The Impact of Liquidation and Merger of Insolvent Iranian Banks

Abstract
This paper examines the systemic and social implications of the recent liquidation and merger of insolvent banks in Iran, focusing on the case of Ayandeh Bank (formerly TAT Bank, merged into Ayandeh, and now absorbed into Bank Melli). We assess whether this resolution mechanism yields positive outcomes in terms of financial stability, inflation control, depositor protection, and public trust. Our analysis argues that while the merger offers significant benefits, its success depends critically on structural reforms and improved governance within the banking sector.

Introduction

• Background: Overview of the Iranian banking crisis, highlighting persistent issues such as non-performing loans, low capital adequacy, and risky business models.
• Case in Focus: Ayandeh Bank, its origins (TAT Bank and other institutions), its accumulated losses, and the decision to liquidate and absorb it into Bank Melli.
• Research Question: Does the liquidation and merger of such banks offer a sustainable path toward stabilising Iran's banking system and improving socio-economic welfare?

Theoretical Framework

• Bank Resolution Mechanisms: Compare liquidation, merger, bail-in, and recapitalization in the literature.
• Economic Effects: How insolvent banks can fuel inflation (via monetary base expansion), reduce credit to productive sectors, and erode public trust.
• Governance and Supervision: The role of supervisory bodies (like the central bank) in ensuring that merged entities do not perpetuate previous malpractice.

Empirical Evidence from Iran

• Narrowing NTA (Negative Tangible Assets): Data indicating the scale of Ayandeh’s balance-sheet problems and how merging might reduce systemic risk.
• Inflation and Money Supply: Analysis of how Ayandeh’s excess liquidity creation contributed to inflation.
• Depositor Outcomes: Examination of how the merger protects or fails to protect depositors, referencing statements by the central bank.
• Public Trust and Institutional Reform: Discussion of the broader political signaling, including public perception and trust restoration, as reported in media.

Risks and Challenges

• Moral Hazard: The risk that other banks will rely on similar bailouts or take excessive risk if they expect lenient resolution.
• Asset Valuation: Difficulty in valuing non-liquid assets, such as real estate and project-based investments, which may lead to hidden losses post-merger.
• Governance Weaknesses: Persistent issues in bank governance structures may not be fully addressed by mere consolidation.
• Political Economy Constraints: Potential resistance from stakeholders, budgetary costs, and the challenge of aligning reform incentives.

Policy Recommendations

• Strengthen Regulation and Supervision: Enforce stricter capital adequacy requirements, corporate governance norms, and risk management.
• Transparency in Asset Transfer: Ensure transparent valuation and gradual realization of non-liquid assets (e.g., real estate) transferred during the merger.
• Depositor Safeguards: Implement deposit insurance mechanisms or guarantee schemes to protect small depositors and prevent loss of confidence.
• Long-Term Structural Reform: Use the merger as an opportunity for broader banking sector reform, including digitalization, improved governance, and alignment of banking operations with productive economic activities.

Conclusion
The liquidation and merger of Ayandeh (formerly TAT) Bank into Bank Melli represent a critical juncture in Iran’s banking reform trajectory. While the immediate effects — reducing systemic risk and potentially curbing inflation — are promising, the long-term success of this intervention hinges on meaningful reform. Only if accompanied by rigorous supervision, asset transparency, and institutional rebuilding can the merger deliver lasting benefits to both the financial system and the wider society.

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