Good morning to you, ladies and gentlemen, I’m very happy having participated in the seminar which took place on Saturday and also very happy to be here and share very briefly, my view on Iran challenges for implementing Basel II accord. As you know well, sustainable economic growth calls for an efficient financial system, which needs to be enhanced in every country. To this end, optimizing functions of financial systems, becomes a main target. This process focuses on innovation, enhancing competitiveness and efficiency in the banking system. The more efficiently banks and other financial institutions perform, the higher and more stable economic growth will achieve. Therefore, the subject of banking supervision with a view to mitigating risks, merits special attention. The guidelines set by the Basel Committee for promoting supervision, encouraging international cooperation, and designing standards are a major step forward.
As you know, Basel II Accord is a comprehensive and broadly welcomed set of recommendations on banking supervision, which includes three pillars:  minimum capital requirements, supervisory review and market discipline. The second pillar deals with the key principles of supervisory review, risk management guidance, supervisory transparency and accountability. It also tries to ensure developing an internal capital assessment process and setting capital targets that are commensurate with the bank's risk profile.
Banks achieve their general goals, namely stability, soundness and securing resources and interests of customers by meeting the above requirements with a view to implementation of the first pillar of Basel II Accord. Of course, arrangements for formulating regulations and banking supervision vary from country to country. The number and size of banking institutions, the complexity of banking activities, extent of liberalization, method of information disclosure, access to information technology and the qualified staff explain these differences.
Central bank of the Islamic Republic of Iran, since long ago, has put on agenda formulating regulations with regard to the guidelines set by the Basel Committee and upon implementation of the Basel I guidelines, attempted to create appropriate ground for the implementation of Basel II Accord. Of course, due to the Islamic nature of the banking activities in Iran, it demands further studies, especially after recent financial crisis which has posed questions on regulations regarding asset allocations, securitization and efficiency of rating agencies. The Islamic Financial Services Board (IFSB) is also studying this issue meticulously.
Implementation of the Basel II Accord in Iran also requires creating the necessary infrastructures and in this regard, Credit rating of customers is one of the challenges. Actually, we miss existence of efficient credit rating agencies, as we need more sufficient data about companies; and we need to improve corporate governance and transparency within the banks.  I can not deny that private banks are suffering such a weak point of being under the influence of family ownership or single nature owner ship which can in its turn divert bank resources from efficient allocation and weaken the incentives  for being more transparent.
The most important issue in the second pillar of the Basel II Accord is to determine the level of additional capital on the basis of the supervisors' assessment. This will require bank's shareholders to either inject capital or ignore their annual dividends. Decisions concerning this matter seem difficult for supervisors in terms of the quality of staff doing such a job and in the terms of quantification methods for assessing risks such as reputation risk, credit concentration risk and so on. In Iran, if we admit the absence of legal problems (of which I suspect) , quality of staff who is supposed to take such a decision, still remains a matter of concern. That’s why we need to arrange more train on the job for the current staff, and also we need to mobilize high qualified human capital to extend geographic on site supervision.  This last issue is also a major concern; since the number of banks in Iran is increasing considerably and the need for on site supervision is urgent.  For instance, nowadays, every one quarter of the year one new bank emerge in the market, either through transforming of already established unregulated institutions in the form of credit unions and funds, or being created from the beginning.  We need to expand our on site supervision by creating rep offices in provinces. This way we would be more able to regulate local financial institution and all the bank which are presently under the multiplication process.
The last but not least issue I would like to mention is the issue of stress testing. We need to provide a wide range of scenarios for our banks to make sort of a stress testing. Central bank can provide great momentum in order to have such an initiative.
Thank you very much for your attention
Ghazavi@cbi.ir