A new directive aimed at enhancing banks' capital adequacy ratio in line with international standards was approved during the last meeting of the Money and Credit Council late Tuesday.

The motion–put in place by the financial sector's decision-making body–obligates the banking sector to strengthen its capital base in accordance with the latest international regulations, the Central Bank of Iran's website reported.

The ruling strives to promote the stability of banks, which will accelerate the development of international relations in line with the guidelines for banking reform.

These guidelines will replace the old ones that MCC approved in 2003 and had remained intact.

Need for changing the law became more acute, in view of its limitations and especially after international standards witnessed major changes in the aftermath of the global financial crisis.

According to the directive, banks have five years to upgrade themselves as per the new rulings and instructions.

Last month, the Central Bank of Iran notified Basel III principles on corporate governance to Iranian private banks and credit institutions, as part of the regulator's mandate to incorporate global standards.

Basel III (or the Third Basel Accord) is a global, voluntary regulatory framework on banks' capital adequacy, stress testing and market liquidity risk. The third installment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–8 to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.

As Iranian banks were struggling with low CAR and conforming to international standards, CBI issued a directive last October to plumpup banks’ capital cushions.

Iranian government took two important steps to improve the capital adequacy ratio of banks, namely the recapitalization of eight public-sector banks and settling payment arrears to the banking system.

As the government increased its capital to public-sector banks by 242 trillion rials ($6.4 billion), their capital adequacy ratio improved significantly but most of the banks are still having issues with the ratio.

Minimum capital requirement–8% under Basel II and 13% under Basel III-obligates banks to maintain the minimum capital ratios of regulatory capital over risk-weighted assets. It was reported last year that the average capital adequacy ratio of Iranian banks is around 5%, which is well below international norms.