Romania: Selected Issues

Abstract

Romania: Selected Issues

Financial Sector Development in Romania: At a Crossroads?1

During the last decade the Romanian financial sector has undergone a substantial transformation. A fast expansion phase that happened during 2004–08 on the back of massive capital inflows was followed by a major negative shock in the wake of the global financial crisis. After prolonged decline, private credit seems to be turning the corner but financial intermediation needs to be enhanced so it can better support future growth. The financial sector appears to be at a crossroads: will it expand at a healthy pace and thus contribute to future growth or affected by harmful legislative initiatives it will stagnate or even shrink further?

Core Questions

  • How has the financial sector developed in Romania in the last decade and what have been the main challenges?

  • Will more financial development and financial inclusion be conducive to growth?

  • What has driven bank credit and what are the prospects for a credit rebound?

  • What has been the impact of past financial sector policies and what are priorities?

A. An Overview of Romania’s Financial Sector

1. Romania’s financial sector is dominated by banks which hold around 80 percent of sector’s assets. During the last decade the sector has undergone a substantial transformation. In the early 2000s, the sector was relatively small compared to the size of the economy. During 2004–08, a fast expansion phase happened in the banking sector on the back of massive capital inflows to Romania (Isarescu, 2009). Private sector credit grew at an average annual rate of above 40 percent almost tripling its ratio to GDP and showing one of the fastest expansions in the region (this holds also in real terms). Despite such an expansion, the level of financial intermediation in Romania remained one of the lowest in the EU.

A04ufig01

Private Sector Credit Average Annual Change in Selected European Countries

(Percent)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Sources: Haver Analytics; and IMF staff estimates.
A04ufig02

Private Sector Credit in Selected European Countries

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Sources: Haver Analytics; and IMF staff estimates.

2. The expansion in credit was increasingly reliant on foreign currency financing, largely from foreign parent banks which own most of the Romanian banks (accounting for 88 percent of total bank assets). This in turn was reflected in the growing share of foreign currency-denominated loans which peaked in 2011 at 63 percent of total loans. In terms of credit composition, the shares of credit to households and to corporates were proportional until late 2010 when credit to corporates started to increase faster while household credit stagnated. After a decline in both categories since late 2012, the household credit has recently started to grow. Within credit to households, mortgages, which a decade ago had a very small share, have been growing constantly and now constitue close to half of total household credit. In terms of the composition of lending to non-financial corporations, borrowers almost equally represent main sectors of economic activity with the exception of agriculture which has a smaller share (below 10 percent).

A04ufig03

Foreign-Currency-Denominated Loans to Total Loans

(Percent)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Sources: FSI Database; and IMF staff estimates.
A04ufig04

Romania Household Credit Composition

(Billions of national currency)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Sources: Haver Analytics; and IMF staff estimates.
A04ufig05

Romania Non-FinancialCorporations’ Loansby Sector of Activity

(Billions of national currency)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Sources: NBR; and IMF staff estimates.

3. In the wake of the global financial crisis, Romanian banking sector suffered a major shock, but no public funds were used to support the banks. External flows halted, financial instability ensued and corporate and household balance sheets started to deteriorate (IMF (Romania FSAP), 2010). After several years of extremely rapid growth, private sector credit sharply slowed down in 2009 and credit growth turned negative in 2013. The deleveraging process ensued in a relatively orderly manner. The structure of credit started to change notably reflecting a shift to lending in domestic currency-denominated loans as well as FX loan conversions. In the last quarter of 2015, the accelerating credit in domestic currency, largely driven by credit to households, turned the credit growth positive.

A04ufig06

Credit Growth

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Sources: National Bank of Romania.

4. Despite an expansion of the non-bank financial institutions (NBFIs) in Romania, their assets make less than one-third of the banking sector assets, a relatively low share.2 This segment of the financial sector is dominated by investment funds, private pension funds, and insurance companies. The investment and private pension funds assets expanded in the aftermaths of the Fondul Proprietatea’s (government-established fund whose shares were awarded in lieu of compensation to claimants who lost their property) registration as an investment fund, and the introduction of Pillar II and III pension legislation. The Romanian insurance market has one of the lowest levels of insurance density and insurance penetration in Europe. The insurance sector has recently been stagnant as several major insurance companies have come under financial strain. The largest insurance company, Astra, entered bankruptcy in late 2015.

A04ufig07

Non-bank Financial Sector Assets

(Percent of GDP)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Source: NBR Financial Stability Report (2015).1/ Includes private pension funds.
A04ufig08

Insurance Markets, 2013

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Sources: Financial Supervisory Authority Report 2014; and IMF staff calculations.

5. The Romanian capital market is characterized by relatively few issuers, limited number of new issues and IPOs, and low liquidity. The equity market with only 84 listed companies had a capitalization of €32 billion as of end-2015. The fixed-income market is also relatively small and undiversified, with around 80 bonds traded at the Bucharest Stock Exchange of which a majority is securities issued by central and local governments. There are only seven corporate bonds.

A04ufig09

Performance of Stock Exchanges, December 2015

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Note: CEESEG is CEE Stock Exchange Group consisting of four stock exchanges: Budapest, Ljubljana, Prague and Vienna.Sources: FESE; Zagreb Stock Exchange; Bucharest Stock Exchange; Belgrade Stock Exchange; and Bratislava Stock Exchange.

6. At end-2015, Romanian financial sector continued to face major challenges. The banking sector has been shrinking amid continuous reduction in parent funding, and the non performing loans (NPLs), albeit recording a substantial decline, remain at elevated levels. While credit has started to rebound on the back of low rates and stronger economic activity, the recent legislative initiatives that involve unilateral and retroactive change of contracts pose substantial risks for banks (Box 1). The main challenges for further development of the capital market include both supply- and demand-side factors. In particular, the equity market in Romania has a limited supply of equity issues and there is no strong IPO pipeline. Low levels of awareness among potential investors and relatively low household savings rate (EC, 2015) may constrain the demand. In addition, the stock exchange has had a low level of accessibility and attractiveness in terms of infrastructure, and, until recently, relatively high regulatory fees.

A04ufig10

Foreign-Currency-Demoninated Liabilities to Total Liabilities

(Percent)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Sources: FSI Database; and IMF staff estimates.

Progress with NPL Reduction

Romanian banks’ NPLs have been on a declining trend since the second quarter of 2014. The substantial reduction was primarily prompted by the NBR’s more active stance towards tackling the high level of NPLs. In particular, the NBR issued several “recommendation” letters to commercial banks encouraging them to write-off fully- provisioned NPLs. Also, the NBR required the banks to fully provision loans with payments past due over one year and demanded to increase the coverage for all exposures to borrowers under insolvency or bankruptcy proceedings to 90 percent. Furthermore, the NBR required banks to submit more detailed and higher frequency reports on restructured loans and to periodically use external professional appraisers for collateral valuations to ensure the latter were in line with market values. As a result, Romanian banks became more active in write-off and sale of NPLs with large transactions taking place in the second half of 2014.

A04ufig11

Non-performing Loans 1/

(Percent of total loans)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

1/ In December 2015, NBR moved from a national definition to an EBA methodology-based definition of NPLs.Sources: National Bank of Romania; and IMF staff calculations.

B. Financial Development and Inclusion: A Cross-Country Perspective

7. Financial development generally contributes to economic growth, especially when we talk about development from relatively low levels. While there could be tradeoffs between growth and stability at very high levels of financial development, one can argue that many emerging market economies, including Romania, are still some way from that point. Sahay and others (2015a) find that there is a significant, bell-shaped, relationship between financial development (as measured by a newly-constructed index) and growth and that the level of financial development above which the positive effects on growth begin to decline lies between 0.4 and 0.7 of the index. Sahay and others (2015b) also suggest that financial sectors that are not only deep but also provide higher levels of financial inclusion appear more conducive to economic growth.

8. We use the Financial Development Index (FDI) to evaluate the level of Romania’s financial sector development. The FDI, developed recently by the Fund staff (Sahay and others, 2015a), captures both financial institutions and markets and assesses those across three dimensions—depth, access, and efficiency (see Annex I for details). The compiled index covers a large number of advanced and emerging economies allowing a look at financial development also from a cross-country perspective. One caveat is that the developments after 2013 are not captured by the index.

9. The FDI for Romania presents a notable contrast between the level of development of financial institutions and that of financial markets. Romanian financial institutions fare relatively well in terms of access and efficiency, but the low level of depth reflects low financial intermediation in Romania.3 At the same time, low indices for financial markets reflect low level of equity and debt market development. From a cross-country perspective, Romania lags behind many EU members including some of its peers in terms of the overall level of financial development and in particular in terms of financial markets.

A04ufig12

Financial Development Index: European Union, 2013

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Note: EU28 is a simple average of 28 EU member states.Source: Sahay et al. (2015); and IMF staff calculations.
A04ufig13

Financial Development Index

(Average of 2008-13)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Peers: Unweighted average of Bulgaria, Croatia, Czech Republic, Hungary, Poland, Slovakia and Slovenia.Source: Sahay et al. (2015); and IMF staff calculations.

10. We also look at financial inclusion in Romania, a concept closely related to financial development. Financial inclusion refers to the access to and use of various financial services by firms and households, including across such dimensions as gender. To gauge the level of financial inclusion in Romania, we utilize data from two World Bank databases: the Global Financial Inclusion Database and the World Bank Enterprise Survey.

11. Romanian households’ use of financial services seems to be on the low side when compared to EU and Eastern European averages. However, there has been a progress during recent years: the share of adults with banking accounts has increased to above 60 percent in 2014. The gender gap in terms of accounts with banks seems to be larger in Romania and has grown even bigger recently.

A04ufig14

Adults with Accounts at a Financial Institution

(Percent of 15y+)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

A04ufig15

Adults with Accounts at a Financial Institution

(Percent of 15y+)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Note: EU28 is a simple average of 28 EU member states. EE is a simple average of ALB, BGR, BIH, BLR, CZE, EST, HRV, HUN, KOS, LTU, LVA, MDA, MKD, MNE, POL, ROU, RUS, SRB, SVK, SVN, TUR and UKR.Source: World Bank Global Financial Inclusion (Global Findex) database.

12. Romanian households and firms’ seem to have also lower access to finance when compared to EU and Eastern European averages. The share of adults who borrowed from a financial institution was slightly above 10 percent in 2014 and the share of Romanian firms that reported access to finance as a major constraint was close to 35 percent in 2013, substantially higher than that in many peer countries.

A04ufig16

Adults who Borrowed from a Financial Institution

(Percent of 15y+)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Note: EU28 is a simple average of 28 EU member states. EE is an simple average of ALB, BGR, BIH, BLR, CZE, EST, HRV, HUN, KOS, LTU, LVA, MDA, MKD, MNE, POL, ROU, RUS, SRB, SVK, SVN, TUR and UKR.Sources: World Bank Global Financial Inclusion (Global Findex) database.
A04ufig17

Share of Firms Identifying Access to Finance as a Major Constraint

(Percent)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Note: All data as of 2013 except RUS (2012).Source: World Bank Enterprise Survey.

13. Higher levels of financial sector development and financial inclusion will benefit Romanian economy. While Romanian financial institutions fare relatively well in terms of access and efficiency, higher levels of financial intermediation, further equity and debt market development and bigger financial inclusion will help mobilize savings, fund much needed investment in the economy and make higher growth rates sustainable.

C. Determinants of Bank Credit in Romania

14. There have been a number of studies on the determinants of bank credit, particularly in light of the developments after the global financial crisis. Many European emerging market economies experienced then a precipitous fall in bank credit after a long credit boom. In particular, Kamil and Rai (2010) argued that the sources of funding (external vs. internal) mattered during the crisis for credit growth, with countries that relied more on external funding suffering the most. Aisen and Franken (2010) documented that pre-crisis boom and slowdown in partner countries were the main determinants of credit growth during the crisis. Barajas et al. (2010) found that bank-level fundamentals—capitalization and loan quality—helped to explain differences in credit growth across Middle Eastern and North African countries. Takáts (2010) concluded that supply shock was the main determinant of slowdown in cross-border lending to emerging markets during the crisis. Everaert et al. (2015) analyzed the roles of demand and supply factors in explaining credit growth for a number of European emerging market economies. Their results, based on the panel data analysis, indicate that supply factors gained more importance in explaining credit growth in the post-crisis period.

15. Our analysis focuses on both credit supply and credit demand factors. Broadly following the approach in Guo and Stepanyan (2011) it includes the following variables in the benchmark model: banking sector private credit (dependent variable), banking sector foreign liabilities, banking sector domestic deposits, inflation, and real GDP. We tried to include also a variable that reflects a change in monetary policy stance such as lagged policy rate, and also interbank market rate (ROBOR) or deposit rate. However, these interest rate variables did not turn out to be statistically significant.

16. We use OLS regression and employ quarterly data series. These are sourced from the IMF and NBR databases and span a period from the first quarter of 2003 to the fourth quarter of 2015. Most of the series were nonstationary in their levels and we use growth rates to address this issue. The benchmark specification of the regression is as follows:

Credit Growtht = β0 + β1Deposit Growtht + β2Non—resident Liability Growtht

+ β3πt–1 + β4Gt–1 + ∊t

17. The explanatory variables are:

Growth rate of deposits (Deposit Growtht). The expectation is that higher deposit growth would lead to more credit growth as banks would have more loanable funds. In an alternative specification, this variable is weighted by the share of deposits in total credit to the private sector one quarter ago to control for the overall importance of domestic deposits as a funding source.

Growth rate of non-resident liabilities (Non-resident Liability Growtht). The expectation is that this variable would have a positive impact on domestic credit growth. Again, in an alternative specification this variable is weighted by the share of liabilities to non-residents in total credit to private sector one quarter ago to control for the overall importance of foreign borrowings as a funding source.

Lagged Inflation (πt-1). As nominal credit growth will in general be affected by inflation, we use inflation as a control variable. We expect that, unless it creates financial instability, inflation will be positively associated with credit growth. In addition, it could also inform us whether inflation is detrimental to real private credit growth or not.

Lagged GDP growth (Gt-1). GDP growth measures the overall health of the economy, and thereby can reflect the demand for credit. Higher GDP growth should translate into higher credit growth. We use lagged GDP growth in the regression in order to help address the problem of possible reverse causality, namely high credit growth leading to higher GDP growth.

18. Table 1 presents the estimation results of the benchmark specification. All coefficients are statistically significant with expected signs. Both domestic deposits and liabilities to nonresidents contribute positively, albeit somewhat asymmetrically, to private credit growth. Private credit also increases with inflation, although the coefficient seems to be somewhat high and suggests no negative impact on real credit. Higher GDP growth leads to more demand for credit and hence higher credit growth. A number of statistical tests that were performed to verify our regression assumptions and to detect potential problems did not reveal any major issues.4

Table 1.

Regression Results Under Benchmark Specification 1/

article image
Source: Author’s estimates.

Standard errors are in parentheses. *** p<0.01, ** p<0.05, * p<0.1

19. In many emerging market economies foreign currency loans represent a significant portion of private credit. In Romania, until recently, foreign currency loans represented the largest share of private credit. Therefore, part of the change in private credit in terms of domestic currency could simply reflect exchange rate movements rather than genuine change of credit. Hence, we include the change in exchange rate in our estimation to control for the valuation effect (an increase in the exchange rate denotes depreciation of Romanian leu against the euro).

20. The strength of banking sector balance sheet can be another important determinant of credit growth. We tried to use non-performing loans as an additional explanatory variable; however, the variable did not turn out to be statistically significant. We used the capital adequacy ratio as a proxy for the strength of the banking sector position to expand credit.

21. Table 2 below reports the results after introducing the exchange rate change and the lagged capital adequacy ratio in our estimation. The positive and significant sign for exchange rate confirms that private credit growth in terms of domestic currency does seem to pick up valuation effect of foreign currency loans. Furthermore, it seems that a stronger capital position of the Romanian banks tends to associate with more credit to the private sector.

Table 2.

Regression Results Under Alternative Specifications 1/

article image
Source: Author’s estimates.

Standard errors are in parentheses. *** p<0.01, ** p<0.05, * p<0.1

22. In the third column of Table 2, we report results of an alternative specification. Here the deposit growth and non-resident liability growth variables are weighted with their respective shares in total credit to control for their overall importance as a funding source. In this specification, the point estimates for these two variables suggest that for every unit of additional funding from domestic sources, banks would lend out less than half of that to the private sector on average, while in case of foreign funds the ratio would be much higher.

23. Different time period and a dummy variable were used for a robustness check of our results. We estimated the above regressions also for a shorter period—from 2003Q1 to 2014Q2—given that starting in the second half of 2014 Romanian banks undertook a substantial write off of loans and many borrowers chose to participate in FX loan conversion schemes which have affected the credit developments. The results are broadly similar to those in the second and third columns of Table 2. We have also employed a dummy variable for the period immediately following the onset of the global financial crisis; however, it was not statistically significant.

24. Both demand and supply factors seem to be behind recent trends in bank credit. On the supply side, non-resident funding (mostly parent bank) has seen a declining trend since 2011 and has been negatively associated with the change in private credit. At the same time, growing domestic deposits—particularly demand deposits—have compensated the decline in foreign funding and have been associated with credit growth. The strength of banks’ capital positions is another important supply-side factor for change in private credit. On the demand side, credit is strongly related to economic activity as proxied by GDP growth.

25. Recent developments in NPLs and private sector leverage suggest improving prospects for credit growth but the level of financial intermediation needs to grow. Both corporates and households have reduced their leverage since the 2008 global financial crisis.5 Non-financial corporations’ indicators also point to some improvement in liquidity and profitability ratios. The recent improvement in bank and private sector balance sheets and strong near-term growth prospects should help banks further improve their loan portfolio and find new lending opportunities. Absent renewed flows from parent banks, this will require Romania to boost domestic deposits and develop alternative sources of funding for banking sector.

A04ufig18

Corporates Leverage Ratio 1/

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

1/ Non-financial Corporations Financial Debt to Equity ratio.Sources: Eurostat; and IMF staff calculations.
A04ufig19

Households Leverage Ratio 1/

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

1/ Households Debt to Net Financial Assets ratio.Sources: Eurostat; and IMF staff calculations.

D. Financial Sector Policies: The Past and Priorities for Future

26. Financial sector regulation and supervision policies have evolved in line with rapidly transforming financial sector. A major change was experienced during mid-2000s when financial sector was expanding fast and Basel II provisions were being implemented. In particular, new regulations on banks including new capital adequacy were introduced as well as a substantial change was implemented in supervisory practices by moving from a compliance-based approach to risk-based assessment. With the EU accession, financial sector regulation and supervision frameworks convergence with the EU frameworks gained pace. Cooperation between supervisory authorities in Romania as well as other EU member states strengthened as home-host supervisory rules were implemented (Georgescu, 2007). More recently, legislation was adopted to implement transposition of the EU’s bank recovery and resolution directive and capital requirements regulation and directive.

27. The National Bank of Romania (NBR) saw the risks associated with fast credit expansion during 2004–08 and took a number of measures to contain them. Its response included stricter reserve requirements and expanded reserve bases, tighter classification and provisioning rules as well as macroprudential measures which the NBR was one of the first in the region to introduce. The macroprudential measures included debt service-to-income and loan-to-value ratios and restrictions on FX credit (Dimova and others, 2016). Overall, while curbing credit growth to some extent, especially for households, those measures had limited efficiency as financial counterparties found ways to circumvent them and banks had excess liquidity and capital buffers (Isarescu, 2007). Having said this, macroprudential policies can still be helpful if carefully designed based on past experience and differentiated to address the specific risks. For example, Neagu and others (2015) suggest that DSTI and LTV measures be tailored by differentiation based on borrowers’ income as well as on currency and type of loans.

28. The NBR’s prudent and proactive policies preserved financial stability in the aftermath of global financial crisis. The NBR actively encouraged certain banks to boost capital and conducted stress test based on which precautionary increases in banks’ capital were assessed. Subsequently, the largest parent banks committed to maintain their exposure and adequate capital levels in Romanian subsidiaries under an initiative supported by the IMF and other international partners. The NBR also strengthened the supervisory and regulatory requirements and the frameworks for bank resolution and restructuring. The NBR continued its prudent approach to provisioning after the adoption of the International Financial Reporting Standards by introducing prudential filters.

A04ufig20

Capital to Risk-Weighted Assets

(Percent)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Source: National Bank of Romania.

29. The NBR also enhanced monitoring of cross-border banking sector flows to address negative impact from possible contagion from the euro area banks. The Greek bank subsidiaries in Romania came under stress on several occasions due to developments in Greece. The most recent episode was in summer of 2015 when the four Greek-owned banks experienced substantial deposit withdrawals. The NBR managed the episode well by proactively engaging with banks to put in place pre-notifications for cross-border transactions and announcing its readiness to provide liquidity. The deposit withdrawals have largely reversed as of end-2015.

30. In the aftermath of the global financial crisis the NBR embarked on a prolonged easing cycle. More recently, policies have strived to support credit recovery in Romania. Unprecedented monetary easing as reflected in the large policy rate reduction led to substantial declines in lending rates. Gradual reductions in minimum reserve requirements (MRRs) (which are still elevated compared to peer countries) released liquidity into the banking system. There are indications that private credit has started to recover.

A04ufig21

Interest Rates on RON Instruments

(Percent)

Citation: IMF Staff Country Reports 2016, 114; 10.5089/9781475555370.002.A004

Sources: National Bank of Romania, Haver; and IMF staff estimates.

31. The non-bank financial sector supervision and regulation have also transformed substantially. Significant progress has been made on institutional restructuring of the Financial Supervisory Authority (FSA) since it became the single supervisor of the non-bank financial sector in 2013. A number of barriers to capital market development were removed including reduction of fees and charges. New legislation was approved that strengthened FSA intervention and resolution tools for the insurance sector. Meanwhile, the FSA prepared the legal framework for the implementation of the Solvency II regime for the insurance sector. Regarding capital market development, the FSA initiated the implementation of the “STEAM” project which aims to transform Romanian capital market from “frontier” into “emerging” market and has made a notable progress in this regard. In 2015, the FSA implemented a comprehensive balance sheet review and stress testing exercise which covered virtually the whole insurance sector. The exercise revealed a number of deficiencies including substantial capital shortfall in several insurance companies.

32. Going forward, financial sector policies should continue to focus on stability and strength of balance sheets of financial intermediaries. At the same time, financial intermediation needs to be enhanced so it can better support future growth. In particular:

  • The authorities should make strong efforts to prevent legislative initiatives that involve unilateral and retroactive change of contracts and should remove from adopted legislation provisions that could undermine financial stability and legal predictability (e.g., provisions in “Giving in Payment” law). At the same time, it is important to move steadfastly to create an adequate institutional framework to ensure that the personal insolvency law becomes effective as soon as possible and that specialized courts for cases involving abusive clauses become operational.

  • Continued efforts are needed to further improve the quality of financial intermediaries’ portfolios. Steadfast implementation of the comprehensive assessment (asset quality review and stress testing) for the banking system and addressing persistently any revealed shortfalls and weaknesses will be crucial in this regard. Similarly, for the insurance sector, plans to remedy the revealed deficiencies and a swift follow-up on measures to address deficient solvency positions are needed.

  • Banks should be encouraged to invest more resources in improving lending practices and in training of staff with a focus on cash flow-based lending. Active engagement with existing and potential borrowers including SMEs is needed to raise awareness of loan products and of potential benefits of long-term partnership. While this will entail additional costs for banks, benefits in the longer term are likely to be substantial.

  • The efficiency of the SME Guarantee Fund needs to be increased to support Romanian banks’ funding of SMEs.

  • The NBR should continue to gradually reduce the MRRs to align them with rates prevailing in the EU. This would release additional loanable funds for Romanian banks, but should be done taking into account potential conflicts with NBR’s primary objective of price stability.

  • Steadfast implementation of the recently adopted covered bond law will allow the development of long-term bank funding including from foreign sources and should contribute to financial deepening.

  • Efforts to promote capital market development should intensify. The continued implementation of the “STEAM” project is important to strengthen and further develop capital market infrastructure as is educational efforts to raise awareness among potential investors. Focused efforts to fast track SOE privatizations including through IPOs will also help by creating additional supply for the equity market.

33. Looking forward, financial sector policymakers will need to continue exploring what policies promote a deeper and more inclusive financial system and how to mitigate tradeoffs that may exist between financial deepening and financial stability. Meanwhile, supervisors should constantly look for new risks that may be building in the banks and non-bank financial institutions.

Annex I. Construction of the Financial Development Index

article image
Source: Sahay et al (2015a).

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  • Takáts, Előd, 2010, “Was it Credit Supply? Cross-Border Bank Lending to Emerging Market Economies During the Financial Crisis,” BIS Quarterly Review (Basel: Bank for International Settlements, June).

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1

Prepared by Vahram Stepanyan.

2

In the EU as a whole, the NBFIs assets are around 1.5 times bigger than those of banks (EC, 2012).

3

Some large Romanian corporates have benefited from access to inter-company loans from foreign parents which in 2014 stood at around 15 percent of GDP, broadly in line with regional peers’ average.

4

These included checks for the normality and homoscedacticity of residuals, for autocorrelation, for multicollinearity and for model specification as well as Granger causality tests.

5

The reduction in leverage is more modest based on NBR’s data on non-financial corporate sector balance sheets.

Romania: Selected Issues
Author: International Monetary Fund. European Dept.