IMF published its staff report in context of the 2019 Article IV consultation with Romania. While welcoming the strong banking sector performance, Directors noted that efforts to strengthen financial stability should continue, including sustaining the good progress on implementing the 2018 Financial Sector Assessment Program (FSAP) recommendations. They called for measures to increase resilience to risks stemming from high bank exposure to the Romanian state and encouraged close monitoring of the new tax on bank assets due to its potential impact on monetary policy transmission and credit allocation.
The report highlights that the banking sector performance is strong, while facing the new bank tax. After several profitable years, banks have strong capital and liquidity positions and their non-performing loans (NPLs) have approached the EU average level. The banking system is stable, but the tax on bank assets creates some uncertainty. The tax could negatively affect the cost of bank credit to the private sector and linking the tax to performance targets could lead to distortions in the allocation of credit and resources. The policy uncertainty surrounding implementation of the tax as well as the recently introduced Consumer Credit Reference Index (IRCC) could hinder financial sector development.
Good progress has been made to improve resilience, consistent with the 2018 FSAP recommendations. A majority of FSAP recommendations, including debt-service-to-income ratios and currency-differentiated liquidity requirements, have been fully or partially implemented. Additional progress in some areas, in line with FSAP recommendations, would further support financial stability. One such area is the introduction of a carefully calibrated systemic risk buffer, which would increase resilience of the banking sector under a high sovereign exposure. While the exposure of banks to the Romanian state approached 20% of assets in 2018, which is one of the highest in EU, the exemption of government bond holdings from the new bank tax could incentivize banks to further increase the exposure. The authorities broadly agreed with the financial sector assessment of the IMF staff. The National Bank of Romania stressed the good progress made on many FSAP recommendations. They shared the staff concerns over the sovereign-bank nexus and have been internally discussing an introduction of a systemic risk buffer.
Related Link: Staff Report
Keywords: Europe, Romania, Banking, FSAP, NPLs, Systemic Risk Buffer, Financial Stability, Article IV, IMF
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