’s intervention is primarily aimed at preventing the bank’s collapse, not covering it up. Furthermore, the Iraqi central bank enjoys a strong foreign reserve position, which differs radically from the structural and monetary collapse that Lebanon experienced.
Guardianship committees usually aim to audit accounts and restructure assets and liabilities to ensure rights, as official statements emphasize that depositors’ funds are protected by law and the guarantees of the central bank, which will either correct the bank’s course or arrange precise settlement operations to ensure that deposits are not lost.
The nature of the events surrounding Al-Taif Bank may typically trigger a temporary wave of anxiety among some customers of the private banking sector, given the sensitivity of the issue of financial trust in the Iraqi market in general and the public’s memory of past experiences. A segment of depositors, growing impatient, may resort to monitoring their accounts or inquiring about the financial soundness of their private banks, especially given the occasional lack of complete transparency in promptly disclosing details of irregularities before they escalate.
Private banks in Iraq vary greatly in their financial situations, the size of their liquidity, and their compliance with international and local regulatory standards. The Central Bank’s action is a remedial measure directed at an exceptional case in which the defect has been proven, and does not necessarily mean the existence of a structural infection that includes all private banks, as the statements indicate.
The extent of the spread of concerns depends entirely on the speed and transparency of the central bank in containing the crisis, providing practical reassurances to depositors, and confirming the ability of the banking system as a whole to meet its obligations in order to avoid the crisis of one bank turning into a general panic that harms monetary stability.
Legal experts point out that the rights of those affected and depositors are legally protected, and in extreme cases or when any licensed bank is permanently insolvent, there are clear regulatory and institutional mechanisms for compensation and to ensure that funds do not evaporate, as legislation requires all licensed banks to participate in the “Iraqi Deposit Guarantee Company,” which was established with supporting capital between the public and private sectors, and it is the entity legally responsible for paying compensation to depositors within specific limits in the event that the bank is proven to be insolvent or bankrupt.
Appointing a “trustee” does not signify immediate liquidation or bankruptcy, but rather a proactive measure preceded by legal control over the bank’s assets and its real estate and financial holdings to ensure that they are used first to cover the obligations and rights of depositors before any other party. The official data of the Central Bank indicates that the ratio of liquid assets, which are cash or financial resources that can be converted into cash quickly and easily without a significant loss in their value, to short-term liabilities in the banking system as a whole, exceeds the required hypothetical ratio, and is exceeded by 60%, which means that there is sufficient financial cover to contain individual shocks and prevent them from turning into a comprehensive liquidity crisis.
While many depositors wonder why they were surprised by the decision, and why a statement should have been issued before it was released, specialists say that legal obligation and regulatory secrecy usually prevent banks from issuing such individual statements before the Central Bank intervenes. Decisions to impose guardianship and appoint a guardian are made suddenly and immediately to ensure that funds are not smuggled out or assets are not manipulated by the management that has been found to have committed violations.
Issuing a statement of reassurance on its own initiative contradicts supervisory mechanisms due to the nature of the violations. If the management is implicated in financial irregularities or suspicions that prompted the Central Bank’s intervention, it is unlikely to be transparent with depositors and may even attempt to conceal the truth to avoid public backlash. Once the trusteeship decision is issued, executive powers are immediately withdrawn from the bank’s management and board of directors and transferred to the trustee appointed by the Central Bank. This renders any previous or subsequent statements outside the purview of the former management. Crisis management and the dissemination of reassuring messages become the exclusive responsibility of the Central Bank of Iraq and the new legal trustee, who is tasked with accurately assessing the financial situation and addressing the public with facts, rather than empty promises that might be made by a compromised or complicit management.
Shafaq.com