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June 12, 2018

IMF published a report on the assessment of financial sector in Romania, under the Financial Sector Assessment Program (FSAP). IMF also published technical notes on crisis preparedness, systemic risk analysis and stress testing the financial sector, macro-prudential policy framework and tools, balance sheet analysis, and calibration of a debt-service-to-income (DSTI) limit in Romania.

The financial sector assessment reveals that the financial sector in Romania has strengthened significantly over the last few years. Effective supervisory measures have helped reduce the high level of nonperforming loans (NPLs) from 21.9% at its peak in 2013 to 6.4% as of December 2017. Foreign-owned banks’ dependence on parent funding has significantly declined, while deposits from the domestic private sector have increased, reducing liquidity risks. Banks’ capital buffers strengthened, on the back of a slowdown of credit and low interest rates, with an average capital to risk-weighted assets now above 18%. However, some vulnerabilities are emerging. Lending practices of nonbank financial lenders (NBFLs) may lead to loan defaults and reputational risks for the banking sector. As the financial system is small, shocks may further discourage financial intermediation, which is already among the lowest in EU.

Stress test results indicate that, over a three-year horizon, banks face losses of close to 900 basis points (bps) in capital, resulting from trading losses on their sovereign securities portfolios, and credit losses on their loan portfolios. A number of the 12 stressed banks fail to meet the minimum threshold for the common equity tier 1 capital ratio. Policy action is needed to address these risks and strengthen financial stability. The authorities are already contemplating a debt-service-to-income (DSTI) limit on mortgages and calibration of this limit could draw on the mission’s analysis of loan-level information from the Romanian credit register. In addition, the team recommends a currency-differentiated liquidity coverage ratio and the monitoring of a currency-differentiated net stable funding ratio, to limit FX liquidity risks. Strengthened monitoring of NBFLs is warranted to avoid reputational risks and regulatory arbitrage. The mission also recommends introducing capital buffers to increase resilience and guard against risks from large sovereign exposures.

The National Bank of Romania (NBR) is transitioning to a risk-based supervisory approach that needs further enhancements. The new Supervisory Review and Evaluation Process (SREP) Guidelines of EBA are still in the initial stages of implementation. NBR should conduct more risk-focused, banking industry-wide thematic analyses and develop its off-site monitoring tools, such as by conducting bottom up stress tests. The NBR should also build up specialized expertise, in particular in IT and cyber security. This will benefit the systemically important payment and securities settlement systems that are being brought under the roof of the NBR. Finally, remaining gaps in the anit-money laundering and combating the financing of terrorism (AML/CFT) framework should be addressed. The upgrade of crisis management and resolution procedures that is underway should continue. Important progress has been made, in particular through the adoption and implementation of the Bank Recovery and Resolution Directive (BRRD). Finally, the FSAP recommended the adoption of a comprehensive strategy for financial development.


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Keywords: Europe, Romania, Banking, Insurance, Stress Testing, FSAP, Macro-prudential Policy, IMF

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