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June 06, 2018

IMF published its staff report and selected issues report under the 2018 Article IV consultation with Romania. Directors commended the improvements in the financial sector in recent years and examined the findings of the Financial Sector Assessment Program (FSAP). They called for strengthened macro-prudential policies to address emerging vulnerabilities from the exposure of banks to the government and the real estate sectors. They supported enhancing supervisory practices and the crisis management framework.

The staff report noted that, in line with the FSAP recommendations, the authorities are encouraged to continue strengthening the anti-money laundering and combating the financing of terrorism (AML/CFT) framework in compliance with the Financial Action Task Force (FATF) standards. The report highlighted that the resilience and profitability of the banking sector has improved in recent years. Moreover, profitability and liquidity positions of banks have strengthened. Non-performing loans (NPLs) declined significantly, reflecting the proactive efforts of the National Bank of Romania (NBR) to encourage NPL sales and write-offs. However, vulnerabilities arise from the high exposure of banks to the real estate sector and sovereign debt. The mortgage contracts expose banks to credit risks in the event of sharp increases in interest rates. The effectiveness of existing macro-prudential tools on mortgages is undermined by the Prima Casa program, which allows loan-to-value ratios of up to 95%.

Staff warned against legislative initiatives that could harm the financial system. Several recent initiatives would, if enacted, reduce the amount of credit provided to the real economy and slow the resolution of NPLs, thus adversely affecting financial stability. This includes the proposed caps on interest rates for household lending and several measures that adversely affect the functioning of the market for NPLs, such as allowing individuals to repurchase debt from debt collectors at a legislated maximum amount. NBR agreed with the main vulnerabilities identified by the ongoing FSAP and welcomed its recommendations. Initial steps have been taken to implement most of the FSAP recommendations. Implementing the FSAP recommendations will help to further improve the resilience of the banking sector. Drawing on the conclusions of the ongoing FSAP, staff recommended certain macro-prudential policies to address these vulnerabilities.

  • A debt-service-to-income (DSTI) limit on mortgage lending would mitigate risks from the exposure of banks to the real estate sector.
  • Carefully calibrated capital surcharges could address vulnerabilities from sovereign exposures.
  • Capital surcharges—preferably the systemic risk buffer—should be calibrated carefully to increase the resilience of the banking system while avoiding unintended market impact. 
  • The National Committee for Macro-prudential Oversight (NCMO) should strengthen its accountability framework. Staff welcomed recent steps in this direction, including developing a common assessment of systemic risk at each NCMO meeting and publicly disclosing the proposed policy actions and voting distribution.

The assessment also revealed that supervisory practices and the crisis management framework need bolstering. The processes supporting banks’ supervisory review should be further developed and the framework for Emergency Liquidity Assistance should be finalized and implemented. Aligning provisioning regimes across banks and non-bank financial lenders (NBFLs) is also recommended. In addition, the selected issues report reviews the level and structure of tax revenues in Romania, analyzes the growth-friendliness and efficiency of its tax structure, and proposes options to improve revenue mobilization drawing from the experiences of other countries.

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Keywords: Europe, Romania, Banking, NPLs, Article IV, FSAP, Macro-prudential Policy, Systemic Risk, IMF

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