Annex I. Impact of the SRB Scheme on Bond Yields and Bank Profitability1
This Annex provides an analysis of the likely impact of introducing the SRB for sovereign exposures on sovereign bond yields, and banks’ profitability.
This Technical Note has been prepared by Thorvardur Tjoervi Olafsson, Monetary and Capital Markets Department, IMF.
The first two Presidents of ASF had to leave before the regular end of their tenure. In February 2014, the ASF President was jailed on accusations of corruption and resigned. The second President was dismissed in May 2017 on the basis that he had lost his good reputation, which is a legal criterion for dismissal but one that is unspecified in the law. Doubts about the independence of the ASF among market participants seem widespread.
The NBR has a long experience in implementing macroprudential policies. See Neagu, F., L. Tatarici, and I. Mihai, (2015), “Implementing Loan-To-Value and Debt-Service-To-Income Measures: A Decade of Romanian Experience”, National Bank of Romania Occasional Papers, No. 15; and Dimova, D., P. Kongsamut, and J. Vandenbussche, (2016), “Macroprudential Policies in Southeastern Europe”, IMF Working Paper, No. WP/16/29.
The framework could allow for exemptions, which should be voted on unanimously by the NCMO, for cases in which public disclosure are likely to have detrimental effects on financial stability.
Banks are obliged to perform a stress test on borrowers, who are applying for consumer loans, based on specific assumptions from the NBU. Banks are allowed to set their own limits, but they can be rejected by the NBU.
The authorities’ strategy for the Prima Casa program for the period 2017–2021 envisages a decrease of the state guarantee ceiling from RON 2.5 billion in 2017 to RON 2 billion in 2018–2020 and to RON 1.5 billion in 2021. There have also been other changes made in 2018, for instance, on how the guarantee ceiling is allocated to incentivize banks to use their own mortgage products rather than the Prima Casa mortgages.
The weighted average remaining maturity of Romanian sovereign debt is 3.2 years for domestically issued debt and 8.4 years for Eurobonds, which entails 5.4 years for sovereign bonds as a whole.
The comparison with euro area countries is relevant despite their holdings of euro-denominated sovereign bonds from other member countries as the euro area debt crisis was a clear example of sovereign risk premia being different across countries having the same currency.
All the three main credit rating agencies lowered Romania to speculative grade following the GFC and it was not Until May 2014 that they had all upgraded the country back to investment grade. However, Romania remains in the lowest quartile of European Union member countries in terms of credit rating and credit default swaps (CDS) spreads.
The discussion on the prudential treatment of sovereign exposures and the need to mitigate risks from the sovereign-bank nexus has intensified recently, see e.g., Véron (2017) and the Basel Committee on Banking Supervision (2017).
The CRD has specific maximization rules for how the SRB and the O-SII buffers can be applied. In most cases the highest buffer applies and the two cannot be added on top of each other. However, when the SRB applies only to domestic exposures, as is the case here, both buffers can apply and be added on top of each other (see Table 4.6 in the ESRB Handbook on Operationalising Macro-prudential Policy in the Banking Sector. The ESRB Handbook provides further information on the SRB, in particular Chapters 4,
In its December 2017 meeting, the NCMO recommended the use of the SRB to facilitate a continued reduction of NPLs. However, while NPLs have continued to decrease with the share falling below eight percent as banks are subjected to NPL targets in the supervision process, the high concentration of sovereign exposures is by and large left unattended. A potential option is to utilize the SRB to ensure some further progress in lowering NPLs before applying the SRB to mitigate risks from the concentrated sovereign exposures.
Foreign investors hold approximately 17 percent of domestic sovereign bonds, so there is still room to increase the share of foreign investment in the domestic government bond market.
The Annex has been prepared by Maral Shamloo, Monetary and Capital Markets Department, IMF.
This is more conservative than the actual situation, where government bonds are 78 percent of HQLA holdings.