The Iranian Banking Crisis

With a shopping mall twist.

Photo by Alireza Akhlaghi on Unsplash

We tend to think of revolutions as principled historical events, born out of virtues like freedom, equality, liberty, and all the rest. Revolutions are disruptive, yes — there’s bound to be bloodshed, turmoil, and collateral damage when the world gets turned upside down. But a successful revolution creates something new out of the old, with lasting and meaningful aspirations like those articulated in the Declaration of Independence or the Declaration on the Rights of Man and of the Citizen (France, 1789).

But there is another variable inherent in virtually every major revolution in human history: economics. Taxes and banks are not as much fun to talk about as life, liberty, and the pursuit of happiness (other than that bit about throwing all the tea into Boston Harbor), but even the most high-minded revolutions in history burn from the grassroots of economic turmoil. Runaway inflation, currency devaluation, the questions of who pays for what: these are generally core prerequisites for revolutionary fervor. The first seed of the American Revolution wasn’t Thomas Jefferson’s flowery prose; it was the Stamp Act of 1765, which placed a tax on all manner of colonial goods.

As a quick aside, I included Aaron Ross Sorkin’s book 1929 in my list of top book recommendations for 2025, and it is indeed a very good read. Contrarians, pessimists, and stock-market bears often look to the 1920s for comparisons to today, and there are, of course, many. But I think an equally apt historical parallel is the French Revolution. Widening inequality, elite control of institutions paired with popular distrust, hostility toward stale and out-of-touch leadership, and an uneasy mix of theology and politics — the more one reads about the French Revolution, the more familiar (and uncomfortable) it all starts to feel.

The Price of Bread

The French Revolution is understood historically as a true people’s revolution. We think of the Bastille and the guillotine, and of soldiers and barricades in the streets a la Les Misérables. But much like on the American side of the Atlantic, the French Revolution unfolded against a backdrop of tax revolt, currency instability, and inflation. Isn’t one of the most famous lines associated with the era (which may or mat not have been actually uttered), Marie Antoinette’s alleged response of “Let them eat cake!” This classic statement from history was a reaction to peasant frustrations with the rising cost of bread.

I thought of this line earlier this week while listening to a podcast about the current turmoil in Iran, where ordinary Iranians are suddenly struggling to afford things like, well, bread. Food prices of all types in Iran, including staples like bread, have skyrocketed over the past few months. Iran’s overall inflation rate in 2025 reached roughly 43%, higher than anywhere else in the world other than Venezuela and Sudan. Much of this deterioration came in the closing months of the year, as Iranian leaders found themselves in rapidly disintegrating political and economic turmoil. How did Iran get here? And what comes next?

I should acknowledge that I am not an expert in the structure of the Iranian banking system. But my reading of the current landscape is that, for years, Iranian banks have not functioned as neutral financial institutions. Instead of operating like utilities (i.e. dull but dependable), they have extended credit to favored firms, state-linked enterprises, and well-connected borrowers with little regard for the ability or propensity to repay these loans. Bad loans have been rolled forward with good money chasing the bad, losses have been obscured, and solvency has been maintained only through government support and creative bookkeeping rather than proper capital management.

Sanctions from the United States and others turned a fragile banking system into something combustible. Iranian banks lost access to international capital. Investment dried up. There were no external lifelines beyond what the government was willing or able to provide. And for all the current global flirtation with isolationism, participation in the international financial system imposes a kind of discipline on institutions that want to be taken seriously. None of that discipline is operating in Iran today.

The more acute danger now is behavioral and psychological as much as it is financial. Ordinary Iranians and wealthy elites alike recognize that many banks are effectively insolvent. Capital ratios are thin, non-performing loans are widespread, and survival depends on centralized government support that may or may not arrive. Iran has entered a familiar spiral: bank runs, flight to hard assets, currency depreciation, rising prices, deepening mistrust, and political instability (i.e. the ingredients for a revolution).

The Ayandeh Bank Failure

Those of us in the West sometimes mistakenly think of Iran and other Middle Eastern countries as existing in a completely different time, as though they are frozen in the past. In reality, the pressures for modernization and social freedom (especially among young people who glimpse life in more open societies) are among the primary engines of today’s unrest. Even in an isolated country where internet access is sometimes strictly controlled, young people are still sometimes able to get an idea of what life is like for their generational peers in other countries, and they want aspects of that lifestyle for themselves.

Yet Iran is a modern country, and that reality was driven home for me this week while reading about the crisis at Bank-e Ayandeh. Ayandeh became almost a caricature of what has gone wrong in Iran’s banking system, thanks in large part to a massive bet on a politically connected shopping mall in Tehran. The bank tied a significant portion of its balance sheet to the project, betting that rising real estate values would compensate for weak cash flow. When international sanctions hit, consumer demand collapsed, inflation surged, and revenues from the mall fell far short of covering debt service. What had once been booked as a long-term asset became dead weight to the bank.

The Iranian central bank repeatedly injected liquidity to keep Ayandeh afloat. The result was a gleaming mall, one of the largest in the world, propped up on the rickety scaffolding of a financial system on the verge of collapse. The mall remains open. Ayandeh Bank does not. Its liabilities have largely been absorbed by state-run banks, where results and reporting are opaque and questionable.

What Comes Next

I mentioned the revolutionary fervor among young Iranians above, which is a true catalyst for what is happening in the country now. But one of the distinctive features of the current protests in Iran is the participation of thousands of merchants and small business owners, in addition to the young people. This is not simply a youth movement, nor is it confined to any single class or ideology. It is not a labor-only uprising or a narrow political revolt. It is cross-generational, multi-class, and economically rooted, precisely the kind of movement that regimes historically have struggled most to suppress. Change is coming to Iran.

To be sure, Iran’s banking crisis is not the sole catalyst for the country’s current upheaval. Much of the immediate economic damage was triggered by last year’s devastating 12-Days War, during which Israeli strikes destroyed hundreds of Iranian targets. Many of Iran’s deeper problems long predate that conflict, rooted in decades of political decisions made both inside the country and abroad. It would be simplistic to pin Iran’s current crisis entirely on its banks.

But banking systems are accelerants. When they fail, they compress years of bad decisions into months of lived reality. Inflation becomes visible and acutely felt by ordinary people and businesses alike. Savings evaporate. Trust collapses.

There are lessons here, even for countries that like to imagine themselves as immune from destabilizing revolts, political, economic, social or otherwise. In the United States, regulatory skepticism is often treated as a sign of seriousness or sophistication. But Iran offers a reminder of what happens when banks cease to operate with a fiduciary mindset. When lending decisions serve political power rather than economic (or mathematical) reality, and when losses are hidden instead of resolved, things can easily spiral.

Equally important is independence. Banks require a regulatory framework, but they also require distance from direct government control. Once credit allocation becomes a political tool, confidence erodes. And once confidence is gone, it rarely returns easily, quickly, or without turmoil.

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Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com. Thoughts and opinions here do not represent First National Bank.