Financial

Stability Report
2015

Financial
Stability Report
2015

NO TE
The Financial Stability Report was prepared by the Financial Stability Department under
the coordination of Deputy Governor Liviu Voinea.
The team involved in the elaboration of the Report comprised Eugen Rdulescu,
Ion Drgulin, Florian Neagu, Horaiu Lovin, Irina Mihai, Andra Pineta, Virgil Dsclescu,
Ruxandra Avram, Adriana Neagoe, Luminia Tatarici, Bogdan Chiriacescu, Angela Pslaru,
Ana-Maria Cazacu, Florin Dragu, Ruxandra Popescu, Elena Banu, Antoaneta Amza,
Alexie Alupoaiei, Luminia Vintileanu, Matei Kubinschi, Gabriela Hoholea, Florin Blu,
Gabriel Gaiduchevici, Alina Broiu, Anca Dini, Mariana Tudoran, Petre Marica,
Alexandru Dobrev, Mihai Voicu, Cristian Ghin, Silviu Cristea, Claudiu Negrea,
Daniela Radovici. The team would like to thank the colleagues from the Monetary Policy
Department, the Economics Department, the Statistics Department, the Macroeconomic
Modelling and Forecasting Department and the Supervision Department for their
comments.
The Report was examined by the National Bank of Romania Board and approved
in its meeting of 30 September 2015.
The analyses draw on the information available by 20 August 2015.
All rights reserved.
Reproduction for educational and non-commercial purposes is permitted provided
that the source is acknowledged.
National Bank of Romania,
25 Lipscani Street, postal code 030031, Bucharest
Telephone: +4021/312 43 75; Fax: +4021/314 97 52
Website: http://www.bnr.ro
ISSN 1843-3251 (print)
ISSN 1843-326X (online)
ISSN 1843-326X (e-Pub)

Contents

OVERVIEW

1. INTERNATIONAL AND DOMESTIC ECONOMIC AND FINANCIAL ENVIRONMENT

10

1.1. International economic and financial developments

1.2. Domestic macroeconomic developments
1.3. Non-financial private sector indebtedness
1.4. External balance
1.4.1. Current account

11
15
18
25
25

1.4.2. Capital flows

29

2. REAL SECTOR

32

2.1. Non-financial corporations

2.1.1. Non-financial corporations economic and financial performance

33
33

2.1.2. Financial discipline of non-financial corporations

2.1.3. Developments in non-financial corporations insolvency
2.1.4. Risks generated by the commercial real-estate sector and
mortgage-backed lending to non-financial corporations
2.2. Households
2.2.1. Households balance sheet and saving behaviour

37
45
48
50
50

2.2.2. Households capacity to service debt

2.2.3. Risks generated by the residential real-estate sector
and mortgage-backed lending to households

61

3. THE FINANCIAL SYSTEM

64

3.1. Structure of the financial system

3.2. Banking sector
3.2.1. Structural developments

65
69
69

3.2.2. Aggregate balance sheet of credit institutions

3.2.3. Capital adequacy
3.2.4. Loans and credit risk

72
75
79

3.2.5. Liquidity risk

3.2.6. Market risk
3.2.7. Profitability and efficiency

87
91
93

3.2.8. Misconduct risk

3.3. Non-bank financial sector
3.3.1. Insurance sector

95
96
96

3.3.2. Private pension funds

3.3.3. Non-bank financial institutions
3.3.4. Shadow banking

58

99
101
104

3.4. Financial markets

3.4.1. Money market
3.4.2. Foreign exchange market

108
108
110

3.4.3. Government securities market

3.4.4. Capital market

111
113

4. FINANCIAL SYSTEM INFRASTRUCTURE STABILITY OF PAYMENT

AND SECURITIES SETTLEMENT SYSTEMS

118

4.1. Stability of ReGIS

4.2. Stability of SENT
4.3. Securities settlement systems
4.4. Cybersecurity

118
121
122
125

5. FINANCIAL STABILITY, REGULATORY FRAMEWORK

AND MACROPRUDENTIAL POLICIES

127

5.1. The role of financial stability in the current economic and financial context
5.1.1. The international context
5.1.2. The implementation framework for macroprudential policy in Romania

127
130
131

5.1.3. Objectives, functions and tasks of macroprudential policy in Romania

5.2. The NBRs macroprudential objectives and the instruments
of macroprudential policy for achieving the objectives

134

5.2.1. The objective of mitigating and preventing excessive credit

growth and leverage
5.2.2. The objective of mitigating and preventing excessive maturity
mismatch and market illiquidity
5.2.3. The objective of limiting direct and indirect exposure concentrations
5.2.4. The objective of limiting moral hazard

134
135
135
136
137

5.2.5. The objective of strengthening the resilience of financial infrastructures

137

5.3. Capital buffers with a view to preserving financial stability

5.3.1. The capital conservation buffer

138
138

5.3.2. The countercyclical capital buffer

5.3.3. The capital buffer relating to other systemically important institutions
5.3.4. The systemic risk buffer

138
140
142

5.4. Implementation by the NBR of ESRB macroprudential recommendations

5.5. Developments of the Central Credit Register in order to obtain
the information necessary for monitoring macroprudential objectives
5.6. EU regulations with implications on financial stability
5.6.1. Banking Union and Capital Markets Union
5.6.2. The recovery and resolution framework for credit institutions

143
148
150
150
152

5.7. The new EU-wide harmonised definition of non-performing exposures

153

Special feature. Romanias public debt sustainability seen

from the perspective of financial stability

156

1. How much does Romanias public debt amount to?

2. Why has government debt gone up?

157
160

3. Is Romanias public debt sustainable?

3.1. Public debt size
3.2. Public debt maturity

162
163
168

3.3. Public debt financing cost

3.4. Investor base
4. Can the local financial system further cope with the rising public debt financing?

169
170
171

Abbreviations

173

Tables

174

Charts

174

OVERVIEW

Financial stability has remained solid since the release of the previous Report
(September 2014). The National Bank of Romania fulfilled the macroprudential
objectives within its scope of activity. Financial stability is a public good that may be
safeguarded by coordinating macroeconomic policies and cooperating with the other
macroprudential authorities. Both cyclical and structural risks have remained
manageable. The international economic and financial environment continues
to be characterised by elevated volatility, but the local banking sector has got the
resources to withstand potential adverse developments. Domestically, preserving
macroeconomic equilibria, especially on the fiscal front, is of the essence for financial
stability. With a view to strengthening system resilience to possible adverse
developments and aligning with the European regulatory framework requirements,
new macroprudential tools are to be implemented in the period ahead.
The main risks to financial stability are as follows:

Map of risks to financial stability

No severe systemic risk
Risk generated by external uncertainty surrounding global economic growth, the state of the
international financial system, a possible reversal of the downward trend in interest rates
worldwide and shifts in investor sentiment
Domestically, the risk of returning to pro-cyclical economic policies
Risk of further modest dynamics of loans to non-financial corporations, despite the sustainable
growth potential
Contagion risk from the banking sector in Greece
Credit risk associated with the stock of loans, amid the widening share of domestic
currency loans
Risk triggered by the geopolitical situation in the Middle East, with possible consequences on the
European single market
severe systemic risk
high systemic risk
moderate systemic risk
low systemic risk
Note: The colour shows risk intensity. Arrows indicate whether the risk has increased/decreased since the
previous Financial Stability Report.

On the external front, the European Central Bank launched a large-scale quantitative
easing programme to prevent deflation risk in the euro area at a time when the
quantitative easing cycle in the US was losing momentum. This asynchrony of
monetary policy in the euro area and that in the US, driven also by the difference
between business cycles, fuels global uncertainty and may cause heightened capital
flow volatility in emerging economies.

NATIONAL BANK OF ROMANIA

Financial stability report 2015

Low interest rates: (i) may create distortions through the lending channel, as they
deepen the debt trap for both households and companies; (ii) may lead to public
finance imbalances via temporary low-cost financing of wider deficits; (iii) reduce the
incentive for structural reforms in the economy; (iv) may lead to misallocation of
resources between economic sectors; (v) foster investment in higher-yielding, yet
riskier and less liquid assets and hence increase the role of the shadow banking
sector, which is less regulated and supervised; (vi) underestimate credit risk; and
(vii) may diminish monetary policy effectiveness after testing the zero bound.
The persistence of too low interest rates for too long induces the risk of their abrupt
reversal.
Against this backdrop, the domestic macroeconomic policy mix should remain
prudent and promote sound economic growth, along with keeping the fiscal deficit in
line with the Medium Term Objective (MTO) of fiscal policy.
The domestic macroeconomic environment improved on the back of the following
developments: (i) economic growth supported the fast narrowing of the negative
output gap, which is foreseen to close in the course of 2016; (ii) the end of 2014
saw the achievement of the MTO, i.e. a structural deficit of 1 percent of GDP;
(iii) households purchasing power increased as the inflation rate slipped into negative
territory and their income moved higher; (iv) the monetary policy rate touched an
all-time low; (v) the current account deficit consolidated at around 1 percent of GDP,
amid more competitive exports; and (vi) the cost of public debt financing stayed on a
downward trend.
However, these developments are not risk-free, as: (i) economic growth started to be
mostly consumption-driven, while potential GDP is further depressed by weak
transport infrastructure, the insufficiently fast pace of EU fund absorption and the
non-financial corporations payment delinquency; (ii) budget adjustment was
accomplished largely via spending cuts, amid failure to carry through the scheduled
investment, and now the risk of a trend reversal of the last five years budget
adjustment is looming because of pro-cyclical economic policies; (iii) curbing of
inflation was primarily ascribed to lower fuel prices on international markets and to
the cut in the VAT rate on food items domestically, which mask however the
persistence of inflationary pressures that will become manifest once the base effect
has faded out; (iv) monetary policy should take account of the macroeconomic policy
mix; (v) the current account deficit may start widening again, on the back of higher
imports driven by rising consumer spending; and (vi) investor sentiment might
change following adverse developments locally or externally, which may swiftly push
financing costs higher, while restraining the possibility for the domestic banking
sector to raise its sovereign debt exposure.
The local banking sector supported the favourable developments in the economy via:
(i) substantial rise in leu-denominated loans, particularly mortgage loans to
households, amid lower lending rates; (ii) decline in household indebtedness and in
debt servicing cost for leu-denominated variable-rate loans; (iii) improvement in asset
quality through a significant reduction in the non-performing loan rate, which is likely
to facilitate lending recovery; (iv) mitigation of currency risk through a change in the

NATIONAL BANK OF ROMANIA

Overview

loan stock composition, i.e. a widening share of leu-denominated loans; (v) narrowing
of the spread between lending and deposit rates; and (vi) further consolidation of
bank prudential indicators (solvency and liquidity ratios), which helped insulate the
banking sector against the contagion risk induced by foreign market uncertainty.
On the other hand, an impact on banking sector dynamics had also the following
factors: (i) the still weak lending to non-financial corporations, despite their important
borrowing potential; (ii) low-income households still report an elevated level of
indebtedness and remain vulnerable to interest rate shocks; (iii) the banks balance
sheet clean-up is still under way, contributing to their lower profitability; (iv) foreign
currency loans still prevail and currency risk materialised in 2015 for borrowers in
Swiss francs and US dollars following the strengthening of these currencies versus the
euro, without however triggering systemic risk; (v) the interest rate margin can be
narrowed further in order to near the EU average; and (vi) close monitoring and a
prudent approach in relation to local banks with Greek capital are further warranted.
The 2015 Financial Stability Report is organised as follows: Chapter 1 discusses the
international and domestic economic and financial environment. Chapter 2 deals with
the real sector, i.e. non-financial corporations and households. Chapter 3 looks at the
financial sector, and Chapter 4 focuses on the financial sector infrastructure. Chapter 5
provides an in-depth overview of financial stability as a public good, describes the
European regulatory framework and how macroprudential policies are implemented
in Romania. Topical issues are separately addressed throughout the Report, such as
the sovereign debt crisis, the state of CHF-denominated loans, the developments in
the First Home programme, the role played by the National Committee for
Macroprudential Supervision.
The 2015 Financial Stability Report also includes a special feature on Romanias public
debt sustainability seen from the perspective of financial stability. The special feature
provides answers as to why the public debt increased and how the money was spent,
and assesses public debt sustainability. The analysis finds that Romanias public debt
is sustainable at present in terms of size, but there is a risk of going beyond a critical
threshold in the case of adverse economic conditions, an interest rate shock or budget
slippages. Since 2011, refinancing risk has been decreasing steadily, financing costs
have contracted substantially and the investor base has diversified. Nevertheless,
public debt has shown reliance on the local banking sector, which has also had some
benefits in terms of mitigating contagion risk and boosting liquidity, but the potential
to further tap this financing source has largely been exhausted.

NATIONAL BANK OF ROMANIA

1. INTERNATIONAL AND
DOMESTIC ECONOMIC AND
FINANCIAL ENVIRONMENT

The international economic and financial environment was marked by rising volatility.
The still high uncertainty surrounding future international economic and financial
developments, among which those linked to the diverging monetary policy stances
of the worlds major central banks, the lingering doubts about the situation in Greece
and the economic picture in China, is the main challenge to financial stability posed
by the external sector.
The domestic macroeconomic framework continued to be supportive of financial
stability, but there is a risk of returning to pro-cyclical economic policies. Preserving
macroeconomic equilibria, also via the consistent implementation of an adequate
fiscal, budgetary and monetary policy mix, is pivotal to maintaining financial stability.
The level of indebtedness of non-financial corporations and households is below the
average of the countries in the region. Total debt stock of non-financial corporations
and households further moved up, albeit at a slow pace, mostly due to resident banks,
which granted leu-denominated loans to households. Nevertheless, non-financial
corporations have a sizeable sustainable borrowing potential, which comes especially
from the sectors that may weigh heavily upon Romanias economic growth pattern.
Romanias international trade and financial relations did not create vulnerabilities for
financial stability. The current account deficit remained low, whereas capital flows
were similar in composition to the preceding year. The main challenges to financial
stability stemming from the companies with a bearing on external balance are related
to strengthening the sustainability of the current account deficit, improving the
competitiveness of Romanias exports and the capacity of foreign trade companies
and foreign-funded companies to withstand potential adverse developments, as well
as to increasing the share of such companies with borrowing potential in domestic
banks loan portfolios.
The European Commission identified 16 EU Member States facing certain
macroeconomic challenges and Romania is seen as one of the countries dealing with
risks that are relatively easy to manage (along with Belgium, the Netherlands, Finland,
Sweden and the United Kingdom). Nevertheless, there is still a significant need to
further pursue structural reforms both in Romania and the EU.

10

NATIONAL BANK OF ROMANIA

1. International and domestic economic and financial environment

1.1. International economic and financial developments

Since the previous Report, the international economic and financial environment has
been marked by rising volatility, which had however mixed effects on financial stability
in Romania. Economic growth returned to positive territory in many of Romanias
trading partners, benefitting its exports, and the accommodative monetary policy
stances of the main developed countries pushed down its financing costs as well.
The outlook is further uncertain, which could generate significant effects on the
stability of the financial sector in Romania. Moreover, the domestic economic and
financial environment came under pressure from the worsening situation in Greece,
the uncertainty surrounding the developments in the Ukraine conflict and the low
profitability of the European banking groups operating also in Romania. In the period
ahead, the said factors remain the key sources of vulnerability for the European
banking sector and, via this channel, for financial stability in Romania.
The external macroeconomic environment and its implications
for the domestic economy
Romanias main trading partners (Germany, France and Italy) reported improved
economic growth in 2014 as compared with 2013 and these positive trends look set to
continue. The stronger economic performance was manifest worldwide, but
uncertainty still surrounds growth projections. According to the IMFs World Economic
Outlook Update of July 2015, global GDP growth is forecasted at 3.3 percent in 2015
and 3.8 percent in 2016, with marked heterogeneity across countries depending on
their level of development. The EU witnesses a more tepid consolidation of economic
growth, the European Commission (EC) estimating GDP dynamics at 1.8 percent in
2015 and 2.1 percent in 2016 (the European Commissions Spring 2015 Economic
Forecast), yet uneven across Member States.
The rebound in economic activity was also underpinned by the accommodative
monetary policy stances taken by the main developed countries. The European
Central Bank (ECB) further expanded its set of instruments in 2014 as well, with a view
to boosting lending to the real sector amid the cut in the main refinancing rate to
historical lows1, to include (i) targeted longer-term refinancing operations (TLTROs)
and (ii) new assets in the asset purchase programme2 (estimated to amount to
EUR 1,140 billion until September 2016). Behind the quantitative easing decisions
taken by the ECB, as well as by the Federal Reserve, stood concerns over a too
prolonged period of low inflation. The ECB mainly aimed to reduce real interest rates,
household, corporate and government debt burden, and banks funding costs.
On the other hand, keeping interest rates low for an extended period fuels the search
for yield, which may lead to unsustainable increases in some asset prices (real estate,
financial instruments) and the emergence of liquidity illusion on certain segments of
financial markets worldwide. These are the main vulnerabilities for financial stability
1

On 4 September 2014, the ECB decided to lower the interest rate on its main refinancing operations (MROs) to 0.05 percent.

In June 2014, the asset purchase programme was expanded, before being adjusted in January 2015. The purchases under
the programme currently include asset-backed securities, covered bonds and public sector securities.

NATIONAL BANK OF ROMANIA

11

Financial stability report 2015

identified by major international institutions (Box 1. Challenges to the international

financial system). The build-up of such imbalances might cause systemic risks to
become manifest following fast and significant changes in investor sentiment on
global financial markets. These swings may be driven by lower-than-expected
macroeconomic performance, materialisation of geopolitical risks or uncertainty
surrounding the future monetary policy decisions of major central banks worldwide.

Box 1. Challenges to the international financial system

In its latest Annual Report, the Bank for International Settlements (BIS) identified
several aspects of international financial stability, as follows:

The main challenges to global economy are: the persistence of interest rates at
exceptionally low levels, the unbalanced economic expansion, the high debt
burden, financial risks, the low productivity growth and the limited room for
manoeuvre in macroeconomic policy. The build-up of these vulnerabilities owed to
the excessive focus of macroeconomic policies on short-term objectives for output
and inflation and to losing sight of the position of the economy in the financial cycle;

The accommodative policies of the worlds major central banks continue to fuel the
uptrend in prices in global asset markets, whereas investor expectations about the
diverging monetary policy decisions of the Federal Reserve and the European
Central Bank keep putting pressure on the single currency. Moreover, the further
accommodative monetary policies led to the emergence of liquidity illusion in
financial markets worldwide, and particularly bond markets: market liquidity seems
to be ample in normal times, but vanishes quickly during market stress;

The movements in the oil price and the US dollar triggered different responses of
the economies depending on the stages of their business and financial cycles, with
better macroeconomic management and more robust financial structures
increasing resilience to such shocks. The large stock of debt worldwide and the shift
from banks to capital market funding could raise new risks;

The build-up of global financial imbalances, in the context of inflation rates running
below targets, complicates the decision of keeping accommodative monetary
policies in place, pointing to the need for an adjustment of monetary policy
frameworks to incorporate financial stability considerations;

The current international economic and financial environment brought to the fore
again the debate about the design of the international monetary and financial
system and the need to strike a balance between international cooperation and
domestic macroeconomic policies, given the integration of financial markets
worldwide and the spillovers it facilitates;

Despite a further improvement in its capital and liquidity positions, the banking
sector in advanced economies continues to face difficulties, adding to those driven
by the persistently low interest rates and the still frail macroeconomic environment.

Source: BIS Annual Report, 2014/15

12

NATIONAL BANK OF ROMANIA

1. International and domestic economic and financial environment

Another risk factor could stem from the adverse developments in emerging market
economies, such as China (economic slowdown, the deterioration of the loan portfolio
quality, adjustments in the real estate market and marked drops in equity prices),
via the shift in investors exposure from this asset class, as well as via the indirect
channel of Chinas trade with EU Member States that are also some of Romanias
major trading partners.
The potentially detrimental impact that a change in investor sentiment towards
emerging economies may exert on Romania could be substantially less severe than
in other countries in the region. This assumption is supported by further robust
domestic macroeconomic equilibria, strengthened economic growth and lower
presence of non-residents on domestic financial markets. Non-residents stock of
portfolio investment ranks among the lowest in the EU (14 percent of GDP versus
86 percent of GDP at EU level in December 2014) and the size of capital and interbank
markets is also smaller than in other emerging countries in the EU.
As for the geopolitical environment, the domestic economy was marginally exposed
to the risks stemming from the conflict between Russia and Ukraine, chiefly via the
indirect channel of business relationships and funding of non-financial corporations
and via the European banking groups operating in Romania with exposure to Russia
and Ukraine, the most important of which are based in France, Austria and Germany3.
Although the situation in the region continued to be a source of uncertainty,
systemic risk has not manifested itself across the banking sectors in the EU so far.
The worsening sovereign debt situation in Greece exerted a moderate impact on the
banking sector (for further details, see Box 2. The sovereign debt situation in Greece).
On the other hand, the geopolitical tensions in the Middle East led to significant
influxes of migrants from this region to the EU Member States. Although at present
Romania is not directly affected by these developments, the main risks to the
economy could occur through the following channels: (i) budgetary pressures via the
increase in social security and national security spending; (ii) foreign trade, following
the potential freight transport bottlenecks that may emerge in the European Union
and (iii) the labour market, via the higher unemployment rate.
The state of the European banking sector
The European banking sector further reported low profitability, to which contributed
particularly the modest economic growth. The significant non-performing loan stock
in some countries, especially those with high public and private sector indebtedness,
was an additional concern for certain European banking groups and continues to
hinder the resumption of lending, playing a certain part in the sluggishness of
economic recovery as well. Another factor that may weigh on the profitability of the
banking sector is its interdependence with the public sector. With a view to limiting
contagion effects via this channel, the reform of the EUs institutional framework was
carried on, translating into the adoption of Directive 2014/59/EU establishing a
framework for the recovery and resolution of credit institutions and investment firms,

NATIONAL BANK OF ROMANIA

According to Bank for International Settlements data as of December 2014.

13

Financial stability report 2015

as well as of Regulation (EU) No. 806/2014 establishing uniform rules and a uniform
procedure for the resolution of credit institutions and certain investment firms in the
framework of a Single Resolution Mechanism and a Single Resolution Fund.

Box 2. The sovereign debt situation in Greece

Four credit institutions with Greek capital operate in Romania, playing a moderate
part in the domestic banking system. They hold approximately 12 percent of total
bank assets (June 2015). All banks with Greek capital are Romanian legal entities
under the direct supervision of the National Bank of Romania.
These credit institutions
evince an adequate
lei bn.
EUR bn.
prudential standing, most
120
24
indicators further improving
100
20
in the past year. At present,
80
16
these banks boast a total
60
12
capital ratio significantly
40
8
above the required level
20
4
(18.1 percent in June 2015,
0
0
up from 16.3 percent in
December 2014, as compared
with the 8 percent minimum
Foreign financing from Loans to non-financial
Loans to
parent banks
corporations (rhs)
households (rhs)
threshold), high quality own
other banks
Austrian-owned banks
funds (a 13.1 percent Tier 1
French-owned banks
Greek-owned banks
capital ratio in June 2015), an
Source: NBR
appropriate coverage ratio of
non-performing loans with IFRS provisions (69.4 percent), as well as better loan
portfolio quality, in line with the changes across the banking sector as a whole (with
the NPL ratio standing at 15.8 percent in June 2015, down from 21 percent in April
2014). Over the last year, their funding from parent banks fell to EUR 2.9 billion
(Chart A), accounting for 18 percent of total liabilities, with 12 percent of these loans
having a maturity of up to one year (in June 2015). The liquidity stress test for
macroprudential purposes reveals that the banks with Greek capital have the
necessary means to withstand a shock stemming from the withdrawal of financing
from non-resident financial institutions. The NBR continues to closely monitor the
developments in Greece and those related to the transmission channels of potential
shocks, with a view to acting as early as possible to limit the potential negative
effects on the domestic banking sector.
Jun.15

Dec.14

Dec.13

Jun.15

Dec.14

Dec.13

Jun.15

Dec.14

Dec.13

Chart A. Foreign exposures and the effect on corporate

and household lending

An analysis of the impact of the sovereign debt situation in Greece on the real
economy in Romania shows that, over the short term, the consequences via the trade
channel are limited (domestic exports to Greece accounted for 1.4 percent of total
exports in December 2014). Moreover, the difficulties encountered by parent
undertakings in Greece that would beset their subsidiaries in Romania would exert a
moderate impact. Romanian companies with Greek capital make a modest
contribution to economic activity (as they generated 0.5 percent of gross value
14

NATIONAL BANK OF ROMANIA

1. International and domestic economic and financial environment

added and accounted for 0.3 percent of the number of employees economy-wide in
December 2014) and have a relatively low share in domestic banks loan portfolio
(tantamount to approximately lei 1 billion).
In the medium to long run, the fallout from the situation in Greece on Romanias
economy and banking sector is expected to manifest itself along three main lines:
(i) the reshaping of the Romanian banking sector via the lower importance of credit
institutions with Greek capital; (ii) an increased focus on the sustainable fulfilment of
real convergence criteria with a view to joining the euro area, which pleads for
further structural reforms and the preservation of macroeconomic equilibria4, and
(iii) higher relevance attached to keeping public and private sector indebtedness
indicators within prudent limits in the oversight of financial stability. Public sector
indebtedness is currently relatively low in Romania, but there is limited room for
manoeuvre to exceed it (for further details, see Special feature Romanias public
debt sustainability seen from the perspective of financial stability).

1.2. Domestic macroeconomic developments

The domestic macroeconomic framework continued to be supportive of financial
stability. Economic growth strengthened without affecting macroeconomic equilibria.
In the coming period, the major challenge to financial stability remains the safeguarding
of domestic macrostability, also through further efforts to foster conditions conducive to
investment and to keeping in place a coherent fiscal policy framework.
Romanias economic growth stuck to the positive trend it had started in 2011, albeit at
a slower pace. Specifically, in 2014, GDP dynamics stood at 2.8 percent, down from
3.4 percent a year earlier. This performance ensured the preservation of the
macroeconomic equilibria regained after the outbreak of the global financial crisis.
Future economic growth needs to be oriented along the same coordinates of
sustainability, as macrostability may be affected by numerous risks. The European
Commission identified 16 EU Member States facing certain macroeconomic
challenges and Romania is seen as one of the countries dealing with risks that are
relatively easy to manage5 (along with Belgium, the Netherlands, Finland, Sweden and
the United Kingdom). In 2015-2016, favourable GDP dynamics are expected to
continue, domestic demand further acting as the main driver of growth.
After joining the EU, Romania reported one of the fastest convergence rates towards
the euro area economy. Nevertheless, the domestic economy still has a lot of
catching-up to do, also with economies that have recently adopted the single
currency. At present, GDP (expressed in PPS) per capita accounts for approximately
50 percent of GDP (expressed in PPS) per capita for the euro area, as compared with
38 percent in 2007, when Romania joined the EU (Chart 1.1).
4

Isrescu, M. (2015), speech delivered at the CESEE Old and New Policy Challenges conference, http://www.bnr.ro/CESEE--old-and-new-policy-challenges-12535.aspx.

The Alert Mechanism Report 2015, published on 28 November 2014. According to this Report, the macroeconomic risks
facing Romania stem from the markedly negative net international investment position (NIIP) and the long-term
strengthening of export capacity.

NATIONAL BANK OF ROMANIA

15

Financial stability report 2015

Chart 1.2. Labour market developments in Romania and the EU

Chart 1.1. GDP (expressed in PPS) per capita relative

to the euro area average (regional comparison)
80

percent

26

70

24

60

22

50

20

percent

18

40

16

30

RO

14

20

EU

12

10

2006

2007-2008

2009-2011

2012-2014

Youth unemployment rate

(under 25 years of age)

2014

2013

2012

2011

2010

2009

2008

2014

CZ

2013

PL

2012

HU

2011

HR

2010

RO

2009

BG

2008

10

Youth NEET rate

(under 25 years of age)

Source: Eurostat

Source: Eurostat

In 2014, the advance in economic activity was strongly supported by private

consumption, whereas net exports made a neutral contribution and investment
recorded negative dynamics for the second consecutive year. Under the
circumstances, in the absence of economic policies that should ensure sustainable
growth, there is a risk of reverting to the former (mainly consumption-based) growth
pattern. The government has lately taken a series of measures to boost investment,
which have had however a limited effect. Starting in 2014, a government-supported
scheme was launched with a view to spurring investment with a major economic
impact. The maximum budget of the said scheme amounts to lei 2.7 billion for
2014-2020, with an annual budget equalling lei 450 million. In 2015, the available
amount was spent in the first half of the year, i.e. lei 483 million. Although the level of
investment in Romania remains high (22 percent of GDP in 2014, above 19.3 percent
of GDP, the EU average), its capacity to generate traction on the economy may be
improved, also by implementing measures designed to prioritise public investment.
Moreover, European funding could help secure substantial investment, yet the EU fund
absorption rate6 remains among the lowest in the European Union (51.3 percent in
July 2015, up from 35.6 percent in the same year-earlier period). In addition to
investment-boosting schemes, the authorities should consider measures to improve
the business environment also by ensuring a predictable legal framework and by
reducing the administrative burden, particularly on SMEs. In fact, the latter issue ranks
among the conditions set forth in the financing arrangement signed with the
European Union.
Romanias R&D expenditure is further low, standing at 0.4 percent of GDP in 2013,
down from 0.5 percent of GDP in 2012, below the EU average (2 percent of GDP in
2013) and well beneath the national R&D intensity target set in the Europe 2020
Strategy (2 percent of GDP by 2020, of which 1 percent from public funding and
1 percent from private funding).
6

16

The absorption rate refers to the 2007-2013 funds. Regulation (EU) No. 1297/2013 of the European Parliament and of the
Council allowed Romania to further draw EU funds from the 2007-2013 budget. EU funds earmarked for Romania for
2014-2020 amount to EUR 30.7 billion.

NATIONAL BANK OF ROMANIA

1. International and domestic economic and financial environment

The labour market placed no pressure on financial stability, yet structural vulnerabilities
remain. The unemployment rate continues to be low when compared with the
EU average and fell slightly (from 7 percent in 2013 to 6.8 percent in 2014), so that
borrowers debt servicing capacity was not impaired. There is significant room for
improvement in terms of composition: (i) the employment rate of the population
aged 20-64 was 65.7 percent in 2014, below the EU average (69.2 percent in the same
year) and the 70 percent target set in the Europe 2020 Strategy and (ii) reaching
higher levels of youth employment is still a matter of concern, as both the
unemployment rate of the young people aged 15-24 and the NEET rate7 for the same
age group stayed above the EU average in 2014 (Chart 1.2).
The general government deficit remained on a downtrend in 2014, narrowing to
1.5 percent of GDP from 2.2 percent of GDP a year earlier (ESA2010 methodology).
In the seven months to July 2015, Romania reported a surplus of 1.06 percent of GDP,
as compared with a 0.15 percent of GDP deficit in the same year-ago period (national
methodology).
In 2014, Romania fulfilled the medium-term objective assumed under the European
Fiscal Compact, one year earlier than planned in the fiscal strategy (the structural
deficit stood at 1 percent of GDP). The major challenge to fiscal policy in the period
ahead is to achieve stabilisation of the indicator at this level amid (i) significant public
investment needs in the sectors contributing most to a sustainable economic growth
pattern (education, infrastructure, and healthcare) and (ii) the passing of the new
Tax Code with an impact on the volume and composition of budget revenues.
Fiscal discipline strengthened, but there is still room for improvement. Payment
discipline of the general government versus the real sector improved in 2014, but the
trend failed to extend into the early part of 2015. At end-2014, arrears dropped by
42 percent year on year to lei 126 million, before
Chart1.3. Gross public debt and its components*
rising to lei 266 million in the first seven months of
2015. Local governments hold the largest share in
percent
lei bn.
total general government arrears, i.e. 94 percent in
300
60
July 2015.
250
50
200

40

150

30

100

20

50

10

0
2010

2011

2012

2013

2014

public debt - medium and long term

public debt - short term
public debt (% of GDP, rhs)
* ESA2010 methodology
Source: MPF

NATIONAL BANK OF ROMANIA

2015
May

To keep public sector indebtedness at a prudent

level is pivotal for public debt sustainability, as a
possible increase could pose a threat to financial
sector stability as well (for further details, see
Special feature Romanias public debt
sustainability seen from the perspective of financial
stability). The public debt ratio stood at 38.1 percent
of GDP in May 2015, hovering around 38 percent of
GDP in 2014 and the first part of 2015 (Chart 1.3).
The banking sectors capacity to grant additional
loans to the public sector is limited. Bank exposure

The NEET (Not in Employment, Education, or Training) rate is the share of young people who are not in employment,
education or training, as a percentage of the total number of young people in the corresponding age group.

17

Financial stability report 2015

to the latter is high and rising, accounting for 22 percent of total bank assets,
68 percent of total domestic public debt and 35 percent of total public debt in
May 2015.

1.3. Non-financial private sector indebtedness

Total debt stock of non-financial corporations and households moved slightly up, with
resident banks increasing their share of loans to these sectors to the detriment of
NBFIs and non-resident banks. Debt breakdown saw mixed developments:
(i) leu-denominated loans continued to rise, while loans in foreign currency
contracted; (ii) loans to households witnessed a recovery, especially housing loans,
reflecting both stronger demand and improved supply conditions thanks to lower
lending rates.
A sustainable performance would advocate loans being channelled mostly to
companies, those operating in high value-added sectors in particular. The corporate
sectors sustainable borrowing potential is sizeable, yet it remains broadly
unharnessed, some developments indicating the enlargement of its customer base
notwithstanding. Looking ahead, the ongoing balance sheet clean-up should be
accompanied by improved selection of borrowers and better tailoring of products and
services to their needs.
Developments in indebtedness, total and by creditor
Total corporate and household debt owed to financial institutions (resident and
non-resident banks and NBFIs, including bank loans removed from the balance sheet)
rose by merely 1 percent8 from December 2013 to June 2015, reaching
EUR 71.7 billion (Chart 1.4). This picture reflects the still nascent trends in extending
new loans at aggregate level, on the one hand, and credit institutions efforts aimed at
compressing their portfolios of non-performing loans granted during the credit boom
and thereafter, on the other hand.
Resident banks are the main fund provider to the non-financial private sector9, making
up 69.8 percent of its total indebtedness in June 2015, amid the 4.1 percent rise in the
period December 2013 June 2015. Looking at the debt composition, given that
banks have been taking measures to clean up their balance sheets since mid-2014,
increasingly significant are the non-performing loans removed from the balance
sheet, currently accounting for 6.2 percent of credit institutions on-balance-sheet
loans to the non-financial private sector, i.e. EUR 2.9 billion (Chart 1.4). Credit to the
private sector, excluding loans removed from the balance sheet, declined by 2 percent
in the same period.

18

In this section, the dynamics of lending are calculated by adjusting the nominal stock of foreign currency-denominated
loans for exchange rate changes, unless otherwise specified.

In this section, the non-financial private sector refers to non-financial corporations and households.

NATIONAL BANK OF ROMANIA

1. International and domestic economic and financial environment

Chart 1.5. Corporate and household indebtedness,

regional comparison10

Chart 1.4. Corporate and household indebtedness by creditor

80

EUR bn.

90
80
70
60
50
40
30
20
10
0

70
60
50
40
30
20
10
0
Dec.10

Dec.11

Dec.12

Dec.13

Dec.14

Jun.15

2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

Dec.09

percent of GDP

loans from non-resident financial institutions

loans from resident NBFI
loans removed from the balance sheet (banks)
loans from resident banks

Non-financial corporations
Bulgaria
Poland

Source: NBR

Households
Czech Rep.
Romania

Hungary

Source: ECB, Eurostat, Reuters, NBR calculations

It is highly likely that resident banks will play a more prominent role in private sector
financing over the period ahead, thanks to: (i) the further small gaps between EUR and
RON funding, which was one of the drivers for many outward-oriented firms to resort
to foreign (largely EUR-denominated) financing in the past and (ii) the enhancement
of the EU-wide macroprudential framework, also by observing the principle of
mutuality and of the level-playing field for borrowers and/or same risk exposures,
regardless of the country where the credit institution is doing business. 10
Chart 1.7. Growth rate of non-financial private indebtedness
from resident and non-resident financial institutions by currency

Chart 1.6. Loantodeposit ratio

250

percent

percent

40

200

40

30

150

30

20

100

20

10

50

10

total - non-government sector

lei
foreign currency
foreign liabilities/total liabilities (rhs)
Source: NBR

annual change, percent (3-quarter moving average)

-10
Jun.09
Sep.09
Dec.09
Mar.10
Jun.10
Sep.10
Dec.10
Mar.11
Jun.11
Sep.11
Dec.11
Mar.12
Jun.12
Sep.12
Dec.12
Mar.13
Jun.13
Sep.13
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

Mar.09
Jun.09
Sep.09
Dec.09
Mar.10
Jun.10
Sep.10
Dec.10
Mar.11
Jun.11
Sep.11
Dec.11
Mar.12
Jun.12
Sep.12
Dec.12
Mar.13
Jun.13
Sep.13
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

50

companies lei
households lei
total

companies fx*
households fx*

* series adjusted for exchange rate changes

Source: NBR

The other types of creditors, namely foreign creditors and NBFIs, cut back on their
exposure to the non-financial private sector by 6.7 percent and 1.2 percent
respectively from December 2013 to June 2015 (Chart 1.4). These entities accounted
10

NATIONAL BANK OF ROMANIA

In order to make a regional comparison, total indebtedness was computed by using: (a) domestic bank loans and
(b) foreign loans from financial institutions.

19

Financial stability report 2015

for 23.6 percent and 6.6 percent respectively of corporate and household
indebtedness in June 2015.
The banking sector in Romania is in a position favouring sustainable resumption of
lending: (i) indebtedness measured by the leverage ratio stood at a prudent 8 percent
in June 2015, which compares favourably to the 3 percent threshold under the Basel III
framework, and (ii) its resources are adequate in terms of capital and liquidity
requirements (for further details, see Section 3.2. Banking sector). Moreover, certain
vulnerabilities that marred the banking sector when the financial crisis broke out have
faded11, while the ongoing balance sheet adjustments further work towards
strengthening credit institutions soundness: (i) reliance on foreign funding decreased
significantly, as the share of external liabilities in total liabilities contracted by
3.8 percentage points from December 2013 to June 2015, down to 16.6 percent, and
(ii) the loan-to-deposit ratio for the non-government sector witnessed a considerable
adjustment of 8.2 percentage points to 93.1 percent in June 2015, which is deemed
an adequate level from a macroprudential perspective (Chart 1.6). In turn, the overall
corporate and household indebtedness in Romania is lower than the regional average
(Chart 1.5).
Loans in foreign currency
Providing financing mostly in the local currency is a trend already manifest towards
the sustainable lending of the economy (Chart 1.7). The share of new EUR-denominated
loans in total new loans to companies and households narrowed to 24.5 percent in
2014 and down to 20.5 percent respectively January through June 2015. As for
households, new EUR-denominated business held merely 4.9 percent and 3.4 percent
respectively in the same periods. As a result, the share of loans in foreign currency
granted to companies and households in the total Romanian banking sector plunged
by 8.4 percentage points from December 2013 to June 2015, reaching 52.8 percent.
Local currency financing to the private sector was underpinned primarily by the
lowering cost of lending in lei to levels comparable to that of EUR-denominated loans
following the monetary policy rate being successively cut by a total of 2.25 percentage
points from December 2013 to June 2015, down to 1.75 percent. In the same direction
acted the central banks previously implemented regulations aimed at protecting
unhedged borrowers, as well as the First Home government programme shifting
to lending in domestic currency alone as from August 2013.
Banks foreign currency-denominated loan stock, albeit on the wane, still holds the
prevailing share, and such loans continue to carry the strongest risks to both firms and
households (for details, see Sections 2.1.2 and 2.2.2). These developments support the
need for a further highly prudent approach to extending forex loans over the period
ahead as well.

11

20

Isrescu, M. (2015), speech delivered at the conference titled S nelegem viitorul. Perspectivele sectorului bancar i ale
economiei. Pot bncile schimba viitorul Romniei n bine?, http://www.bnr.ro/Alocu%C8%9Biune-sus%C8%9Binuta-incadrul-conferin%C8%9Bei-SA-IN%C8%9AELEGEM-VIITORUL.-Perspectivele-sectorului-bancar-%C8%99i-ale-economiei.-Potbancile-schimba-viitorul-Romaniei-in-bine-12392.aspx.

NATIONAL BANK OF ROMANIA

1. International and domestic economic and financial environment

Loans to non-financial corporations

Corporate financing (excluding loans removed from the balance sheet) saw
across-the-board declines for most types of loans. From the perspective of the shift in
banks business model, the adjustment in funding was less pronounced in the case
of tradable goods sectors, high-tech firms, tradable services (travel, transportation,
telecommunications) or productive sectors with export potential than for the other
types of loans. From December 2013 to June 2015, the following developments in
corporate financing were discernible: (i) tradable goods sectors witnessed a
0.5 percent increase in loans taken, against the 7.7 percent fall recorded by
non-tradables (Chart 1.8); (ii) most of the key economic sectors posted lower
financing, with construction being the hardest hit (down 12.9 percent), with the
exception of the agricultural sector, which reported a 5.5 percent expansion in
funding; (iii) loans to medium high-tech and high-tech companies saw a 10.6 percent
decrease, compared with the 0.5 percent rise in the case of low-tech and medium
low-tech companies; (iv) knowledge-intensive service companies recorded a sharper
reduction in funding than less knowledge-intensive service companies,
i.e. -9.5 percent against -5.2 percent; and (v) SMEs saw their financing dropping by
6 percent, a stronger decline than that reported by large companies (-1.5 percent).
Chart 1.8. Loans to SMEs and large companies, from resident banks and NFBIs and non-resident banks
8

EUR bn.

EUR bn.
agriculture
manufacturing and mining
services and utilities
real-estate and construction
trade
total (rhs)

7
6
5
4

24
21
18
15
12

Resident banks

Non-resident banks
SMEs

NBFIs

Jun.08
Jun.09
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15

1
Jun.08
Jun.09
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15

Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15

Jun.08
Jun.09
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15

Jun.08
Jun.09
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15

Resident banks
Non-resident banks
Large companies

Note: Large companies loans from NFBIs have not been shown in the chart, as their amounts are small (EUR 0.5 billion).
Source: NBR, MPF

Bank lending to small and medium-sized enterprises remained weak. The number of
SMEs that make recourse to resident bank loans is small and falling, accounting for
16.1 percent of total companies in operation12. These entities contribution to
economic activity is lower than that of SMEs not having taken any loan from resident
banks. The SMEs with bank loans make up 22.6 percent of gross value added
generated by non-financial corporations and hold 24.6 percent of their total assets.
Moreover, they have on their payrolls 24.9 percent of the staff economy-wide,
accounting for around 25.7 percent of corporate turnover (December 2014). Lending

12

NATIONAL BANK OF ROMANIA

The companies reporting positive turnover in 2014 (consistent with the financial statements submitted to the Ministry of
Public Finance in 2014): 442,300 entities.

21

Financial stability report 2015

is concentrated on relatively few SMEs, out of which the first 10 percent of the SMEs
by the value of bank loans take 79.5 percent of total financing.
The surveys among banks and non-financial corporations conducted by the NBR do
not currently indicate a more robust resumption of lending to enterprises. According
to the Survey on the access to finance of the non-financial companies in Romania and
their capacity to cope with adverse financial conditions, the level of taxation,
competition and lack of demand are the most pressing problems for companies in
their day-to-day activity. Access to finance13 is an issue for roughly 16 percent of these
entities. The main obstacles faced by companies in accessing funds from banks and/or
NFBIs are the requirements regarding the value or type of collateral, the overly high
level of interest rates and commissions, and the loan covenants. Furthermore, the
survey shows that companies are somewhat wary of (further) taking loans, regardless
of their cost (64 percent would not take a loan in lei and 68 percent would not borrow
in euro), and intend to keep unchanged or even curb their level of bank debt. Instead
of applying for a bank loan, companies rely mainly on internal funds: 44 percent of
respondents opted for resorting to retained earnings or the sale of assets as
alternative financing sources, including the companies that recorded a decline in
profits in the reference period (35 percent of companies in this state).
The Bank Lending Survey paints a similar picture. The balance sheet clean-up efforts
by the private sector resulted in the local credit market being kept, with few
exceptions, at low levels in terms of both demand and supply. Loan demand from
non-financial corporations in the period December 2013 June 2015 posted mixed
developments, without showing a clear trend. Banks expectations point to a possible
rise in corporate loan demand. As for households, credit institutions identified a clear
trend towards renewed demand for real-estate loans from December 2013 to June
2015, while in the case of consumer credit, demand was positive in the first part of
2014 and negative thereafter, but rebounded somewhat in 2015. Respondents expect
stronger demand for both types of loans to households. On the supply side, credit
institutions signalled, albeit feebly, a slight easing of credit standards for the loans
extended to both non-financial corporations and households.
Borrowing potential of non-financial corporations
Even though corporate loans are still at low levels, there is a significant, yet
unharnessed, sustainable borrowing potential economy-wide. To harness such a
potential is all the more important, given the persistence of balance-sheet
adjustments at company level14. Around 10,000 well-performing companies (selected
in terms of profitability and investment criteria) report low indebtedness15 and they
could service a substantial loan volume that might entail, over time, a doubling of the
current stock of loans to non-financial corporations. These enterprises play a
significant role in the economy. The companies having a sustainable potential for

22

13

The survey results cover the period October 2014 March 2015. For further details, go to: http://bnro.ro/Publication
Documents.aspx?icid=16645.

14

Isrescu, M. (2015), Romania Investors Days Conference, http://www.bnr.ro/'Romania-Investors-Days'-conference-12554.aspx.

15

Companies reporting a leverage ratio lower than 1 in December 2014, upon submitting their latest financial statements.
The borrowing potential was computed by adding the room for debt growth for each company so that the leverage ratio
be equal to 1.

NATIONAL BANK OF ROMANIA

1. International and domestic economic and financial environment

borrowing contribute 22.2 percent to the sectors gross value added, account for
18.5 percent of overall turnover and 18.3 percent of total assets of non-financial
corporations, and have 15.1 percent of staff on their payrolls (Chart 1.9). Out of all
these entities, in June 2015 about 3,450 had outstanding bank loans worth
lei 8 billion, making up 7.5 percent of the stock of loans to non-financial corporations.
Small and medium-sized enterprises are the bulk of the said entities, on 96 percent,
yet by volume large companies may account for some 75 percent of the potential
value estimated at aggregate level.
An encouraging sign is that the borrowing potential comes especially from the sectors
that may weigh heavily upon Romanias economic growth pattern (Chart 1.10).
Industry is the key sector where companies could account for a significant volume
of loans, with a cumulated value exceeding that of all other economic sectors,
i.e. 51.3 percent of total borrowing potential. Industry comes before services and
utilities, whose share in total borrowing potential would be roughly 26.6 percent,
ahead of trade on 10.3 percent. The companies that proved a lower capacity to cope
with adverse economic conditions (for instance, those in construction and real-estate
sectors) are less able to qualify for being granted new loans.
Chart 1.9. The role in economy of non-financial corporations
with sustainable borrowing potential
25

percent

Chart 1.10. Potential borrowing volume of the best-performing

firms by sector, December 2014
lei bn.

3,500
2008

2014

20
15
10

70

3,000

60

2,500

50

2,000

40

1,500

30

1,000

20

500

10

5
0

0
Agriculture

0
Gross value added

Turnover

Source: MPF, NBR calculations

Total assets

Number of
employees

Industry

Services and Construction

utilities
and real
estate

borrowing potential (rhs)

Trade

number of companies

Source: MPF, NBR calculations

Another source of sustainably boosting domestic credit is non-financial corporations

external debt, i.e. resident credit institutions could attract local companies with loans
from banks abroad, against the background of the sizeable cut in lending rates on
leu-denominated business. The foreign loan stock of these enterprises tops 60 percent
of the loans granted by resident banks to local enterprises. Specifically, larger
enterprises could be an extremely valuable premium customer base for resident
banks with which these firms could enter into beneficial long-term partnerships.
External debt of large companies runs at EUR 4.4 billion and that of medium-sized
enterprises at EUR 1.1 billion, with both categories holding external debt equivalent
to about 23 percent of corporate loans granted by resident banks.

NATIONAL BANK OF ROMANIA

23

Financial stability report 2015

Against this background, credit institutions must persuade companies that entering
into partnership with a bank may improve the firms financial results, as the broader
monitoring by a creditor may entail a sounder balance sheet or more efficient
management of both material and human resources available. As stated in the
previous Reports, with a view to fostering bankable firms interest in what credit
institutions have to offer, the following are needed: (i) to develop tailor-made
products; (ii) to put in place special divisions focusing on loans granted to risky
entities such as young firms; (iii) to streamline the lending process, etc. Moreover,
banks should attach particular attention to the advanced training of loan officers
responsible for analysing the applicants loan projects and the company-specific risks
so as to enhance their capacity to select creditworthy customers.
Mention should be made of the steps taken with respect to enlarging the banks
customer base by including the companies that had never taken loans before as well
as the start-ups. In 2014, nearly 11,000 new entrants borrowed from resident credit
institutions a total of lei 5.5 billion, accounting for 5.2 percent of corporate loans as of
end-December 2014 (Chart 1.11). These businesses contributed 5.5 percent to the
gross value added generated by non-financial corporations and had roughly
5.6 percent of the sectors staff on their payrolls at end-December 2014. Most of the
funding was accessed by real-estate firms (28.7 percent), ahead of companies in
manufacturing (19.3 percent), services (17.8 percent) and trade (13.5 percent). In terms
of the number of new entrants into the credit market, the bulk is made up of
companies in services (3,686), followed by trade and industry (2,855 and 1,139
respectively) (Chart 1.12). By size, small and medium-sized enterprises account for
about 85 percent of the loans taken by the new entrants into the credit market. 16
Chart 1.11. New entrants into the credit market16
and their importance for bank credit

Chart 1.12. New entrants into the credit market by sector in terms
of loan balance and the number of companies, December 2014
percent

30
Real estate

25

Services and
utilities

20

Trade

15

Construction

Industry

Agriculture
2007
2008
2009
2010
2011
2012
2013
2014
2007
2008
2009
2010
2011
2012
2013
2014
2007
2008
2009
2010
2011
2012
2013
2014

10

Number
(thousand)

Outstanding loans
(lei bn.)

45

35

25

number of firms

15

15

25

35

outstanding loans

Source: NBR, MPF

Source: NBR

16

24

Percent of
total credit

A company is deemed to be a new entrant into the credit market if it did not hold such debt instrument in the 24 months
prior to applying for the current loan.

NATIONAL BANK OF ROMANIA

1. International and domestic economic and financial environment

Start-ups carry out their activity largely without any bank support. Out of
approximately 42,000 start-ups established in 2014, some 814 had outstanding loans
from resident banks in June 2015. Their borrowings amounted to lei 1.1 billion,
accounting for 1.1 percent of the corporate loan stock in June 2015. Lending to these
enterprises is relatively concentrated, given that top-ten companies make up
34.6 percent of total loan value.

1.4. External balance

Romanias international trade and financial relations did not create vulnerabilities for
financial stability. The current account deficit remained low, whereas capital flows
were similar in composition to the preceding year. The main challenges to financial
stability stemming from the companies with a bearing on external balance are related
to strengthening the sustainability of the current account deficit, improving the
competitiveness of Romanias exports and the capacity of foreign trade companies
and foreign-funded companies to withstand potential adverse developments, as well
as to increasing the share of such companies with borrowing potential in domestic
banks loan portfolios.

1.4.1. Current account

Since the previous Report, foreign trade relations have not been a source of
vulnerability for financial stability, but certain challenges have however persisted in
regard to: (i) strengthening the sustainability of the current account deficit and the
competitiveness of Romanias exports, and (ii) improving the capacity of exporters to
withstand shocks stemming from foreign markets, along with boosting lending to
these businesses by resident banks instead of external creditors.
Current account deficit and export competitiveness
In 2014, the current account deficit narrowed further, standing at 0.4 percent of GDP
(from 0.8 percent of GDP in 2013, Chart 1.13). The last three-year moving average of
the current account balance (the scoreboard indicator monitored by the European
Commission in the Alert Mechanism Report for the prevention and correction of
macroeconomic imbalances in the EU) fell to -1.9 percent of GDP (compared with
-3.3 percent of GDP in 2013), remaining below the indicative threshold (-4 percent
of GDP).
The European Commissions Spring 2015 Economic Forecast indicates a slight
worsening in the current account deficit, which is however expected to remain
relatively low (0.8 percent of GDP). Euro area developments are a key determinant of
the current account deficit in the period ahead, given the strong influence exerted by
the economic environment in the euro area on the dynamics of domestic exports
(the correlation coefficient between the two series is roughly 72 percent, Chart 1.14).
As a matter of fact, the euro area is Romanias main trading partner, accounting for
50 percent of the countrys exports of goods in 2014.

NATIONAL BANK OF ROMANIA

25

Financial stability report 2015

Chart 1.14. Euro area economic growth and Romanias

export dynamics

Chart 1.13. Current account total and components

10

percent of GDP

percent

10

percent

50
40

30

20

10

-10

-2

-10

-15

-4

-20

-6

-30

5
0
-5

goods
secondary income
current account

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

-20

2007 Q1
2007 Q3
2008 Q1
2008 Q3
2009 Q1
2009 Q3
2010 Q1
2010 Q3
2011 Q1
2011 Q3
2012 Q1
2012 Q3
2013 Q1
2013 Q3
2014 Q1
2014 Q3
2015 Q1

real annual growth rate of euro area GDP

primary income
services

nominal annual growth rate of Romanian

exports of goods (rhs)

Source: Eurostat, NBR calculations

Source: Eurostat, NBR calculations

The gain in Romanias export competitiveness was mirrored by a higher growth rate
of exports, as well as by a wider share of exported goods with medium to high value
added. On the other hand, export concentration at firm level remained high, whereas
the geographical spread and product variety were limited.
Chart 1.15. Annual growth rate of exports, imports and GDP
in EU-10
16

percent

percent

Chart 1.16. Balance on trade in goods with Romanias

major trading partners

12

-4

-1

1,0

percent of GDP

0,5

0,0

-0,5

BG
exports

CZ

HU
imports

PL
GDP (rhs)

Source: Eurostat, NBR calculations

RO

2014

2013

2014

2013

2014

2013

2014

2013

2014

2013

2014

2013

2013

EU-10

2014

-1,0

-1,5
HU CN PL AT RU DE NL CZ SK BE UA IS RS US FR MD NO TR EG UK
Source: NIS, NBR calculations

In 2014, Romanias exports posted a 6.6 percent annual growth rate, above the
4.4 percent EU-10 average (Chart 1.15), scoring the second-fastest dynamics after the
Czech Republic (whose exports rose by 7.1 percent). Under the circumstances,
Romanias export market share worldwide stayed on the upward path it followed over
the last two years, inching up to 0.33 percent in 2014 from 0.31 percent in 2013.
The country saw an increase in exports to both EU and non-EU markets (8.1 percent
and 0.7 percent respectively). Romanias trade balance with a fair number of trading
partners improved, irrespective of whether it was positive or negative (Chart 1.16).

26

NATIONAL BANK OF ROMANIA

1. International and domestic economic and financial environment

Non-EU trading partners play an important part in the sustainability of the current
account, as the trade balance with these countries stood at +0.9 percent of GDP in
2014, although down from 1.5 percent in 2013. Romania reported ongoing, albeit
narrowing, trade deficit with the EU (3.3 percent of GDP in 2014 versus 3.9 percent a
year earlier).
Romanias export market share increased amid the appreciation of the real effective
exchange rate and the return to positive territory of unit labour cost dynamics in
industry as of the latter half of 2014. These developments highlight a less strong
connection between price competitiveness indicators and export dynamics, a
phenomenon seen in other countries as well, especially in Central and Eastern
Europe17. Non-price competitiveness factors are the main pillar of Romanias mediumand long-term external competitiveness. In this respect, it is necessary to find
solutions to some of the countrys soft spots, such as infrastructure, the institutional
framework, business sophistication and innovation.
The increase in Romanias external competitiveness via a wider share of exports with
high value added and innovative technology witnessed mixed developments. Thus,
medium high-tech goods further held the largest share of Romanias exports
(41.5 percent), making a larger contribution to the trade balance, to the amount of
EUR 1 billion in 2014, accounting for 0.7 percent of GDP. By contrast, the share of
high-tech goods in the countrys exports declined marginally to 5.9 percent versus
6.2 percent in the previous year. High-tech goods saw their contribution to the trade
deficit widening further to 2.4 percent of GDP (Chart 1.17), amid the decline in exports
of these goods by 0.6 percent in annual terms, in conjunction with a 4.7 percent rise
in imports.
Chart 1.17. Balance on trade in goods by added value

2
1
0
-1
-2
-3
-4
-5
-6

Chart 1.18. Foreign trade in motorcars

percent of GDP

2010

2011

2012

low-tech
medium low-tech
other

2013

2014

medium high-tech
high-tech

Source: NIS, NBR calculations

NATIONAL BANK OF ROMANIA

EUR bn.

2007

Note: The classification of industries according to their

technological intensity and of services according to
knowledge intensity was made based on Eurostat
aggregation.

17

3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5

thou.

2008

2009

2010

2011

2012

2013

550
500
450
400
350
300
250
200
150
100
50
0

2014

net exports
no. of exported motorcars (rhs)
no. of imported motorcars (rhs)
Source: NIS, NBR calculations

Competitiveness Research Network (2013), First Year Results. http://www.ecb.europa.eu/home/pdf/research/compnet/

CompNet_First_Year_Results.pdf.

27

Financial stability report 2015

Trade in motorcars played a significant part in the favourable developments posted

by medium high-tech goods, ending 2014 on a EUR 1.9 billion surplus, i.e. 1.3 percent
of GDP (Chart 1.18), given the further large number of units sold (some 386,000 in
2014). The companies in the automotive sector enjoy a better financial standing than
the economy-wide average. Specifically, the sectors return on equity stood at
19.2 percent versus 11.2 percent for non-financial corporations as a whole, its leverage
ratio is lower (1.24 against 2.22), while the capacity to cover interest costs from
earnings and the liquidity indicators are on the rise and significantly higher than those
of other companies.
Export concentration at firm level remained high: the top one percent Romanian
companies by export value jointly accounted for 56.1 percent of total exports (slightly
down from 2013), whereas the top ten percent exporters took about 88 percent of
total exports. The top major exporters include mostly companies with majority foreign
capital, jointly accounting for 77 percent of total exports.
Looking at the breakdown of exports by geographical spread and product variety,
evidence at firm level shows there is room for improvement in sales distribution by
destination market or product type. Thus, the geographical diversification of exports
is limited: over 50 percent of exporters have a single destination market, whereas less
than 20 percent of traders export to more than five destination markets. At the same
time, approximately 70 percent of exporters sell less than five types of products.
However, there are major differences between high-volume and small-volume
exporters, namely the top 10 percent exporters trade 13 types of products and are
active in seven destination markets, whereas across the economy exporters focus only
on three product types that target a single destination market (median values in
2014). The significantly wider market and product diversification seen at top exporters
is most likely one of the underlying factors behind their competitiveness on external
markets. Moreover, export diversification in terms of destination markets and
products is important as it reduces the countrys vulnerability to demand shocks in
trade partners or to high export price volatility.
Economic performance of and lending to foreign trade companies
Foreign trade companies make a significant contribution to the creation of value
added in the economy (approximately 40 percent in 2014). The financial soundness of
foreign trade companies18 continued to be above the economy-wide average. Return
on equity was 11.4 percent for net exporters and 11.6 percent for net importers
respectively, compared with the 11.2 percent average for non-financial companies as
a whole, whereas the interest coverage ratio, the liquidity position and the leverage
ratio stood at comfortable levels (Chart 1.19).
Foreign trade companies were further less important to the domestic banking sector
than to the economy. Thus, in June 2015, the share of net exporters loans in total
loans to non-financial corporations was 11.5 percent, whereas loans to net importers
18

28

They were divided into net exporters (generating trade surplus) and net importers (generating trade deficit). Only the
companies that are engaged in significant exports or imports worth more than EUR 100,000 in each quarter over a year
on an ongoing basis were taken into account. The above-mentioned businesses accounted for 96 percent of the exports of
non-financial corporations and 91 percent of their imports, respectively, in 2014.

NATIONAL BANK OF ROMANIA

1. International and domestic economic and financial environment

accounted for 21.5 percent of total loans to non-financial corporations. The readings
are however higher than at end-2013 (by 1.8 percentage points for net exporters and
by 4.7 percentage points for net importers respectively), amid faster dynamics of
domestic bank loans to foreign trade companies as from the second half of 2014.
Moreover, bank loans hold a relatively low share in the total funding of foreign trade
companies, accounting for 26 percent of total financing of net exporters and
40 percent of that of net importers respectively, these companies making recourse
mostly to loans from non-resident financial institutions and intercompany lending
(Chart 1.20).
Chart 1.19. Indicators for foreign trade companies versus
non-financial corporations, December 2014

0
NPL ratio*

net exporters
net importers
total companies economy-wide

* June 2015

Source: MPF, NBR, NIS

Financial loans

Intercompany
lending
Foreign loans

2015 Q2

2014 Q2

100

net importers

2015 Q2
2013 Q2

200

net exporters

2014 Q2

EUR bn.

2015 Q2
2013 Q2

300

EBIT/interest
expenses (rhs)

12

Current
ratio (rhs)

400

Leverage
ratio (rhs)

500

16

Return
on equity

20

14
12
10
8
6
4
2
0

2014 Q2

600

2015 Q2
2013 Q2

percent

2014 Q2

percent

2013 Q2

24

Chart 1.20. Funding of foreign trade companies

Financial loans

Total

Loans from
domestic banks

Indebtedness*

* financing from resident NBFIs not included

Source: NBR, NIS

Behind the domestic banks stronger interest in funding foreign trade companies
stands the latters debt servicing capacity, which is above the economy-wide average
(the non-performing loan ratio19 of net exporters and net importers stood at
6.9 percent and 2.3 percent respectively, versus 17.9 percent across non-financial
corporations as a whole in June 2015).

1.4.2. Capital flows

The dynamics and composition of foreign capital flows did not have an impact on
financial stability. Romanias external debt stock contracted on both public and
private channels. Foreign capital flows targeted to a greater extent the sectors that are
able to bolster a sustainable economic growth pattern and foreign-funded companies
preserved their capacity to adequately withstand a potential adverse shock.

19

NATIONAL BANK OF ROMANIA

The non-performing loan ratio is the share of corporate loans past due by more than 90 days and/or for which legal
proceedings have been initiated (with firm-level contagion) in total corporate loans.

29

Financial stability report 2015

Dynamics of capital flows

The 2014 capital flows did not put pressure on financial stability. The Romanian
economy witnessed sustainable developments in net capital inflows: (i) foreign direct
investment (FDI) further made a positive contribution, similar to that seen in the
previous years; (ii) the capital account continued to increase, notably on account of
the rise in the EU fund absorption rate from 26.5 percent in December 2013 to
44.9 percent in December 2014, and (iii) portfolio investment shrank by approximately
15 percent in 2014 versus 2013, alleviating the domestic economys vulnerability to
sudden changes in foreign investor risk appetite (Chart 1.21).
Chart 1.22. Financial standing of direct investment enterprises
and companies incurring external debt

Chart 1.21. Net foreign capital flows in Romania

percent of GDP

20

percent

index

6
4
2

15

10

0
-2
-4
0

-6

capital account
portfolio investment
change in official reserve

2014

2013

2012

2011

2010

-8

foreign direct investment

other investment

Companies total

Companies with FDI

Companies
incurring
external debt

Companies
incurring ST
external debt

return on equity (2014)

non-perfoming loan ratio (June 2015)
debt/equity (2014, rhs)
Source: NBR, MPF, NTRO

Source: NBR

Romanias external debt stock continued to drop December 2013 through June 2015
to EUR 91 billion. The breakdown by debtor shows that the external public debt,
including that of monetary authorities, fell by 7 percent, given the repayment of a
significant portion of the loan taken from the IMF under the financing arrangement
signed by Romania with international institutions, whereas external private debt
decreased by 4 percent in the period December 2013 June 2015. The ratio of
external debt to foreign exchange reserves stands at an acceptable level (67 percent
in June 2015). The gold stock of the National Bank of Romania has held steady at
103.7 tonnes, being an important asset against the background of economic
uncertainty.
Destination of foreign funds
The foreign financing of major business sectors promoting a sustainable economic
growth pattern saw a slight increase. In June 2015, the external debt stock of
companies in the tradables sector stood at EUR 15.2 billion, up 8 percent against
December 2013, whereas companies in medium high-tech and high-tech industries
posted a EUR 4 billion external debt, up 4 percent from December 2013.

30

NATIONAL BANK OF ROMANIA

1. International and domestic economic and financial environment

Companies in the non-tradables sector further held a significant share in external debt
(57 percent), with real-estate companies accounting for 29 percent of the total
external debt of non-financial corporations (June 2015). Moreover, the debt
composition adds to the sectors vulnerability, i.e. the high dependence on foreign
funding, with financial institutions holding the largest share (62 percent), compared
with 41 percent across the economy and approximately 33 percent for the
manufacturing sector (June 2015).
Economic performance of and lending to foreign-funded companies
The composition of non-financial corporations external debt points to low
vulnerability of the real sector, with manageable risks to financial stability. Specifically:
(i) the largest component of such debt is the medium- and long-term external debt
(65 percent of total debt); (ii) the rollover ratio of short-term external debt is high (over
80 percent), and (iii) non-resident parent undertakings account for a considerable
share of the non-financial corporations external debt (59 percent of total external
debt in June 2015). Any component of the real sector that incurs external debt runs a
potential currency risk.
Direct investment enterprises have a fairly good capacity to withstand possible
adverse developments, posting favourable financial results in 2014. These firms make
a significant contribution to economic growth, accounting for 46 percent of the gross
value added generated by non-financial corporations. The direct investment
enterprises are less vulnerable in the face of a potential foreign funding withdrawal
shock. Although a significant share of their funding comes from non-resident financial
institutions, these enterprises contracted mostly medium- and long-term funds and
are backed to a large extent by parent undertakings. The direct investment
enterprises play an important part in foreign trade, generating approximately
82 percent of Romanias exports in 2014. However, looking at their impact on the
current account, these companies produce a slight trade deficit (0.15 percent of the
2014 GDP).
Companies incurring external debt, especially over the short term, could affect the
non-financial corporations sector via the payment discipline channel should they face
a decline in their economic performance. Trade credits taken by foreign-indebted
companies hold a sizeable share in domestic firms total trade credits (27 percent in
December 2014) and the total overdue payments of such companies to their trading
partners account for 23 percent of total overdue payments to suppliers in the real
sector (in December 2014). The number of companies with external debt undergoing
insolvency or bankruptcy proceedings is low (6.3 percent in June 2015). The companies
with outstanding foreign loans also benefited from significant domestic funding,
i.e. lei 28.6 billion in June 2015. The concentration of exposure to companies with
external debt across credit institutions is relatively high, as five banks account for
57 percent of these loans. The non-performing loan ratio of these companies stood
below the average of the non-financial corporations sector (9.2 percent versus
17.9 percent in June 2015, Chart 1.22).

NATIONAL BANK OF ROMANIA

31

2. REAL SECTOR

Financial soundness of companies in Romania has continued to improve at aggregate

level since the previous Report against the background of robust economic growth,
but, in terms of the sectors composition, developments were uneven, featuring
significant asymmetries. The firms that can contribute to a better sustainability
of the economic growth pattern posted, overall, financial performances above the
economy-wide average, but the pace of these positive developments was slower.
The lack of financial discipline remains the firms main vulnerability. In spite of the
amelioration seen over the last year, there is still large room for improvement and
measures should be implemented to address particularly firms facing negative net
worth. Insolvency diminished, but the negative effects that insolvent firms generated
on the economy and the financial system remain significant.
In 2014, the aggregate net result totalled lei 20.9 billion. This reflects the contribution
of two categories of firms posting opposite results: those with a net profit in amount
of lei 62.9 billion and those with negative net results in amount of lei 42 billion.
The volume of losses reported by the non-financial corporations sector continued to
be significant in 2014 too, with the rises seen after the international financial crisis
outbreak persisting in spite of the notable improvement in the macroeconomic
framework. The losses incurred by the non-financial corporations sector in 2014
amounted to lei 42 billion (roughly EUR 9.4 billion), with the private sector making the
largest contribution thereto (lei 39 billion or EUR 8.7 billion, i.e. 93 percent of total
losses recorded across the economy by firms reporting negative net results). The firms
having posted losses for a long time or firms lacking financial discipline distort the
competition in real economy and generate negative effects on inflation (due to unpaid
bills, business partners are forced to increase prices, and owing to overdue payments,
banks put up interest rates). Furthermore, the inflationary loss generated by
companies causes a drop in the gross value added across the economy and in GDP
respectively.
The average default rate reported by Romanian companies with outstanding bank
loans remains on a downward trend. This owes mainly to the positive expectations on
the macroeconomic framework evolution as well as to the aggregate improvement in
companies financial soundness. Close monitoring should continue considering the
further uneven dynamics of firms financial performance at microeconomic level.
At aggregate level, households indebtedness declined, the net creditor position
towards the financial system consolidated, and net wealth grew, which allowed for the
sector to improve its debt servicing capacity. The risks associated with lending to
households have lessened since the previous Report, but the structural characteristics
incorporate significant vulnerabilities, especially in terms of borrower income. Given

32

NATIONAL BANK OF ROMANIA

2. Real sector

that indebtedness remains relatively elevated for the individuals with high financial
fragility, the macroprudential instruments implemented in the previous years will
most likely have to be recalibrated.
With a view to improving especially the capacity of over-indebted low-income
households to repay their debts, the National Bank of Romania: (i) enforced
regulations designed to cut debt restructuring costs, and (ii) encouraged banks to
further seek solutions tailored to suit the broad range of cases in their loan portfolios,
in order to support borrowers that have good recovery prospects. Moreover, lest
financial system stability should be affected, the National Bank of Romania acted to
prevent evergreening by banks, i.e. the provision of additional loans to stressed
borrowers, in spite of their not being able to repay outstanding loans.

2.1. Non-financial corporations

In this chapter, the non-financial corporations sector includes all companies whose
core business is to produce goods and non-financial services for the market.
The indicators calculated in this chapter differ from those reported in the Financial
Accounts (ESA 2010): (i) as ESA 2010 provides the re-classification of certain entities
from Non-financial corporations (S.11) into Central government (S.1311) and Local
government (S.1313), respectively, based on some indicators on the states control
over the relevant entity and (ii) considering the differences in assessing certain debt
instruments (at market value or book value). The decision to analyse the non-financial
corporations sector overall originates in the need to capture a fair image of the risks
that this sector may pose to financial stability. This approach is in line with the
prudential treatment of financial institutions exposures to this sector.

2.1.1. Non-financial corporations economic

and financial performance
The profitability, indebtedness and liquidity ratios reported by the active firms20 across
the economy continued to ameliorate over 2014 (Chart 2.1), which shows an
increasingly higher potential for sustainably resuming lending to companies. Return
on equity and return on assets went up marginally (from 11 percent to 11.2 percent
and from 3.2 percent to 3.5 percent respectively, in 2013-2014). The development was
accompanied by a rise in the profit margin (from 3.8 percent to 4.1 percent) and an
increase in the interest coverage ratio21 (from 2.5 to 2.8 over the same period).
Companies indebtedness shrank slightly (the leverage ratio calculated as the
debt-to-equity ratio went down from 2.39 in 2013 to 2.22 in 2014) and liquidity
indicators improved. The current ratio22 rose to 90.4 percent from 88.7 percent in the
previous year, while the cash ratio climbed to 16.2 percent (compared to 14.4 percent).
20

Firms having submitted their financial statements to the Ministry of Public Finance in 2014.

21

The EBIT/interest expenses ratio is calculated only for firms that incurred interest expenses (in 2014, the number of these
firms neared 111,000).

22

The current ratio was calculated as a ratio of current assets to liabilities with maturity shorter than one year. The cash ratio
was determined as the ratio of highly liquid assets (cash, bank accounts and short-term investments) to liabilities due in less
than one year.

NATIONAL BANK OF ROMANIA

33

Financial stability report 2015

In this context, Romanian companies allotted additional amounts for investment, with
cash flows earmarked for this purpose increasing by approximately 8.7 percent in 2014
from the previous year.
The aggregate results mask an elevated heterogeneity both at individual level and by
type of company. The analysis by company size shows that the SMEs sector posted
faster growth rates of turnover and gross value added than large companies; this
confirms a more pro-cyclical nature of SMEs, which are capable of making a swifter
recovery than large companies after recessions or economic crises thanks to their
higher flexibility. These developments were, however, accompanied by a fall in the
number of employees across the SMEs sector (-2.7 percent in 2013-2014), while
payrolls of large companies stood 1.3 percent higher at end-2014 than at end-2013.
For the second year in a row, ROE reported by SMEs surpassed that reported by large
companies (15.3 percent compared to 9.1 percent in 2014); nevertheless, this was the
result of a higher leverage ratio in the case of SMEs (4.43 versus 1.05). Looking at the
structure of SMEs, the vulnerabilities identified in the previous Reports across
micro-enterprises have not diminished: (i) the liabilities side of their balance sheets
consists overwhelmingly of debts, (ii) their interest coverage ratio has remained below
one (0.4) totally unlike that reported by large companies, which stands comfortably
at 5.5, and (iii) the pressure exerted by micro-enterprises on banks balance sheets is
further significant (the non-performing loan ratio23 stood in this case at 40.5 percent in
June 2015, with the share of loans taken by these firms accounting for 22.7 percent of
banks corporate portfolio).
Chart 2.1. Financial soundness indicators
for non-financial corporations
percent

percent

2013

2014

2013

2014

2013

EBIT / Interest
expenses

Leverage ratio
(debt/equity)

economy

large companies

2014

Current ratio

2013

2014

ROE (rhs)

18
15
12
9
6
3
0

700
Leverage ratio (percent)

600
500
400
300
200
100
0

Chart 2.2. Financial performance of non-financial corporations

by sector (2014)
Real estate
(2.5)

600
500

Agriculture
(3.2)

300

Utilities
(6.7)

200

Note: The EBIT/interest expenses ratio is calculated only

for firms that incurred interest expenses.
Source: MPF, NBR

Services
(32.5)

Mining and
quarrying (5.7)

100

Manufacturing
(24.0)

SMEs

Trade
(17.1)

Construction
(8.3)

400

10

15

20

25

ROE (percent)
Note: The size of the circles is given by the share of the
business sector in the value added generated by
non-financial corporations (values in brackets).
Source: MPF, NBR

By business sector, the most dynamic sectors in terms of gross value added and
turnover were agriculture (with a 9.2 percent increase in GVA and a 7.9 percent rise in
sales) and industry (with a 7.7 percent advance in GVA and a 3 percent pick-up in
sales). Based on ROE, agriculture ranks third (13.2 percent in 2014), after trade
23

34

The non-performing loan ratio is the share of corporate loans past due by more than 90 days and/or for which legal
proceedings have been initiated (with firm-level contagion) in total corporate loans.

NATIONAL BANK OF ROMANIA

2. Real sector

(21.4 percent) and services (16.1 percent), Chart 2.2. At the opposite pole, the utilities
sector posts the lowest profitability ratio (2.1 percent), while in the real-estate sector
ROE stood, for the first time since the outbreak of the financial crisis, in positive
territory (5.4 percent in December 2014 versus -4 percent in the previous year) amid
better operating results. On the other hand, the liquidity position in the real-estate
sector continues to report the lowest level across the economy, with the current ratio
coming in at 46.5 percent in 2014, on the decrease compared to the prior year
(48.3 percent) and almost half the average reported by non-financial corporations
overall (90.4 percent). Given banks significant exposure to the real-estate sector
(15.3 percent in June 2015), the low liquidity level of this business sector may morph
into a vulnerability.
State-owned enterprises role in the economy continued to narrow (their share in
added value and turnover declined from 8.2 percent in 2013 to 7.7 percent in 2014
and from 4.6 percent to 4 percent, respectively). This evolution occurred on the
backdrop of the contraction in the value added and the number of employees
reported by state companies (by 3 percent in 2013-2014) and in the context of a
9 percent fall in sales over the same interval. State-owned firms continue to post a ROE
below the economy-wide average (5.2 percent compared to 11.2 percent) and a low
liquidity level, with the ratio of current assets to liabilities due in less than one year
coming in at 46.5 percent. On the other hand, compared to private companies,
state-owned enterprises have a more prudent balance sheet structure, enjoying higher
capitalisation than the former. The leverage ratio of these firms was 1.1 compared
to 2.7 in the case of private companies with majority domestic capital and to 2.3 in the
case of firms with majority foreign capital. Foreign private companies, although
accounting for a small number (7.8 percent of total non-financial corporations that were
active in 2014), play a major part in the economy, generating over 42 percent of the
value added and the turnover across the economy and holding 26 percent of the
number of employees. On the other hand, private companies with majority domestic
capital, yet much more numerous (over 540 thousand companies, i.e. 90.6 percent of
the total number of companies in 2014), generate 45 percent of the value added and
slightly over 50 percent of sales.
The firms that can contribute to a better sustainability of the economic growth
pattern posted, overall, financial performances above the economy-wide average,
but the pace of these positive developments was slower. Companies in the tradables
sector increased marginally their contribution to the value added in the economy
(to 38.8 percent from 38.5 percent in 2013) and to the number of employees
(to 37 percent from 36.7 percent). These firms ROE and interest coverage ratio
contracted compared to the previous year (ROE fell to 7.6 percent and the
EBIT/interest expenses ratio to 2.97). Firms in the tradables sector post lower
indebtedness (the leverage ratio stood at 1.46 in 2014).
Net exporting companies24 made a relatively steady contribution to value added in the
economy (about 18.2 percent in 2014), amid a marginal increase in both the turnover

24

NATIONAL BANK OF ROMANIA

Only firms having recorded exports or imports worth more than EUR 100,000 in each quarter of 2014 were taken into
consideration.

35

Financial stability report 2015

and the number of employees in 2013-2014. These firms ROE dropped close to the
economy-wide average (11.4 percent compared with 11.2 percent), down by
1.7 percentage points versus the previous year (from 13.1 percent). The same as in
2013, the interest coverage ratio posts a comfortable 5.7 level, whereas the leverage
ratio for these companies is considerably below that reported by non-financial
corporations overall (1.05 compared with 2.22, in December 2014). Net exporting
companies current ratio is higher than the economy-wide average (107.2 percent
compared with 90.4 percent, at end-2014).
In 2014, firms operating in sectors producing goods
and services with high value added and innovative
technology improved their performance. The return
percent
percent
700
21
on equity reported by high-tech and medium
600
18
500
15
high-tech companies picked up to reach
400
12
15.3 percent in December 2014 (from 9.4 percent
300
9
200
6
previously, Chart 2.3), while knowledge-intensive
100
3
service companies saw a relatively unchanged return
0
0
2013
2014
2013
2014
2013
2014
on equity of 18.3 percent, significantly above the
EBIT / Interest expenses
Leverage ratio
ROE (rhs)
average reported by companies overall
(debt/equity)
(11.2 percent). Moreover, these companies improved
low tech
high tech
other services
knowledge-intensive services
their interest coverage capacity (the EBIT/interest
Note: 1) The classification of industries according to their
expenses ratio posted by firms in the high-tech and
technological intensity and of services according to
medium high-tech sectors rose from 3.1 to 6.2, while
knowledge intensity was made based on Eurostat
aggregation. 2) The EBIT/interest expenses ratio is
that registered by companies in the knowledgecalculated only for firms that incurred interest expenses.
intensive service sector climbed from 2.8 to 3.7 in
Source: MPF, NBR
2013-2014). On the other hand, the contribution
made by the three categories of firms to non-financial corporations gross value added
in 2014 came in at 26.3 percent, slightly down (by 0.4 percentage points) from 2013.
Chart 2.3. Financial soundness indicators for non-financial
corporations by technological intensity

Based on the regions where companies are registered, disparities remain in terms of
performance. Specifically, South-West Oltenia has the lowest number of firms
(43.9 thousand, i.e. 7.3 percent of the total number of companies in 2014) and makes
the smallest contribution to value added in the economy (3.7 percent). Moreover,
this region features a low return on equity (3.4 percent) and a low current ratio
(85.6 percent compared with the 90.4 percent economy-wide average). Bucureti-Ilfov
is the region which generates the largest share of value added, i.e. 46.7 percent,
holding almost a quarter of the total number of active companies in 2014.
Heterogeneity is also visible across firms that fall within the same category by size,
geographical region or business sector. The strong asymmetry in the firms
performance is the usual pattern to be found in most EU countries (CompNet, 201525).

25

36

P. Lopez-Garcia, F. di Mauro and the CompNet Task Force (2015), Assessing European competitiveness: the new CompNet
micro-based database, ECB Working Paper Series, No. 1764, March 2015.

NATIONAL BANK OF ROMANIA

2. Real sector

2.1.2. Financial discipline of non-financial corporations

The portfolio of bank loans to non-financial corporations improved in terms of quality
in December 2013 June 2015. This evolution was mainly determined by the stronger
balance sheet clean-up, following the NBRs recommendations to credit institutions
with a view to ensuring the conditions for sustainably resuming lending. This process
materialised into a 5.7 percentage point fall in the non-performing loan ratio for
non-financial corporations in December 2013 June 2015 (from 23.6 percent to
17.9 percent). There is still significant room for cleaning up bank balance sheets,
considering that approximately 80 percent of non-performing loans report payments
overdue by more than one year and the migration rate of non-performing loans to
lower risk buckets is very low.
Although it entered a downward trend, the relatively high non-performing loan ratio
contributes further to a great extent to maintaining a fragile pace of lending to
companies. It is necessary that, alongside the clean-up of non-performing loans, credit
institutions should seek to turn to good account the lending potential that exists
across the economy but has not yet been exploited. The downward trend in the
non-performing loan ratio is expected to persist in the coming period. Banks have
the necessary resources to resume financing of firms, given the adequate levels of
solvency, liquidity and provisioning. Total capital ratio stood at 18.1 percent in
June 2015, significantly higher than the 8 percent required level, while the
coverage ratio of corporate non-performing loans with IFRS provisions came in
at 68 percent.
The credit migration matrix by days past due confirms the need for banks to carry on
the clean-up of their balance sheets: (i) approximately half of the firms with payments
overdue between 16 and 90 days have witnessed a risk profile worsening during one
year, and (ii) a very low number of borrowers reporting payments overdue for more
than 90 days have seen an improvement in their risk bucket (Table 2.1).

Table 2.1. Credit migration matrix by days past due

(June 2014 June 2015)
A

A
B

93.1

1.4

1.5

1.1

2.9

42.1

18.9

8.4

10.1

20.6

32.8

6.2

15.9

14.7

30.4

20.6

5.9

11.4

20.6

41.5

2.5

0.4

0.7

1.0

95.4

A delay of maximum 15 days

B delay from 16 days to 30 days
C delay from 31 days to 60 days
D delay from 61 days to 90 days
E delay of more than 90 days
Source: MPF, NBR

NATIONAL BANK OF ROMANIA

180
160
140
120
100
80
60
40
20
0

percent

lei bn.

27
24
21
18
15
12
9
6
3
0

Jun.09
Oct.09
Feb.10
Jun.10
Oct.10
Feb.11
Jun.11
Oct.11
Feb.12
Jun.12
Oct.12
Feb.13
Jun.13
Oct.13
Feb.14
Jun.14
Oct.14
Feb.15
Jun.15

Chart 2.4. Non-performing loans by currency

volume of loans, foreign currency

volume of loans, lei
NPL ratio, lei (rhs)
NPL ratio, foreign currency (rhs)
Source: MPF, NBR

37

Financial stability report 2015

The further implementation by banks of a prudent lending policy, with tougher

conditions imposed on unhedged firms, is also necessary in order to improve bank
asset quality. The risk level of lending in foreign currency supports such an approach,
as it is higher than that of lending in domestic currency: (i) the non-performing loan
ratio for loans in foreign currency stood at 19.4 percent in June 2015 (compared to
16.2 percent for loans in lei, Chart 2.4); (ii) the spread between the two ratios has
steadily grown since the beginning of 2015, and (iii) loans in foreign currency hold
56.4 percent of the volume of non-performing loans in banks balance sheets. The NPL
ratio for loans in euro stood at 19.5 percent in June 2015 (down from 23.4 percent in
December 2013), while that for loans in US dollars was 14.2 percent (compared with
18.2 percent at end-2013). The risk posed by the potential difficulties in servicing debt
in US dollars (assuming an appreciation of this currency against the leu) is manageable
across the Romanian banking sector. The number of companies with outstanding
loans in US dollars is low (around 500 in June 2015, an overwhelming share of which
are unhedged26) and the volume of exposures in US dollars stood at lei 3.2 billion in
June 2015 (namely 3.1 percent of total bank loans to non-financial corporations).
By borrower size, micro-enterprises are the riskiest firms in banks portfolio, ahead of
small-sized companies (Chart 2.5). In both cases, the non-performing loan ratio fell
markedly (by more than 6 percentage points in June 2015 compared to December
2013). At the opposite pole are large companies, with a non-performing loan ratio
of 6.2 percent, slightly up compared with December 2013 (+0.2 percentage points).
Chart 2.5. Non-performing loan ratio by company size

60

percent

Chart 2.6. Loan stock and non-performing loan ratio by sector

30

percent

lei bn.

30

10

10
Dec.10
Feb.11
Apr.11
Jun.11
Aug.11
Oct.11
Dec.11
Feb.12
Apr.12
Jun.12
Aug.12
Oct.12
Dec.12
Feb.13
Apr.13
Jun.13
Aug.13
Oct.13
Dec.13
Feb.14
Apr.14
Jun.14
Aug.14
Oct.14
Dec.14
Feb.15
Apr.15
Jun.15

non-financial corporations
large companies
SMEs, total
micro-enterprises
small-sized companies
medium-sized companies

Agriculture

Industry

Trade

total non-performing loans

total performing loans
NPL ratio (rhs)

Jun.15

10

Dec.13

20

Jun.15

15

Dec.13

30

Jun.15

20

15

Dec.13

20

Jun.15

40

Dec.13

25

Jun.15

25

Dec.13

50

Services and Construction

utilities
and real
estate

Source: MPF, NBR

Source: MPF, NBR

By business sector, companies in construction and real estate continue to pose the
largest credit risk, with their non-performing loan ratio reporting the highest level
26

38

Hedged borrowers are defined as those borrowers for whom net export in 2014 covers the annualised debt service in
foreign currency (principal and interest for both domestic and external loans) in the same period. Debt service is estimated
as follows: 1) For domestic loans a) it is assumed that maturing credit lines are not renewed (loans are fully repaid at
maturity), b) for the rest of loans, it is assumed that they are serviced in equal monthly instalments calculated based on the
constant annuity formula. 2) Net external payments made by companies in the period under review are considered for
short-term external loans. 3) For medium- and long-term external loans, the following are taken into account: principal
repayments and interest payments on these loans in the reviewed period.

NATIONAL BANK OF ROMANIA

2. Real sector

(23.9 percent, in June 2015), albeit on a significant decrease versus December 2013
(from 29.2 percent). The lowest non-performing loan ratio was recorded by companies
in services and utilities (12.7 percent in June 2015), followed by firms in industry
(which are expected to contribute to the sustainable change in the economic growth
pattern), i.e. 16.4 percent (Chart 2.6).
Credit institutions stronger orientation towards sectors generating a higher value
added, that could support the change in the Romanian economic growth pattern, is
also warranted by the capacity of the firms in the respective sectors to better service
their debts to banks compared to the rest of the economy. The non-performing loan
ratio for companies in medium high-tech and high-tech sectors stood at 15.8 percent
in June 2015 (down from 19.1 percent at end-2013), while that for firms in the
knowledge-intensive service sector fell to 11.7 percent in June 2015 (from 15.8 percent
in December 2013). The non-performing loan ratio across low-tech and medium
low-tech sectors and less knowledge-intensive service sector stood at 16.7 percent
and 16.6 percent respectively (June 2015). Moreover, the risk generated by tradables
companies remained significantly below that posed by firms in the non-tradables
sector (14.7 percent compared to 19.7 percent, in June 2015).
The drop in the claims on the social security budget and the government budget not
collected by companies on the due date contributed most likely to limiting the
non-performing loan flow over the last three years. Thus, in 2012, the companies
newly classified as non-performing that had significant overdue claims27 on the
government budget generated a 5.4 percent NPL ratio, while in 2013 and 2014 the
reported NPL ratios were 3.9 percent and 1.9 percent respectively.
Non-financial corporations payment discipline in relation to their business partners
and the state improved both at aggregate level and by company size. The total
volume of overdue payments generated by this sector shrank by approximately
8 percent in 2014 compared to the previous year (to lei 92.5 billion) amid the
contraction in overdue payments to both suppliers and the state. A significant
proportion of economy-wide arrears is generated by firms that reported net losses in
2014. These firms accumulated overdue payments in amount of lei 61.9 billion, out of
which lei 33.5 billion to suppliers (namely 62 percent of total overdue payments to
suppliers generated by non-financial corporations overall), lei 14.3 billion to the
government budget (namely 77 percent of total overdue payments to the state) and
lei 14.2 billion to other creditors (namely 70 percent of these arrears across the
economy).

27

NATIONAL BANK OF ROMANIA

Firms which in 2012 held overdue claims on the social security budget and the government budget exceeding lei 5,000 or
firms for which such claims took more than a quarter of total claims.

39

Financial stability report 2015

Chart 2.7. Breakdown of overdue payments* across the economy

80
70
60
50
40
30
20
10
0

lei bn.

lei bn.

40
35
30
25
20
15
10
5
0

Chart 2.8. Default rate28 on commercial liabilities by ownership

50

percent

40
30
20

2010 2011 2012 2013 2014 2010 2011 2012 2013 2014
SMEs
Large companies (rhs)
suppliers between 30 and 90 days
suppliers between 90 days and 1 year
suppliers for more than 1 year
general government
other creditors
* other than those to the banking sector
Source: MPF, NBR

10
0
2010
2011
2012
2013
companies with majority state capital
companies with majority private capital
total non-financial corporations

2014

Source: MPF, NBR

Payment discipline improved both across large companies and SMEs (Chart 2.7).
The total volume of overdue payments reported by large companies diminished by
0.8 percent in 2014, against the background of a 3.3 percent drop in overdue
payments to the government budget (to lei 4.2 billion, in December 2014), as well as
amid the contraction of overdue payments to other creditors (-10.8 percent), while
overdue payments to suppliers went up by 1.4 percent (from lei 18.4 billion in 2013 to
lei 18.6 billion in 2014). On the other hand, total overdue payments recorded by SMEs
saw a 10.6 percent adjustment, the dynamics being chiefly influenced by the fall in
overdue payments to the government budget, as well as by lower overdue payments
to suppliers. In this context, SMEs generate 72 percent of the volume of total overdue
payments in the economy and 77 percent of the arrears to the government budget,
respectively. 28
The lower capacity of SMEs to service their debts to both banks and the other partners
across the economy (suppliers, the state) is further negatively influenced by the
difficulties encountered by these companies in collecting overdue claims, as well as by
a lower capacity to cover interest expenses from their earnings. Thus, the receivables
collection period reported by SMEs (125 days) continues to exceed that corresponding
to large companies, which saw further improvement (from 78 days in 2013 to 73 days
in 2014, Chart 2.9).
State-owned enterprises encounter higher difficulties in collecting claims from
business partners compared to the other firms in the economy, which affects their
capacity to service debts (Chart 2.8). The difficulty faced by state-owned companies in
collecting claims exerts pressure on their liquidity level. The receivables collection
period is longer than that reported by private companies (144 days compared to
91 days, in December 2014), while the current and quick ratios post considerably lower
levels. State-owned firms service debts to their partners in a differentiated manner:

28

40

The default rate was calculated as a ratio of the arrears generated by companies in relation to their suppliers to total
commercial liabilities incurred by the firms generating the respective overdue payments.

NATIONAL BANK OF ROMANIA

2. Real sector

(i) significantly better than private companies regarding their liabilities to banks, and
(ii) considerably worse than private companies regarding their liabilities to business
partners. The default rate on commercial liabilities of state-owned enterprises in
2009-2014 remained above that posted by private companies (Chart 2.8), while the
non-performing loan ratio for bank loans to firms with majority state capital is
significantly lower than that for bank loans to private companies (9.2 percent
compared to 18.3 percent, in June 2015). State-owned enterprises hold 27.4 percent of
total overdue payments of non-financial corporations to the government budget
(in December 2014), while overdue payments to business partners come in at
16.7 percent as a share of non-financial corporations overdue payments to suppliers.
At sectoral level, the highest default rates were recorded by private companies in the
utilities, agriculture and real-estate sectors (22.3 percent, 21.9 percent and
19.8 percent, respectively). The concentration of companies generating arrears
expanded in 2014, given that the top 10 companies, most of which are state-owned,
account for 19 percent of the overdue payments to suppliers reported across the
economy, compared to 16 percent in the previous year.
Chart 2.10. New major payment incidents

Chart 2.9. Receivables collection period

200

number of days

10

lei bn.

thousands

50

180
160
140

40

30

20

10

120
100
80
60
2007

2008
2009
2010
2011
large companies
SMEs, total
micro-enterprises
small-sized companies
medium-sized companies
Source: MPF, NBR, NBR calculations

2012

2013

2014
0

0
2007

2008

2009

total amount

2010

2011

2012

2013

2014

2015
Jun.

number of companies (rhs)

Source: MPF, PIR, NBR calculations

The volume of major payment incidents generated by non-financial corporations

plunged in 2014 versus the previous year by approximately 26.2 percent to
lei 4.3 billion, whereas the number of firms producing such incidents stood, for the first
time over the last years, below the values seen at the beginning of the financial crisis,
after a 22.6 percent decline in 2014 against the preceding year (to approximately
11 thousand firms, Chart 2.10). The concentration of payment indiscipline remains
elevated, with the top 100 companies generating approximately 59 percent of the
volume of major payment incidents. These trends persisted in the first six months of
2015, with the volume of major payment incidents contracting by 5 percent from the
same year-earlier period.
The volume of losses reported by the non-financial corporations sector continued to
be significant in 2014 too, with the rises seen after the international financial crisis
outbreak persisting in spite of the notable improvement in the macroeconomic

NATIONAL BANK OF ROMANIA

41

Financial stability report 2015

framework (Chart 2.11). The losses incurred by the non-financial corporations sector in
2014 amounted to lei 42 billion (roughly EUR 9.4 billion), with the private sector
making the largest contribution thereto (lei 39 billion or EUR 8.7 billion, i.e. 93 percent
of total losses recorded across the economy by firms reporting negative net results).
Total losses of state-owned enterprises which report negative net results amount to lei
3 billion (approximately EUR 0.7 billion). A large number of firms posted net losses in
2014 (about 245 thousand firms, i.e. over 40 percent of the total number of
companies). The firms having posted losses for a long time or firms whose financial
discipline is low distort the competition in real economy and generate second-round
negative effects on inflation (due to unpaid bills, business partners are forced to
increase prices, and owing to overdue payments, banks put up interest rates).
Furthermore, the loss generated by companies causes a drop in the gross value added
across the economy and in GDP respectively.

Chart 2.11. Aggregate loss of firms with negative net results

by ownership (nominal values)

thousands
0.7

650

0.7

600
1.0

550

596.2

595.7

600.7

603.6

602.7

599.7

2010

2011

2012

2013

2014

554.1

521.5

2005

408.1

2002

495.9

400.9

2001

449.8

406.2

350

2000

400

2004

1.5
2.1 1.9 1.7

2009

1.3

500
450

0.7 0.7 0.9 0.9 1.0 1.0

0.8

649.5

700

605.2

lei bn.

companies with majority state capital

companies with majority private capital

2008

2007

2006

2003

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

300
2000

0
-5
-10
-15
-20
-25
-30
-35
-40
-45
-50

Chart 2.12. Number of firms by ownership

companies with majority state capital

companies with majority private capital

Note: To the firms that annually submit their financial statements to the MPF add undisciplined firms which do not submit their
financial statements (estimated by the MPF at approximately 10 percent).
Source: NTRO, MPF, NBR calculations

Over the last years, the number and role of state-owned enterprises across the economy
has diminished considerably in favour of private companies, with the number of
economic agents with majority state capital shrinking to a half and the number of
private companies across the economy rising by 48 percent in 2000-2014 (Chart 2.12).
The number of private companies incurring losses went up markedly compared to
2000 (by more than 88 thousand to 244.6 thousand, accounting for 41 percent of
private companies). However, the number is on the decrease compared to 2009, when
the number of private firms reporting losses across the economy reached an all-time
high (341 thousand). Firms carrying out activity on the books only (with a zero
turnover) hold an important share of private economic agents reporting losses,
amounting to over 67 thousand in 2014.
Moreover, a significant share of the losses seen in 2014 is accounted for by firms which
consistently reported negative financial results. Over 42 percent of the companies that
posted losses in 2014 have faced losses over the last three years. These firms generate
almost half of the aggregate loss (lei 20.3 billion).

42

NATIONAL BANK OF ROMANIA

2. Real sector

Firms with negative net results operate mainly in trade (38 percent, 2014) and services
and utilities sectors (37 percent), yet the largest losses are posted by services and
utilities (lei 12.8 billion, i.e. 31 percent of the aggregate loss) and industry
(lei 12.1 billion, i.e. 29 percent). By size, the overwhelming majority of firms reporting
losses are micro-enterprises (231.5 thousand).
The aggregate result shows high concentration, with only 342 large companies
accounting for more than a quarter of total losses reported across the economy
(lei 10.6 billion). By territorial distribution, the counties with the largest number
of firms reporting negative net results in 2014 are Bucharest (24 percent),
Cluj (5.4 percent), Timi (4.7 percent) and Constana (4.6 percent).
Incurring losses repeatedly leads to capital erosion and, hence, to higher
indebtedness. A significant proportion (around 75 percent) of loss-making firms
reported negative net worth in 2014. Across the economy, there are 285.6 thousand
firms with negative equity (48 percent of the total number of firms), while almost one
third of companies have posted negative equity over the last three years.
A paradox emerges, considering the high frequency of loans granted by private
shareholders to their own loss-making firms. At end-2014, the balance on these loans
came in at lei 87.3 billion (accounting for 24 percent of the total debt reported by
those companies), of which lei 63.9 billion worth of loans directly from shareholders
and lei 23.4 billion worth of loans from affiliates of the same group of companies.
There is an important direct relationship between the volume of losses, financial
discipline and economic growth. Companies generating losses have a negative impact
on the economic activity through: (i) a decline in the gross value added generated by
the non-financial corporations sector and, implicitly, in the gross domestic product;
(ii) lower government budget receipts, and (iii) distorted relationships between
business partners owing to the worsening of payment discipline across the economy.
The significant and consistent improvement in the trade, fiscal and accounting
legislation, including through the implementation of the best practices in the field at
European level, may help diminish this vulnerability across the non-financial
corporations sector.

Box 3. Probability of default of non-financial corporations in Romania

The average default rate reported by Romanian companies with outstanding bank
loans remains on a downward trend according to the macroeconomic baseline
scenario, reaching 4.6 percent in June 2015, compared with 5.4 percent in
December 2014 and 6.9 percent in December 2013 (Chart A). This owes mainly to the
positive expectations on the macroeconomic framework evolution, as well as to the
agregate improvement in companies financial soundness. In this context, the
average default rate stood for the first time below the level seen at the outbreak of
the financial crisis in Romania. However, close monitoring should continue
considering the further uneven dynamics of firms financial performance at
microeconomic level and the fact that the average probability of default on a

NATIONAL BANK OF ROMANIA

43

Financial stability report 2015

one-year horizon is estimated to pick up slightly to 4.8 percent in June 2016,

assuming the macroeconomic framework stays within the expected parameters.
Chart A. The annual default rate across the non-financial
corporations sector according to the macroeconomic baseline
scenario
percent

16
14
12
10
8
6
4
2

95 percent confidence interval

forecasted annual default rate
annual default rate - non-financial corporations
Source: NBR calculations

Jun.16

Jun.15

Dec.15

Jun.14

Dec.14

Jun.13

Dec.13

Jun.12

Dec.12

Jun.11

Dec.11

Jun.10

Dec.10

Jun.09

Dec.09

Jun.08

Dec.08

The probability of default was

calculated on a 12-month
horizon for non-financial
corporations with
outstanding bank loans
reporting no payments
overdue for more than 90 days
over the last 12 months.
The individual probability of
default (PD) is calibrated by
using the annual default rate
(the percentage of
newly-defaulted companies
in the last 12 months).
The model was developed in
two stages, as follows:

I. a model was built for estimating the probability of default of the non-financial
corporations sector with a view to assessing the quality of the portfolio of
corporate loans;
II. a connection/link was established between the PD model and a macroeconomic
module, with the aim to capture the impact of macroeconomic developments
passed through to the banking sector via non-financial corporations. The scenario
underlying the (baseline) macroeconomic projection is that discussed in the
August 2015 Inflation Report.
A logit model was used for determining the probability of default. In order to obtain
the final specification of the model, apart from winsorising, additional filters and
discriminatory power tests were applied on a pool of candidate explanatory variables
and intermediate default models29. The variables included in the specification used in
this model were the leverage ratio (debt/equity), the interest coverage ratio, ROE,
debt-to-value added ratio, and four dummy variables related to bank debt service of
non-financial corporations (<15 days past due, 15-30 days past due, 30-60 days past
due, 60-90 days past due).
The approach used for the macroeconomic module is a Merton model with a latent
factor, which includes a default threshold dependent on the state of the economy.
The role of this module is to estimate a future default rate that would incorporate the
developments in macroeconomic variables, namely the GDP growth rate and the real
effective exchange rate (REER). The link with the PD model is ensured via the
calibration method, which shifts the distribution of the PDs in order to capture the
macroeconomic context.
29

44

For further methodological details, see Costeiu, A. and Neagu, F. (2013), Bridging the Banking Sector with the Real
Economy. A Financial Stability Perspective, ECB Working Paper Series, No. 1592, https://www.ecb.europa.eu/pub/
pdf/scpwps/ecbwp1592.pdf?5fe4120138ff31abc23085eb335ed7d9

NATIONAL BANK OF ROMANIA

2. Real sector

2.1.3. Developments in non-financial corporations insolvency

Apart from the weaker results posted by many companies, insolvency is another
important phenomenon that contributes sizeably to the persistently high level of
losses in the economy, given its low efficiency (Chart 2.13).

Chart 2.13. Number of newly-established firms

and insolvency cases

90
80
70
60
50
40
30
20
10
0

thousands

2009
2010*
2011
2012
number of newly-insolvent firms
number of firms struck off
number of newly-established firms**

2013

2014

Companies in Romania resort more frequently to

insolvency proceedings than firms in other European
countries (Creditreform Economic Research Unit,
2012), but the efficiency of the process is rather
low30. The World Bank ranks Romania among the
worst-performing ten countries in Europe in terms of
how easy it is to resolve insolvency. Insolvent firms
play a relatively small direct part in fuelling
economic growth, but may significantly affect
financial stability via worsening payment discipline
across the economy and loss making in the banking
sector.

* other 127.3 thousand firms struck off based on

GEO No. 44/2008 provisions add to the 43.8 thousand firms
struck off in 2010
** provided that firms submitted their financial statements
to the MPF in the respective year
Source: MPF, NTRO, NBR

The number of firms undergoing insolvency

proceedings in June 2015 amounted to
45.2 thousand (accounting for 7.5 percent of the
total number of non-financial corporations which
submitted their financial statements to the Ministry of Public Finance in 2014).
The insolvency phenomenon has seen marked improvement since 2014: (i) the
number of newly-insolvent companies in 2014 plunged by 30 percent versus 2013 to
20.6 thousand, while (ii) in January-June 2015, less than 6 thousand firms entered
insolvency proceedings, i.e. half the figure recorded in the same year-earlier period.
Insolvent companies role in the economic activity is modest. The firms undergoing
insolvency proceedings in June 2015 have on their payrolls 4.5 percent of the number
of employees in the non-financial corporations sector, generate 2.7 percent of gross
value added and hold 8.3 percent of firms total assets.
Although their direct role in the economy is contained, insolvent firms play a
significant part in payment discipline in the economy. Companies undergoing
insolvency proceedings in June 2015 cause considerable distortions in the payment
mechanism across the economy, generating a third of the overdue payments to
suppliers (lei 17.7 billion) and 68 percent of the payments overdue to the state and
other creditors (lei 26.5 billion) economy-wide at end-2014. Most late payments
generated by insolvent companies were overdue for more than one year (81 percent
of overdue payments to suppliers, December 2014).

30

NATIONAL BANK OF ROMANIA

For further details, see Mihai, I. and Tara, A. (2015) The Role of the Insolvency Framework in Strengthening the Payment
Discipline and in Developing the Credit Market in Romania, Central Bank Journal of Law and Finance, No. 2/2015.

45

Financial stability report 2015

Chart 2.14. Non-performing loans generated by

insolvent/bankrupt companies

30

Chart 2.15. The financial soundness of newly-insolvent

companies in the year before entering insolvency proceedings

lei bn.

percent

30

25

25

20

20

15

15

10

10

0
2008

2009

2010

2011

2012

2013

2014

2015
Jun.

NPLs, other companies

NPLs, insolvent/bankrupt companies
share of loans to insolvent companies in total loans (rhs)
Source: NTRO, MPF, CCR, NBR calculations

200

percent

number of days

150

100

-5

50

-10

-15
2008

2009

2010

2011

2012

2013

2014

receivables collection period newly-insolvent companies

receivables collection period total economy
ROA newly-insolvent companies (rhs)
ROA total economy (rhs)
Source: NTRO, NBR calculations

Insolvent firms role in generating major payment

incidents in the economy increased slightly: in
percent
June 2015, the firms undergoing insolvency
35
2011
proceedings carried 46 percent of the volume of
30
2012
major payment incidents (lei 0.9 billion), up from
25
2013
2014
2014, when their share was 43 percent. The negative
20
June 2015
15
effects caused by these firms in the economy are
10
significant not only at the moment of initiating
5
insolvency proceedings: a substantial proportion of
0
the volume of major payment incidents (about
t-3
t-2
t-1
t
t+1
t+2
18 percent, average values for 2011-June 2015) is
share in total major payment incidents in the respective year
Note: t represents the year when insolvency proceedings were initiated.
generated by companies one year before insolvency
For example, in 2014, 30 percent of the total major payment incidents
were generated by companies that entered insolvency proceedings
proceedings are opened. For instance, in 2014,
in the same year, 4.1 percent of the incidents were generated by firms
30 percent of the volume of major payment
that became insolvent in 2013 (the blue bar in t-1 section) and
15.6 percent by firms that were to become insolvent in January-June 2015
incidents across the economy came from firms
(the blue bar in t+1 section).
Source: NTRO, MPF, CCR, NBR calculations
which started insolvency proceedings the same
year, while 15.6 percent of major payment incidents
were generated by firms that were to declare themselves insolvent in January-June 2015
(Chart 2.16). These are reasons for the information collected by the National Bank of
Romania via the Payment Incidents Register to be more widely accessed by firms in
order to check on their present or potential business partners.
Chart 2.16. Major payment incidents generated by insolvent
companies, by year of entering insolvency proceedings

Insolvent firms also generate the largest share of non-performing loans in banks
balance sheets: 73 percent in June 2015 (similarly to 2013 and 2014, Chart 2.14),
although they account for under 15 percent of the volume of loans taken. Net of these
exposures, the non-performing loan ratio in the banking sector would stand below
6 percent in June 2015. The probability that insolvent firms non-performing loans may
become performing again is very low, which warrants the National Bank of Romanias
recommendations to credit institutions to continue the balance sheet clean-up.
In June 2015, a considerable part of the loans to insolvent companies had been
non-performing for more than a year (about 75 percent of total loans to insolvent
46

NATIONAL BANK OF ROMANIA

2. Real sector

companies). Based on the collateral associated with such loans, real-estate collateral
was the most frequently used (roughly 87 percent of loans had, inter alia, real-estate
collateral). Only 6.1 percent of the loans granted to insolvent firms were not
collateralised (in June 2015). Companies undergoing insolvency proceedings may also
cause negative effects on external creditors, given that they have outstanding loans
from external financial institutions in amount of EUR 1.3 billion and loans from parent
undertakings worth EUR 0.9 billion (in June 2015).
Insolvent companies are overwhelmingly private enterprises with majority domestic
capital (over 80 percent) and mainly micro-enterprises (89 percent in June 2015).
By business sector, they operate in the services and trade sectors (about 60 percent),
but companies in industry also hold a relatively significant share in the number of
insolvent firms compared to their representation across the economy. The share of
industrial companies in total insolvent companies is 17 percent in May 2015 against
10 percent in total firms across the economy. A substantial share of total insolvent
firms as well as of companies newly declared insolvent starting in 2014 is accounted
for by companies set up during the economic boom, namely in 2000-2008 (over
50 percent of firms).
Companies undergoing insolvency proceedings face financial difficulties long before
becoming insolvent: a quarter of the firms declared insolvent during January 2008
June 2015 had been inactive in the year preceding the insolvency declaration (their
turnover amounted to zero), 75 percent of them had had negative net worth in the
year before, and more than a third had had negative equity in the previous three years
(technical insolvency). Besides, in the year prior to the initiation of insolvency
proceedings, these firms reported negative profitability as well as a significantly lower
asset use efficiency than the rest of the companies (asset turnover of newly-insolvent
firms is about 16 percent lower than the economy-wide average, average values in
2008-2014), Chart 2.15. At the same time, the receivables collection period reported by
these firms compares unfavourably with the sectors average, exceeding by 1.6 times
that recorded by non-financial corporations overall (average values in 2008-2014).
Insolvent companies feature high indebtedness and a precarious liquidity position
prior to the year when they are declared insolvent. These characteristics advocate the
implementation of swift, flexible solutions for the market exit of unviable firms.
A feasible approach should be to consistently abide by the provisions of Law
No. 31/1990 on commercial companies as regards the steps to be taken when the net
assets of a company fall below the required threshold. Such a measure would also lead
to an improved payment discipline in the economy.
The low efficiency of insolvency proceedings is also linked to their being relatively
lengthy. The average duration of insolvency for the companies that were wound up
January 2014 through June 2015 was approximately 18 months, varying substantially
across the sectors in which they operated (firms in industry reported a longer average
duration of insolvency proceedings, i.e. 22 months). The new regulations on
insolvency passed in 2014 should lead to a shorter duration of corporate insolvency.
Nevertheless, the impact of the legal changes will be felt over the longer term, given
that a significant number of companies declared insolvent still fall under the scope of
former regulations (out of 45.2 thousand insolvent companies in June 2015, only

NATIONAL BANK OF ROMANIA

47

Financial stability report 2015

26.4 thousand firms entered insolvency proceedings in January 2014 June 2015).
Consequently, the clean-up of unviable businesses and the reduction of
non-performing loans via insolvency arrangements will most likely proceed at a slow
pace economy-wide.
As the experience of the last decade has shown, companies declared insolvent
generally fail to recover and are eventually wound up. Restructuring is rarely used, as
only a small number of firms that entered insolvency proceedings were reorganised.
Companies undergoing a judicial reorganisation procedure account for 5.9 percent of
the firms that entered insolvency proceedings January 2014 through June 2015. These
companies are typically larger enterprises (in terms of asset size, number of employees
and turnover) that post a lower level of indebtedness than the other insolvent firms.
Out-of-court workouts are infrequent, as 570 insolvency proceedings were annulled in
January 2014 June 2015.

2.1.4. Risks generated by the commercial real-estate sector

and mortgage-backed lending to non-financial corporations
Romanian banks exposure to assets correlated with the real-estate market31 is further
high, i.e. 74.2 percent of the stock of loans to non-financial corporations in June 2015,
down 2.8 percentage points from December 2013), which might advocate the
introduction of macroprudential measures with a view to mitigating this
concentration risk. Such exposure is widespread across the domestic banking sector
(the Herfindahl-Hirschman concentration index stood at 75932 in June 2015). The
developments in the credit risk associated with the said exposures indicate that the
real-estate collateral does not guarantee the borrowers higher debt-servicing
capacity. The non-performing loan ratio for the portfolio of mortgage-backed loans
came in at 22.2 percent in June 2015 (Chart 2.17), above the economy-wide average
(17.9 percent) and significantly higher than that of loans without real-estate collateral
(7.6 percent).
Close monitoring of the potential currency risk is warranted, given that more than half
of the exposure to assets correlated with the real-estate market is in foreign currency
and the NPL ratio for foreign-currency denominated exposures to the real-estate
market is higher than that for leu-denominated exposures, i.e. 23 percent versus
21 percent in June 2015.
Credit institutions have a significant direct exposure to companies in the construction
and real-estate sectors, loans granted to these firms holding 23.5 percent of the stock
of loans to non-financial corporations in June 2015. The credit risk from exposures to
construction remains high, with the NPL ratio standing at 39.3 percent in June 2015,
down from 43.2 percent in December 2013. On the other hand, the NPL ratio posted
by real-estate companies came in at 15.6 percent, being substantially lower than at
end-2013, i.e. down by 5.7 percentage points.

48

31

The loans considered included the loans granted to companies in the construction and real-estate sectors and mortgage-backed
loans (other than those granted to the aforementioned sectors).

32

The threshold beyond which the Herfindahl-Hirschman index signals a concentration problem is 1,800.

NATIONAL BANK OF ROMANIA

2. Real sector

Chart 2.18. NPL ratio by LTV bucket in June 201533

Chart 2.17. Developments in lending and

the NPL ratio real-estate collateral

60
40

40

20

30

15

20

10

10

0
Mar.10
Jun.10
Sep.10
Dec.10
Mar.11
Jun.11
Sep.11
Dec.11
Mar.12
Jun.12
Sep.12
Dec.12
Mar.13
Jun.13
Sep.13
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

20

volume of loans without real-estate collateral

volume of loans with real-estate collateral
NPL ratio for loans with real-estate collateral (rhs)
NPL ratio for loans without real-estate collateral (rhs)

Source: CCR, NBR calculations

LTV100%

80

50

25

LTV [75%, 100%)

100

percent

10

LTV [50%, 75%)

120

lei bn.

30

LTV [25%, 50%)

percent

lei bn.

LTV<25%

140

volume of loans
loans overdue by more than 90 days
NPL ratio (rhs)
Source: CCR, NBR calculations

The developments in the construction and real-estate sectors should further be

monitored, given the vulnerabilities shown during the crisis. The companies operating
in the said sectors report high levels of indebtedness, notably above the economy-wide
average (the leverage ratio for real-estate companies stood at 6.2 in December 2014
and that for firms in construction was 3.8, compared with 2.2 economy-wide).
Moreover, companies in the aforementioned sectors continued to show loose
payment discipline, as they accounted for approximately 16 percent of the total
overdue payments of non-financial corporations in 2014, similarly to the previous year.
These firms generate a significant share of major payment incidents across the
economy (22 percent, down however from over 40 percent in 2013). In 2015 H1, major
payment incidents produced by firms in the construction and real-estate sectors held
17 percent of the total volume of such incidents, almost half of the share taken in the
same year-earlier period. 33
The NPL ratio and the loan-to-value (LTV) ratio continued to be tightly linked.
The riskiest loans are those with an LTV ratio above one (loans past due by more than
90 days account for 40.8 percent of the said loans), while in the case of loans with an
LTV ratio below one, the share of loans overdue by more than 90 days is substantially
lower (13.3 percent in June 2015, Chart 2.18).
Companies operating in the real-estate and construction sectors are also vulnerable
with respect to their financing structure, being exposed to the risk of shifts in
international investor sentiment. These firms account for 32 percent of the total
external debt of the real sector, with externally indebted real-estate companies
tending to underperform economically (for further details, see Section 1.4.2. Capital
flows).

33

NATIONAL BANK OF ROMANIA

Loans backed solely by mortgage.

49

Financial stability report 2015

2.2. Households
2.2.1. Households balance sheet and saving behaviour
Aggregate household indebtedness fell moderately in the period under review and,
while it generally stands below the levels posted across the EU, the risks associated
with low-income households becoming overindebted and the fast-paced dynamics of
lending call for monitoring. The favourable macroeconomic picture contributed to a
decrease in the short foreign currency position and to households net wealth
remaining on an uptrend, albeit at a slow pace. Moreover, the changes in the
demographic structure may exert additional pressure on financial stability in the
medium to long run via the developments in lending and saving.
Household indebtedness34
Aggregate household indebtedness amounts to lei 118 billion (of which lei 113 billion
owed to banks and lei 5 billion to NBFIs, June 2015), the ratio of bank debt service to
net income declining by 2.8 percentage points in the reviewed period (December 2013
June 2015, Chart 2.19). Behind the drop in aggregate household indebtedness
indicators stood: (i) balance sheet factors, such as debt reduction following the lower
flow of lending than the volume of loans that reached maturity or were removed from
banks balance sheets; (ii) macroeconomic factors, like the rise in households net
income (the economy-wide minimum wage included) and net wealth; (iii) monetary
factors, namely the fall in interest rates to historical lows, and (iv) fiscal factors, i.e. the
cut in the VAT rate.
Household indebtedness is significant from the perspective of the number of persons
with outstanding loans from banks and NBFIs. At present, 4.3 million individuals have
outstanding loans from these financial institutions (of which 1.4 million have credit
cards), accounting for 47 percent of the economically active population (June 2015).
On average, a borrower has 1.6 loans from banks and NBFIs and 20 percent of bank
borrowers have loans from at least two banks (June 2015).
At an individual level, the risks stemming from the structural characteristics of
household indebtedness remain important, translating into: (i) the asymmetry of
indebtedness distribution across income brackets (Chart 2.20); (ii) the further
prevalence of foreign currency-denominated loans, and (iii) the predominance of
consumer loans.

34

50

It includes banks on-balance sheet exposures, their asset sales, exposures of domestic NBFIs and banks off-balance sheet
exposures. Unlike on-balance sheet exposures, which consist solely of the amount of outstanding principal, off-balance
sheet exposures also comprise the related claims, in line with the FINREP framework at solo level.

NATIONAL BANK OF ROMANIA

2. Real sector

Chart 2.19. Household indebtedness aggregate indicators35

percent

180
Romania
Euro area (18)

70

* sum of bank loans (asset sales included) and loans

granted by domestic NBFIs
Source: ECB, NBR, NIS

<=900

(900;1,700]

>1,700

2015 Q2

2013

2008

0
2015 Q2

Liabilities/ Liabilities/ Liabilities/ Liabilities/ Bank debt Loans*/

Assets Net wealth Gross
GDP
service/ Net Net income
disposable
income
income

2013

10

0
2008

20

20
2015 Q2

30

40

2013

40

60

20

2008

50

80

2015 Q2

60

100

2013

120

40
0

80

median

140

90

2008
2010
2012
2014
2008
2010
2012
2014
2008
2010
2012
2014
2008
2010
2012
2014
2008
2010
2012
2014
2015 Q2
2008
2010
2012
2014
2015 Q2

60

percent

160

100
80

percent

2008

120

Chart 2.20. Distribution of household indebtedness to banks

by monthly net wage36 (individual data)

Total (rhs)

Borrower's monthly net wage (lei)

Source: NBR, CB, MPF

Borrowers with an income below the economy-wide minimum wage exhibit the
largest asymmetry of the debt service-to-income (DSTI) ratio. The corresponding DSTI
ratio stands at 65 percent as compared with 35 percent for the household sector as a
whole (median value, June 2015, Chart 2.20). In addition, around 40 percent of
employees with outstanding bank loans belong to this household segment
(Chart 2.21, June 2015), although they account for less than a third of the exposure,
i.e. 29 percent of employees bank loans. The aforementioned aspects, along with the
fact that the said borrowers show the highest risk of payment default, lead to
increased financial frailty and sensitivity to interest rate, exchange rate and income
shocks. This sensitivity was confirmed during 2008-2015, borrowers with an income
below the economy-wide minimum wage posting an increasing level of indebtedness
compared to 2008, due to a drop in the earnings of borrowers previously included
in higher income brackets and a rise in the amounts to be repaid, as well as to a
higher degree of indebtedness for new debtors than in 2008. Once the loans to
below-minimum wage earners outstanding in 2008 reached maturity, the share of
such borrowers narrowed and lending targeted particularly above-average income
earners (Chart 2.21). 35 36
With a view to improving the capacity of over-indebted low-income households to
repay their debts, the National Bank of Romania: (i) enforced regulations designed to
cut debt restructuring costs, (ii) contributed its expertise, at the request of the Ministry
of Public Finance, to setting out the technical criteria for the implementation of legal
measures aimed at reducing the debt service for households and (iii) encouraged
banks to further seek solutions tailored to suit the broad range of cases in their loan
portfolios, in order to support borrowers that have good recovery prospects.
35

Net income is estimated as the sum of net wages, social security benefits, workers remittances from abroad and transfers.
Unlike net income, gross disposable income also includes the self-consumption component, which is not, however, generally
used for loan repayment. Debts are the total sum of household loans in compliance with the financial accounts (including
the related claims).

36

Indebtedness was calculated only for households with bank loans, based on individual data. Constant annuities were used
and co-borrowers were not considered.

NATIONAL BANK OF ROMANIA

51

Financial stability report 2015

Moreover, lest financial system stability should be affected, the NBR acted to prevent
evergreening by banks, i.e. the provision of additional loans to stressed borrowers, in
spite of their not being able to repay outstanding loans.
Chart 2.21. Distribution of the number of borrowers,
natural entities, by monthly net wage (individual data)

Chart 2.22. Correlation between the value and the

average interest rate of new mortgage loans in lei

60

12

the share of borrowers by

income bracket (%)
40

percent

lei bn.

12

10

10

Correlation coefficient = -0.881

20
0

0
2007

<=900

(900;1,700]
Borrower's monthly net wage (lei)

Source: NBR, CB, MPF

2015 Q2

2013

2008

2015 Q2

2013

2008

2015 Q2

2013

2008

2008

2009

2010

2011

2012

2013

2014 2015*

value of new mortgage loans in lei

average interest rate on new mortgage loans in lei (rhs)

>1,700
* January-June, annualised data on the value of mortgage loans;
January-July, data on the average interest rate
Source: NBR

Foreign currency-denominated loans are further the main component of household

indebtedness, albeit on a decline, on the back of the positive developments in
leu-denominated loans, which hold 95.7 percent of the new loans granted in the
period under review. The stock of foreign currency loans extended by banks (including
asset sales) and NBFIs accounted for 55 percent of total loans to households
(June 2015), down 11 percentage points during December 2013 June 2015.
CHF-denominated lending to households did not pose any systemic risk following the
appreciation of the Swiss franc versus the domestic currency in early 2015 (Box 4).
Consumer loans are further prevalent in the loan portfolios of banks and NBFIs,
having however a significantly smaller share also amid the faster-paced removal of
non-performing loans from banks balance sheets. Consequently, the share of
real-estate loans grew steadily in the reviewed period, from 37.5 percent in
December 2013 to 44 percent in June 2015 (data also include asset sales by banks).
The First Home programme made an additional substantial contribution to the
higher share of real-estate loans (Box 5).
The declining interest rate on mortgage loans has stimulated the extension of new
loans in recent years (Chart 2.22). The correlation coefficient between the volume of
new leu-denominated mortgage loans and the interest rate on such loans stood at
approximately -0.881 during 2007-2015. More than 90 percent of mortgage loans were
granted at a variable interest rate.
Households face mixed prospects regarding their capacity to take credit. On the one
hand, households perception of their financial standing in the coming year turned

52

NATIONAL BANK OF ROMANIA

2. Real sector

positive again in January 2015, after posting negative values for more than five years.
On the other hand, negative expectations persist with regard to unemployment.
Credit institutions estimate that households demand for loans, particularly real-estate
loans, will rise further. Moreover, the level of household endowment with durables
points to the sectors dormant potential for purchasing such goods. Durables bought
in the boom phase of the credit cycle tend to have depreciated, which could prompt
households into buying new ones. The residual maturity of the consumer loans
granted during 2004-2008 is 2.4 years (median value, June 2015). The purchase of
these goods could help boost consumer loan demand.

Box 4. CHF-denominated lending37

CHF-denominated loans to the non-government sector do not pose any systemic risk,
holding a low share of GDP (1.3 percent in June 2015) and a small and declining
weight in total non-government credit (4.1 percent in June 2015). This compares with
a share of CHF-denominated loans in total non-government loans of 14.9 percent in
the case of Poland and 6.2 percent in that of Hungary respectively (March 2015).
A significant fall in the number of CHF-denominated loans can be seen against
end-2014, i.e. around 19 percent in December 2014 June 2015, this trend gaining
momentum in the last months. The decrease in the number of loans owes primarily
to the implementation of measures for the conversion of these loans into a
different currency, as well as to their repayment, removal from banks balance sheets
or sale.
Swiss franc-denominated loans mainly consist of mortgage-backed loans (93 percent
in June 2015, of which almost 40 percent are real-estate loans), being usually long-term
loans. Their average residual maturity, i.e. 12.6 years in June 2015, is significantly
higher than that of leu-denominated loans. Nevertheless, approximately 45 percent
of CHF-denominated loans have a residual maturity of less than 10 years, accounting
however for 10 percent of total exposures.
Households benefiting from CHF-denominated loans are not homogeneous, but
highly asymmetric. The risks associated with this type of loan stem from the
appreciation of the Swiss franc versus the euro, the financial standing of certain
categories of borrowers with CHF-denominated loans, as well as from the
adjustments in the value of the collateral against which the loans were provided.
The latter factor can be accounted for by the fact that most CHF-denominated loans
were granted in a period marked by sharply rising housing prices (2007-2008).

37

NATIONAL BANK OF ROMANIA

For further details, see Analysis on CHF-denominated loans, February 2015, http://www.bnr.ro/DocumentInformation.
aspx?idDocument=19454&directLink=1

53

Financial stability report 2015

Borrowers with outstanding CHF-denominated loans post a significant and increasing

E
level
of indebtedness (DSTI ratio), i.e. approximately 70 percent in June 2015 (median
x
value),
up 11 percentage points from December 2008. The breakdown of such
i
borrowers
by income brackets reveals substantial differences. Borrowers whose
s
monthly
net income is below lei 900 are overindebted following both the adverse
t
developments
in their income and the appreciation of the Swiss franc. Furthermore,

about
60 percent of the borrowers that took CHF-denominated loans and account for
43 percent of such exposures are below-average wage earners (Chart A). The said
a
borrowers
were generally extended small-value loans. In addition, around 30 percent
s borrowers have above-average outstanding loans worth more than CHF 47,000
of
p
each,
holding two thirds of the stock of loans (Chart B). 38
e
c Chart A. Distribution of borrowers with
Chart B. Distribution of borrowers with
CHF-denominated loans by loan size (June 2015)
loans by monthly net wage38
t CHF-denominated
(June 2015)
lei mill., total loans - stock
e
percent
percent

7,000

77.2

50

250

27.8%

6,000

c
40
a
r 30
e

59.7

200
5,000

DSTI (median, rhs)

150

20

100
10.3

5.9

a 10
r 0

3.2

3.4

50

>7,000

(5,000-7,000]

(3,500-5,000]

(2,500-3,500]

(1,700-2,500]

(900-1,700]

(0-900]

4,000
3,000
25.7%

2,000
1,000

25.2%
21.3%

0
p
<= CHF 4,000 (CHF 4,000 - (CHF 18,000 - >= CHF
u
CHF 18,000] CHF 47,000]
47,000
Monthly net wage (lei)
t
Source: NBR, CB
e Source: NBR, CB, MPF
a
CHF-denominated loans exerted greater pressure on borrowers than the other foreign
currency-denominated
loans as a result of the shock triggered by the strengthening of
d
the
i Swiss franc in early 2015. The NPL ratio for these loans stood at 15.8 percent versus
9.7
m percent in the case of foreign currency loans to households in June 2015. On the
other
hand, the CHF-denominated loan portfolio witnessed the sharpest drop in the
i
NPL
ratio
as compared with that posted in December 2013 (2.2 percentage points
n
against
0.7 percentage points for EUR-denominated loans), also due to the stepped-up
u
conversion
and/or restructuring of CHF-denominated loans.
a

There are certain aspects that could reduce households capacity to take credit. On the
one hand, the long maturity of outstanding loans across all age groups limits
borrowers demand for new loans, given that loans mature when they are over 60.
On the other hand, the large share of consumer spending in household income
(67 percent in 2014) and the difficulty to comply with sound eligibility criteria lower
the capacity of the economically active population that has not taken any loans so far
to successfully apply for one.
38

54

The income used refers to December 2014. The DSTI ratio was calculated without considering co-borrowers.

NATIONAL BANK OF ROMANIA

2. Real sector

Net creditor position

Households net creditor position vis--vis the financial system improved in 2014 and
2015 H1 (Chart 2.23) following a rise in bank saving in nominal terms, i.e. up 9 percent,
tantamount to lei 11.7 billion, and a decrease in the stock of loans to households,
down 0.3 percent in the period under review (lei 0.4 billion). Saving kept on increasing
despite the cut in deposit rates and households loan-to-deposit ratio saw an
improvement (Chart 2.24). Also, households short foreign currency position towards
the financial system witnessed a significant adjustment, i.e. by 60.2 percent, to
lei 10.4 billion, December 2013 through June 2015.
Chart 2.23. Households position vis--vis banks
(asset sales included) and NBFIs

position in lei
position in foreign currency
net total position
annual real growth rate of deposits (rhs)
Source: NBR

2015 Q1
2015 Q2

2014 Q3

2014 Q1

2008 Q1

2014 Q4

2014 Q1

2013 Q2

2012 Q3

2011 Q4

2011 Q1

-30
2010 Q2

-45
2009 Q3

40

2008 Q4

-20
2008 Q1

-30

2013 Q3

80

-10

2013 Q1

-15

2012 Q3

120

2012 Q1

10

2011 Q3

15

160

2011 Q1

20

2010 Q3

30

30

percent

2010 Q1

45

200

2009 Q3

40

2009 Q1

percent

lei bn.

2008 Q3

60

Chart 2.24. Loan-to-deposit ratio for households

loans to deposits total

loans to deposits lei
loans to deposits FX
Source: NBR

The favourable developments in households net creditor position and short foreign
currency position vis--vis the financial system need to be regarded with caution,
taking into consideration the following features: (i) the different asymmetries between
the saving and the borrowing behaviour respectively; thus, saving is more important
for above-average earners, whereas indebtedness is concentrated among low-income
earners; (ii) the widening income inequality: the individuals with the top 20 percent
of incomes earned an income that was 6.6 times larger than that of those with the
bottom 20 percent of incomes in December 2013, rising slightly from 6.3 times in the
same year-ago period; (iii) according to the indicators computed by the European
Commission, the outlook for saving points to its remaining modest and below that
in other countries in the region (the Czech Republic, Poland, Slovakia and Slovenia)
in the coming year.

NATIONAL BANK OF ROMANIA

55

Financial stability report 2015

Households net wealth

real-estate assets
net financial assets
net wealth/gross disposable income (rhs)
net wealth/net income (rhs)
real-estate assets/net financial assets (rhs)
Source: NBR, NIS, FSA

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

Households net wealth stuck to the uptrend that had started in 2012, yet at a
moderate pace (up 3 percent in 2014 from 2013, Chart 2.25). Behind the expansion
stood both the 2.5 percent pick-up in financial and real-estate assets and the
2.8 percent reduction in liabilities. Real-estate assets further hold a substantial share
of households net wealth, albeit on the decline
Chart 2.25. Households net wealth
following the significant price adjustments that
have occurred from 2009 to present. In 2014, the
percent
lei bn.
said weight was 64 percent of the net wealth versus
1,200
1,200
85
percent in 2009. In Romania, net wealth
1,000
1,000
per person was approximately lei 44,000 in 2014,
800
800
13 times lower than in the euro area. Debt per
600
600
person stood at around lei 6,000. In 2014,
400
400
households assets accounted for 156 percent
200
200
of GDP, while their liabilities made up 17.8 percent
0
0
of GDP.
Households liquidity improved in 2014. Thus, liquid
financial assets39 held a wider share in total financial
assets, i.e. 42 percent, on the back of the rise in bank
deposits and cash. Moreover, risk-free liquid assets
account for a sizeable and stable share in total
financial assets (36 percent in 2014).

Box 5. Sensitivity analysis of the loans extended under the First Home
programme
The First Home programme was launched in 2009 and it has a social nature, as it
makes it easier for the youth to purchase or build a house by taking out a loan.
Its major advantages are: (i) the provision by the government of a guarantee for
50 percent of the loans value; (ii) a capped interest rate margin; (iii) the requirement
to advance 5 percent of the houses price. The programme bolstered real-estate
lending during the recession and afterwards. The mandatory shift to lending in
domestic currency alone under this scheme as of August 2013 had a key role in
narrowing the currency mismatch in the balance sheets of credit institutions and
households foreign currency position.
The programme made an important contribution to the recovery of household
lending when it was launched and, starting in 2013, to the step-up in loans in local
currency. January 2014 through June 2015, banks granted approximately 60 percent
of the new real-estate bank loans under this scheme, and the corresponding share of
leu-denominated loans was similar, i.e. 63 percent. Since the implementation of the
First Home programme, 147,567 loans amounting to lei 24.5 billion were extended,
making up around a fifth of household loans and 51 percent of real-estate loans
39

56

Liquid financial assets consist of: cash, bank deposits, securities, liquid shares and investment fund shares or units. Risk-free
liquid assets include: cash, bank deposits and securities (specifically government securities).

NATIONAL BANK OF ROMANIA

2. Real sector

(June 2015). The period from January 2014 to June 2015 also witnessed a significant
increase in real-estate loans other than those granted under the First Home
programme.
In the context of interest rates at historical lows, the major attraction of the loans
extended under this programme is the lower advance required, i.e. 5 percent of the
price of the purchased house. Between January 2014 and June 2015, banks charged
an interest rate similar to that set under the aforementioned scheme on about
30 percent of the new leu-denominated real-estate loans (the comparison took into
account a cap of around 4 percent on the annualised interest rate on leu-denominated
loans granted under the First Home programme, corresponding to the 90th percentile
of the distribution of the interest rate on the said loans).
Accepting a higher LTV ratio in the case of loans extended under the First Home
programme implicitly impacts borrowers saving behaviour and their vulnerability to
future shocks. The higher vulnerability of borrowers with outstanding loans under the
First Home programme is associated with: (i) a long residual maturity that increases
interest rate sensitivity and (ii) a higher level of indebtedness40 than that of borrowers
with real-estate loans that did not resort to the programme (about 42 percent against
38 percent, median value, June 2015). The features of the said programme mitigate
some vulnerabilities by: (i) limiting the risk of real-estate speculations, given that buyers
cannot sell the housing unit in the first five years after the purchase; (ii) capping the
maximum amounts borrowers can take, and (iii) undertaking a tighter check on
borrowers. Nevertheless, an assessment is needed to gauge the usefulness of the First
Home programme under the current terms and the context in which it still creates
higher value added than the entailing vulnerabilities.
The risks arising from the
loans granted under this
percent
programme could increase in
14
12
the period ahead in the event
10
of a rise in the interest rate.
8
An analysis of indebtedness
6
4
sensitivity to higher interest
2
rates points to a significant
0
Consumer loans Real-estate loans
Real-estate
Real-estate
impact on the loans
loans under the
loans other
extended under the said
"First Home" than "First Home"
programme
programme loans
scheme. The stress scenario
* The shocks were set based on the levels specified in NBR Regulation
under analysis assumes a
No. 17/2012 on certain lending conditions, as well as in similar analyses
conducted across the EU. They referred to: a 2 percentage point increase
2 percentage point interest
in the interest rate and a 6 percent decrease in the monthly net wage.
rate shock and a 6 percent
The shocks under analysis trigger an ongoing adjustment in the period
following their occurrence, entailing a recalculation of the debt service
borrower income shock.
for the whole period remaining to maturity.
Source: NBR, CB, MPF
This scenario could lead to an
increase in the DSTI ratio (median value) by 12 percentage points for borrowers with
outstanding loans under the First Home programme and by 9 percentage points
Chart A. Change in the level of indebtedness
under a stress scenario* (June 2015)

40

NATIONAL BANK OF ROMANIA

The level of indebtedness is computed for borrowers with outstanding real-estate loans under the First Home programme
and borrowers with real-estate loans that were not extended under this scheme respectively by considering also their other
financial debts if applicable.

57

Financial stability report 2015

for those with other real-estate loans versus 4 percentage points on average for the
whole portfolio (Chart A). However, for a fifth of the borrowers with loans under the
above-mentioned programme, the monthly instalments after applying these shocks
are relatively close to the instalments set at the beginning of the loan contracts, with
monthly instalments returning to the levels mentioned at the time the loans were
taken.

Demographic structure
The changes in the demographic structure may pose medium to long-term risks to
financial stability. Romanias population is currently aging, on the back of youth
migration, lower fertility and increased longevity. In the absence of demographic policy
measures, prospects are not encouraging. Estimates41 of the performance of indicators
by 2030 show: (i) a decrease in population by 4.5 percent; (ii) a rise in the old-age
dependency ratio42 to 33 percent from 24 percent in 2013, and (iii) a significant increase
in the median age to 45 years. The structural issues concerning demographic
developments may impact financial stability via at least two channels, namely: (1) the
macroeconomic channel, following the changes in labour force and labour productivity,
as well as the pressures on public expenditure (particularly health and pension
spending) and (2) credit institutions strategies in response to the adjustments in the
volume and composition of saving and of household demand for financial products.

2.2.2. Households capacity to service debt

The credit risk stemming from bank loans to households contracted. The non-performing
loan ratio fell by almost 3 percentage points December 2013 through June 2015 (to
7.5 percent from 10.2 percent, Chart 2.26). The drop in the volume of non-performing
loans owed both to the clean-up of banks balance sheets and the slower deterioration
of the loan portfolio quality.
Banks equally resorted to non-performing loan sales and removal from their balance
sheets. In the period under review, banks removed from their balance sheets43
household loans amounting to about lei 1.6 billion and sold off non-performing loans
worth lei 1.53 billion, whereas the volume of new non-performing loans fell by
25 percent. In the absence of balance sheet clean-ups, the NPL ratio for households
would have stood at around 9 percent as compared with 7.5 percent in June 2015
(Chart 2.27). The removal of loans from the balance sheets of credit institutions was
aimed at non-mortgage backed consumer loans (about 68 percent of these loans) and
foreign currency-denominated loans (69 percent of total off-balance sheet loans in June
2015). Conversely, loan portfolio sales generally concerned mortgage-backed loans
(around 70 percent) and implicitly foreign currency loans (approximately 90 percent)
and loans past due by more than 90 days (over 95 percent of total loan sales).

58

41

According to Eurostat, NIS and United Nations Population Division statistics.

42

The old-age dependency ratio is the ratio of older dependents (people older than 65 years) to the working-age population
(people aged 15-64).

43

In this section, the analysis of loans removed from banks balance sheets is based on the data reported to the CCR and the
CB, given that they allow for a breakdown of such exposures. Off-balance sheet loans consist solely of the principal amount.
The inclusion of related claims and claims accumulated after the removal from the balance sheets pushes up the value of
these loans to approximately lei 2.3 billion.

NATIONAL BANK OF ROMANIA

2. Real sector

12

total NPL ratio

real-estate loans
mortgage-backed consumer loans
non-mortgage backed consumer loans
credit cards and overdrafts
Source: NBR, CB

lei bn.

percent

12

Jun.15

0
Mar.15

0
Dec.14

2
Sep.14

Jun.14

Mar.14

Dec.13

Sep.13

10

Dec.12

10

Jun.13

percent

Sep.08
Dec.08
Mar.09
Jun.09
Sep.09
Dec.09
Mar.10
Jun.10
Sep.10
Dec.10
Mar.11
Jun.11
Sep.11
Dec.11
Mar.12
Jun.12
Sep.12
Dec.12
Mar.13
Jun.13
Sep.13
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

16
14
12
10
8
6
4
2
0

Chart 2.27. Breakdown of non-performing loans

Mar.13

Chart 2.26. Banks NPL ratio by loan type

non-performing loan sales

volume of off-balance sheet loans
volume of non-performing loans
NPL ratio
NPL ratio*
* without considering balance sheet clean-up
Source: NBR, CB

Debt rescheduling did not play a key role in the improvement of bank asset quality.
Rescheduled loans for financially stressed borrowers held about 7.6 percent of the
loan portfolio, 38 percent of them being non-performing loans (in June 2015, similarly
to December 2013). Nevertheless, non-mortgage backed consumer loans account for
the largest share of rescheduled non-performing loans, i.e. 45 percent.
Recent developments point to a moderate improvement in households payment
capacity. On the one hand, the plunge in the number of borrowers who were more
than 90 days overdue on payments for the first time and the slight increase in the
migration rate of loans 1-90 days past due to lower risk buckets suggest a drop in the
NPL ratio also in the coming period. Thus, January 2014 through June 2015 the
number of borrowers whose loans were newly classified as non-performing fell by
around 20 percent as compared with the period between January 2013 and June 2014,
while the migration rate of loans overdue up to 90 days rose to 87.9 percent in the
period January 2014 June 2015 from 84.8 percent on average in 2013. On the other
hand, the further low migration rate of non-performing loans to lower risk buckets,
i.e. 5.3 percent (the average for January 2014 June 2015), and the higher share of
loans remaining non-performing for more than two years (69 percent in June 2015, up
from 41 percent in December 2013) are indicative of persistent non-performance,
emphasising the need to continue bank balance sheet clean-ups.
Foreign currency-denominated loans further pose the greatest risks. The differential
between their NPL ratio and that for leu-denominated loans is high, i.e. 5.1 percentage
points in June 2015. All types of loans paint a similar picture, with non-mortgage
backed consumer loans reporting the largest differential (Chart 2.28). Foreign currency
loans account for the wider share of the non-performing loan stock (74 percent in
June 2015). Moreover, borrowers with foreign currency-denominated loans post a
higher level of indebtedness than that of borrowers with domestic currency loans
(48 percent as compared with 31 percent, DSTI median values, June 201544).
44

NATIONAL BANK OF ROMANIA

Credit cards and overdrafts were not included.

59

Financial stability report 2015

The aforementioned developments warrant ongoing enhanced prudence in the future

as well as regards foreign currency lending, with potential recalibration of the current
LTV and DSTI macroprudential instruments in order to incorporate the currency risk
movements that have occurred over the past years.
One of the lessons from the recent global financial crisis is that banks should maintain
appropriate lending standards throughout the business cycle. Inadequate lending
from a prudential perspective can be manageable over the short term, backed
temporarily by the upward trend in the business cycle, but it will most likely become
unsustainable in the medium run. The loans granted by 2008 currently account for
approximately 70 percent of total non-performing loans (Chart 2.29). The loans
originated in 2007-2008 were generally mortgage-backed loans mostly granted over
an extended period (the original maturity stood at 24.5 years). At present, the
NPL ratio for this portfolio is 15.4 percent (June 2015).

percent

NPL ratio lei

NPL ratio foreign currency
NPL stock lei (rhs)
NPL stock foreign currency (rhs)
Source: NBR, CB

Credit cards

Non-mortgage
backed loans

Mortgagebacked loans

lei bn.

Real-estate
loans

Total

35
30
25
20
15
10
5
0

7
6
5
4
3
2
1
0

Chart 2.29. NPL ratio by the quarter of credit agreement

(2003 Q1 2015 Q1) over a three-year moving window
16

percent

percent

100

12

75

50

25

0
2003 Q1
2003 Q4
2004 Q3
2005 Q2
2006 Q1
2006 Q4
2007 Q3
2008 Q2
2009 Q1
2009 Q4
2010 Q3
2011 Q2
2012 Q1
2012 Q4
2013 Q3
2014 Q2
2015 Q1

Grafic 2.28. Banks NPL ratio by loan type and currency, June 2015

cumulative distribution of NPLs (rhs)

NP L ratio

Note: The NPL ratio for each quarter is the ratio of loans past due
by more than 90 days at least once in a three-year period
after the date of credit agreement to the volume of loans
granted in that quarter.
Source: NBR, CB

Individuals level of indebtedness measured by the debt service-to-income ratio

is a good indicator of borrowers payment capacity (Chart 2.30). Borrowers with loans
more than 90 days overdue have a substantially higher DSTI ratio than borrowers
without overdue payments (56 percent versus 35 percent in June 2015). This holds
for all wage brackets. Borrowers with an income below the economy-wide
minimum wage (lei 900 per month) further pose the greatest risk to the banking
sector, posting higher DSTI and NPL ratios, i.e. 65 percent and 11.5 percent
respectively in June 2015.

60

NATIONAL BANK OF ROMANIA

2. Real sector

Chart 2.30. NPL ratio by monthly net wage bracket

percent

percent

Borrower's monthly net wage

change in NPL ratio (2013 Q4 2015 Q2)

NPL ratio

350
300
250
200
150
100
50
0

Total

>7,000

(5,000;7,000]

(3,500;5,000]

(2,500;3,500]

(1,700;2,500]

(900;1,700]

<=900

Total

>7,000

Consumer loans

(5,000;7,000]

(3,500;5,000]

(2,500;3,500]

(1,700;2,500]

(900;1,700]

Real-estate loans

<=900

15
12
9
6
3
0
-3
-6

Borrower's monthly net wage

DSTI performing loans (median, rhs)

DSTI non-performing loans (median, rhs)

Note: Wage earnings refer to December 2014 and the coverage ratio is around 75 percent in terms of total exposures and 65 percent in terms of the number
of borrowers (June 2015). The debt service-to-income (DSTI) ratio is the ratio of bank debt service to the borrowers monthly net wage, without
considering co-borrowers.

Source: NBR, CB, MPF

The Romanian banking sector enjoys appropriate coverage against the risks stemming
from lending to households. The total capital ratio was on the rise (18.1 percent in
June 2015) and the coverage ratio of household non-performing loans with IFRS
provisions was adequate (68.1 percent in June 2015). The value of the collateral further
exceeded that of real-estate loans and the loan-to value (LTV) ratio remained broadly
unchanged in the reviewed period (87 percent, according to the May 2015 Bank
Lending Survey).

2.2.3. Risks generated by the residential real-estate sector and

mortgage-backed lending to households
The real-estate market witnessed mixed developments in the period under review
(December 2013 March 2015). On the one hand, prices of residential property
increased markedly in 2015 Q1 (up 3.7 percent, Chart 2.31), strengthening the upward
trend that had started at end-2014. The fast-paced dynamics of house prices could
hint at potential problems over the medium term, given that there are already certain
EU Member States (Estonia or Hungary) in which these prices have risen above the
indicative threshold set by the European Commission, i.e. a 6 percent year-on-year
change in house prices. On the other hand, the number of real-estate transactions fell
in 2014 (down 4 percent year on year), staying however at a level similar to that
recorded prior to 2009.
The dynamics of the real-estate market in Romania have been bolstered by both
demand and supply side factors. Household intention to purchase a house has
remained relatively stable, yet banks expect a higher demand in the coming period
(according to the August 2015 Bank Lending Survey). In addition, starting in 2015,
there has been a step-up in construction activity, particularly residential construction.
The volume of investment in new construction works rose by 16.2 percent in nominal
terms in 2015 Q1.

NATIONAL BANK OF ROMANIA

61

Financial stability report 2015

The domestic banking sector is further under pressure from the mortgage-backed loan
portfolio45 following the latters deteriorating quality. This calls for prudent monitoring
with a view to potentially recalibrating the macroprudential measures on sustainable
household lending that are already in place. Banks have substantial exposure to the
residential real-estate sector. Mortgage-backed loans to households amount to lei
70.2 billion (of which loans worth lei 54 billion are in foreign currency), accounting for
67 percent of total bank loans to households (June 2015), up 3.5 percentage points
from the level posted in December 2013. Such exposures are broadly based across the
banking sector46. As far as real-estate loans extended by NBFIs are concerned, their
share has narrowed substantially in the recent period, to 18.2 percent in June 2015
from 28.5 percent in December 2013.
The current risks to the banking sector stemming from household lending backed by
real-estate collateral remain significant. The high residual maturity of this loan
portfolio may put pressure on the banking system in case of interest rate shocks.
Thus, the residual maturity of mortgage-backed loans was 18.5 years in June 2015.
Moreover, the large share of real-estate foreign currency loans is further a vulnerability,
although its intensity diminished somewhat. These loans hold 77 percent of the total
stock of real-estate loans, down from 92 percent December 2013 through June 2015.
Both the shift to leu-denominated lending under the First Home programme and the
decline in funding costs in domestic currency to levels similar to those in foreign
currency contributed to the decreasing share of foreign currency-denominated loans.

Chart 2.32. NPL ratio by current LTV ratio (June 2015)

Chart 2.31. Developments in residential property prices

percent

30

percent

25

real-estate loans*

20

mortgage-backed
consumer loans

-5
15
-10

10

Mar.15

Jul.14

Nov.14

Nov.13

Mar.14

Jul.13

Mar.13

Jul.12

Nov.12

Mar.12

Jul.11

Nov.11

Mar.11

0
Jul.10

-20
Nov.10

Mar.10

-15

residential property price index Romania, annual change

residential property price index EU average, annual change
Source: NIS, Eurostat, NBR calculations

<=50%

(50%; 75%]

(75%; 100%]

>100%

Current LTV ratio (June 2015)

* The analysis did not take into account the loans granted
under the First Home programme.
Source: NBR

The mortgage-backed loan portfolio poses considerable credit risk owing to the
changes in the quality of mortgage-backed consumer loans and of loans granted
during 2007-2008. The NPL ratio for mortgage-backed loans currently stands at
6.9 percent, with non-performing loans being mostly mortgage-backed consumer

62

45

This consisted of real-estate loans and mortgage-backed consumer loans to households (including real-estate loan sales).

46

The Herfindahl-Hirschman concentration index for these exposures stood at 970, below the threshold (1,800) beyond which
it signals a concentration problem (June 2015).

NATIONAL BANK OF ROMANIA

2. Real sector

loans (58 percent of non-performing mortgage-backed loans in June 2015). The NPL
ratio for mortgage-backed consumer loans is 12.5 percent against a merely 4.3 percent
in the case of real-estate loans (June 2015, Chart 2.26).
With a view to dealing with non-performing exposures from mortgage-backed loans,
banks resorted to asset sales (worth approximately lei 1.1 billion) to a larger extent
than to the removal of loans from their balance sheets (tantamount to lei 548 million
in June 2015 versus lei 0.3 million at end-2013). The loss given default (LGD) for
real-estate loans rose slightly (from 23 percent to 25 percent in the reviewed period),
whereas that for mortgage-backed consumer loans remained around 35 percent.
The recent developments in bank loan quality show that the request for real-estate
collateral does not mitigate the credit risk. Thus, a comparison of the NPL ratio for
mortgage-backed consumer loans with that for non-collateralised consumer loans
(after adjusting it by taking into consideration also the loans that were removed from
banks balance sheets) did not produce markedly different readings (13.5 percent
versus 12.9 percent respectively).
The analysis of loans by their current LTV ratio shows that borrowers having taken
mortgage-backed loans with an above-one LTV exhibit lower payment capacity
(Chart 2.32). Both real-estate loans and mortgage-backed consumer loans with an
above-one LTV post a substantially higher NPL ratio, i.e. 25.5 percent and 29.8 percent
respectively. As regards non-performing real-estate loans, an important factor in the
declining payment capacity is the stronger deterioration of the value of the real-estate
collateral. LTV is subject to sharper adjustment in the case of non-performing loans
than for performing loans.
The above-mentioned evidence pleads for a reassessment of the macroprudential
framework in place. In fact, many European countries are concerned with this issue
and the European Systemic Risk Board decided that two of the intermediate objectives
of the new macroprudential policy framework should be defined in connection with
real-estate market risks (for further details, see Section 5.2. The NBRs macroprudential
objectives and the instruments of macroprudential policy for achieving the
objectives), namely: (1) to mitigate and prevent excessive credit growth and leverage
and (2) to limit direct and indirect exposure concentrations. The proposed
macroprudential instruments target borrowers and creditors alike. The requirements
for creditors are used in a uniform and consistent manner, in line with the Basel III
Accord, which was implemented into EU law via the CRD IV/CRR package. National
authorities may establish, together with the specific capital requirements, a systemic
capital requirement if the risk is not cyclical and it is not covered by standard
measures or set exposure limits on a certain segment.

NATIONAL BANK OF ROMANIA

63

3. THE FINANCIAL SYSTEM

Financial intermediation declined further, with Romania still showing the lowest level
in the EU after having recorded the fastest pace of decrease in the past four years.
Among the financial system components, the banking sector continued to witness the
largest adjustments. The authorities policies have to ensure favourable conditions for
the resumption of financial intermediation, also by avoiding measures that might
distort the role of financial institutions in the society.
The evolution of the banking sector has led to the strengthening of its resilience in
case of unfavourable developments. Bank prudential indicators further posted
adequate levels, standing significantly above the minimum required thresholds.
Satisfactory solvency and liquidity ensured the smooth management of emerging
international tensions (such as the crisis in Greece). The stress tests conducted by the
NBR on a regular basis confirm the proper capital and liquidity adequacy. Credit
institutions reliance on foreign financing continued to decline in an orderly manner,
the loan-to-deposit ratio reaching a level that no longer poses macroprudential risks.
The balance sheet clean-up accelerated, leading to a significant reduction of the NPL
ratio. Banks efforts in this area affected their current profitability, but contributed to
the resumption of sustainable lending. Profit re-entered positive territory in the first
part of 2015, but it remains at a modest level mainly due to: (i) the structural balance
sheet changes generated by the shift to low risk-assets; (ii) the weak lending in recent
years (especially to non-financial corporations), and (iii) the interest margin
adjustments.
Foreign currency loans in banks portfolios, albeit on a decline, still prevail and are
further the riskiest among the loans extended to both companies and households.
Recently, loans have been mainly granted in domestic currency, which has helped
reduce the currency risk markedly. The share of new EUR-denominated loans to
households became marginal (less than 5 percent in 2014).
The non-bank financial sector have witnessed mixed developments: the insurance
sector has been struggling with undercapitalisation issues, aggravated by the decline
in activity, the NBFIs have shared the same problems with banks regarding the weak
loan demand and the poorer portfolio quality, while private pension funds and
investment funds have recorded sustained business development. The probability of
systemic risk emerging from the non-bank financial sector is relatively low, but on the
rise. The current low interest rate environment may be a vulnerability that will put
pressure on the non-bank financial sector.
The domestic financial markets (money market, foreign exchange market,
government securities market and capital market) have remained robust, evolving in

64

NATIONAL BANK OF ROMANIA

3. The financial system

line with regional markets, regardless of the challenges that have occurred since the
previous Financial Stability Report. The narrowing spreads against Europes
benchmark indices, the lower volatility along with the shrinking risk premium are
factors that can contribute to strengthening the external perception of the Romanian
economy as an emerging financial market attractive to institutional investors. The
same as in Europe, the main risks to the stability of domestic financial markets are
associated with concerns over the fragility of global economic growth and the tense
episodes at regional level.

3.1. Structure of the financial system

Financial intermediation declined further, with Romania still showing the lowest level
in the EU. The aggregate drop came from mixed developments of the main financial
system components, i.e. the banking sector continued to witness significant
adjustments, whereas pension funds and investment funds reported increases.
The authorities policies have to ensure favourable conditions for the resumption
of financial intermediation, also by avoiding measures that might distort the role of
financial institutions in the society.
Chart 3.2. Relative sizes of banking and non bank financial sectors
in CEE countries

Chart 3.1. Structure of the Romanian financial system

(assets as a share of GDP)
percent

170%

2011

2012

investment funds
private pension funds
insurance companies
non-bank financial institutions
credit institutions
Source: NBR, FSA

2013

2014

Czech
Rep.
Slovenia

Hungary

160%
Monetary financial institutions'
total assets-to-GDP ratio (%)

100
90
80
70
60
50
40
30
20
10
0

150%

Croatia

R 2 = 0.576

140%

Estonia

130%
Slovakia

120%
110%

Poland

100%
90%

Romania
Lithuania

80%
15%

25%

35%

45%

55%

Other financial institutions' total assets-to-GDP ratio (%)

Source: ECB, national financial accounts

The share of the financial systems assets in GDP decreased by 4.1 percentage points
in 2014 compared with 2013 to reach 77.4 percent (Chart 3.1). Financial
intermediation declined at the fastest pace in the past four years. Future
developments are closely monitored, given that Romania posts the lowest level of
financial intermediation in the EU (Chart 3.2). Romanias financial system is still
dominated by the banking sector, which accounts for about 78 percent of total assets,
ahead of investment funds (7.9 percent), NBFIs (5.9 percent), pension funds and
insurance companies (3.7 percent and 3.5 percent respectively, at end-2014).

NATIONAL BANK OF ROMANIA

65

Financial stability report 2015

Deleveraging is manifest both in the euro area and in the CEE countries, but its size
varies depending on the development of the financial system in these regions. In
recent years, the pace of deleveraging was more pronounced in the euro area, due to
the fall in the overall volume of financial assets and in the context of modest GDP
growth in the region. In contrast, financial intermediation in countries such as Poland
or the Czech Republic was stable or even increased.
Chart 3.3. The share of exposures to and funds raised from domestic financial institutions in the balance sheet of credit institutions

10

percent

equity participation in financial

institutions

exposures to other financial

institutions

8
7

exposures to insurance companies and

private pension funds

6
5

exposures to credit institutions

4
3

funds raised from other financial

institutions

2
1

funds raised from insurance

companies and private pension funds
Jun.15

May.15

Apr.15

Mar.15

Feb.15

Jan.15

Dec.14

Nov.14

Oct.14

Sep.14

Aug.14

Jul.14

Jun.14

May.14

Apr.14

Mar.14

Feb.14

Jan.14

Dec.13

funds raised from credit institutions

Source: NBR, FSA

Heterogeneity also characterises the development of the non-bank financial sector in

relation to the banking sector, with countries (such as Poland and Lithuania) that
feature more developed non-bank financial sectors compared with the rest of the
countries in the sample. The share of monetary financial institutions in GDP stands
below 90 percent in the case of Romania, while it exceeds 150 percent in the Czech
Republic, Hungary and Slovenia, the situation being similar for the non-bank financial
sector development.
The direct contagion risk in the Romanian financial system works asymmetrically.
The contagion risk is relatively moderate from NBFIs to credit institutions and
relatively high in the opposite direction, from banks to NBFIs. The exposures to the
rest of financial sectors do not exceed 4 percent of bank assets, while the funds raised
from these sectors account for 5.5 percent of bank liabilities (Chart 3.3). Under these
circumstances, the potential adverse developments generated by insurance
companies or private pension funds would have a manageable impact on the banking
sector.

66

NATIONAL BANK OF ROMANIA

3. The financial system

Chart 3.4. The share of exposures to credit institutions in the assets of financial sectors
Investment funds

Investment funds
2012

2014

Private pension funds

Private pension funds

Insurance
companies

Insurance
companies
Credit institutions
Non-bank financial
institutions

Non-bank financial
institutions

Note: The size of the circles stands for the relative share of the financial system's components, while the arrows
show the shares of exposures of each non-bank financial sector to credit institutions.
Source: NBR, FSA

On the other hand, exposures to credit institutions in the balance sheets of domestic
financial institutions are significant (Chart 3.4). The diversification of exposures in
order to reduce dependency could prove useful. The dynamic analysis of the share of
exposures shows a decrease in the dispersion of this indicator over the reviewed
period. Thus, it is worth noting a sustained drop in the exposures of investment funds
to the banking sector (from over 20 percent in 2012 to less than 15 percent at
end-2014) and an increase in the share of exposures of insurance companies to credit
institutions in Romania.
The quality of shareholding in the Romanian
financial system was further appropriate, leaving
room for improvement especially in the banking
sector. The share capital of credit institutions in
Romania improved in recent years, as illustrated by
the larger share of capital from investment grade
countries (73 percent at end-2014, from 67.9 percent
in 2012). The quality of NBFIs share capital decreased
slightly, yet the share of foreign investors from
investment grade countries further exceeded
93 percent at end-2014.

Chart 3.5. Share capital by country of origin

percent

NBFIs

2014

2012

Banks

2014

2012
0

20

40

60

non-investment grade capital

investment grade capital
Source: NBR

NATIONAL BANK OF ROMANIA

80

100

The local and international financial environment

characterised by low interest rates has mixed
implications for the domestic financial system: the
effects are mostly positive for the banking sector
and negative for the non-bank financial sector.

67

Financial stability report 2015

Box 6. The impact of a low interest rate environment on the financial sector
Maintaining low interest rate levels improves the profitability of credit institutions as
a result of: i) the maturity mismatch of interest rate risk-sensitive assets and liabilities,
with a slower revaluation of assets at the new interest rate level (Section 3.2.6. Market
risk) and of ii) a decline in the NPL ratio via reducing borrowers debt service.
A significant interest rate hike may increase the occurrence of defaults of borrowers
with variable interest rate loans, in particular for lending products with long residual
maturity, such as real estate loans and, primarily, loans taken under the First Home
programme.
The expectations of future interest rate increases hamper the recent positive trend
seen in leu-denominated loans and may influence credit institutions decisions
regarding the allocation between various classes of exposures, with negative effects
on sovereign debt holdings.
The local and European financial environment characterised by low interest rates
contributed to a reduction in the profitability of private pension funds in Romania.
The impact of a low interest rate environment on the insurance system is particularly
relevant in the case of life insurers and varies depending on their business model, the
duration mismatch between assets and liabilities or the opportunities for diversifying
interest rate sensitive exposures. Moreover, low nominal interest rates can amplify
procyclicality as investors take higher risks in order to preserve yields, thereby
contributing to the build-up of vulnerabilities that can generate negative effects on
the entire sector. In the long run, the local and European economic environment
witnessing low interest rate levels can contribute to a reduction in the profitability of
private pension funds and can affect the capacity of insurance companies to obtain
profit by limiting investment income. The combined effects are all the more
important for the two sectors, as they are not offset by an increase in demand for
related financial products.
The low interest rate economic environment generates the search for yield
behaviour of investors on the capital market. With interest rates at historical lows,
investors shift to variable-income securities, which are higher-yielding, yet riskier
assets, may fuel the volatility of stock indices, reducing their resilience to external
shocks. In contrast, investment funds recorded an upward trend in activity, being
seen as an alternative to bank savings in the context of declining deposit rates.
Moreover, the uncertainties surrounding the future interest rate developments are
likely to contribute to hindering the development of interest rate swap operations
needed to implement hedging strategies; unlike in the past, the emergence of
potential inflationary episodes may affect the debt servicing capacity of housing
loans, due to the increase in the share of leu-denominated loans. The very low euro
area interest rates may boost the search-for-yield activities, with potentially adverse
effects on the exchange rate given the asynchrony of the ECB monetary policy with
that in the US (a consequence of different macroeconomic developments).

68

NATIONAL BANK OF ROMANIA

3. The financial system

3.2. Banking sector

3.2.1. Structural developments
The structural developments in the banking sector since the previous Report
contributed to strengthening financial stability. In 2015, bank mergers gained
momentum, on the background of a further moderate degree of concentration that
lies slightly below the European average. The cuts in bank staff levels and the number
of territorial units in order to reduce operating expenses continued at the fast pace
seen in previous years, with potentially negative effects on financial intermediation,
due to the more difficult access of companies and households to financial services.
The needs to increase the coverage of banking services and improve bank staff
training are arguments for rethinking the policies to optimise operating costs.
Table 3.1. Structural indicators of the Romanian banking system
end of period
2015
2014
Jun.
40
40

2008

2009

2010

2011

2012

2013

Number of credit institutions

43

42

42

41

40

40

Number of credit institutions with

majority private capital

41

40

40

39

38

38

38

38

37

35

35

34

34

34

34

34

10

10

94.6

92.5

92.4

91.6

91.6

91.5

91.3

91.6

88.2
54.3
926

85.3
52.4
857

85.0
52.7
871

83.0
54.6
878

89.8
54.7
852

90.0
54.4
821

89.9
54.2
797

90.2
55.3
812

Number of banks with majority foreign

capital,
of which:
foreign bank branches
Assets of banks with majority private
capital/Total assets (%)
Assets of banks with foreign
capital/Total assets (%)
Assets of top five banks/Total assets (%)
Herfindahl-Hirschman index (points)
Source: NBR

Although the number of credit institutions remained unchanged (40 credit

institutions, of which 31 are Romanian legal entities and 9 are foreign bank branches
Table 3.1)47, their classification according to the origin of capital saw significant
changes. The market share of banks with majority Romanian capital halved48 (to less
than 10 percent of total bank assets) and that of banks with Austrian capital followed
a downward trend, as a result of mergers and balance sheet clean-up operations
(Chart 3.6).

47

To the 40 credit institutions added 556 foreign financial institutions that notified the central bank of their intention to
directly conduct banking activities in Romania.

48

Due to the shift of Banca Transilvania from the category of banks with majority domestic capital to the category of banks
with majority foreign capital, following the acquisition of shares by the International Finance Corporation.

NATIONAL BANK OF ROMANIA

69

Financial stability report 2015

Chart 3.6. Credit institutions share capital as a percentage of total capital and their market share by country of origin

40

percent

percent

35

market share

40
35

capital share (rhs)

30

25

25

20

20

15

15

10

10

0
2012
2013
2014
2015 Q2
2012
2013
2014
2015 Q2
2012
2013
2014
2015 Q2
2012
2013
2014
2015 Q2
2012
2013
2014
2015 Q2
2012
2013
2014
2015 Q2
2012
2013
2014
2015 Q2
2012
2013
2014
2015 Q2
2012
2013
2014
2015 Q2

30

Romania

Heterogenous

Greece

Austria

Netherlands

Hungary

France

Italy

Other

Source: NBR

The Romanian banking sector consists mainly of credit institutions originating in

European countries. The 34 credit institutions with foreign capital (mostly from
EU Member States) account for over 90 percent of the Romanian banking sectors
assets, which makes Romania rank second in the EU classification by foreign
ownership (Chart 3.7).
Chart 3.7. Market share and number of credit institutions with foreign capital (international comparison)

200
180
160
140
120
100
80
60
40
20
0

Romania

Sweden

Spain

Slovenia

Slovakia

Portugal

Czech Rep.

Poland

Netherlands

Malta

Lithuania

Luxembourg

Latvia

Italy

Ireland

Greece

Germany

France

Finland

Estonia

Croatia

Denmark

Cyprus

Bulgaria

Belgium

Hungary

number

percent

Austria

100
90
80
70
60
50
40
30
20
10
0

assets of credit institutions with foreign capital as a share in total assets

number of credit institutions with foreign capital, including foreign bank branches (rhs)
Note: 2014 data were available for EU Member States and June 2015 data were available for Romania.
Source: NBR, ECB (Structural Indicators for the EU Banking Sector)

Given the balance sheet adjustment on account of weak lending activity, as well as of
removal of non-performing loans from the balance sheet, the optimisation of
operating costs by cutting the number of units and bank staff levels continued at a
steady pace during the period since the previous Report.

70

NATIONAL BANK OF ROMANIA

3. The financial system

Chart 3.8. Number of bank branches and employees

7,500

branches

thou. employees

75

7,000

70

6,500

65

6,000

60

The further slow lending dynamics and households

increased preference for online financial services led
to the territorial network rescaling. During June
2014 June 2015, the number of bank branches
dropped by 105 to 5,203 units and the number of
payrolls in the banking system decreased by 669
to around 57,300 (Chart 3.8).

Jun.15

Dec.14

Jun.14

Jun.13

Dec.13

Jun.12

Dec.12

Dec.11

Jun.11

Jun.10

Dec.10

Jun.09

Dec.09

Dec.08

The restructuring of activity illustrated by the

smaller number of bank branches and employees
55
5,500
has a negative impact on households access to
50
5,000
banking services. In the Romanian banking sector,
a bank branch provides services to an average of
3,760 persons, well above the European average of
total number of branches
total number of employees (rhs)
2,450 persons. Moreover, among the EU countries,
Romania reports the lowest number of bank staff
Source: NBR
relative to population, with one bank employee
providing services to an average of 345 persons (the EU average is 175 persons per
bank employee). On the other hand, there is room for improving the efficiency of bank
personnel. In Romania, a bank employee manages assets worth about EUR 1.5 million,
while the EU average exceeds EUR 10 million. The rise in the value added of bank
services (a process that is also possible if the level of training of bank employees
improves and the coverage of banking services increases) will alleviate the
aforementioned efficiency constraints.
Chart 3.9. Financial intermediation (international comparison)

400

percent

Chart 3.10. Asset concentration (international comparison)

100

350

percent

points

2,500

80

2,000

60

1,500

200

40

1,000

150

20

500

300
250

100
0
Austria
Bulgaria
Estonia
France
Germany
Greece
Italy
Latvia
Lithuania
Netherlands
Poland
Portugal
Czech Rep.
Slovakia
Slovenia
Spain
Hungary
Romania

assets/GDP

loans/GDP

deposits/GDP

Note: December 2014 data

Source: NBR, ECB (Structural Indicators for the EU Banking Sector)

0
Austria
Bulgaria
Czech Rep.
Estonia
France
Germany
Greece
Italy
Latvia
Lithuania
Netherlands
Poland
Portugal
Slovakia
Slovenia
Spain
Hungary
EU-28 average
Romania*

50

market share of top five banks

HH index (rhs)

* June 2015

Note: December 2014 data

Source: NBR, ECB (Structural Indicators for the EU Banking Sector)

Two of the indicators used to determine the level of financial intermediation

(assets-to-GDP ratio and loans-to-GDP ratio) stuck to the downward path they had
embarked on in 2011, while the deposits-to-GDP ratio remained relatively steady over
the past year. Compared with the other EU countries, Romania posts the lowest level
of financial intermediation, with bank assets accounting for about 60 percent of GDP
at end-2014 (Chart 3.9).
NATIONAL BANK OF ROMANIA

71

Financial stability report 2015

The concentration of the Romanian banking sector is further moderate, standing

slightly below the EU average (Chart 3.10). The market share of the top five banks
in total bank assets is 55.3 percent. In terms of size, in June 2015, large and
medium-sized banks held 68.2 percent and 25.1 percent respectively of total bank
assets.

3.2.2. Aggregate balance sheet of credit institutions

Since the previous Financial Stability Report, the Romanian banking sector has
undergone a significant period of non-performing loan resolution and strengthening
financial stability by raising funds from the domestic market, households in particular.
These developments, along with the significant liquidity released into the system by
cutting the minimum reserve requirements ratio (in the context of the continued
harmonisation of the reserve requirements mechanism with the ECB standards in the
field) could pave the way for the sustainable resumption of lending, especially in
domestic currency.
The large stocks of highly liquid assets and the appropriate level of capital and
reserves rank further among the strengths of credit institutions operating in Romania.
These holdings allow banks to smoothly cope with the vulnerabilities associated with
foreign financing fluctuations and the implementation of the new prudential
requirements for liquidity standards in the EU banking sector.
3.2.2.1. Dynamics of bank assets
In the period since the previous Financial Stability Report, the dynamics of aggregate
bank assets49 reflected mainly the mixed influences from: (i) the step-up in NPL
resolution starting with 2014 Q3 (credit institutions began cleaning up their balance
sheets in April 2014, at the recommendation of the NBR) and (ii) the strengthening
of domestic saving. The additional funds taken from the local market fully offset the
decline in the volume of credit lines extended by parent banks to their subsidiaries
in Romania.
The breakdown by asset reveals three major trends:
(i) the slight recovery of lending to the private sector in 2015 Q2, after the significant
contraction in the loan stock amid measures on the removal of non-performing loans
from banks balance sheets and/or loan sales. This evolution was spurred by the
improvement in asset quality, the further downward trend in interest rates and the
relative increase in both supply and demand (Section 3.2.4. Loans and credit risk);
(ii) credit institutions further interest in government securities, as suggested by the
larger exposures to the government sector both in volume and as a share in the
on-balance sheet assets (Table 3.2). In the period ahead, government credit might
witness a gradual adjustment, having regard to the European Commissions initiative50

72

49

According to monetary statistics, bank assets (gross) totalled lei 403.8 billion at end-June 2015, up 1.5 percent (3.1 percent
in real terms) over the same year-earlier period.

50

The ESRB Report on the regulatory treatment of sovereign exposures published on 10 March 2015.

NATIONAL BANK OF ROMANIA

3. The financial system

concerning the regulatory treatment of sovereign exposures by removing the

exemption of sovereign exposures from the large exposures regime and the
introduction of a capital requirement for concentration risk (Section 3.2.6. Market risk);
(iii) the contraction in claims on the NBR (to a volume less than half the balance recorded
at end-December 2008), due to the lower minimum reserve requirement ratios51 and
the fall in non-residents deposits. However, the share of this balance sheet item in the
asset portfolio remains significant, reflecting the prudential nature of these assets.
Table 3.2. Asset structure of credit institutions operating in Romania

Domestic assets,
of which:
Claims on the NBR
and credit institutions,
of which:
claims on the NBR
Claims on the domestic
non-bank sector,
of which:

percent of total assets

2014 2014 2015
Jun.
Dec.
Jun.
95.7
95.3
94.6

2008
Dec.
98.0

2009
Dec.
96.6

2010
Dec.
96.8

2011
Dec.
97.7

2012
Dec.
97.2

2013
Dec.
97.0

23.8

18.6

16.5

15.3

13.4

14.9

12.0

13.1

10.5

21.8

15.8

14.2

13.7

11.9

12.9

9.7

11.6

8.6

63.4

67.6

70.1

74.5

75.2

73.2

74.3

73.2

75.0

21.1
26.9
25.2
9.0
4.7

21.7
27.3
26.0
9.1
5.4

claims on the
government sector
5.0
12.7
15.7
17.7
19.5
19.7
20.2
claims on legal entities*
29.2
27.4
27.9
30.3
30.0
28.2
28.7
claims on households
29.2
27.5
26.5
26.5
25.8
25.3
25.5
Other assets
10.8
10.3
10.3
7.9
8.6
9.0
9.4
Foreign assets
2.0
3.4
3.2
2.3
2.8
3.0
4.3
* including non-financial corporations and non-monetary financial institutions
Note: Due to rounding, some totals may not correspond to the sum of the separate figures.
Source: NBR Aggregate monetary balance sheet of credit institutions

Even though the foreign exposure of the Romanian banking sector followed an
upward path, it further held a marginal weight in aggregate assets. About 43 percent
of foreign investments recorded at end-June 2015 were made with euro area credit
institutions and took the form of loans with an agreed maturity of up to and including
one year; more than one third (34 percent) of these loans were denominated in euro,
while almost 10 percent were made in the form of cash in euro and other currencies.
3.2.2.2. Developments in own, raised and borrowed funds
Deposits from residents, non-government clients, continued to strengthen their
prevailing share in the structure of aggregate bank liabilities (Table 3.3). These
deposits totalled nearly lei 231.0 billion in June 2015, up 7.9 percent (9.6 percent in
real terms) year on year, despite the protracted decline in average interest rates. For
most credit institutions operating in Romania, local deposits became a major source
of funding, gradually replacing foreign liabilities.

51

NATIONAL BANK OF ROMANIA

During the reviewed period, the NBR lowered the minimum reserve requirement ratios in July, October, November 2014
and May 2015 (Section 3.2.4. Loans and credit risk).

73

Financial stability report 2015

Table 3.3. Liability structure of credit institutions operating in Romania

2008
Dec.
69.3

2009
Dec.
73.6

2010
Dec.
73.2

2011
Dec.
73.5

2012
Dec.
76.8

2013
Dec.
79.5

percent of total liabilities

2014 2014 2015
Jun.
Dec.
Jun.
81.3
82.3
83.4

Domestic liabilities,
of which:
interbank deposits
2.1
5.4
3.4
3.4
4.6
2.3
2.2
1.3
1.3
1.4
government deposits
3.1
2.1
1.7
1.4
18.5
21.0
21.0
deposits from legal entities*
20.2
19.3
19.0
19.0
deposits from households
24.4
26.7
27.0
28.7
30.2
31.7
32.9
capital and reserves
10.6
12.0
14.2
16.2
18.0
19.4
19.5
other liabilities
8.9
8.1
7.9
4.8
4.2
3.8
4.4
Foreign liabilities
30.7
26.4
26.8
26.5
23.2
20.5
18.7
* including non-financial corporations and non-monetary financial institutions
Note: Due to rounding, some totals may not correspond to the sum of the separate figures.
Source: NBR Aggregate monetary balance sheet of credit institutions

1.5
1.5
23.5
34.1
18.0
3.8
17.7

2.3
1.7
22.2
35.0
18.1
4.1
16.6

The two main categories of depositors, households in particular, contributed to the

favourable developments in the domestic deposit base. Larger volumes were mainly
recorded by leu-denominated deposits52, which helped consolidate the share of this
component in total deposits (up to 65.8 percent in June 2015). The trends were
particularly correlated with the growth in households real disposable income, as well
as with budget payments to the agricultural sector and higher amounts received
from the government budget on account of VAT refunds in the case of companies.
Since December 2010, households have maintained their net creditor position
towards the banking sector; this position was exclusively supported by the evolution
of leu-denominated deposits.
Looking at the breakdown by maturity, deposits with maturity of up to one year
continued to hold a prevailing share (93 percent of the volume of deposits taken from
non-bank clients, or around 53 percent of total bank liabilities in June 2015). This
potential vulnerability is mitigated, to a large extent, by the prevalence of household
deposits in total deposits, which are generally characterised by a good stability in
terms of the degree of permanence.
Own funds remained at an appropriate level both in terms of volume and as a share in
the bank asset financing structure. The dominant position of share capital ensures the
high quality of these sources as regards their capacity to absorb potential unexpected
losses, including in the context of NPL resolution initiated in 2014 (Section 3.2.3.
Capital adequacy).
Foreign financing, albeit on the wane, continued to hold an important share in
balance sheet liabilities. The annual rate of decline of these liabilities slowed down in
the period under review (-9.8 percent in June 2015 from -15.0 percent in June 2014).
Overall, the drop in foreign liabilities was driven by a small number of credit
institutions with foreign capital (but holding a large weight in the system), while the
additional raised funds had mostly small volumes (Section 3.2.5. Liquidity risk).
52

74

June 2014 through June 2015, household deposits increased by lei 10.6 billion (to lei 141.4 billion), 62 percent of the
growth being accounted for by the leu-denominated component; in the case of companies, the stock of deposits rose by
lei 7.2 billion (to lei 75.1 billion), of which about 81 percent on the back of the leu-denominated component.

NATIONAL BANK OF ROMANIA

3. The financial system

As shown in Chart 3.11, cross-border deleveraging continued to unfold in an orderly

manner.
Chart 3.11. Developments in the main indicators relevant to assessing the magnitude of deleveraging

15

index

annual nominal percentage change

14
12

10

-5

-10

-15

-20

0
Jan.12
Feb.12
Mar.12
Apr.12
May.12
Jun.12
Jul.12
Aug.12
Sep.12
Oct.12
Nov.12
Dec.12
Jan.13
Feb.13
Mar.13
Apr.13
May.13
Jun.13
Jul.13
Aug.13
Sep.13
Oct.13
Nov.13
Dec.13
Jan.14
Feb.14
Mar.14
Apr.14
May.14
Jun.14
Jul.14
Aug.14
Sep.14
Oct.14
Nov.14
Dec.14
Jan.15
Feb.15
Mar.15
Apr.15
May.15
Jun.15

10

assets (gross value)

deposits of non-bank customers
assets/equity (rhs)

loans to the private sector

foreign liabilities

Source: NBR

3.2.3. Capital adequacy

The Romanian banking sector continues to report adequate capital ratios, also due to
the central banks proactive use of regulatory and supervisory instruments. High lossabsorption capacity plays a crucial role in the context of a macroeconomic
environment featuring low interest rates and heightened competition.
3.2.3.1. Developments in own funds of banks, Romanian legal entities
The own funds53 of banks (Chart 3.12) further posted favourable developments54 June
2014 through June 2015, despite the accounting losses recorded by several banks at
the end of the 2014 financial year, mainly on account of: (i) the 40 percent drop,
starting with 2015, in the volume of deductions from own funds generated by
nationally regulated prudential filters (following the gradual implementation of the
CRD IV/CRR regulatory framework); (ii) the ongoing efforts to increase share capital
through new capital contributions and profit retention55; (iii) further weak lending
activity. These developments ensured appropriate capital ratios that exceeded by far
the minimum required levels.

53

The volume of own funds of banks, Romanian legal entities, was lei 33.3 billion in June 2015, up from the levels recorded in
December 2014 (lei 32.1 billion) and June 2014 (lei 31.9 billion) respectively.

54

The real annual growth rate of total own funds equalled 13.1 percent in December 2014 and 6.1 percent in June 2015.

55

Capital increases amounted to the equivalent of EUR 502 million in 2014 and EUR 520 million in 2015 H1. New capital
contributions of shareholders (the equivalent of EUR 394 million in 2014 and EUR 366 million in 2015 H1) were the main
source of capital increase, ahead of retained earnings (the equivalent of EUR 87 million in 2014 and EUR 1.6 million in 2015).

NATIONAL BANK OF ROMANIA

75

Financial stability report 2015

Chart 3.12. Total own funds and Tier 1 capital

Mar.15

Dec.14

Sep.14

Jun.14

Mar.14

Dec.13

Sep.13

Jun.13

Mar.13

Dec.12

Dec.11

Dec.10

Dec.09

Tier 1 capital
Tier 1 capital - real annual changes (rhs)

25
20
15
10
5
0
-5
-10
-15
-20

Jun.15

percent

lei bn.

Dec.08

45
40
35
30
25
20
15
10
5
0

total own funds

total own funds - real annual changes (rhs)

Source: NBR, NIS

3.2.3.2. Analysis of capital adequacy indicators

Capital adequacy indicators witnessed an upward trend during June 2014 June 2015
(Chart 3.13).
Chart 3.13. Capital adequacy indicators

20

percent
solvency ratio

18
16

Tier 1 capital ratio for credit risk

14
12

Tier 1 capital ratio

10
total capital ratio (CRD IV/CRR)

8
6

Tier 1 capital ratio (CRD IV/CRR)

4
2
Dec.08
Mar.09
Jun.09
Sep.09
Dec.09
Mar.10
Jun.10
Sep.10
Dec.10
Mar.11
Jun.11
Sep.11
Dec.11
Mar.12
Jun.12
Sep.12
Dec.12
Mar.13
Jun.13
Sep.13
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

Common Equity Tier 1 capital ratio

(CRD IV/CRR)

Source: NBR

The implementation of the new CRD IV/CRR regulatory framework as from

1 January 2014 helped strengthen the capital position of EU banking sectors
(Chart 3.14). The capitalisation of the Romanian banking sector is similar to that of
countries in the region, comparing favourably with most countries of origin having
subsidiaries in Romania.

76

NATIONAL BANK OF ROMANIA

3. The financial system

Chart 3.14. Comparative developments in solvency ratio

24

percent
2009

2010

2011

2012

2013

2014

20
16
12
8
4
0
-4
Bulgaria

Czech Rep.

Hungary

Poland

Romania

Austria

Greece

Italy

Netherlands

France

Source: IMF (Financial Soundness Indicators, FSI Tables, April 2015); NBR calculations

Bank distribution by total capital ratio (Chart 3.15) posted mixed developments,
generated, on the one hand, by the large volume of accounting losses reported in
2014 by certain credit institutions and, on the other hand, by the significant capital
increases in the current year.
Bank asset distribution by total capital ratio (Chart 3.16) indicates that most bank
assets are held by banks with a total capital ratio in the 12 percent 20 percent range.
Chart 3.15. Bank distribution by total capital ratio

8 - 10%

10 - 12%

12 - 16%

20 - 24%

24 - 30%

above 30%

Source: NBR

16 - 20%

8 - 10%
20 - 24%

10 - 12%
24 -30%

12 - 16%
above 30%

Jun.15

0
Dec.14

Jun.14

10
Dec.13

Dec.12

20

Dec.08

30

Jun.15

40

Dec.14

Jun.14

50

Dec.13

10

Dec.12

60

Dec.11

12

Dec.10

70

Dec.09

80

14

Dec.08

16

percent

Dec.11

90

Dec.10

number of banks

Dec.09

18

Chart 3.16. Bank asset distribution by total capital ratio

16 - 20%

Source: NBR

The structure of capital requirements remained consistent with that seen in the
previous periods. Capital requirements for credit risk accounted for the largest share,
i.e. 82.6 percent, ahead of capital requirements for operational risk (14.9 percent) and
market risk (2.4 percent). Capital requirements for the adjustment of credit risk
assessment held only a marginal share in total capital requirements for regulated risks,
i.e. 0.1 percent.
NATIONAL BANK OF ROMANIA

77

Financial stability report 2015

Chart 3.17. Comparative developments in leverage ratio

12

percent
2009

2010

2011

2012

2013

2014

0
Bulgaria

Czech Rep.

Hungary

Poland

Romania

Austria

Greece

Italy

France

Netherlands

Source: IMF (Financial Soundness Indicators, FSI Tables, April 2015); NBR calculations

The leverage ratio calculated for the Romanian banking sector further stood at an
appropriate level (8.0 percent in June 2015), following the substantial increases in
shareholders capital contributions. The EU legislation requires the compulsory use of
this indicator as a macroprudential instrument, in view of mitigating the risk of
excessive leverage, starting with 2018. At EU level, the leverage ratio witnessed mixed
developments (Chart 3.17), the Romanian banking sector faring better than most
countries of origin of capital of foreign bank subsidiaries.
3.2.3.3. Results of the solvency stress test of the banking sector
The National Bank of Romania performs regularly stress tests of credit institutions
capital adequacy based on macroeconomic scenarios envisaging the potential
developments of the main risk factors: economic growth, exchange rate, interbank
interest rates, risk premium, real estate market prices. The stress tests imply both
estimating credit institutions operating results according to the analysed scenarios
(including the effects of unrealised losses on capital) and capturing the impact of
scenarios on adjustments for impairment of financial assets (provisions). Stress tests
are conducted for microprudential purposes, as well as for identifying the main
systemic risk factors.
The latest solvency stress test of credit institutions covered a 12-quarter horizon
(2015 Q1 2017 Q4) and was based on two macroeconomic scenarios: a baseline
scenario, consistent with the European Commissions winter forecast for 2015-2016
(the data for 2017 are not official, representing an extrapolation of trends) and an
adverse scenario envisaging the application of shocks similar in size with those used
in the solvency stress test developed by the European Banking Authority and the
European Central Bank in 2014. The adverse scenario foresees: (i) an economic
recession in the first two years under review (annual economic decline of 1.15 percent
in 2015 and 0.81 percent in 2016), followed by a slight recovery in 2017 (economic
growth of 1.33 percent at end-2017); (ii) a 15 percent persistent shock on the EUR/RON
exchange rate; (iii) a relatively steady unemployment rate in the context of economic

78

NATIONAL BANK OF ROMANIA

3. The financial system

contraction correlated with the exchange rate depreciation; (iv) a significant inflation
rate increase (to 3.82 percent in 2015 Q4) as a result of the domestic currency
depreciation, partially offset by the negative output gap; (v) a shock applied to
interest rates on new leu-denominated loans and deposits that gradually fades
towards the end of the assessment horizon and (vi) a persistent shock applied to
interest rates on new EUR-denominated loans and deposits. The results of stress tests
are used in credit institutions supervision and financial stability assessments.
According to the baseline scenario, the solvency ratio would witness favourable
developments over the assessment horizon amid the lower adjustments for
impairment of financial assets. However, a static balance sheet assumption implies
losses that, for certain credit institutions, would result in the decline in Common
Equity Tier 1 capital ratio and total capital ratio below the minimum required levels,
with a strong effect being manifest particularly in the third year of analysis. Credit
institutions that would face difficulties are small-sized and have low operating
profitability.
According to the adverse scenario, total capital ratio would drop markedly (by about
3 percentage points to 14.4 percent). Certain vulnerabilities are identified in the case
of small- and medium-sized credit institutions. The main factors behind these
developments were: (i) the large volume of adjustments for impairment of financial
assets (total expenses in excess of lei 14.5 billion during the three years); (ii) the
erosion of operating profit amid the narrowing interest margins; (iii) the zero growth
assumption of the volume of new loans (severe hypothesis for estimating credit
institutions operating profit). The decrease in operating profit (especially due to the
slow lending dynamics in recent years, credit institutions scale of activities aimed at
non-performing asset resolution, and the historically low interest rate environment)
is the main reason for the vulnerabilities encountered by certain credit institutions.
The balance sheet of certain credit institutions shows an inadequate proportion of
high-yield financial assets (loans to non-financial corporations, retail loans other
than housing loans, high risk bonds). In the absence of lending resumption, compared
with previous years, credit institutions have a lower capacity to cover credit risk losses
without affecting the capital position (i.e. from the current profit).

3.2.4. Loans and credit risk

The NBR continued to actively support the sustainable resumption of lending to the
real sector by resorting to monetary policy instruments. The signals sent to the
banking sector resulted in increased local currency-denominated financing flows at
historically low interest rates. The prudential measures on foreign currency lending
led to the steady decline in the stock of foreign currency-denominated loans, which
helped mitigate the vulnerabilities in banks balance sheets. The NBRs
recommendations on banks balance sheet clean-up translated into the marked
decline in the NPL ratio, which provides a sustainable basis for the resumption of
lending to the economy. The high coverage by IFRS-compliant adjustments for
impairment is an important factor to reduce credit risk. Potential unexpected losses
that may arise from credit risk becoming manifest can be covered by the substantial
capital reserves of credit institutions.
NATIONAL BANK OF ROMANIA

79

Financial stability report 2015

3.2.4.1. Main credit developments

In 2014, the loan stock saw a decline (Chart 3.18), mainly as a result of banks efforts to
clean up their balance sheets by removing the carrying amount of unrecoverable
loans fully or partly covered by adjustments for impairment56. In the current year,
lending to the real sector increased57, amid the narrowing of the negative output gap
and the strengthening of the domestic macroeconomic environment. The supply-side
factors restricting the flow of loans to the economy are further the balance sheet
adjustment to the prudential capital adequacy and liquidity requirements imposed by
the CRD IV/CRR regulatory framework, as well as a cautious lending stance against the
background of an insufficiently identified eligible demand.
Chart 3.19. Annual real growth rate of loans to private sector

Chart 3.18. Bank assets and loans to private sector

700

lei bn.

50

percent

40

600

30

500

20

400

10

300

0
200

-10

100

loans to private sector

2014

GDP

Jun.2015

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

bank assets

Dec.08
Mar.09
Jun.09
Sep.09
Dec.09
Mar.10
Jun.10
Sep.10
Dec.10
Mar.11
Jun.11
Sep.11
Dec.11
Mar.12
Jun.12
Sep.12
Dec.12
Mar.13
Jun.13
Sep.13
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

-20

loans to private sector (lei)

loans to private sector (foreign currency)
loans to private sector (total)
Source: NBR, NIS

Source: NBR, NIS

The NBR continued to support the sustainable resumption of lending to the real
sector, by resorting to monetary policy instruments: a) the policy rate was cut by
175 basis points during the period under review (from 3.5 percent in June 2014 to
1.75 percent in June 2015), as a signal for commercial banks to reduce the cost of
leu-denominated loans along with the improvement in the domestic macroeconomic
environment; b) the minimum reserve requirements ratio on leu-denominated
liabilities of credit institutions was gradually cut from 12 percent to 8 percent, while
that on foreign-currency denominated liabilities was lowered from 18 percent to
14 percent, with a view to increasing the volume of resources available for lending to
the real economy.
The monetary policy measures adopted by the NBR in the reviewed period had as a
result the fall, between June 2014 and June 2015, in banks average interest rates on
new leu-denominated loans to historically low levels, i.e. from 8.4 percent in June

80

56

The balance sheet clean-up operations also led to the drop in the volume of bank assets. In December 2014, bank assets
totalled lei 405.3 billion (down from lei 408.7 billion in December 2013). At the end of 2015 H1, bank assets stood at
lei 403.8 billion (according to monetary statistics).

57

At end-June 2015, loans to the private sector amounted to lei 215.1 billion, up from lei 211.1 billion at end-2014, but below
the level recorded before the balance sheet clean-up (lei 218.5 billion at end-2013).

NATIONAL BANK OF ROMANIA

3. The financial system

2014 to 6.5 percent for household loans and from 6.0 percent to 4.9 percent for loans
to non-financial corporations. The interest rate level varies depending on the type of
loans offered by credit institutions, namely on the credit risk level. In the case of new
leu-denominated loans to households, the average interest rate on housing loans
(4.0 percent in June 2015, down from 5.2 percent in June 2014) stood lower than that
on consumer loans (7.9 percent in June 2015, down from 10.2 percent in June 2014).
As regards new leu-denominated loans to non-financial corporations, the average
interest rate on loans to large companies (4.2 percent in June 2015, down from
5.1 percent in June 2014 for loans exceeding the equivalent of EUR 1 million) was
lower than that on loans to smaller companies (5.4 percent in June 2015, down from
6.8 percent in June 2014 for loans in amount of up to the equivalent of EUR 1 million),
as a result of differences in profit generating capacity, market share and bargaining
power.
Table 3.4. The main components of loans to the private sector

Total loans to the private sector,

of which:
Leu-denominated loans,
of which:
short-term
medium-term
long-term
Foreign currency-denominated loans,
of which:
short-term
medium-term
long-term

2011
Dec.
223.0

2012
Dec.
225.8

2013
Dec.
218.5

2014
Jun.
215.4

2014
Dec.
211.2

lei bn.
2015
Jun.
215.1

81.7

84.7

85.3

90.4

92.1

102.4

30.1
19.5
32.0
141.4

33.4
22.1
29.2
141.1

29.3
27.9
28.1
133.1

30.2
31.7
28.6
124.9

27.5
33.5
31.1
119.1

28.8
37.9
35.6
112.7

22.6
24.8
93.9

21.3
24.8
95.0

17.9
23.3
91.9

15.8
22.8
86.4

13.7
21.3
84.1

12.4
19.6
80.6

Source: NBR

Since the previous Financial Stability Report, loans to the private sector (Table 3.4) saw
the following developments:
(a) the reversal of the downward trend that had started in 2012 Q3 (Chart 3.19), with the
annual rate of change entering positive territory (1.4 percent) in June 2015. This
development was triggered by leu-denominated loans, which kept on posting a
growth pace of about 7 percent during June 2014 April 2015, reaching a 15 percent
peak in June 2015 (amid increased medium- and long-term lending facilities to
non-financial corporations and households). The uptrend in leu-denominated loans to
the private sector is likely to facilitate the transmission of monetary policy impulses
to the banking sector, thereby contributing to the alleviation of vulnerabilities in
banks balance sheets.
(b) the further contraction in foreign currency-denominated loans, which had begun in
December 2012 (proceeding at a relatively constant pace of -11 percent during the
period since the previous Report), as a result of the legislative amendments consisting
in the implementation of ESRB Recommendation on lending in foreign currencies
(ESRB/2011/1). The prudential provisions are aimed at limiting lenders exposure to
credit and market risks. The enforcement of regulations in all EU Member States was

NATIONAL BANK OF ROMANIA

81

Financial stability report 2015

intended to ensure a level playing field and reduce regulatory arbitrage. The effect of
nationally adopted measures translated into the notable drop in the share of foreign
currency-denominated loans in total loans to the private sector (down 5.6 percentage
points in June 2014 through June 2015, to 52.4 percent at the end of 2015 H1).
(c) the change in the maturity composition of non-government loans, by increasing the
share of long-term loans (up to 54 percent of total credit to the private sector in June
2015), a trend that was more visible for leu-denominated loans (up 3.2 percentage
points during June 2014 June 2015), but that was also manifest in the case of foreign
currency-denominated loans (up 2.4 percentage points), due to the pick-up in
housing loans to households and in investment and equipment loans to non-financial
corporations.
(d) the further downtrend in loans to non-financial corporations58 (-2.7 percent, in real
terms), the flow of new leu-denominated loans failing to offset the reduction in
foreign currency-denominated loans (Chart 3.20). In contrast, household loans59
recorded an upward path, with a significant real annual rate of increase of 5.2 percent
in June 2015, on account of the higher volume of leu-denominated loans (housing
loans in particular).
The modest lending developments have been
in line with those reported by other EU
countries, where the annual dynamics of loans
percent
lei bn.
120
50
remained in negative territory between 2012
100
40
and 201460. Credit contraction in the euro area
80
30
reached a trough in early 2014, followed by a
60
20
gradual recovery in loan dynamics towards the
end of the period, mainly due to positive
40
10
developments in loans to non-financial
20
0
corporations (the annual rate of change of
0
-10
credit granted by monetary financial
institutions stood at -0.1 percent in December
household loans (volume)
2014 versus -2.0 percent in December 2013).
corporate loans (volume)
The return of lending to positive territory on the
household loans (real annual dynamics), rhs
back of corporate loans is also revealed by the
corporate loans (real annual dynamics), rhs
euro area bank lending surveys, which show
Source: NBR
that the rising demand, lower financing costs
and stiffer competition helped ease lending standards in the case of both
non-financial corporations and households (for housing loans).
Dec.08
Dec.09
Dec.10
Dec.11
Dec.12
Mar.13
Jun.13
Jul.13
Aug.13
Sep.13
Oct.13
nov.13
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Jan.15
Feb.15
Mar.15
Apr.15
May.15
Jun.15

Chart 3.20. The annual dynamics of private sector loan

components

82

58

Corporate loans decreased from lei 110.6 billion in June 2014 to lei 106.0 billion in June 2015.

59

The stock of loans to households increased from lei 101.4 billion in June 2014 to lei 105.0 billion in June 2015.

60

European Central Bank Annual Report 2014.

NATIONAL BANK OF ROMANIA

3. The financial system

Table 3.5. The average bank interest rates on outstanding loans and deposits

Lending rates in lei households

Lending rates in lei companies
Lending rates in euro households
Lending rates in euro companies
Deposit rates in lei households
Deposit rates in lei companies
Deposit rates in euro households
Deposit rates in euro companies
Source: NBR

2011
Dec.
14.00
10.45
7.11
5.73
6.24
5.59
3.29
2.74

2012
Dec.
13.26
10.11
5.65
4.77
5.31
4.94
3.12
2.43

2013
Dec.
11.32
7.36
5.38
4.76
4.03
2.69
2.25
1.78

2014
Jun.
10.47
7.04
5.36
4.76
3.32
2.26
1.92
1.46

2014
Dec.
9.47
5.93
5.13
4.32
2.92
1.61
1.66
1.10

percent
2015
Jun.
8.22
5.30
5.08
4.50
2.11
1.13
1.18
0.72

In June 2014 June 2015, the average bank interest rates on outstanding loans and
deposits (Table 3.5) witnessed the following developments:
(i) the interest rate on leu-denominated loans dropped by around 2 percentage points as
a result of the pass-through of monetary policy impulses to credit institutions to cut
lending costs; the adjustment trend was visible for both main categories of borrowers;
(ii) the interest rates on foreign currency-denominated loans remained lower than those
on leu-denominated loans, but the differential narrowed markedly, due to ongoing
decline in financing costs and the further cautious lending activity;
(iii) the downward trend in the average interest rate on leu-denominated time deposits
continued amid the drop in inflation rate and the need to improve operational
efficiency;
(iv) the interest rates on foreign currency-denominated deposits were lowered further
(falling close to 1 percent), in line with international trends.
Table 3.6. The average bank interest rates on new loans and deposits

Lending rates in lei households

Lending rates in lei companies
Lending rates in euro households
Lending rates in euro companies
Deposit rates in lei households
Deposit rates in lei companies
Deposit rates in euro households
Deposit rates in euro companies
Source: NBR

2011
Dec.
12.66
9.74
5.90
5.64
6.59
5.78
3.47
2.38

2012
Dec.
12.41
9.76
4.33
4.62
5.64
5.15
3.39
1.97

2013
Dec.
9.05
6.84
4.81
4.89
3.92
2.19
2.13
1.47

2014
Jun.
8.44
6.01
5.63
4.38
3.17
1.88
1.85
1.06

2014
Dec.
7.27
5.87
4.42
3.93
2.78
1.11
1.58
0.71

percent
2015
Jun.
6.48
4.86
5.08
3.76
1.79
0.79
0.94
0.42

The evolution of average bank interest rates on new loans and deposits (Table 3.6)
reveals the adjustment of margins June 2014 through June 2015:
(i) the average interest rate on new leu-denominated loans to households decreased in
the period under review amid the pass-through of monetary policy impulses to the
banks business strategy and the keener competition among credit institutions. This
indicator stood 1.7 percentage points lower than the corresponding average interest
NATIONAL BANK OF ROMANIA

83

Financial stability report 2015

rate calculated for outstanding loans. The interest rates on new loans to non-financial
corporations also headed downwards, in the context of the further prudent approach
to financing this sector;
(ii) the average interest rate on new foreign currency-denominated loans to households
and non-financial corporations fell due to the channelling of the funding flow to
lower-risk loans (for households, funding has focused on mortgage loans) and to
increased competition on this market segment;
(iii) the average interest rates on new deposits in domestic currency for both categories of
customers remained on the downtrend started in the previous period, the deposit
rates on new business being lower than those on outstanding deposits, amid the
improved domestic macroeconomic environment and the further substantial liquidity
available to credit institutions;
(iv) the average interest rates on new foreign currency-denominated deposits stayed on a
downward path in the context of the still very low euro area interest rates.

percentage points

Dec.08
Dec.09
Dec.10
Dec.11
Mar.12
Jun.12
Sep.12
Dec.12
Mar.13
Jun.13
Sep.13
Dec.13
Jan.14
Feb.14
Mar.14
Apr.14
May.14
Jun.14
Jul.14
Aug.14
Sep.14
Oct.14
Nov.14
Dec.14
Jan.15
Feb.15
Mar.15
Apr.15
May.15
Jun.15

9
8
7
6
5
4
3
2
1
0

interest rate margin - lei (households)

interest rate margin - lei (companies)
interest rate margin - euro (households)
interest rate margin - euro (companies)
Source: NBR

Chart 3.22. Interest rate margins on new loans and deposits

8
7
6
5
4
3
2
1
0

percentage points

Dec.08
Dec.09
Dec.10
Dec.11
Dec.12
Mar.13
Jun.13
Sep.13
Dec.13
Jan.14
Feb.14
Mar.14
Apr.14
May.14
Jun.14
Jul.14
Aug.14
Sep.14
Oct.14
Nov.14
Dec.14
Jan.15
Feb.15
Mar.15
Apr.15
May.15
Jun.15

Chart 3.21. Interest rate margins on outstanding loans

and deposits

interest rate margin - lei (households)

interest rate margin - lei (companies)
interest rate margin - euro (households)
interest rate margin - euro (companies)
Source: NBR

The interest rate margins between leu-denominated loans and deposits (Chart 3.21)
stuck to the downward trend (mainly due to the fall in interest rates on household
loans granted under the First Home programme). This change in the business model
calls for new efficiency requirements for the banking activity on this segment. The
interest rate margins between foreign currency-denominated loans and deposits rose
amid the faster decline in deposit rates, similar to the trends seen in the previous
period. The downtrend in the interest rate margin between new leu-denominated
loans and deposits (Chart 3.22) continued in June 2014 June 2015, due to stronger
decline in lending rates. The interest rate margins on new business are lower than
those calculated based on outstanding loans and deposits, which will push the
operating profit lower in the period ahead, given the low elasticity of loan demand.
The interest rate margins between new foreign currency-denominated loans and
deposits followed a similar downward course, on the back of the sharper cut in
lending costs than in financing costs.

84

NATIONAL BANK OF ROMANIA

3. The financial system

3.2.4.2. Loan quality

In 2014 and 2015 H1, the banking sector saw a fast-paced balance sheet clean-up that
was aimed at supporting the sustainable resumption of lending to the real sector.
The NBR required credit institutions to develop accounting policies concerning the
removal from the balance sheet of the carrying amount of unrecoverable loans fully or
partly covered with adjustments for impairment61. In accordance with the NBRs
recommendations, credit institutions accounting policies should comply with the
generally-accepted banking practices, the International Financial Reporting Standards
(IFRS) and the professional judgment, the approval of external auditors being
mandatory. The balance sheet clean-up was the result of operations to remove from
the balance sheet the carrying amount of unrecoverable loans fully or partly covered
with adjustments for impairment.
Chart 3.24. Non-performing exposures at aggregate level
(EBA definition)

volume of loans overdue for more than 90 days (gross

exposure, standardised approach and internal rating models)
share of loans overdue for more than 90 days (gross exposure,
standardised approach) in total classified loans (rhs)
share of loans overdue for more than 90 days (gross exposure,
standardised approach and internal rating models) in total
loans (rhs)

percent

lei bn.

60

50

50

40

40

30

30

20

20

10

10

Jun.15

volume of loans overdue for more than 90 days (gross

exposure, standardised approach)

60

Mar.15

50
40
30
20
10
0

Dec.14

percent

lei bn.

Dec.08
Dec.10
Dec.12
Feb.13
Apr.13
Jun.13
Aug.13
Oct.13
Dec.13
Feb.14
Apr.14
Jun.14
Aug.14
Oct.14
Dec.14
Feb.15
Apr.15
Jun.15

50
40
30
20
10
0

Sep.14

Chart 3.23. Non-performing loans at aggregate level

(national definition)

volume of non-performing exposures (rhs)

non-performing exposure ratio
coverage of non-performing exposures by IFRS provisions
Source: NBR

Source: NBR

The volume of non-performing loans decreased significantly62, which pushed the NPL
ratio down to 12.8 percent in June 2015, from 19.2 percent in June 2014 (Chart 3.23).
In 2014, credit institutions carried out non-performing loan sales in amount of lei
8.9 billion. The NPL coverage by IFRS provisions remains high (69.0 percent in June
2015, similar to the level recorded in December 2014, but higher than that seen in
June 2014, i.e. 68.4 percent).
Starting with September 2014, the Implementing Technical Standards on supervisory
reporting on forbearance activities and non-performing exposures developed by the
EBA have become applicable. The technical standards provide a uniform definition for
the assessment of non-performance of financial assets, as determined by the nonperforming exposure ratio, the methodology being applicable in all EU Member

61

Georgescu, F. (2015), speech delivered at the conference Dezvoltarea Romniei n noul context financiar european
(Romanias Development in the New European Financial Context), http://www.bnr.ro/Discurs-sus%C8%9Binut-laconferinta-'Dezvoltarea-Romaniei-in-noul-context-financiar-european'-12074.aspx.

62

The volume of loans and interest overdue by more than 90 days and in which case legal proceedings were initiated
dropped to lei 26.8 billion in June 2015 from lei 41.5 billion a year earlier.

NATIONAL BANK OF ROMANIA

85

Financial stability report 2015

States on a consolidated basis. These standards are aimed at providing competent

authorities with the additional instruments for assessing the level of forbearance
activities and non-performing exposures, comparable at EU level, in the context of
uncertainties surrounding the quality of bank assets, as well as of the inconsistent
national practices for assessing asset quality, especially those regarding the scope of
the non-performing asset class.
According to the EBA definition, the non-performing exposure ratio calculated for the
Romanian banking sector, based on individual reports, stood at 16.57 percent in
September 2014 (Chart 3.24) and posted a downward trend in 2015 (to 12.7 percent in
June 2015). The NPL coverage by IFRS provisions was relatively stable in the reviewed
period (about 55 percent).
Chart 3.25. Loan portfolio quality in selected EU Member States (share of non-performing loans in total loans)

50

percent

45

2009

2010

2011

2012

2013

2014

40
35
30
25
20
15
10
5
0
Bulgaria Czech Rep.

Croatia

Poland

Slovenia

Hungary

Romania

Austria

France Netherlands

Italy

Ireland

Greece

Cyprus

Source: IMF (Financial Soundness Indicators, FSI Tables, April 2015); NBR calculations

Asset quality is still a vulnerability in many EU countries (Chart 3.25)63. The large stock
of non-performing assets continues to affect banks capacity to simultaneously build
up additional capital buffers and secure the flow of loans to real economy, which
generates systemic consequences64. The NPL ratio reported by 50 percent of the
significant banking groups in the euro area further exceeds 10 percent (one of the
causes consisting in the difficulties faced during the balance sheet clean-up process).
Romania compares favourably with most EU Member States in terms of the NPL
coverage by IFRS provisions65 (Chart 3.26).

63

86

The latest comparable data are for 2014. Therefore, NPL data were reported in compliance with national definitions.
From this standpoint, data between countries are not fully comparable.

64

European Central Bank Financial Stability Review (May 2015).

65

The data in the table were reported by EU Member States in compliance with national definitions and the levels of the
indicator are not fully comparable.

NATIONAL BANK OF ROMANIA

3. The financial system

Chart 3.26. Coverage of non-performing loans in selected EU Member States

100

percent
2009

90

2010

2011

2012

2013

Cyprus

Ireland

2014

80
70
60
50
40
30
20
10
0
Bulgaria

Czech Rep.

Poland

Hungary

Slovenia

Romania

Austria

France

Greece

Italy

Source: IMF (Financial Soundness Indicators, FSI Tables, April 2015); NBR calculations

Potential unexpected losses that may be generated by credit risk becoming manifest
can be covered by the substantial capital reserves of credit institutions in Romania
(which accounted for about 10 percent of total risk exposure amount in 2015 H1).

3.2.5. Liquidity risk

The loan-to-deposit ratio in the banking sector witnessed a fast decline in 2014, as a
result of an increase in deposits taken from the local market and a weak lending
activity. Starting with 2015, the indicator has seen a modest recovery amid the
marginal reduction in the deposit base, corroborated with slightly favourable lending
developments in May and June. The loan-to-deposit ratio posted a similar evolution
across the region, as credit institutions continued to lower their reliance on foreign
financing in favour of funds raised from the local market (Chart 3.27).
The loan-to-deposit ratio of banks with majority Romanian and Austrian capital was
particularly influenced by structural changes across bank groups66, while in the case of
banks with majority Greek capital, the rise in this indicator (starting with 2015) was
triggered by increased volatility of domestic financing amid the deepening financial
crisis in Greece (Chart 3.28).

66

NATIONAL BANK OF ROMANIA

At end-December 2014, Banca Transilvania shifted from the category of banks with majority domestic capital to that of
banks with heterogeneous capital, while in April 2015, Volksbank changed its ownership after being purchased by Banca
Transilvania.

87

Financial stability report 2015

Chart 3.27. Private sector loan-to-deposit ratio

(regional comparison)
160

Chart 3.28. Private sector loan-to-deposit ratio for banks

with majority Greek and Austrian capital

percent

250

140

percent

200

120
100

150

80

100

60
40

50

20

Dec.07
Dec.08
Dec.09
Dec.10
Mar.11
Jun.11
Sep.11
Dec.11
Mar.12
Jun.12
Sep.12
Dec.12
Mar.13
Jun.13
Sep.13
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

Dec.07
Dec.08
Dec.09
Dec.10
Dec.11
Mar.12
Jun.12
Sep.12
Dec.12
Mar.13
Jun.13
Sep.13
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

Romania
Poland

Hungary
Czech Rep.

banks with majority Greek capital

banks with majority Austrian capital
banks with majority Romanian capital

Bulgaria

Source: NBR

Source: ECB

Foreign financing continued to decline, the move being offset by the pick-up in
funding from local sources, which resulted in lower cross-border contagion risk.
The share of foreign liabilities in total liabilities shrank by 2.1 percentage points in
June 2015 versus the same year-ago period to reach 16.6 percent, yet remaining
higher than the average for the countries in the region (Chart 3.29). Foreign financing
was largely ensured by deposits and loans from financial institutions and particularly
by intercompany lending (73.2 percent of total foreign liabilities).
Chart 3.29. Foreign liabilities

35

EUR bn.

percent

70

40

15

30

10

20

10

Hungary

Romania

foreign liabilities (rhs)

Bulgaria

Poland

Dec.08
Dec.09
Dec.10
Dec.11
Dec.12
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

20

Dec.08
Dec.09
Dec.10
Dec.11
Dec.12
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

50

Dec.08
Dec.09
Dec.10
Dec.11
Dec.12
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

25

Dec.08
Dec.09
Dec.10
Dec.11
Dec.12
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

60

Dec.08
Dec.09
Dec.10
Dec.11
Dec.12
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

30

Czech Rep.

foreign liabilities in total liabilities

Source: ECB

Foreign financing from parent banks stayed on a downward trend, recording a

13.6 percent drop (in lei equivalent) in the past four quarters, mainly because
short-term credit lines that reached maturity were no longer extended. Starting with
2014 H2, the average residual maturity shortened, on the back of the halt in raising
new funding with maturity of over 2 years. In terms of currency breakdown, the share

88

NATIONAL BANK OF ROMANIA

3. The financial system

of financing in euro from parent banks moved up to 81.3 percent of total parent bank
funding, while the shares of the financing in lei and that in US dollar and other
currencies narrowed to 12.9 percent and 5.8 percent respectively.
Holdings of unpledged government securities were further high over the past year,
making a favourable contribution to the comfortable liquidity position of banks.
At end-June 2015, credit institutions held government securities of more than
63 billion in lei equivalent (over 17.5 percent of total assets). In the case of large banks
(with market shares of over 5 percent in total assets), the share of unpledged
government securities in total assets was higher than that recorded system-wide
(roughly 20 percent).
Chart 3.30. Liquidity provided by and frequency of repo operations

16

lei bn.

percent

8
7

12

10

0
Jan.11
Feb.11
Mar.11
Apr.11
May.11
Jun.11
Jul.11
Aug.11
Sep.11
Oct.11
Nov.11
Dec.11
Jan.12
Feb.12
Mar.12
Apr.12
May.12
Jun.12
Jul.12
Aug.12
Sep.12
Oct.12
Nov.12
Dec.12
Jan.13
Feb.13
Mar.13
Apr.13
May.13
Jun.13
Jul.13
Aug.13
Sep.13
Oct.13
Nov.13
Dec.13
Jan.14
Feb.14
Mar.14
Apr.14
May.14
Jun.14
Jul.14
Aug.14
Sep.14
Oct.14
Nov.14
Dec.14
Jan.15
Feb.15
Mar.15
Apr.15
May.15
Jun.15

14

amount provided

monetary policy rate (fixed rate), rhs

Source: NBR

Due to the favourable liquidity position of the banking sector, the NBR found it less
necessary to conduct repo operations. Banks carried out these operations (6 times in
the first half of 2015) mainly in order to cover reserve requirements in the context of
temporary liquidity shortfalls generated by one-off factors such as liquidity
absorptions from Treasury operations or autonomous factors (seasonal increase in
currency outside the NBR). In this context, the NBR provided liquidity to credit
institutions via one-week repo operations conducted as fixed-rate tenders with full
allotment (Chart 3.30). Banks perceived that the periods of relative worsening of
liquidity position were temporary, as shown by the small fluctuations in long-term
(3M-12M) ROBOR rates. The favourable liquidity position in the banking sector was
also confirmed by the low levels and volatility of the 3M ROBOR reference rate, which
hit an all-time low in March 2015.
The correction in the currency mismatches between EUR-denominated assets
and liabilities continued over the past year. However, the loan-to-deposit ratio for
these balance sheet items stood at 149.7 percent in June 2015 amid the lower
EUR-denominated funds raised from parent banks, indicating the increased
importance of currency swaps for ensuring short-term financing in euro (despite the
ongoing adjustment of the indicator, mainly as a result of the contraction in
NATIONAL BANK OF ROMANIA

89

Financial stability report 2015

EUR-denominated loans). The EUR-RON swaps conducted with non-resident financial

institutions as counterparties are the most significant type of currency swap in terms
of both number and value of transactions. The net daily balance of funds raised across
the banking system via EUR-RON currency swaps in relation to non-residents followed
a slightly downward course in 2015 H1, its volatility declining to around EUR 5.4 billion
on average (Chart 3.31). In terms of flow, in the first half of 2015, the daily average of
new transactions stood at around EUR 950 million. The deviation of the value of new
transactions from the average is small, which shows that, despite the uncertainties
generated by the situation in Greece, there was no contagion via this channel, the
banks in Romania further benefiting from easy access to international financial
markets. Most transactions initiated in 2015 H1 (82 percent) had maturities of one
week at most, thus representing a system vulnerability. Similarly, the amounts raised
by Romanian banks with majority Greek capital followed a slightly downward trend,
their 2015 H1 average standing at 23 percent of the amounts raised system-wide.

Chart 3.31. Net daily balance of EUR-denominated funds raised via currency swaps with non-resident financial institutions

EUR bn.

7
6
5
4
3
2
1

total banking system

Greek-owned banks

Romanian-owned banks

Jun.15

May.15

Apr.15

Mar.15

Feb.15

Jan.15

Dec.14

Nov.14

Oct.14

Sep.14

Aug.14

Jul.14

Jun.14

May.14

Apr.14

Mar.14

Feb.14

Jan.14

-1

Austrian-owned banks

Source: NBR

The FX swaps involving the Swiss franc are different from those used to ensure
financing in euro, due to their longer maturity (nearly 35 percent of transactions have
one-week maturity and most banks with Swiss franc exposures have at least one
oustanding transaction with a maturity of over 30 days). Despite the effects on
financial markets produced by the Swiss National Banks decision of January 2015 to
remove the 1.2 EUR/CHF floor, the volatility of funds raised in Swiss francs is low,
indicating that the access of the Romanian banks to international markets was not
restricted. The spike in CHF-denominated funds raised in early April 2015 (Chart 3.32)
was due to the acquisition of Volksbank by Banca Transilvania, yet the effects of this
intervention faded out in the following months.

90

NATIONAL BANK OF ROMANIA

3. The financial system

Chart 3.32. Net daily balance of CHF-denominated funds raised via currency swaps with non-resident financial institutions

1,600

CHF mill.
CHF-RON

USD-CHF

EUR-CHF

1,400
1,200
1,000
800
600
400
200
Jun.15

May.15

May.15

Apr.15

Mar.15

Feb.15

Feb.15

Jan.15

Dec.14

Dec.14

Nov.14

Oct.14

Oct.14

Sep.14

Aug.14

Aug.14

Jul.14

Jun.14

May.14

May.14

Apr.14

Mar.14

Mar.14

Feb.14

Jan.14

Jan.14

Source: NBR

In line with the reports on the liquidity indicator and the high liquidity risk, no credit
institution reported liquidity ratios below one. This may be attributed to a significant
volume of government securities in banks portfolios, as well as to the modest
lending, in foreign currency in particular, to non-financial corporations. Certain
vulnerabilities are visible in the case of liquidity indicators for euro exposures, yet they
are small in size and are not likely to adversely impact the liquidity position.
Stress tests highlighted a comfortable liquidity position of the Romanian banking
system. The results showed banks good capacity to withstand some unexpected
withdrawals of funding sources, while the identified vulnerabilities occur individually
and have as main causes the low volume of liquid assets or the increased reliance on
short-term financing. The main factors leading to a favourable liquidity position in the
banking sector are the substantial holdings of unpledged government securities, the
low reliance on foreign financing, concurrently with maintaining the financing base
from domestic sources, cash and holdings in the NBRs current account higher than
the minimum reserve requirements, as well as the low reliance on wholesale
financing. In addition, monetary policy measures created a favourable environment
for ensuring appropriate liquidity in the banking sector.

3.2.6. Market risk

The interest rate risk assessed in terms of change in the economic value of capital is on
a rise. The increase in the shares of variable interest-bearing liabilities and fixed
interest-bearing assets in the balance sheet of credit institutions may cause significant
losses for banks if interest rates, currently standing at historically low levels
domestically and internationally, start to pick up.
Holdings of debt securities (generally bearing fixed interest), which include mostly
Treasury certificates and Romanian government securities, saw their share in total bank
assets moving ahead to reach 22.2 percent in June 2015. Equity instruments held a

NATIONAL BANK OF ROMANIA

91

Financial stability report 2015

modest share of 0.12 percent, being mainly classified as available for sale (82 percent of
total equity instruments). Over the past year, foreign investors showed lower interest in
government securities (owing probably to the decline in yields), as shown by the drop in
the share of government securities held by non-residents (18.6 percent in April 2015
versus 20.3 percent in April 2014). The lei- and EUR-denominated Romanian
government securities held by non-residents totalled EUR 4.96 billion at end-April 2015,
with medium- and long-term securities holding an overwhelming share of 97 percent.
In the event of a parallel upward shift67 by 200 basis points in the yield curve and the
realisation of forward rates implied by this shift (the persistence of shock), banks
would incur a relatively low potential loss. The loss occurs against the background of
the duration mismatch of interest rate risk-sensitive assets and liabilities. The impact
is stronger compared with June 2014, as a result of the increase in the share of
fixed-interest bearing assets in the balance sheets of credit institutions as well as in
that of variable-interest bearing liabilities, given the continued decline in the volume
of foreign financing. Unlike previous years, the impact on credit institutions is highly
heterogeneous (Chart 3.34), the application of the standardised shock leading to a
change in the economic value of the capital ranging from -42 percent to +34 percent
of own funds, based on the breakdown by maturity/timing of revaluation of credit
institutions assets and liabilities.

Chart 3.33. Balance sheet recognition of securities holdings

percent

40

percent

30
20
10
0
-10

-50

Jul.14

May.15

Jan.15

Mar.15

Nov.14

Sep.14

held-to-maturity securities
available-for-sale securities
securities designated at fair value through profit or loss
held-for-trading securities

Jul.13

-30

Source: NBR

May.14

Jan.14

Mar.14

Nov.13

Sep.13

Mar.13

May.13

-20
Jan.13

100
90
80
70
60
50
40
30
20
10
0

Chart 3.34. Credit institutions ranked by the impact

of a 200 bp shock on own funds

-40

potential impact on own funds

loss > 20% for 200 bp decrease
loss > 20% for 200 bp increase
Source: NBR

The potential loss is largely generated by the high sensitivity of fixed-interest bearing
assets, other than loans. In absolute terms, potential losses increased from a year ago,
as a result of lower market interest rates at the time of the analysis to which the shocks
were applied, as well as amid the declining share of held-to-maturity securities in the
balance sheets of credit institutions (Chart 3.33), corroborated with the rise in the
share of government securities holdings in total bank assets.
67

92

This working assumption is recommended by EU regulations that were incorporated in the Romanian legislation by NBR
Regulation No. 5/2013 on prudential requirements for credit institutions. Recently, considering the very low interest rates
by historical standards, some authorities started using stricter working assumptions (i.e. the Bank for International
Settlements used a 250 basis point shock in its latest Annual Report).

NATIONAL BANK OF ROMANIA

3. The financial system

Credit institutions appetite for using hedging derivatives is low, these instruments
holding immaterial shares in total assets and liabilities, i.e. 0.008 percent and
0.11 percent respectively.
The currency risk across the banking system, estimated based on the maximum
potential losses generated by unfavourable exchange rate developments (with a fixed
probability), was further low (0.087 percent of own funds68 in June 2015 versus
0.102 percent in June 2014). This may be explained by regulations in force, which
impose costly capital requirements in the assumption that the net currency position
of a credit institution exceeds 2 percent of own funds69.

3.2.7. Profitability and efficiency

Since the previous Report, the profitability of the Romanian banking system posted
uneven developments. After a negative financial result of lei 4.7 billion recorded at
end-2014, the banking system returned to profit in 2015. The operating profit was
eroded by the significantly higher net expenses on adjustments for impairment of
financial assets (IFRS provisions), amid the stepped-up removal from balance sheet and
sale of non-performing loan portfolios, concurrently with ensuring appropriate
provisioning (by cautiously reassessing the recoverable value of collateral related to
these loans)70. In this context, the main profitability indicators of the banking sector
(return on assets ROA and return on equity ROE) stood at -1.3 percent and
-12.5 percent respectively at end-2014. Except for Hungary, the profitability of the
Romanian banking system compares unfavourably with other countries in the region
(Chart 3.35).
Chart 3.35. Banks' return on equity regional comparison

21

percent

14
7
0
-7
Dec.10

Dec.11

Dec.12

Dec.13

Dec.14

-14
-21
Bulgaria

Hungary

Czech Rep.

Poland

Romania

Source: IMF (Financial Soundness Indicators Database)

68

Provisional data.

69

In line with Article 351 of CRR, the capital requirement of the credit institution would be increased by 8 percent of the net
position.

70

The magnitude of loss was significantly influenced by the provisioning costs concerning litigations for commercial clauses
and the coverage of losses arising from the CHF appreciation and other risks incurred by a medium-sized credit institution.

NATIONAL BANK OF ROMANIA

93

Financial stability report 2015

The market share of loss-making banks reached 39.2 percent, mainly as a result of the
increase in net expenses for IFRS provisions in the context of non-performing loan
resolution (Chart 3.36).
Chart 3.36. Distribution of credit institutions market share by ROA

60

percent

Chart 3.37. Net profit/loss and ROE

50
40
30

lei bn.

percent

25

20

15

10

5
0
-5

-2

-10

10

-3

-15

-4

-20

-5

-25

0<=ROA<1
ROA=>3

1<=ROA<2

2014

2013

2012

2011

2010

2009

2008

ROA<0
2<=ROA<3

Dec.08
Dec.09
Dec.10
Dec.11
Dec.12
Mar.13
Jun.13
Sep.13
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

0
-1

20

net profit/loss

ROE (rhs)

Source: NBR

Source: NBR

The substantial rise in net expenses for IFRS provisions in 2014 H2 caused the banking
sectors financial result to show losses starting with August 2014 (Chart 3.37), despite
the operating profit reported by most banks. In 2015 H1, the aggregate financial result
was positive, benefiting from the negative dynamics71 of net expenses for IFRS
provisions. Thus, at end-June 2015, the main profitability indicators (ROA and ROE)
stood at 0.7 percent and 6.4 percent respectively.
The operating profitability registered negative dynamics, under the influence of weak
lending in recent years, as well as the ongoing adjustment of interest rates given the
low eligible demand and credit institutions continued efforts aimed at non-performing
loan resolution (Chart 3.38).
The steady decline in net interest income (the main item under operating income) has
been caused by the narrower net interest rate margin, as well as by the contraction in
financial assets bearing high nominal yields (also due to the sale of some problematic
portfolios), despite the reduction in the costs of funding in lei and the persistently low
interest rates on EUR-denominated deposits in the context of a weak sovereign risk
(Chart 3.39).

71

94

The growth rates are calculated in real terms versus the same year-ago period.

NATIONAL BANK OF ROMANIA

3. The financial system

Chart 3.38. Annual real growth rates of operating revenues,

expenses and profit

Jun.15/Jun.14

Dec.14/Dec.13

Mar.15/Mar.14

Sep.14/Sep.13

Jun.14/Jun.13

Mar.14/Mar.13

Dec.13/Dec.12

Jun.13/Jun.12

Sep.13/Sep.12

Mar.13/Mar.12

Jun.15/Jun.14

Mar.15/Mar.14

Dec.14/Dec.13

Sep.14/Sep.13

Jun.14/Jun.13

Mar.14/Mar.13

Dec.13/Dec.12

Sep.13/Sep.12

Jun.13/Jun.12

Dec.12/Dec.11

Mar.13/Mar.12

Dec.11/Dec.10

Dec.10/Dec.09

Dec.09/Dec.08

-30
-40

Dec.12/Dec.11

20
10
0
-10
-20

percent

Dec.11/Dec.10

30
20
10
0
-10
-20
-30
-40
-50

Dec.10/Dec.09

percent

Dec.09/Dec.08

30

Chart 3.39. Annual real growth rates of interest revenues,

expenses and net interest income

net interest income

interest revenues
interest expenses

operating revenues
operating expenses
operating profit

Source: NBR

Source: NBR

The annual growth rate of net income from commissions has stayed in negative
territory since end-2014. The dynamics of gains from trading have remained negative
as of February 2014, amid the slower adjustment of market yields. Banks concern to
cut down operating expenses was reflected by the mostly negative dynamics of staff
costs (-4.2 percent in December 2014 and 1.5 percent in June 2015 respectively) and
depreciation expenses (-10.4 percent in December 2014 and 1.0 percent in June 2015
respectively).
The efforts to clean up credit institutions balance sheets by removing non-performing
exposures may have negative effects on this years financial results. At the same time,
eliminating the uncertainty surrounding the actual capital level (influenced by the
collateral valuation practices used for determining the value of adjustments for
impairment of non-performing loans) will have beneficial effects on economic activity,
by channelling available resources to granting new loans.

3.2.8. Misconduct risk

Misconduct risk is a form of operational risk, defined as the risk of losses generated by
internal processes, personnel or inappropriate/failed systems or by external factors.
The misconduct in the banking sector is generally associated with the wilful or
intentional disregard of laws, ethics or internal governance and controls and can be
manifest at individual, institutional and sectoral levels. In view of recent examples, the
following types of misconduct can be identified: the mis-selling of financial products
to retail customers (i.e. mis-selling insurance against default risk by banks in the
United Kingdom), mis-selling financial products to professional investors without
presenting all the related risk factors (e.g. subprime mortgage-backed securities
mis-sold by US investment banks), the violation of international rules and regulations
(e.g. the breach of trade restrictions imposed on certain countries), the manipulation

NATIONAL BANK OF ROMANIA

95

Financial stability report 2015

of financial markets (i.e. the manipulation of LIBOR rates and foreign exchange
benchmark rates by certain EU credit institutions).
From a macroeconomic perspective, the potential systemic impact of misconduct risk
in the European banking system refers to: a) the high costs on society and the fact that
it could damage confidence in financial markets and institutions; b) the effects of
sanctions applied to the banking system, considering the uncertainties that could
occur about the business model, solvency and profitability of credit institutions.
Misconduct issues may sometimes arise in systemically important banks; the
emergence of costs associated with misconduct during periods of recession can
enhance the negative effects, thus having a procyclical impact; c) the unethical
conduct could lead to withdrawal from activities by a systemically important bank,
such that the functioning of a particular market and the provision of certain financial
services are impaired.
Considering the potentially high costs to society and the potential consequences for
financial stability, in order to prevent misconduct risks, the following are
recommended: the implementation of corporate governance and internal controls to
manage risks in compliance with the banks business model, as well as at the level of
executive management, by promoting and preserving a corporate culture of risk
management and adopting a sound ethical culture.
Credit institutions in Romania are faced with misconduct risk, given the misaligned
interests between managers and shareholders and the insufficient risk control. As a
result of the improperly trained staff involved in lending activity, consumers were
sometimes poorly informed about the basic risks associated with lending products.
The strongly adverse macroeconomic developments contributed to highlighting
some aspects that were masked in the pre-crisis period: the application of interest
rates whose calculation raised understanding issues for customers, granting loans for
which the debt service capacity was of secondary importance (relying on the fact that
payment default was not likely to generate losses in an environment in which the
market value of real estate properties used as collateral for contracting loans was
continuously increasing), charging excessively high commissions, exposing vulnerable
categories to products with high volatility of risk factors.
At present, several regulations are in force concerning the internal governance for
approaching misconduct risk, recommendations for assessing the competence of
bank managers, principles for establishing a benchmark index, recommendations for
remuneration policies.

3.3. Non-bank financial sector

3.3.1. Insurance sector
The insurance sector contracted in 2014, amid weak financial intermediation, the
lowest across the European Union. Behind this development stood both households
low disposable income and the absence of adequate financial education. 2015 H1
96

NATIONAL BANK OF ROMANIA

3. The financial system

saw, however, gross premiums written resuming an upward path on account of

favourable economic conditions. The insufficient capitalisation of insurance
companies was one of the sectors key vulnerabilities during the period under review.
In 2014, the Financial Supervisory Authority (FSA), in cooperation with the European
Insurance and Occupational Pensions Authority and the European Commission,
conducted the first comprehensive assessment of the Romanian insurance sector,
which consisted of a review of assets and liabilities and a stress testing exercise for
13 participating insurance undertakings covering over 80 percent of the insurance
market. According to the Report published in July 201572, the assessment of assets
and liabilities under the current prudential framework (Solvency I) revealed an
aggregate capital shortfall of lei 1.6 billion, concentrated in four undertakings. Among
them, one is undergoing a financial recovery procedure, another has already had its
authorisation withdrawn, whereas the other two have been required to submit an
action plan to the FSA by 4 August 2015, containing measures to be taken in order to
restore solvency margins. Moreover, the analysis based on the prudential regime
applicable from 2016 (Solvency II) indicated that the Romanian insurance sector
would not be sufficiently capitalised. The stress test employed both financial and
economic scenarios, as well as insurance-specific stress scenarios for floods and
earthquakes. The test results revealed that the solvency capital requirement would be
met only by one company under the earthquake scenario, by three companies under
the flood scenario and by four companies under the financial and economic stress
scenarios. From the banking sectors perspective, the difficulties encountered by
certain insurance undertakings could not pose systemic risks via the channel of direct
exposure to insurance companies (Section 3.3.4. Shadow banking).
Chart 3.40. Correlation between insurance sector
and GDP dynamics
15

real annual change, percent

10
5
0
-5
-10
-15
-20
2009

2010

2011

2012

non-life insurance

2013

2014

life insurance

2015 H1

Total assets of the Romanian insurance sector

accounted for about 2.8 percent of GDP at the end
of last year. In 2014 and 2015 H1, the non-life
insurance segment held about 80 percent of gross
premiums written in the insurance market, with
motor insurance accounting for the largest share,
specifically motor third party liability insurance
(45 percent) and other motor insurance (24 percent).
The concentration of the insurance market
remained at moderate levels for both non-life and
life insurance, with the top ten insurance companies
holding an 80.7 percent market share based on
gross premiums written as at 30 June 2015.

GDP

Gross premiums written in the insurance sector fell

slightly in 2014, in both nominal and real terms,
mainly due to a contraction of the non-life insurance
market. However, the magnitude of the decline was lower than in the previous year,
given the consolidation of economic growth (Chart 3.40). Data for 2015 H1 indicate a

Source: FSA, NBR, NIS

72

NATIONAL BANK OF ROMANIA

FSA Report Balance Sheet Review and Stress Test of the Romanian Insurance Sector, July 2015. The Report is available at
http://www.asfromania.ro/files/engleza/comunicate/20150715%20BSR%20-%20Final%20Report%20-engl-logo.pdf.

97

Financial stability report 2015

reversal of the general downtrend in gross premiums written, as they rose by

10.45 percent in real terms versus the same year-ago period. As a result, the financial
intermediation ratio at sector level, calculated as a share of gross premiums written in
GDP, stood at 1.25 percent in 2015 H1, similarly to the 2013 level (Chart 3.41).
Chart 3.41. Dynamics of gross premiums written as a share in GDP comparison across EU Member States

14

percent

12
10
8
6
4
2
0
AT BE
2008

BG

CY

CZ

2011

DE DK

EE

2013

ES

FI

FR GR HU

2014

IE

IT

LT

LU LV MT NL NO PL

PT

RO

SE

SI

SK UK HR

2015 H1

Source: FSA

The ratio of gross claims paid to gross premiums written for non-life insurance
decreased by more than 13 percentage points in the past five years to reach
58 percent at 30 June 2015, revealing a relatively lower pressure on the segments
profitability.

Chart 3.42. Insurance sector Return on assets (ROA)

25

lei bn.

percent

20

-2

15

-4

Return on assets increased by 7.45 percentage

points in 2014, but is still in negative territory
(Chart 3.42). This rise is due to the 97 percent
reduction of losses incurred by insurance companies
as a result of improved technical results reported by
non-life insurance undertakings.

In August 2015, the FSA withdrew the authorisation

of Societatea Asigurare-Reasigurare Astra SA and
10
-6
opened the winding-up proceedings. The company
operates mainly in the non-life insurance market,
5
-8
accounting for 2.85 percent of total assets of the
0
-10
insurance sector at 30 June 2015. Astra ranked third
2009
2010
2011
2012
2013
2014
2015
by value of gross premiums written for non-life
Jun.
insurance in 2015 H1, with a 12.5 percent market
total assets
return on assets (rhs)
share. Although most of the companys current
Source: FSA
accounts and deposits are held with a single credit
institution, they represent a small share in the insurance companys assets, so that the
risk of contagion of the banking sector due to direct exposures is low.

98

NATIONAL BANK OF ROMANIA

3. The financial system

3.3.2. Private pension funds

Private pension funds are not exposed to significant risks that are likely to affect the
financial system stability. The total assets of this sector saw high growth rates amid
the larger number of participants and greater volume of contributions, without
reporting significant payment obligations. Government securities further held the
largest share in the investment portfolio of private pension funds, whereas
investments in bank deposits became increasingly less attractive as a result of low
interest rates. Pension funds exposures to credit institutions have a medium to high
concentration, but there is a low risk of banking sector contagion via balance sheet
links with the pension funds.
The local and European financial environment characterised by low interest rates
contributed to the drop in profitability reported by the private pension funds in
Romania. Since the aggregate price index followed a downward path, the profitability
in real terms on pension funds investments remained in positive territory. The
significant share of Romanian government securities in the private pension funds
portfolio and the positive spread between domestic and euro area yields provide
limited investment opportunities.
The assets of private pension funds stood at 3.03 percent of GDP in 2014. The sector
has a significant growth potential given its accumulation stage, at an average annual
growth rate of assets of around 51 percent over the last five years. This development
is ascribable to the larger number of participants and volume of contributions to both
Pillar II (privately-managed pension funds) and Pillar III (voluntary pension funds).
The gross monthly contributions transferred to Pillar II followed an upward trend
during 2014 and 2015 H1, due, on the one hand, to the larger contribution quota (up
to 4.5 percent in 2014 and 5 percent in 2015) and, on the other hand, to the increased
number of participants for which monthly contributions are paid, as well as to the
favourable economic context (Chart 3.43).
Chart 3.43. Contributions to Pillar II
lei mill.

million participants

Jan.14
Feb.14
Mar.14
Apr.14
May.14
Jun.14
Jul.14
Aug.14
Sep.14
Oct.14
Nov.14
Dec.14
Jan.15
Feb.15
Mar.15
Apr.15
May.15
Jun.15

450
400
350
300
250
200
150
100
50
0

Chart 3.44. Composition of investment portfolios

monthly gross contributions

number of participants for whom monthly gross
contributions were paid (rhs)
Source: FSA

NATIONAL BANK OF ROMANIA

4.00
3.90
3.80
3.70
3.60
3.50
3.40
3.30
3.20
3.10

100
90
80
70
60
50
40
30
20
10
0

percent

Jun.14

Dec.14

Jun.15

Pillar II
other assets
bank deposits
government securities

Jun.14

Dec.14

Jun.15

Pillar III
shares
corporate bonds

Source: FSA

99

Financial stability report 2015

Pension funds invested mainly in government securities, with a share of approximately

65 percent for Pillar II and 63 percent for Pillar III (Chart 3.44). Within the limits set by
law, pension funds may increase the volume of government securities holdings as a
result of the rise in total managed assets. The composition of investment portfolios
saw no significant changes June 2014 through June 2015 in terms of the weight of
government securities, shares and corporate bonds. Given the low interest rates on
bank saving products, deposits with credit institutions stayed on the downward trend
manifest in previous years, falling from 6.65 percent to 4.26 percent for Pillar II and
from 6.51 percent to 3.37 percent for Pillar III respectively during July 2014 June 2015.
Investments of private pension funds must strike a balance between the need to
invest in low-risk instruments and the funds capacity to provide satisfactory rates
of return.
Compared to 2013, in 2014 the average yield of pension funds declined for Pillar II
from 11.5 percent to 8.92 percent, owing to lower returns on every type of financial
instrument in the portfolio, but increased from 9.11 percent to 9.87 percent for
Pillar III, mainly on account of higher returns on investments in government securities.
Equity investments reported the highest returns, followed by investments in
government bonds and units of undertakings for collective investment in transferable
securities (UCITS).
The average initial maturity of fixed-income securities increased from 5.8 years in 2013
to 6.9 years in 2014, while the average maturity of bank deposits shortened by 12 days
to 41 days. This development, combined with the large share of fixed-income
securities in the investment portfolio, has a positive impact on the pension funds
capacity to manage risks arising from the asset-liability mismatch.

Chart 3.45. Exposure of pension funds to credit institutions

exposure to shares
exposure to bonds
exposure to bank deposits
Source: FSA, websites of private pension fund administrators

100

INTS

CARP

OTPB

PBRO

CITI

RBSB

CAGR

UCRT

RAIB

GEGA

BCRO

BROD

lei mill.

BTRA

500
450
400
350
300
250
200
150
100
50
0

Pension funds exposures to the Romanian banking

sector amounted to lei 1.8 billion at 31 December
2014, accounting for 9.8 percent of total pension
fund assets and 0.46 percent of total bank liabilities,
thus indicating a low risk of banking sector
contagion from pension funds. The main exposures
consist of bank deposits, followed by shares and
bonds issued by credit institutions (Chart 3.45).
A potential vulnerability of pension funds might be
induced by the high concentration of exposures to
credit institutions. The share of the top four banks in
total funds raised by banks from pension funds
equalled around 80 percent, and the HerfindahlHirschman index stood at 1,761 points versus
1,172 points in July 2013 June 2014, pointing to a
moderate to high concentration of pension funds
exposures to credit institutions.

NATIONAL BANK OF ROMANIA

3. The financial system

3.3.3. Non-bank financial institutions

Given the persistence of high risk aversion, as well as the uncertainty surrounding the
medium-term economic outlook, the lending growth rates reported by non-bank
financial institutions (NBFIs) remained in negative territory in the period under review.
The non-performing loan (NPL) ratio, albeit high, fell slightly, making a positive
contribution to the sectors improved profitability. Behind the decline in the stock of
loans stood not only demand, but also supply, owing to greater interest in risk
management. A major vulnerability of the sector stems from the scarcely diversified
funding sources. The probability of systemic risk being generated by the NBFIs sector
is relatively low, given its size and the loose balance sheet links with the other
components of the Romanian financial system.
The strengthening of the prudential regulatory framework for credit institutions at
international level has increasingly brought into question the prospect of transferring
part of their activity, lending included, to other financial sectors covered by looser
regulatory requirements. In Romania, the NBFIs provide an alternative funding
channel for the real economy, falling, as of 2006, within the National Bank of
Romanias regulatory and supervisory scope, with the aim of mitigating specific risks
and reducing regulatory arbitrage in relation to credit institutions.
NBFIs saw a contraction in activity June 2014
through June 2015: their total assets declined by
lei 0.7 billion to lei 30.9 billion, whereas the loan
annual change, percent
annual change, percent
15
6
stock decreased by 2.6 percent to lei 21.5 billion.
10
4
The comparative analysis of the dynamics of private
5
2
loans granted by NBFIs and credit institutions
0
0
respectively shows a negative annual growth rate of
-5
-2
the two financial sectors loan stock, of a lower
-10
-4
magnitude in the last quarter under review, despite
-15
-6
-20
-8
the improvement in the macroeconomic
-25
-10
environment (Chart 3.46), which may be indicative
of a lag between the credit cycle and the business
cycle. In contrast to the positive developments
real GDP (rhs)
witnessed in the previous year, this decline was
loans granted by NBFIs
stronger in the NBFIs sector, whose market share
loans granted by credit institutions
calculated as a share of the stock of loans granted
Source: NIS, NBR
by NBFIs in total loans taken by the private sector
from NBFIs and credit institutions stood at approximately 9.1 percent in June 2015
versus 9.3 percent in the same year-ago period.
Jun.09
Sep.09
Dec.09
Mar.10
Jun.10
Sep.10
Dec.10
Mar.11
Jun.11
Sep.11
Dec.11
Mar.12
Jun.12
Sep.12
Dec.12
Mar.13
Jun.13
Sep.13
Dec.13
Mar.14
Jun.14
Sep.14
Dec.14
Mar.15
Jun.15

Chart 3.46. Lending and the GDP dynamics

The decline in the loan stock was prompted by a contraction in loans to households,
while loans to non-financial corporations showed a slight rebound (Chart 3.47).
Looking at the portfolio breakdown, the lending activity focuses on non-financial
corporations (75 percent), with SMEs holding the largest share (85 percent of loans to
non-financial corporations). Trade and services companies account for 54 percent of
total loans granted to non-financial corporations, although there has been an increase
in farm loans lately. In relative terms, the breakdown of loans by borrowers business

NATIONAL BANK OF ROMANIA

101

Financial stability report 2015

sector shows a larger share of loans to utility and services companies in the portfolio
of NBFIs compared to that of credit institutions, while manufacturing and mining
companies hold a larger share in the portfolio of credit institutions (Chart 3.48). Loans
to households account for about 23 percent of the total portfolio and are granted
mainly in the form of consumer loans. In the period under review, the breakdown of
the loan portfolio by currency confirmed the improvement trend, i.e. the rise in
domestic currency funding, with leu-denominated loans thus reaching 36 percent of
total loans.
Chart 3.47. Breakdown of NBFIs loan portfolio by borrower
and currency
lei bn.

percent

Jun.08
Jun.09
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15
Jun.08
Jun.09
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15
Jun.08
Jun.09
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15

40
35
30
25
20
15
10
5
0

Households

Non-financial
corporations

foreign currencies
lei
share in total loans (rhs)
Source: NBR

Chart 3.48. Breakdown of loans to non-financial corporations

by sector

80
70
60
50
40
30
20
10
0

30

percent

25
20
15
10
5
0
0

10

15

20

agriculture
mining and manufacturing
utilities and services
construction and real-estate
trade

Total

25

30

35

40
45
percent

Note: The size of the circles is given by the share of the business
sector in total loans granted to non-financial corporations
by credit institutions and NBFIs in Romania.
Source: NBR

Apart from direct lending, the NBFIs underpin the real economy financing also by
issuing guarantees, which helps reallocate credit risk across the Romanian financial
sector. Guarantees were granted largely for the purpose of implementing government
programmes intended to support economic activity and lending, in June 2015 the
coverage equalling 7.7 percent73 of the loans extended to the private sector by credit
institutions and NBFIs (against 7.4 percent in June 2014). Thus, in year-on-year
comparison, the guarantees provided through the First Home programme stayed on
an upward trend, whereas the volume of guarantees issued by guarantee funds for
loans to non-financial corporations declined.
Given their specific activity, the main risk facing NBFIs is credit risk. The NPL ratio is
further high at 21 percent in June 2015, above the level reported by the banking
sector, but a decrease in the stock of overdue loans became manifest over the past
four quarters (Chart 3.49). Moreover, credit risk is mitigated by the comfortable
provision coverage of expected loan loss.
End-2014 and 2015 H1 saw a strengthening of the positive financial result of the NBFIs
sector, notably on account of the reduction in operating expenses. Aggregate profit at
sector level amounted to lei 300.4 million in December 2014, corresponding to a
5 percent return on equity (ROE). The improved financial results were reflected by
73

102

First Home guarantees and other types of guarantees.

NATIONAL BANK OF ROMANIA

3. The financial system

NBFIs in the Special Register and especially by those entered solely into the General
Register (Chart 3.50). In 2015 H1, financial results at aggregate level remained positive
only for the NBFIs listed in the Special Register.
Chart 3.50. Profitability of the NBFIs sector

400

lei mill.

300
200
100
0
-100
-200

quarterly dynamics of outstanding NPLs of NBFIs

Special Register

NPL ratio - credit institutions (rhs)

Jun.15

Dec.14

Jun.14

Dec.13

Jun.13

Dec.12

Jun.12

-300

Dec.11

30
25
20
15
10
5
0
-5
-10
-15

Jun.11

percent

Dec.10

lei mill.

Jun.08
Dec.08
Jun.09
Dec.09
Jun.10
Dec.10
Jun.11
Dec.11
iun.12
Dec.12
iun.13
Dec.13
iun.14
Dec.14
Jun.15

1,200
1,000
800
600
400
200
0
-200
-400
-600

Jun.10

Chart 3.49. Non-performing loans

General Register*

* excluding the NBFIs entered into the Special Register

NPL ratio - NBFIs (rhs)

Source: NBR

Source: NBR

The breakdown of share/endowment capital by country of origin as at 31 December

2014 shows a 6.8 percentage point rise in the share of domestic capital from the
previous year-end to 63.7 percent, on the back of an increase in its value, along with a
decline in foreign capital. The main countries of origin of foreign participation in the
share/endowment capital are the Netherlands (24.3 percent of total foreign capital),
France (18.9 percent) and Germany (15.3 percent).
Chart 3.51. Breakdown of loans taken by NBFIs, by main country of origin

10

lei bn.

percent

50
40

30

20

10

0
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15
Jun.10
Jun.11
Jun.12
Jun.13
Jun.14
Jun.15

Austria

Romania

loans taken

France

Netherlands

Germany

Luxembourg

Greece

Turkey

United Kingdom

Italy

share in total loans taken (rhs)

Source: NBR

The major difference between NBFIs and credit institutions is that the former may not
take deposits or other repayable funds from the public, ensuring their financing by
raising funds from financial institutions or shareholders. The breakdown of financing
NATIONAL BANK OF ROMANIA

103

Financial stability report 2015

points to an approximately 75 percent share of loans taken from non-resident lenders

(Chart 3.51). The weight of Romanian financing entities rose further (from 20.4 percent
in June 2014 to 24.7 percent in June 2015), along with a drop in the volume of loans
from the major foreign creditors, i.e. Austria, France and the Netherlands, cumulating
approximately 50 percent of total loans. NBFIs have also raised funds from international
bodies such as the EIB, EBRD or the European Investment Fund (about 4 percent of
total loans taken) in order to implement financing programmes. The NBFIs generally
exhibit high reliance on raising funds from one entity or a limited number of fund
providers, usually from within the group they are part of, which could pose an
important vulnerability to these institutions in terms of financing risk.
The contagion risk via the direct channel may materialise as a result of the balance
sheet links of the NBFIs sector with other entities in the Romanian financial system.
The main balance sheet links are manifest between the NBFIs and the banking sector
in Romania via the credit institutions NBFIs financing channel, through equity
participation and deposits placed by NBFIs with credit institutions. These links can be
analysed from two perspectives. Thus, as regards NBFIs, the funds raised from credit
institutions (lei 3.2 billion) in the form of capital and loans account for 10.4 percent of
the liabilities of these entities, while from the banks perspective, the balance sheet
exposure to this sector remains low (about 1 percent of total assets). Moreover, the
NBFIs deposits with resident credit institutions amounted to lei 2.7 billion, accounting
for about 9 percent of the NBFIs assets and 0.9 percent of total deposits of credit
institutions respectively. In addition to the aforementioned interconnections, pointing
to a relatively weak interdependence between the two sectors, being part of the same
financial group by both NBFIs and credit institutions may raise the question of the
common lender and the reputational risk.

3.3.4. Shadow banking

In many countries, particularly the developed ones, the financial crisis proved that
financial institutions outside the banking sector played an important part in the buildup and pass-through of financial risks. There have been rising concerns lately among
policymakers in Europe and elsewhere about the likelihood of entities considered as
being part of the shadow banking sector to be involved in future events of a systemic
nature, given the increasing size and low transparency of these institutions. This
sectors development is generally fuelled by extremely strict banking regulations or a
low-rate macroeconomic environment, encouraging investors to seek positive yields
in real terms (search for yield), or by episodes of high demand for assets, for instance
from pension funds and insurance companies. From this perspective, the current
macroeconomic framework could favour shadow banking development. In order to
preserve financial stability and prevent regulatory arbitrage, all entities in the financial
system should be subject to regulation and supervision. As a result of strengthening
the prudential requirements applicable to financial institutions, there is a tendency of
shifting towards the unsupervised financial sector. The fast-paced development of
shadow banking may pose systemic risk. Although on the rise, the shadow banking
sector in Romania is relatively small compared to other EU countries and its entities
must comply with a regulatory and supervisory framework. The risk of direct
contagion, measured via balance sheet links with other financial system components,
104

NATIONAL BANK OF ROMANIA

3. The financial system

is low. However, shadow banking in developed countries may have adverse spillover
effects on the Romanian financial system.
The main entities operating in Romania that can be considered part of the shadow
banking sector (according to the broader approach of the Financial Stability Board)
are non-bank financial institutions74, investment funds and money market funds.
Chart 3.52. Changes in the composition of the financial system
March 2009 through March 2015

Chart 3.53. Developments in investment fund assets

45
Other financial
intermediaries, except
insurance corporations
and pension funds

lei bn.

40
35
30
25
20

Non-MMF investment funds

15
10
5
Money market funds

-5

Source: NBR - national financial accounts

5
10
percentage points

closed-end equity funds

open-end bond funds

Jun.15

Dec.14

Jun.14

Dec.13

Jun.13

Jun.12

Dec.12

Dec.11

Jun.11

Dec.10

Jun.10

Dec.09

Jun.09

Dec.08

other

Source: NBR

The shadow banking sector accounts for 15.5 percent of total financial assets of the
Romanian financial system. Expansion of investment funds, other than money market
funds, in both relative and absolute terms has been the main source of growth of the
non-bank financial sector (Chart 3.52). Starting in 2009, investment funds in Romania
have been developing steadily, posting a faster growth rate since 2012 (Chart 3.53).
The explanations lie with: (i) including Fondul Proprietatea in the category of closed-end
equity funds (Fondul Proprietatea holds about 30 percent of total investment fund
assets) and (ii) seeking alternatives to bank savings amid low interest rates.
Investment funds operate as financial intermediaries, by providing alternative
saving/investment solutions on the one hand, and by channelling funds towards the
real economy on the other hand, either directly (through equity or bond investments)
or indirectly (through investments with other credit institutions). Investment funds in
Romania are regulated and supervised by the Financial Supervisory Authority and, in
terms of their share in total assets, the most important are closed-end equity funds
and open-end bond funds.
From a systemic perspective, investment funds may pose a risk of direct or indirect
contagion, i.e. either by channelling funds to other financial sectors or through their
likely adverse impact on markets in case of fire sales. They may also pose reputational
risk for other financial institutions if they are part of the same group. Along with
74

NATIONAL BANK OF ROMANIA

Classified under Other financial intermediaries, except insurance corporations and pension funds, along with special
purpose vehicles, financial investment firms and central counterparty clearing houses.

105

Financial stability report 2015

providing funding to other economic sectors, on the asset side, investment funds seek
their own financing. The financing structure of investment funds renders them robust
to covering losses, yet also highly sensitive to significant withdrawals. Given that
funds are raised mostly through fund shares or units, potential losses are borne
directly by shareholders, with little impact on other economic agents. By contrast, the
emergence of uncertainty-ridden episodes can lead to massive capital withdrawals
from investment funds, causing fire sales and, thus, significant losses.
Investment funds in Romania place their assets on the domestic market (90 percent of
assets), investing mostly in shares and debt securities (government securities in
particular), while bank deposits account for 13 percent of the total (Chart 3.54).
Romanian investors hold 76 percent of the outstanding fund shares/units, with
households having purchased about 52.7 percent (Chart 3.55).
Chart 3.54. Investment fund assets

Chart 3.55. Outstanding fund units

percent
claims from deposits
and loans
debt securities

other
Cyprus
Luxembourg
UK
Romania
USA

equity (excluding
investment funds and
money market funds)
shares/units of
investment funds and
money market funds
other assets

Source: NBR

households
non-financial corporations
pension funds
other

other financial intermediaries

investment funds
credit institutions

Source: NBR

Another important component of the shadow banking sector is that of non-bank

financial institutions (for further details see Section 3.3.3. Non-bank financial
institutions). NBFIs provide an alternative financing channel for the real economy and
are subject to the National Bank of Romanias regulation and supervision according to
national legislation, in the absence of a uniform regulatory framework at European
level in this area. Compared with the dynamics of the loans granted by credit
institutions, the contraction of lending in recent years was sharper in the case of
NBFIs, whose market share determined as the share of outstanding loans granted by
the NBFIs in total loans to the private sector from NBFIs and credit institutions stood
at approximately 9.1 percent in June 2015 versus 15.7 percent in December 2008.

106

NATIONAL BANK OF ROMANIA

3. The financial system

Money market funds, the third component of the shadow banking sector, are not
particularly relevant to financial stability, given that only one money market fund
operates currently consistent with the definition and mechanisms established at
European level for these entities, having a relatively low asset value.
Chart 3.56. Exposures of the Romanian financial system
Financial auxiliaries
Non-financial corporations

Central bank
Other financial intermediaries,
except insurance corporations
and pension funds

Insurance
corporations
Money market
funds

Households

Non-MMF investment
funds
Deposit taking
corporations
except the central
bank

General
government

Non-profit institutions
serving households

Pension funds

Captive financial institutions

and money lenders
Rest of the world

exposures above lei 10 billion

exposures below lei 10 million
exposures between lei 10 million and 10 billion
Note: The size of the sectors is calculated based on the share of the sectors financial assets in total financial
system assets. Exposures are estimated based on the aggregate value of all types of balance sheet
exposures reported at end-March 2015.
Source: NBR

From the perspective of size and interconnections with other institutional sectors
(Chart 3.56), shadow banking does not pose significant risks to the stability of the
financial system as a whole. However, a significant vulnerability comes from the
concentration of exposures on Romanian government securities in various financial
sectors (credit institutions, investment funds, insurance companies, pension funds),
which may cause difficulties in case of low market liquidity.

NATIONAL BANK OF ROMANIA

107

Financial stability report 2015

3.4. Financial markets

The positive performance of key financial market indicators, corroborated with
lowering volatility across the board, ensures further the stability of local financial
markets. The emergence of temporary stress episodes following the uncertainty
surrounding Greeces financial woes, as well as amid concerns over the fragile global
economic growth, had a limited impact on the major market segments.
The narrowing spreads against Europes benchmark indices, along with the shrinking
risk premium and solid growth rates, may help strengthen the external perception of
the Romanian economy as an emerging financial market attractive to institutional
investors.

3.4.1. Money market

Interbank money market rates stayed on the downward path they had embarked
upon in 2013 Q1 (Chart 3.57). The expected increase in the Federal Reserve rate will
most likely prompt higher interest rates on the international financial markets. Given
the specific structure of the Romanian financial system, the anticipated effects in such
circumstances, aside from other amplifying factors, could lead, first, to a short-lived
episode of interbank market volatility which would not have a high magnitude. In this
regard, interest rates showed a clear trajectory, with sporadic trend reversals. An
exception was the period between end-September and early December, when
3M ROBOR and 12M ROBOR rates saw sudden, albeit moderate to low, increases.
Specifically, the largest spread during this trend reversal episode stood at about
0.50 percentage points for 3M ROBOR rate and roughly 0.30 percentage points for
12M ROBOR rate. The temporary nature of the rise in interbank rates was due to the
timely intervention of the NBR, which conducted 1W repos aimed at easing monetary
conditions.
Chart 3.57. Average interbank money market rates

percent

Chart 3.58. Spread between money market rates in the region

and those in the euro area
7

percentage points

4
5

1
0

Jan.11
Mar.11
May.11
Jul.11
Sep.11
Nov.11
Jan.12
Mar.12
May.12
Jul.12
Sep.12
Nov.12
Jan.13
Mar.13
May.13
Jul.13
Sep.13
Nov.13
Jan.14
Mar.14
May.14
Jul.14
Sep.14
Nov.14
Jan.15
Mar.15
May.15
Jul.15
12M ROBOR
Source: NBR

108

3M ROBOR

Jan.11
Mar.11
May.11
Jul.11
Sep.11
Nov.11
Jan.12
Mar.12
May.12
Jul.12
Sep.12
Nov.12
Jan.13
Mar.13
May.13
Jul.13
Sep.13
Nov.13
Jan.14
Mar.14
May.14
Jul.14
Sep.14
Nov.14
Jan.15
Mar.15
May.15
Jul.15
Sep.15

-1
1

3M ROBOR
3M PRIBOR

3M BUBOR
3M WIBOR

Source: Bloomberg, NBR

NATIONAL BANK OF ROMANIA

3. The financial system

In the period under review, the ROBOR rate on 3- and 12-month deposits decreased
by about one percentage point. Across the region, the 3-month rate spread vis--vis
the EURIBOR benchmark rate has followed, starting in 2015, a downward trend only in
Romania (Chart 3.58). This decline has occurred amid favourable domestic factors.
Similarly to the preceding years, liquidity conditions (shaped also by the increase in
the Treasury reserves) and the monetary policy rate cuts were the main determinants
of the lower rates on the interbank money market. On the other hand, an opposite
influence on interest rates had the rise in international investors risk aversion,
triggered in September through October 2014 by the slowdown in euro area
economic growth.
Chart 3.59. Stochastic volatility of interbank money market rates
35

Chart 3.60. Transition probabilities between stress regimes

in interbank money market

percent
1.0

probability

30
0.8
25
0.6

20
15

0.4

10
0.2

Source: NBR

rising

Jan.15

May.15

Sep.14

May.14

Jan.14

Sep.13

Jan.13

moderating

May.13

Sep.12

May.12

Jan.12

Sep.11

Jan.11

Jan.15

May.15

Sep.14

Jan.14

12M ROBOR

May.14

Sep.13

Jan.13

May.13

Sep.12

May.12

Jan.12

Sep.11

Jan.11

May.11

3M ROBOR

May.11

0.0

falling

Source: Bloomberg, NBR

Starting in 2014 Q2, the volatility of 3- and 12-month deposit rates posted lower
swings than before (Chart 3.59). Moreover, the spread between short- and long-term
interest rate volatilities narrowed significantly, excluding a short-lived episode
between end-September and early October 2014. Stress conditions on the interbank
money market eased further, in favour of financing (Chart 3.60). The improvement in
funding conditions on the Romanian interbank market was mostly ascribable to
endogenous factors, amid the further decline in key ECB rates and the relevant
deposit facility rate already standing in negative territory.
The higher-than-expected growth of the US economy in 2014, along with the broadly
favourable stress test results recorded by credit institutions and the adoption of nonstandard monetary policies by the ECB, led to an improvement in investors sovereign
risk perception in 2014 H2 2015 Q1. This translated in a decline in CDS quotes for
both the euro area and Central and Eastern Europe (Charts 3.61 and 3.62). Subsequently,
the escalating concerns regarding the situation in Greece and the potential negative
externalities prompted a trend reversal in regional CDS quotes. The further decline in
CDS quotes for Romania, which were already relatively low, against a backdrop of
weak savings returns at European level, might channel foreign investments towards
the country, unless other developments offset these positive effects.

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Financial stability report 2015

Chart 3.61. 5Y CDS quotes for selected countries in the region

Chart 3.62. 5Y CDS quotes for selected euro area countries

basis points

800

basis points

1,600

basis points

40,000

700

1,400

35,000

600

1,200

30,000

500

1,000

25,000

400

800

20,000

300

600

15,000

200

400

10,000

200

5,000

100

Romania
Poland

Jan.11
Apr.11
Jul.11
Oct.11
Jan.12
Apr.12
Jul.12
Oct.12
Jan.13
Apr.13
Jul.13
Oct.13
Jan.14
Apr.14
Jul.14
Oct.14
Jan.15
Apr.15
Jul.15

May.15

Jan.15

Sep.14

Jan.14

May.14

Sep.13

Jan.13

May.13

Sep.12

May.12

Jan.12

Sep.11

Jan.11

May.11

Germany
Spain

Czech Republic
Hungary

Source: Reuters

Ireland
Greece (rhs)

Italy
Portugal

Source: Reuters

3.4.2. Foreign exchange market

The domestic currency posted similar developments to those of other currencies
across the region also at times of escalating regional tensions, such as the Greek crisis
or the Ukraine conflict (Chart 3.63). The magnitude of the depreciations seen in 2015
Q2 was similar to that of the appreciations in the first three months of the year. In this
context, the Romanian leu and the Hungarian forint witnessed smaller swings than
the other two currencies in the region, namely the Czech koruna and the Polish zloty,
selected for comparison reasons.
Chart 3.63. Main exchange rates across the region

Chart 3.64. Stochastic volatility of the EUR/RON exchange rate

1.15

16

1.10

14

percent

12

1.05

10
1.00

0.95

0.90

4
2

Source: Bloomberg, NBR

Jan.15

May.15

Sep.14

May.14

Jan.14

Sep.13

Jan.13

stochastic volatility

May.13

Sep.12

Jan.12

May.12

Sep.11

May.11

Jul.15

Jan.15

Apr.15

Oct.14

Jul.14

Apr.14

Jan.14

Oct.13

Jul.13

EUR/CZK
EUR/PLN

Jan.11

EUR/RON
EUR/HUF

Apr.13

Oct.12

Jan.13

Jul.12

Jan.12

Apr.12

0.85

error bands

Source: NBR

In 2014 H2, exchange rate volatility mirrored the less brisk dynamics manifest since
late 2013 (Chart 3.64). By contrast, the start of this year saw an increasingly volatile
EUR/RON exchange rate, amid concerns triggered by the appreciation of the Swiss

110

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3. The financial system

franc and the rise in foreign investors risk aversion. The EUR/RON exchange rate was
less volatile than those of the other currencies in the region.

3.4.3. Government securities market

The convergence of yields on domestic government securities with those on regional
and European government stocks strengthened July 2014 through March 2015.
Alongside the local money and foreign exchange markets, the developments in the
Romanian government securities market uphold the assertion of stronger
synchronous movements with those seen across the region, regardless of the type of
challenges that arose in the period under review (Chart 3.65).
Yields have shown some sensitivity to external shocks, confirming investors ongoing
risk assessment of these instruments. Against this background, the yields on
government securities issued by Romania and Poland increased from close to
2 percent at end-March to more than 3 percent in the former case in early July, amid
the escalating tensions relative to Greeces financial woes and the uncertainty
surrounding the talks with international lenders. Similarly, the yields on German
Bunds posted an uptrend over the above-mentioned period, yet the scale of the
change was lower than half of a percentage point.
Chart 3.65. Spread between yields on 5Y government securities
in Romania and other European countries
8

percent

Chart 3.66. Transactions in government securities

on the interbank secondary market
60

50

40

lei bn.

30

0
20
-2
10

RO-DE spread
RO-HU spread
Source: NBR

RO-CZ spread
RO-PL spread

Jan.11
Mar.11
May.11
Jul.11
Sep.11
Nov.11
Jan.12
Mar.12
May.12
Jul.12
Sep.12
Nov.12
Jan.13
Mar.13
May.13
Jul.13
Sep.13
Nov.13
Jan.14
Mar.14
May.14
Jul.14
Sep.14
Nov.14
Jan.15
Mar.15
May.15

Jan.12
Mar.12
May.12
Jul.12
Sep.12
Nov.12
Jan.13
Mar.13
May.13
Jul.13
Sep.13
Nov.13
Jan.14
Mar.14
May.14
Jul.14
Sep.14
Nov.14
Jan.15
Mar.15
May.15
Jul.15

-4

outright transactions

repos

Source: NBR

The volume of government stock dealings in the interbank secondary market

followed an upward path in the period under review, but readings were far below
those seen in the same months a year earlier (Chart 3.66). One can thus identify the
limited impact exerted by the tense financial situation of Greece on the interbank
secondary market for government securities. Conversely, monthly traded volumes in
the reviewed period were, with few exceptions, close to or higher than the four-year
average for both outright transactions and repo transactions.

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Financial stability report 2015

The composition of domestically-issued government securities holdings changed over

the past 12 months, with credit institutions reducing their share in favour of resident
non-bank clients (from 25 percent in April 2014 to more than 30 percent in April 2015,
according to MPF data). Over the same period, holdings by non-resident clients fell
slightly.
In the period July 2014 June 2015, economic, financial and monetary conditions
exerted effects that translated unevenly into the yield curve for the government
securities traded on the secondary market. The yield curve segments showed different
responses to shocks coming from the three directions mentioned above (Chart 3.67).
Yields across the entire maturity spectrum decreased from July 2014 to March 2015.
During 2014 Q4, yields posted a parallel shift compared to the end of September. Over
the following two quarters, short-term yields saw marginal changes. On the other
hand, yields on 5Y and 10Y bonds embarked on a downward path in 2015 Q1, before
rising sharply to levels higher than those at end-2014.
Chart 3.68. Slope of the yield curve in the secondary market

Chart 3.67. Yield curve in the secondary market

4.5

percent

0.0

percent

-0.2

4.0

-0.4
3.5

-0.6

3.0

-0.8
-1.0

2.5

-1.2

Sep.14

-1.4

2.0

Dec.14

-1.6

1.5

Mar.15

-1.8
1.0

Jun.15

-2.0
6M

12M
Sep.14
Mar.15

Source: NBR

36M
Dec.14
Jun.15

60M

120M

-2.2
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
months
Source: NBR

The uneven shift in the yield curve, in response to the changing economic, financial
and monetary conditions, is attributed to how sensitive yields are, over various
maturities, to the adjustment to the new conditions (Chart 3.68). The yield curve
dynamics seen in the latter half of the year can be put down to the favourable liquidity
conditions, coupled with the lowering of the required reserve ratio on leu-denominated
liabilities, as well as to the three successive monetary policy rate cuts. The adjustment
in investor expectations on the monetary policy rate, after two other cuts in January
and February, prompted lower yields on 5Y and 10Y bonds in the three months to
March 2015. Subsequently however, following foreign investors stronger risk
aversion, amid concerns over the sovereign debt crisis, medium- and long-term yields
increased markedly.

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3. The financial system

On the whole, starting in 2014 H2, yields on 10Y bonds saw wider fluctuations than
the yields at the short end of the maturity spectrum (Chart 3.69). Unlike short-term
yields, those on 10Y bonds exhibited a trend reversal in February 2015. The spread
between the volatilities of long-term and short-term securities has widened since
2015 Q1 (Chart 3.70). The wider spread points also to an asymmetry in the response to
shocks.
Chart 3.69. Benchmark rates on the secondary market
for government securities (bid/ask rate average)
8

percent

Chart 3.70. Volatility of benchmark rates on the secondary market

for government securities (bid/ask rate average)
30

percent

25

20

5
15
4
10
3
5

1Y

10Y yield

Source: NBR

Aug.15

Apr.15

Dec.14

Aug.14

Apr.14

Dec.13

Aug.13

Apr.13

Dec.12

Aug.12

Apr.12

Dec.11

Jan.11
Mar.11
May.11
Jul.11
Sep.11
Nov.11
Jan.12
Mar.12
May.12
Jul.12
Sep.12
Nov.12
Jan.13
Mar.13
May.13
Jul.13
Sep.13
Nov.13
Jan.14
Mar.14
May.14
Jul.14
Sep.14
Nov.14
Jan.15
Mar.15
May.15
Jul.15
1Y yield

Aug.11

10Y

Source: NBR

3.4.4. Capital market

The local stock market posted a positive performance from January 2013 to July 2015,
providing investors with higher yields than those on other capital markets in the
region (Chart 3.71). Romanian capital markets positive results hinge on the achieved
macroeconomic stability and the robust economic growth rate witnessed over the
past year, alongside foreign investors keener interest in emerging markets in Central
and Eastern Europe and the low-rate environment, which prompted a search for yield
by investors. With interest rates at all-time lows, investors shift to variable-income
securities, which are higher-yielding, albeit riskier assets, may fuel the volatility of
stock market indices, reducing their resilience to external shocks. Consequently, the
increase in the volume of speculative capital to the detriment of long-term
investment cannot help achieve a lasting development of the capital market in
Romania.
Compared to the same year-ago period (July 2014), the benchmark index of the
Romanian capital market advanced by more than 5 percent, being overtaken by the
Budapest stock market index alone. Index fluctuations over the period July 2014
January 2015 are indicative of relatively elevated uncertainty surrounding the
geopolitical context in the region, as well as across the world, which weighed on
investors decisions to rebalance their portfolios. Conversely, 2015 Q1 saw a largely
stable expansion of regional markets, associated with relatively low fluctuations.
The start of 2015 Q2 witnessed a trend reversal on the regions capital markets, amid

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Financial stability report 2015

the escalating uncertainty surrounding Greeces financial woes. The similar pattern
seen in stock market indices across the region has been confirmed by relatively stable
dynamic correlations (Chart 3.72), with jumps in the correlation coefficients being
attributed to temporary drops in market indices caused by geopolitical tensions
perceived worldwide. The latest such episode seen on capital markets across the
region stemmed from fears over the economic picture in China, but also from the low
commodity prices, prompting investors to readjust their portfolios sizeably. Testifying
to the strengthening of the capital market segment and the sectors importance for
the real economy is the significant share of resident listed companies in GDP:
12.4 percent at end-2014. 75

Chart 3.71. Regional stock market index dynamics

(reference period: January 2013)
150

percentage points

Chart 3.72. Dynamic correlations75 between the BET and other

regional stock market indices (10-day moving average)
1.0

140

0.8

130

0.6

120
0.4
110
0.2

100

80

-0.2

BET index
BUX index

WIG index
PX index

Source: Bloomberg, NBR

Jan.13
Mar.13
May.13
Jul.13
Sep.13
Nov.13
Jan.14
Mar.14
May.14
Jul.14
Sep.14
Nov.14
Jan.15
Mar.15
May.15
Jul.15
Aug.15

0.0
Jan.13
Mar.13
May.13
Jul.13
Sep.13
Nov.13
Jan.14
Mar.14
May.14
Jul.14
Sep.14
Nov.14
Jan.15
Mar.15
May.15
Jul.15
Aug.15

90

BET-WIG correlation
BET-PX correlation

BET-BUX correlation

Source: Bloomberg, NBR

BSE market capitalisation stayed unchanged in the course of 2014, due to the mixed
picture painted by the dynamics of its major sectors (Chart 3.73). Annualised liquidity76
posted swings from July 2014 to June 2015, with sharp rises being recorded in
November 2014 and April 2015. These increases were transitory in nature, so that,
except for the above-mentioned months, liquidity hovered around the past years
average.
While the domestic corporate sector witnessed positive developments over the
period as a whole (up 13 percent year on year in June 2015), the BSEs International
sector embarked on a downward path in terms of capitalisation until the end of 2014,
before rebounding significantly in 2015 Q1. RASDAQ market capitalisation reported
an annual decline of 19 percent in June 2015, in the context of the entry into force on
24 October 2014 of Law No. 151/201477, whereby the companies listed on this market

114

75

The dynamic conditional correlations were estimated by using a BEKK-type multivariate GARCH model (1,1,1) allowing for
the error heteroscedasticity, which is a characteristic of most financial time series.

76

Monthly transactions * 12 / Market capitalisation at the end of the month.

77

The law on the clarification of the legal status of the shares traded on RASDAQ market or on the unlisted securities market.

NATIONAL BANK OF ROMANIA

3. The financial system

segment should opt for either trading their shares on the regulated market or on an
alternative trading system or being delisted. Compared to the capital markets in the
region, domestic market capitalisation of the Bucharest Stock Exchange (excluding
International) is higher than in Slovenia, Slovakia or Bulgaria and nears that of stock
markets in Budapest and Prague, while Poland exceeds by far all the CEE countries in
this respect (Chart 3.74).

Source: BSE, NBR

40

EUR bn.

EUR bn.

160

120

25

100

20

80

15

60

10

40

20

Poland (rhs)

30

Czech Rep.

140

Romania

35

Hungary

BSE capitalisation - International

RASDAQ capitalisation
BSE capitalisation ("International" excluded)
turnover/capitalisation - annualised data (rhs)

40
35
30
25
20
15
10
5
0

Slovenia

percent

Slovakia

lei bn.

Jan.13
Mar.13
May.13
Jul.13
Sep.13
Nov.13
Jan.14
Mar.14
May.14
Jul.14
Sep.14
Nov.14
Jan.15
Mar.15
May.15
Jul.15

160
140
120
100
80
60
40
20
0

Chart 3.74. Stock market capitalisation of CEE countries

Bulgaria

Chart 3.73. Stock market capitalisation and annualised liquidity

Source: Bloomberg

The empirically-observed path of the dividend growth rate resembles that of

economic fundamentals during upturns. The situation is entirely different during
periods of contraction in the volume of dividends paid. Results show that a time of
rising dividends would be tightly linked to economic fundamentals, with exuberant
behaviour being infrequent from July 2014 to June 2015 in particular (Chart 3.75).
On the other hand, results indicate risk aversion, since empirically-observed declines
are significantly stronger than those derived from the fundamental evolution of the
dividend rate. Specifically, company managers may have had an uncertain outlook for
the macro-financial conditions. Heightened financial market volatility and a possible
tightening of the Federal Reserves monetary policy stance could be the main drivers
behind the managers behaviour.
Volatility of key Romanian stock market indices has displayed relatively stable
dynamics over the period under review (Chart 3.76), interrupted by short-lived
episodes of heightening tensions on the local financial market. While the volatility
episode in 2014 Q1 coincides with the uncertainty surrounding the crisis in Ukraine,
the second surge, in the run-up to the end of 2014, may be ascribed to concerns over
the fragile rebound of European economies. The steep increase at end-August
emerged against the background of the largest correction on the Bucharest Stock
Exchange in four years, highlighting the local capital markets sensitivity to shocks in
global investor sentiment. The main tension-ridden episodes overlap with aboveaverage trading volumes, which illustrate investors swift moves to rebalance their
portfolios amid high uncertainty and invalidate the assumption of volatility induced
by liquidity squeeze on the BSEs regulated market.

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Financial stability report 2015

Chart 3.76. Stock market volatility and daily trading volume

on the BSE
35

20

40

60

* The cumulative distribution is calculated based on the

fundamental relationship between consumption, dividends
and a long-term predictable component defined in the model
developed by Bansal and Yaron (Risks for the Long Run:
A Potential Resolution of Asset Pricing Puzzles, The Journal of
Finance, Vol. LIX, No. 4, 2004).
Source: BSE, NBR

10

0
Jun.15

20

5
Aug.15

-20

10

Apr.15

-40

30

Feb.15

0.0

15

Oct.14

(model-based)
fundamental evolution*

40

Dec.14

0.2

20

Jun.14

July 2014 June 2015

50

Aug.14

0.4

25

Apr.14

February 2011 June 2015

60

Feb.14

0.6

70

30

Oct.13

0.8

lei mill.

percent

Dec.13

probability

Jun.13

1.0

Aug.13

Chart 3.75. Cumulative distribution of dividend growth rate

trading volume (20-day moving average, rhs)

BET volatility
BET-FI volatility
Source: BSE, NBR

Box 7. CoVaR, a tool for assessing systemic risk

The recent financial crisis is proof of how fast individual financial shocks pass through
to the system as a whole via contagion channels, entailing adverse consequences on
financial stability and, hence, the real sector. For this reason, the strong concern of
the academia to identify and monitor systemic risks materialised in a number of
aggregate indicators based on methodologies capable of capturing both the
importance of financial system components and their intricate interlinkages. Adrian
and Brunnermeier78 put forward a measure of individual contributions of each
financial institution to systemic risk of the sector as a whole. The CoVaR (Conditional
Value at Risk) measure uses both market information of financial institutions listed on
the local capital market and balance sheet data in order to determine the potential
loss of individual institutions, using as parameters a time horizon of ten days and a
99 percent confidence level, conditional on how serious the financial distress of an
institution can be. Considering the intuitive manner in which it is defined, as well as
the relevant conclusions that may be inferred, the CoVaR is used in many papers
dealing with systemic risk and is included in the quarterly ESRB Risk Dashboard.
The construction of CoVaR for Romania comprised ten financial institutions listed on
the Bucharest Stock Exchange from the banking sector and from among investment
funds in order to capture various sources of systemic risk. Moreover, quantile
regressions were resorted to, in light of the benefits of this estimation methodology,
given the modelling of non-linearities that may occur when measuring individual
potential losses. By including additional variables capable of capturing the specifics
of risks associated with individual institutions, such as the short-term interest rate
(3M ROBOR), the stock market index (BET) or the induced external vulnerability
(VIX index), CoVaR takes a multidimensional approach to the sources and transmission
channels of potentially systemic risks.
78

116

See Adrian, T. and Brunnermeier, M. K. (2008), CoVaR, Federal Reserve Bank of New York Staff Reports, No. 348.

NATIONAL BANK OF ROMANIA

3. The financial system

Chart A. CoVaR computed for the financial institutions listed on the BSE

percent

-5

-10

-15

-20
interquartile range

CoVaR

-25
2008

2009

2010

2011

2012

2013

2014

2015

Source: BSE, NBR

Having determined the contributions of each financial institution, CoVaR is

computed by using the median of daily distribution of potential losses of individual
institutions. The major systemic distress episodes overlap with the global crises,
showing the level of interconnectivity between the local financial markets and the
developed ones both regionally and globally. The comovement is confirmed by
the similarity of CoVaR determined for the financial institutions listed on the BSE and
the CoVaR computed at European level (the ESRB index uses a sample of 52 credit
institutions and 34 insurance companies listed in the STOXX Europe 600). The results
of estimations prove the significant, albeit asymmetric, impact of tension-ridden
episodes in global financial markets on the financial institutions included in the
sample and show limited potential losses of the financial institutions listed on the
Bucharest Stock Exchange during the last year of observation. In 2015 H1, the level of
systemic risk measured by CoVaR is relatively low, amid decreasing volatility of share
prices across the board. Similar trends in systemic risk were also detected for the
European markets following the brighter outlook for economic growth and the
launch of non-standard monetary policy measures of quantitative easing.

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117

4. FINANCIAL SYSTEM
INFRASTRUCTURE STABILITY
OF PAYMENT AND SECURITIES
SETTLEMENT SYSTEMS

Payment and securities settlement systems in Romania functioned smoothly, without

significant incidents.
The average daily settlement ratio remained high, indicating a low potential for the
liquidity risk to become manifest.
The changes to the system rules aimed especially to increase efficiency and contain
certain risks, such as operational, legal, credit and liquidity risks.
The intention of the National Bank of Romania is to induce the alignment of the
payment-related costs borne by end-users with those applied in the European Union,
with a view to ensuring a pricing level that would stimulate the economic activity,
while maintaining the high quality and security of the services provided.
The NBR, in co-operation with the ECB and the other oversight authorities in the EU,
assesses the systemic risks associated with potential cyber-attacks and engages in
testing and improving the cyber resilience of financial market infrastructures and of
the participants therein.

4.1. Stability of ReGIS

ReGIS is the most important payment system in Romania. It ensures the real-time
gross final settlement of participants fund transfer orders and of the net positions
calculated in the ancillary systems79, which amounted to lei 7,366 billion in July 2014
June 2015 (Chart 4.1). The importance of this system arises from both the value of
settled transfer orders and its ensuring the settlement of payment obligations
resulting from the transactions performed on the capital market and the government
securities market, as well as from central banks operations.
ReGIS functioned smoothly July 2014 through June 2015, amid an increase in both the
number and average value of settled transfer orders. In the period under review, the
79

118

A payment system SENT (operated by STFD TRANSFOND S.A.), two card payment schemes VISA (operated by VISA
Europe Services Inc.) and MasterCard (operated by MasterCard International), and three securities settlement systems
DSClear (operated by Sibex Depository), RoClear (operated by the Central Depository) and SaFIR (operated by the NBR).

NATIONAL BANK OF ROMANIA

4. Financial system infrastructure stability of payment and securities settlement systems

average monthly availability ratio remained very high, above 99.99 percent, similarly
to the level reported during the reference period (July 2013 June 2014), which
indicates a very good system reliability. In 2014 an exercise was successfully
conducted for testing the business continuity plans concerning ReGIS and SaFIR, with
the support of STFD TRANSFOND S.A. as technical operator and the voluntary
participation of 28 financial institutions.
Chart 4.1. Value of transfer orders settled in ReGIS
lei bn.

30,000
25,000
20,000
15,000
10,000
5,000
Jan.13
Mar.13
May.13
Jul.13
Sep.13
Nov.13
Jan.14
Mar.14
May.14
Jul.14
Sep.14
Nov.14
Jan.15
Mar.15
May.15

Jan.12
Mar.12
May.12
Jul.12
Sep.12
Nov.12
Jan.13
Mar.13
May.13
Jul.13
Sep.13
Nov.13
Jan.14
Mar.14
May.14
Jul.14
Sep.14
Nov.14
Jan.15
Mar.15
May.15

1,000
900
800
700
600
500
400
300
200
100
0

Chart 4.2. Maximum number of transfer orders settled in ReGIS

on a monthly basis

NBR

State Treasury

Source: NBR

credit institutions

Note: The red line stands for the evolution of the average
daily number of transfer orders settled during
January 2013 June 2013, July 2013 June 2014 and
July 2014 June 2015.
Source: NBR

The average daily settlement ratio80 was further 99.98 percent, given the rise by
almost 10 percent in the average daily value of settled transfer orders versus the
reference period. No gridlock situations occurred in the waiting queue, which shows a
low potential for the liquidity risk to become manifest. The settlement of the largest
net debtor position81 did not generate liquidity pressures, being carried out under
normal conditions with 21.84 percent of the liquidity available at the start of the day
in ReGIS and without changes in participants normal behaviour.
Transfer orders settled through ReGIS in the period under analysis (3.6 million)
increased by more than 7 percent compared to the reference period and the average
daily number of settled transfer orders (close to 15,000) stuck to the slightly upward
path seen since 2012 with seasonal peaks in December (Chart 4.2) without posing
any problems to the systems processing capacity.
At present, 47 entities participate in ReGIS and the participants concentration ratio82
remains at a moderate 67.79 percent, below the 80 percent alert threshold, which
indicates a good resilience of the system should a significant participant be unable to
settle.

80

Calculated as a ratio of transfer orders settled in the system to the accepted transfer orders.

81

The value was 25 percent higher than the value of the largest net debtor position settled during the reference period.

82

Calculated as the sum of the five largest individual market shares in terms of the value of settled transfer orders.

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Financial stability report 2015

ReGIS system rules were adjusted in the course of

2015 in order to ensure better management of the
operational and legal risks. The changes with an
impact on the operational risk referred mainly to the
system access criteria, the criteria for identifying
critical participants and critical payments, as well as
to additional participation conditions for critical
participants. The adjustments aimed at reducing the
legal risk related to the introduction of provisions
for processing garnishment operations at any time
during the operating day and updating the terms of
reference for the legal opinions on the participants
capacity and country of origin.

Chart 4.3. Liquidity usage ratio in ReGIS

40

percent

35
30
25
20
15
10
5

Source: NBR

Jun.15

May.15

Apr.15

Mar.15

Feb.15

Jan.15

Dec.14

Nov.14

Oct.14

Sep.14

Aug.14

Jul.14

The liquidity usage ratio, calculated based on

simulations, indicates a comfortable liquidity level in
the banking sector (Chart 4.3). The pressure on
banks financial resources was relatively low, pointing to a liquidity surplus relative to
the liquidity needs in ReGIS, as seen over the last years.
The asymmetry of liquidity resources in the banking sector, determined based on
simulations, remains low and posted a relatively stable evolution during July 2014
June 2015 (Chart 4.4). The distribution of liquidity primarily to participants with
temporary resource shortages supports ReGIS stability. The maximum and average
value of waiting queues show some temporary above-average rises in queued orders;
however, when assessed in correlation with the total value of settled orders and with
the use of the intraday credit facility, no implications on system stability were
detected.

Chart 4.4. Maximum value of waiting queues in ReGIS

50

lei bn.

45

Chart 4.5. Queuing time of instructions

30

minutes

25

40
20

35
30

15

25
20

10

15

10

Source: NBR

120

maximum queuing time

Jun.15

May.15

Apr.15

Mar.15

Feb.15

Jan.15

Dec.14

Nov.14

Oct.14

Sep.14

Jul.14
Jan.12
Mar.12
May.12
Jul.12
Sep.12
Nov.12
Jan.13
Mar.13
May.13
Jul.13
Sep.13
Nov.13
Jan.14
Mar.14
May.14
Jul.14
Sep.14
Nov.14
Jan.15
Mar.15
May.15

Aug.14

average queuing time

Source: NBR

NATIONAL BANK OF ROMANIA

4. Financial system infrastructure stability of payment and securities settlement systems

4.2. Stability of SENT

SENT is a payment system, operated by STFD TRANSFOND S.A., which ensures the
multilateral netting of lei- and euro-denominated transfer orders. The netted orders
totalled lei 285 billion and EUR 62 million respectively during the period under review.
Net positions are settled through ReGIS and TARGET2. SENT is pivotal to the economy
because of the high volume of small-value transactions processed and in view of the
fact that it allows for the interbank settlement of debit payment instruments.

Chart 4.6. Availability ratio of SENT

100.0

percent

99.5
99.0
98.5
98.0
Jun.15

May.15

Apr.15

Mar.15

Feb.15

Jan.15

Dec.14

Nov.14

Oct.14

Sep.14

Aug.14

Jul.14

97.5

monthly availability ratio of netting services

for lei-denominated payment obligations
monthly availability ratio of netting services
for euro-denominated payment obligations
Note: The horizontal line stands for the minimum monthly
availability ratio of the system set by SENT rules.

SENT functioned normally, except for isolated

operational incidents, amid a slight pick-up in
netting in the period under review. In 12-month
terms, netting services posted a good average
availability ratio, namely 99.79 percent for
lei-denominated payments (99.89 percent for
euro-denominated payments), slightly down from
99.98 percent (99.92 percent for euro-denominated
payments) in the reference period, but above the
99 percent level set forth by the system rules.
The emergence of operational incidents in July 2014
caused a minor decline in the monthly availability
ratio below the level required by the system rules
(Chart 4.6).

The volume and value of lei-denominated transfer

orders netted during July 2014 June 2015
expanded by more than 10 percent and over 7 percent respectively. Payment
obligations denominated in domestic currency posted a high 98.65 percent
settlement ratio83, similar to that seen in the reference period. The netting ratio84
of lei-denominated payment obligations remained at a very good level, posting a
20.45 percent average, with the variation interval ranging further from 13 percent
to 45 percent. The lower the netting ratio, the more efficient the system, but the
10 percent level marks an alert threshold, below which the contagion risk may
become manifest should a participant be unable to settle. All net payment obligations
in SENT are entirely collateralised and no foreclosure was necessary during the period
under review.

Source: STFD TRANSFOND S.A.

In the context of a low number of participants using netting services for

euro-denominated payment obligations, the significant pick-up in the netting of
euro-denominated payment instructions (by over 150 percent in terms of both
number and value) owes mainly to cross-border transfer orders from outside the
country. The only exception to the 100 percent daily settlement ratio occurred in
February 2015 due to an operational incident caused by a human error, resulting in
the non-completion of the settlement via TARGET2-Romnia of net positions arising
83

Calculated as a ratio of the value of netted-settled transfer orders to the value of transfer orders processed in SENT the lei
component.

84

Calculated as a ratio of net debtor positions to the value of netted transactions. The lower the netting ratio, the stronger
the effect of netting.

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Financial stability report 2015

from the netting of euro-denominated payment obligations calculated in SENT.

Following the remedial measures, among which restoring the netting of
euro-denominated payment obligations and postponing the second netting session,
all euro-denominated payment instructions were successfully settled in the course of
the same operating day. The netting ratio of euro-denominated payment obligations
ranged further between 80 percent and 100 percent, similarly to the previous years,
which indicates very low system efficiency in terms of liquidity.
Participating in SENT are 41 institutions from Romania and branches of some EU credit
institutions. The concentration ratio of SENT participants remained at the level seen in
the previous years, ranging between 57 percent and 59 percent, in terms of the value
of netted transfer orders. The value is moderate, below the 80 percent critical
threshold, showing a low possibility for the contagion risk to become manifest within
the system.
In 2014, SENT rules were amended including with respect to the management of
operational and legal risks. To this end, the operating schedule was adjusted, the
requirements on the participants annual self-assessment were simplified and
provisions were made for the Court of International Commercial Arbitration attached
to the Chamber of Commerce and Industry of Romania to settle the disputes that
were not amiably settled.
At end-2014, the National Bank of Romania started assessing ReGIS and SENT systems
in terms of their compliance with the standards provided by the Principles for financial
market infrastructures, prepared by the Bank for International Settlements together
with the International Organisation of Securities Commissions (IOSCO).

4.3. Securities settlement systems

The three securities settlement systems operating in Romania provide post-trading
services for the capital market DSClear operated by Sibex Depository and RoClear
operated by the Central Depository, as well as for the government securities market
SaFIR operated by the National Bank of Romania. These systems continued to run
safely, without significant incidents, as shown by the 100 percent annual availability
ratio recorded by all three systems.
Changes in the functioning of DSClear and RoClear
During July 2014 June 2015 a series of adjustments were made in the architecture
and operating rules of DSClear and RoClear. The adopted measures were aimed at
reducing exposure to market risk by complying with the provisions under the
European Regulation on Central Securities Depositories CSDR85 regarding the
settlement of transactions no later than on the second business day after trading
takes place (T+2).

85

122

Regulation (EU) No 909/2014 on improving securities settlement in the European Union and on central securities
depositories.

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4. Financial system infrastructure stability of payment and securities settlement systems

In the course of March 2015, the functioning rules governing RoClear were changed in
order to pave the way for the Central Depository to join TARGET2-Securities (T2S)86,
the pan-European platform for securities settlement; in June 2015, the Central
Depository successfully joined the new platform in the first migration wave alongside
other depositories. The main benefits provided by the T2S platform are the
considerably higher efficiency and increased safety of cross-border settlements, as
well as the contribution to developing an integrated European market for the
settlement of securities transactions.
Functioning of SaFIR
SaFIR is a system of a pivotal importance, due to its role in ensuring an adequate
monetary policy transmission channel and to the value of the securities in the system
and of the related transactions. At the end of 2015 H1, the securities in SaFIR
amounted to lei 118.9 billion (Chart 4.7), up by 4 percent compared to the end of the
previous year. This was attributed to a 4.9 percent increase in the value of the bonds
recorded with the system (lei 108.7 billion), in spite of a further visible downward
trend in the value of Treasury certificates (down 4.2 percent to around lei 10.3 billion).
Chart 4.7. Value of securities recorded in SaFIR

30

1,000

15

750

10

500

250

20

bonds

Treasury certificates

Jun.2015

2014

2013

2012

2011

2010

2009

2008

Jun.2015

20

2009

40

1,250

2014

60

1,500

25

2013

80

lei bn.

2012

100

thousand instructions

2011

lei bn.

2010

120

Chart 4.8. Transactions processed in SaFIR by type of securities

bonds value of processed instructions (rhs)

Treasury certificates value of processed instructions (rhs)
bonds - number of processed instructions
Treasury certificates - number of processed instructions
Source: NBR

Source: NBR

The volume and value of settled transactions fell largely because of the decline in
participants liquidity needs, given that financing transactions in securities prevail in
SaFIR. After the peak seen in 2013, when SaFIR settled approximately 32 thousand
transactions, in 2014 the number of transactions diminished to about 25 thousand,
a tendency which carried on in the first half of 2015 (12.6 thousand transactions,
compared with 13.6 thousand in the first half of 2014, Chart 4.8). The volumes of
transactions do not pose any problem to the systems processing capacity.

86

NATIONAL BANK OF ROMANIA

T2S will contribute to increased efficiency and reduced fragmentation of securities settlement activities, thanks to:
(1) delivering a single IT platform, with common interfaces and the same messaging protocol, (2) harmonising the
operational schedules and the settlement deadlines, (3) implementing a single engine for the gross settlement in central
bank money of all national and cross-border transactions settled in T2S-eligible currencies.

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Financial stability report 2015

The aggregate value of transactions settled through SaFIR (Chart 4.9) in 2015 H1
(lei 282 billion) remained on the downward trend that started in 2014, although the
value of transactions in Treasury certificates almost trebled (lei 17.4 billion versus
lei 6 billion in 2014 H1). The settlement of lei-denominated payments through ReGIS,
alongside the securities settlement via SaFIR, ensures compliance with the
delivery-versus-payment (DvP) principle and, consequently, the elimination of the
principal risk. The upward trend in the value of transactions settled in euro was further
manifest in 2014 (up by 36 percent from 2013), before reversing during 2015 H1 (down
20 percent against 2014 H1). The value of transactions settled in euro illustrates how
important it is to implement, in the near future, a fund settlement mechanism that
would ensure full compliance with the DvP principle of these transactions as well, with a
view to eliminating the principal risk. To this end TARGET2 is envisaged to be used.
The drop in the appetite for liquidity and implicitly in the value of collateralised
lending led to a decrease in the total value of transactions settled through SaFIR as a
share in Romanias GDP. Compared to other systems owned by central banks, the
activity level continues to be higher than that in Poland and Bulgaria, remaining,
however, much lower than that reported by the systems owned by central banks in
Greece and the Czech Republic (Chart 4.10). In view of connecting the system to the
T2S platform, the value of cross-border transactions in securities deposited with SaFIR
is expected to grow significantly, with a positive impact on efficiency, which may lead
to a decline in tariffs.
Chart 4.10. The value of transactions settled in systems
owned by central banks as a share in GDP

Chart 4.9. Value of transactions settled in SaFIR

lei bn.

2,120

16

1,897

14

1,620
1,120

12

660

462

620
120

percent of GDP

458

325

184

10

234

80
60
40
20
0

4
2
0

Source: NBR

2014

Jun.2015

settlement instructions in lei

settlement instructions in euro
free-of-payment instructions

2013

2012

2011

2010

2009

2010

2011

2012

SaFIR (Romania)
BOGS (Greece)
SKD (Czech Republic)

2013

2014

RPW (Poland)
GSD (Bulgaria)

Source: ECB (Securities trading, clearing and settlement, July 2015),

NBR calculations

The participants in SaFIR did not encounter difficulties in settling transactions in the
period under review, as also shown by the average settlement ratio87. It continued
to be high compared to the 95 percent limit set forth by standards, reaching
99.94 percent for transactions settled in lei and 99.73 percent for transactions settled
in euro. The contagion risks that may arise in the event of a significant participant
87

124

The settlement ratio is the percentage ratio of transactions settled on the intended settlement date to total transactions
recorded in the settlement system during a period of time.

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4. Financial system infrastructure stability of payment and securities settlement systems

encountering difficulties are mitigated thanks to the possibility to carry out real-time
settlements and due to the moderate, stable concentration level (the concentration
ratio of participants in terms of the value of settled transfer orders is 55.7 percent).
In March 2015, the National Bank of Romania changed the functioning rules of SaFIR,
with the adopted measures aiming mainly to reduce the principal risk, the liquidity
risk and the operational risk, by observing EU recommendations. The changes focused
on: (i) ensuring compliance with the delivery-versus-payment principle for those
transactions settled in lei for which funds are not transferred via ReGIS, but in the
accounting records of a settlement bank; (ii) setting forth the obligation for settlement
banks and participants to credit beneficiary accounts as soon as possible; (iii) providing
explanations by the SaFIR administrator on the decision to withdraw the quality of
participant in the system; (iv) defining the quality of a critical participant in the system,
and (v) setting forth stricter requirements for these participants than for the other
participants.

4.4. Cybersecurity
In the context of operational risk management, cyber resilience has recently become a
priority, owing to the worldwide rise in the number, seriousness and complexity of
cyber-attacks, including against financial market infrastructures and the participants
therein. An increase is also visible in financial services dependence on technology, in
the interdependence and interconnections between the operators of financial market
infrastructures, as well as in the attackers diversity and capabilities for instance
state-based cyber-attacks or attackers backed by terrorist organisations.
Cyber resilience is defined as the capacity to foresee, withstand and/or tailor the
systems to attacks and quickly resume normal activity in the wake of a cyber-attack.
Such attacks may compromise the confidentiality of some information, render
systems unavailable or affect the integrity of the information in the systems.
Cyber-attackers goals are: illicit gains, inducing political and social unrest, espionage
and undermining financial stability. Cyber governance refers to IT systems, the
personnel, processes and communications. The international cybersecurity policy
pursues the prevention of attacks by reducing vulnerabilities and discouraging
attackers, finding attack attempts or successful attacks, and resuming activity in the
wake of an attack in compliance with the pre-set quality standards.
In view of the interdependencies across both the financial market infrastructures and
the participant institutions, cyber-attacks may have a systemic impact on the financial
sector and therefore may affect real economy. The basic standards for assessing and
containing such risks to financial market infrastructures are included in the Principles
for financial market infrastructures, prepared by the Bank for International Settlements
(BIS) in 2012, especially the requirements on operational risks and governance.
According to these standards, the security policy has as objectives to ensure
settlement finality and resume critical activities within two hours. In 2014, the BIS
compiled a study addressing cyber risks, titled Cyber resilience in financial market
infrastructures, which serves as guidance for oversight authorities and administrators

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Financial stability report 2015

of market infrastructures, until the completion of a new set of international standards

thoroughly addressing these risks.
The National Bank of Romania, in co-operation with the European Central Bank and
other oversight authorities in the EU, assesses the systemic risks associated with
potential cyber-attacks and engages in testing and improving the cyber resilience of
financial market infrastructures and the participants therein. This falls within the
central banks scope of business, which includes the permanent oversight, based on
relevant international standards, of the smooth functioning of national payment and
settlement systems, with a view to identifying and minimising the risks that could
harm the financial system and the economy overall.

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5. FINANCIAL STABILITY,
REGULATORY FRAMEWORK AND
MACROPRUDENTIAL POLICIES

Financial stability is a global public good characterised by non-rivalry and nonexcludability. This public good cannot be provided exclusively by the market, being
ensured by the central bank as well as by other public institutions. Moreover,
considering Romanias status as an open economy, financial stability cannot be
achieved at national level alone, as it requires a global approach to coordinating the
related policies.
The intermediate macroprudential policy objectives in the NBRs field of competence,
completely harmonised with the specific EU recommendations are: (i) to mitigate and
prevent excessive credit growth and leverage, (ii) to mitigate and prevent excessive
maturity mismatch and market illiquidity, (iii) to limit direct and indirect exposure
concentrations, (iv) to limit moral hazard and (v) to strengthen the resilience of
financial infrastructures.
In order to consolidate the system resilience to potentially adverse developments and
comply with the requirements of the EU regulatory framework, new macroprudential
instruments are set to be implemented in the period ahead.
In all the assessments made by the European Systemic Risk Board, Romania was found
to be fully compliant or largely compliant with the issued recommendations.

5.1. The role of financial stability in the current economic

and financial context
In order to understand the concept of financial stability, it is necessary to define the
concept of a stable financial system. A financial system, irrespective of its size or
complexity, is considered stable when it is able to facilitate economic processes and
correct the imbalances resulting from significant adverse shocks (Schinasi, 2004).
On the other hand, taking account of its functions, a financial system may be assessed
as stable when it is able to efficiently allocate economic resources both spatially and
especially intertemporally, manage financial risks, and be self-corrective when hit by
external shocks.
The European Central Bank (ECB) defines financial stability as a condition in which the
financial system intermediaries, markets and market infrastructures can withstand
shocks without major disruptions in financial intermediation and in the efficient
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Financial stability report 2015

allocation of savings to productive investment. The main characteristics of financial

stability refer to the identification and effective management of risks, as well as to the
strengthening of financial system resilience to systemic shocks on solid grounds and
without major economic disturbances. The role of safeguarding financial stability is to
help prevent disruptions in the smooth functioning of the financial system, the
exercise of its functions economy-wide focusing on the intermediation between
savers and investors, payment and settlement system functioning and the effective
risk management.
Diagram 1. Financial stability concept, importance, objective

Enhanced
financial sector
resilience

Efficient
allocation
of financial
resources in real
economy

Risk
assessment

Stable
financial
system

Source: NBR

Specifically, financial stability assesses risks and monitors the allocation of financial
resources in real economy, which helps enhance the financial sectors resilience
(Diagram 1)88. Due to its functions, financial stability may be regarded as a global
public good characterised by non-rivalry and non-excludability. This public good
cannot be provided exclusively by the market, being ensured by the central bank as
well as by other public institutions. Moreover, considering Romanias status as an
open economy, financial stability cannot be achieved at national level alone, as it
requires a global approach to coordinating the related policies89.

128

88

Voinea, L. (2015), Stabilitatea financiar, riscul sistemic i instrumentele macroprudeniale din perspectiva bncii centrale,
http://www.bnr.ro/DocumentInformation.aspx?idDocument=19532&directLink=1.

89

Dianu, D. (2015), A central banks dilemmas in highly uncertain times a Romanian view, NBR Occasional Paper No. 13,
http://www.bnr.ro/occasional-papers-3217.aspx.

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5. Financial stability, regulatory framework and macroprudential policies

Diagram 2. The importance of financial stability

Financial instability
Unsustainable
excessive lending

Significant risk-taking

Excessive increase in financial

and/or real estate asset prices

Financial crisis
Payment default by a large
number of borrowers

Marked contraction in corporate

and household loans

Strong decline in financial and/or

real estate asset prices

Negative effects on real economy

Decline in
investment

Lower household
wealth

Higher pressure on
government budget

Rise in
unemployment

Economic
downturn

Source: NBR

According to the literature on financial stability, the importance of this system

characteristic stems from the negative effects that unsustainable lending, significant
risk-taking or the excessive increase in asset prices can have on real economy. Such
imbalances may facilitate the emergence of financial crises, with major implications
for companies and households (Diagram 2).
Diagram 3. Macro and microprudential perspectives compared

Macroprudential

Microprudential

Limit financial system-wide

distress

Proximate objective

Limit distress
of individual institutions

Avoid output (GDP) costs of

financial instability

Ultimate objective

Consumer (investor/depositor)
protection

Dependent on collective
behaviour (endogenous)

Risk assessment

Important

In terms of system-wide
distress

Correlations and
common exposures
Calibration of prudential controls

Independent of individual
behaviour (exogenous)

Irrelevant

In terms of risks
of individual institutions

Source: Adaptation of Borio (2003)

Both European and international supervisory authorities attached higher importance

to the concept of financial stability, which helped define an operational framework for
macroprudential policy, concurrently with the creation of coordination bodies in this
field. The role of financial stability in the mix of already established economic policies
(monetary, fiscal or competition policies) was thus acknowledged. The ever higher
interconnectedness between national financial systems brings to the fore the
importance of coordination between macroprudential authorities in different

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countries, particularly in cases when national banking sectors are dominated by

foreign groups (as in Romania).The analysis of interactions between economic policies
is also relevant, particularly for common instruments and sectors, in which case,
however, objectives and approaches are different (Diagram 3).

5.1.1. The international context

Over the past decades, the economic and financial context underwent sweeping
changes that stemmed from globalisation and the interdependence relations
established at both institutional and national levels. The globalisation of the financial
system is beneficial in view of financing and diversification opportunities available
internationally. Heightened competition fosters the growth of financial service
efficiency and product quality, as well as the decline in costs. On the other hand,
globalisation contributes to a higher degree of financial system interconnectedness,
which may produce chain reactions when financial shocks occur. The fallout from the
high degree of interconnectivity was visible internationally during the 2007-2008
financial crisis. For the first time ever, concepts such as shadow banking or the
interconnectivity of institutions at national and international levels caught the
attention of international bodies.
The global economic recession generated by the financial crisis prompted central
banks worldwide to take exceptional measures aimed at boosting aggregate demand.
The gradual cut in policy rates, which currently stand at minimum levels, concurrently
with the implementation of non-standard monetary policy measures helped shape a
new macroeconomic environment featuring close-to-zero or even negative nominal
interest rates. In this context, monetary policy relies on transmission channels with
uncertain effectiveness and potentially significant consequences on real economy,
such as the heightened vulnerabilities and systemic risk sources within the financial
system. Hence, financial stability came to have a key role in the current
macroeconomic context, by way of macroprudential instruments available to
authorities for containing risks and strengthening financial sector resilience.
The main challenges brought about by the sweeping changes affecting the financial
sector and the economic environment in recent years refer to the weak profitability of
credit institutions and insurance companies, in the context of fragile economic growth
and slow restructuring of asset portfolios, as well as to public and private debt
sustainability. The short-term implications of low interest rates also mirror in the
assessment of asset prices and investors risk appetite. Some of these elements may
contribute favourably to economic growth in the near run; however, the negative
side-effects of investors search for yield may have far-reaching consequences on
financial institutions balance sheets.
In order to ensure the stability of the European financial system, the European
Systemic Risk Board (ESRB) was established in 2010 as a body responsible for the
macroprudential oversight of the EU financial system. The ESRB objective is to
contribute to systemic risk prevention or mitigation and the smooth functioning of
the internal market, thus ensuring a sustainable contribution of the financial sector to
economic growth. The ESRB issues recommendations and warnings in the field of
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5. Financial stability, regulatory framework and macroprudential policies

macroprudential oversight for all EU Member States. To date, the ESRB has issued
seven recommendations (presented in Section 5.4. Implementation by the NBR of
ESRB macroprudential recommendations). The first ESRB Recommendation
(ESRB/2011/3) refers to the macroprudential mandate of national authorities and the
designation of the macroprudential authority, whose implementation deadline was
February 2014 (initially 1 July 2013). According to this Recommendation, Member
States are required to designate in the national legislation an authority entrusted
with the conduct of macroprudential policy, generally either as a single institution or
as a board composed of the authorities whose actions have a material impact on
financial stability. Another ESRB Recommendation supplements the macroprudential
framework by establishing the intermediate objectives and instruments of
macroprudential policy (ESRB/2013/1).

5.1.2. The implementation framework for macroprudential policy

in Romania
5.1.2.1. Designating the macroprudential authority in Romania
In order to implement the ESRB Recommendations in Romania, a draft law on the
macroprudential oversight of the national financial system was prepared. The law
provides the establishment of the National Committee for Macroprudential Oversight
(NCMO) as an interinstitutional cooperation structure without legal personality, which
aims to ensure coordination in the field of macroprudential oversight of the national
financial system by setting the macroprudential policy framework and the appropriate
instruments for its implementation. The NCMO shall be set up taking after the ESRB
model.
Financial stability is a global public good that cannot be ensured by a single
institution, but rather through the joint efforts of several national institutions and the
coordination of macroeconomic policies. Hence, the NCMO gathers the authorities
playing a substantial role in ensuring financial stability in Romania, namely the
National Bank of Romania (NBR), the Financial Supervisory Authority (FSA) and the
Government. A representative of the Bank Deposit Guarantee Fund attends the
General Board meetings as observer. The NCMO organisation chart consists of the
General Board, the Technical Committee for systemic risk, the Technical Committee
for financial crisis management, and the NCMO Secretariat, ensured by the central
bank.
The Committees primary objective is to help safeguard financial stability, also by
strengthening the financial systems resilience and by containing the build-up of
systemic risks, thereby ensuring a sustainable contribution of the financial sector to
economic growth. In pursuing this objective, the functional independence of the
Committee is ensured, meaning that it cannot receive instructions from other public
or private entities. The main tasks of the NCMO are: (i) to identify, monitor and assess
systemic risks; (ii) to identify systemically important financial institutions and financial
system structures; (iii) to develop the macroprudential policy strategy; (iv) to issue
recommendations and warnings in order to prevent or mitigate systemic risks; (v) to
monitor the implementation of ESRB or NCMO recommendations as well as the

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measures adopted by national authorities following the recommendations and

warnings issued by the ESRB or NCMO.
The Committee may issue warnings and recommendations (soft law), based on an
act or explain mechanism, addressed to the NBR or the FSA, in their capacity as
national authorities responsible for the sectoral financial oversight. In addition, the
NCMO may issue recommendations to the Government for the latter to initiate
draft laws, in line with legal provisions, in order to safeguard financial stability.
Non-compliance with the recommendations of the Committee must be justified
accordingly. The Committee is also empowered to request the ESRB to issue a
recommendation in order for one or several Member States to recognise the
macroprudential instruments recommended by the Committee.
The Committee publishes the macroprudential policy decisions, except when they
could pose risks to financial stability, can make statements on systemic risk and is
ultimately accountable to the Parliament, in compliance with the provisions of the
draft law, being bound to submit an Annual Report.
The draft was reviewed by the ESRB Secretariat, and Romania was assessed as largely
compliant (Section 5.4. Implementation by the NBR of ESRB macroprudential
recommendations) with all recommendations and overall in the Follow-up Report on
the ESRB Recommendation on the macroprudential mandate of national authorities.
In addition to Recommendation ESRB/2011/3, Directive 2013/36/EU (CRD IV) required
that each Member State should designate a national macroprudential authority in
charge of using macroprudential instruments. Pursuant to CRD IV, this role may be
attributed either to a specially designated authority or to the competent authority
responsible for microprudential supervision.
5.1.2.2. Designating the macroprudential authority in other EU Member States
Pursuant to Recommendation ESRB/2011/3 on the macroprudential mandate,
Member States entrusted the role of designated macroprudential authority either to a
single authority the central bank (BE, CY, CZ, EE, GR, HU, IE, LV, LT, MT, PT, SK and UK)
or the supervisory authority (FI, SE) or to a board comprising the authorities whose
actions have a material impact on financial stability (AT, BG, HR, DK, FR, DE, IT, LU, NL,
PL, RO, SI and ES).
According to the ESRB assessment, the different approaches of Member States
to the implementation of recommendations concerning institutional design
(Recommendation B) and those concerning tasks, powers and instruments
(Recommendation C) were particularly influenced by the current institutional
supervisory framework and policy preferences.
Therefore, most EU Member States decided that the designated authority for CRD IV
should be the central bank (17), the supervisory authority (5) or the government (1).
In five EU Member States (Romania included), the designated authority for CRD IV was

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5. Financial stability, regulatory framework and macroprudential policies

the national macroprudential authority established as a Committee, pursuant to the

ESRB Recommendation (Table 5.1).
Table 5.1. Classification of Member States based on the institutional arrangements regarding the
implementation of Recommendation ESRB/2011/3 and the designated authority for CRD IV/CRR
90

instruments
CRD IV

Designated
authority

Committee

Central bank

FR, LU, PL,

SL, RO*

ES, NL, HR,

IT, BG

AT, DE

BE, CZ, CY, EE,

GR, HU, IE, LT,
MT, PT, SK, UK

LV

Central bank
Supervisory authority
No

Supervisory
Government
authority

Committee
Macroprudential
authority

DK

17

13

13

FI, SE
5

No

2
1

* according to the draft law on the macroprudential oversight of the national financial system

So far, the legislative process is still ongoing in four Member States (Italy, Poland,
Romania and Spain), while in all other EU countries the macroprudential authority is
already functional. 90
5.1.2.3. Why does the NBR play a leading role in the NCMO?
Pursuant to Recommendation ESRB/2011/3 (Recommendation B.3), Member States
are required to ensure that the central bank plays a leading role in macroprudential
policy and that macroprudential policy does not undermine its independence, in
accordance with Article 130 of the Treaty on the Functioning of the European Union.
At the same time, the Regulation on establishing a European Systemic Risk Board
(Regulation (EU) No 1092/2010) stipulates that the national central banks should have
a leading role in macroprudential oversight because of their expertise and their
existing responsibilities in the area of financial stability, particularly when they have
tasks in the field of macroprudential supervision.
At present, the National Bank of Romania is (i) monetary authority; (ii) supervisory
authority for credit institutions, non-bank financial institutions, payment institutions,
electronic money institutions; (iii) supervisory/oversight authority for payment and
settlement systems; (iv) resolution authority for credit institutions; (v) supervisory
authority for bank deposit guarantee schemes (once the legal framework is passed)
and (vi) has tasks in the field of macroprudential supervision, within its scope of
activity. All these functions are supportive of the NBRs role in safeguarding financial
stability and, implicitly, the central banks leading role in the NCMO activity.
At EU level, the central banks leading role in macroprudential supervision is also
proved by the fact that a large number of Member States decided to designate the
90

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ESRB Recommendation on the macroprudential mandate of national authorities (ESRB/2011/3): Follow-up Report Overall
assessment, June 2014.

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central bank as national macroprudential authority. Moreover, in many EU countries

that decided to designate a committee as macroprudential authority, the central bank
does not have tasks in the field of microprudential supervision.

5.1.3. Objectives, functions and tasks of macroprudential policy

in Romania
According to the ESRB principles, the ultimate objective of macroprudential policy is
to safeguard the financial system as a whole, also by strengthening the financial
system resilience and containing the build-up of systemic risks. In Romania, the
National Committee for Macroprudential Oversight (NCMO)91 will ensure the
coordination in the field of macroprudential supervision of the national financial
system, by designing the macroprudential policy and the appropriate instruments for
its enforcement. Until the NCMO becomes operational, the recommendations and
advisory opinions are adopted by the National Committee for Financial Stability
(NCFS), on the basis of a cooperation agreement between the National Bank of
Romania (NBR), the Financial Supervisory Authority (FSA) and the Ministry of Public
Finance (MPF). Developing the macroprudential policy strategy elements relative to
the intermediate objectives and macroprudential instruments relies on the
assessments made by competent authorities in the field of macroprudential
supervision, namely the National Bank of Romania and the Financial Supervisory
Authority.
The NBR is responsible for developing the macroprudential policy strategy within its
scope of activity. So far, the NBR has adopted several macroprudential measures on
loans to households and non-financial corporations (for further details, see the 2014
Financial Stability Report, Section 7.1. Macroprudential instruments implemented by
the NBR in relation to debtors a decade-long experience). In addition, the
preparations made for achieving compliance with the ESRB recommendations
(detailed in Section 5.4. Implementation by the NBR of ESRB macroprudential
recommendations) helped the NBR improve its capacity to oversee and manage
potentially systemic risks and vulnerabilities across the financial system in Romania.

5.2. The NBRs macroprudential objectives

and the instruments of macroprudential policy
for achieving the objectives
The intermediate macroprudential policy objectives in the NBRs field of competence,
fully harmonised with the specific EU recommendations, are to mitigate and prevent
excessive credit growth and leverage, mitigate and prevent excessive maturity
mismatch and market illiquidity, limit direct and indirect exposure concentrations,
limit moral hazard and strengthen the resilience of financial infrastructures.

91

134

In line with the draft law on the macroprudential oversight of the national financial system, subject to public debate as of
30 October 2014.

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5. Financial stability, regulatory framework and macroprudential policies

5.2.1. The objective of mitigating and preventing

excessive credit growth and leverage
This intermediate objective is important in the context of Romanias experience with
the fast dynamics of bank lending in 2005-2008. The objective aims to contain
unsustainable leverage from the perspective of both borrowers and creditors.
A first set of instruments implemented by the NBR in order to fulfil this objective refers
to the loan-to-value (LTV) and debt service-to-income (DSTI) ratios. These two
instruments have an indirect contribution to mitigating excessive credit growth by
reducing borrowers potential indebtedness. The DSTI ensures borrowers increased
resilience to possibly unfavourable financial developments (and contributes implicitly
to lowering the probability of default), while the LTV ensures the enhanced capacity of
creditors to withstand adverse developments by reducing the loss-given-default
(LGD). The NBR has an almost decade-long experience in implementing and
calibrating these instruments. In Romanias case, the empirical analysis92 showed a
relatively satisfactory contribution of the DSTI and LTV to limiting excessive credit
growth and improving the capacity of borrowers and creditors to withstand
potentially negative financial developments.
Other instruments that can contribute to achieving this macroprudential policy
objective are:
(i) sectoral capital requirements (including intra-financial system). This category also
comprises the requirement for maintaining the risk weight for commercial mortgagebacked loans at 100 percent, irrespective of their conditions;
(ii) countercyclical capital buffer (CCB). The instrument aims to build up additional capital
reserves during excessive credit growth periods and release them during periods of
contraction, being designed particularly to enhance the banking sectors resilience to
potential shocks. The NBR plans to activate this instrument by end-2015, in line with
the ESRB recommendations (for further details, see Section 5.3. Capital buffers with a
view to preserving financial stability);
(iii) macroprudential leverage ratio. This instrument complements the risk-weighted
regulatory framework and is a simple and transparent backstop protecting against
model risk and the mispricing of risks. The regulated level of this indicator will be
established as of 2018, in compliance with EU regulations;
(iv) requirements for appropriate qualitative and quantitative levels of training for bank
employees directly involved in lending.

5.2.2. The objective of mitigating and preventing

excessive maturity mismatch and market illiquidity
The financial crisis highlighted the significant lack of appropriate instruments at
international level which can be used for effective liquidity risk management. One of
92

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Neagu, F., Tatarici, L., Mihai, I. Implementing loan-to-value and debt to income ratios: learning from country experiences,
International Monetary Fund, Monetary and Capital Markets Department project, 2015.

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Financial stability report 2015

the primary functions of banks in an economy is to transform maturities, namely to

raise deposits or other short-term resources (on the interbank market in particular)
and use them to provide long-term funding. An excessive maturity mismatch
between assets and liabilities or holding a small amount of liquid assets increases the
risk of liquidity issues, which can translate into low market liquidity levels and higher
financing risk.
In order to achieve this objective, the NBR can resort to the following instruments:
(i) macroprudential adjustment to liquidity ratio (i.e. liquidity coverage ratio) credit
institutions must have a large enough stock of liquid assets (required liquidity LCR)
to allow them to face the potential imbalances between liquidity inflows and
outflows, in cases of severe crises, over a 30-day period. Transforming the LCR into a
macroprudential instrument could become a time-varying add-on over the prudential
minimum requirement, which should be activated in periods of abundant market
liquidity and deactivated when imbalances are manifest;
(ii) macroprudential restrictions on funding sources (i.e. net stable funding ratio) the
stable funding requirement (NSFR) is a medium- and long-term structural indicator
monitoring the potential maturity mismatches and has the role of encouraging credit
institutions to use stable financing resources. Until the minimum required European
standards are introduced, the provisions of Regulation No 25/2011 on credit
institution liquidity are further applicable. Pursuant to this Regulation, banks must
comply with the national minimum liquidity requirements, with different maturity
ranges of 12 months at most. The macroprudential change in haircuts will require
appropriate calibration based on CRR/CRD IV provisions.
Additionally, the NBR may also use the following instruments:
(i) macroprudential unweighted limit to less stable funding (i.e. loan-to-deposit ratio
LTD) shows the manner in which banks rely on less stable financing sources,
providing information on the potential vulnerabilities in the banking sector;
(ii) margin and haircut requirements included in the indicative list in Recommendation
ESRB/2013/1 refer to the level of collateralisation of secured financing and
derivatives transactions. These instruments can be used as macroprudential
instruments by applying some minimum or time-varying caps for transactions cleared
through central counterparties, as well as for bilateral transactions. The NBR will
further monitor financial market developments, also in order to determine the build-up
of systemic risks in certain sectors or in relation to certain financial instruments.

5.2.3. The objective of limiting direct and indirect

exposure concentrations
The concentration of exposures by loan (e.g. real estate collateralised loans or housing
loans, foreign currency-denominated loans), borrower (e.g. sovereign debt exposures)
or sector (e.g. the financial sector) may have a negative impact on financial stability
and real economy.

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5. Financial stability, regulatory framework and macroprudential policies

An instrument underlying this objective is that referring to clearing through central

counterparties (CCPs). It is part of the requirements set forth by Regulation EU
No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR),
which is directly and entirely applicable in Romania. The NBR initiated the adjustment
of the domestic legal framework in order to comply with the provisions of this
regulation. Specifically, the NBR will supervise credit institutions compliance with
EMIR provisions, while the FSA will supervise the fulfilment of requirements applicable
to the other financial and non-financial counterparties.

5.2.4. The objective of limiting moral hazard

The objective refers to strengthening the resilience of systemically important
institutions and has the potential to mitigate the negative effects of an implicit
government guarantee in cases when these entities are facing financial strains, on the
one hand, and the moral hazard arising from the perceived importance of the
institution for the system, on the other. Moreover, the objective also implies the
adoption of some regulations on the orderly recovery or resolution of these
institutions, given their destabilising potential for the financial system.
This objective can be achieved by implementing additional capital requirements for
systemically important financial institutions. The NBR intends to implement the
additional capital requirements for systemically important financial institutions,
referred to in national regulations as the buffer relating to other systemically
important institutions (O-SII buffer).

5.2.5. The objective of strengthening the resilience

of financial infrastructures
The objective aims to address externalities within the financial system infrastructure
and correct the moral hazard effects that could arise from the institutional set-up
(legal system, credit rating agencies, deposit-guarantee schemes, market practices,
etc.) and refers to the structural dimension of systemic risk, namely that concerning
the distribution of risks across the financial system.
In order to improve the access to credit risk information, the NBR has recently
extended the information available in the Central Credit Register (for further details,
see Section 5.5. Developments of the Central Credit Register in order to obtain the
information necessary for monitoring macroprudential objectives). In addition, the
NBR is regularly conducting surveys on credit market conditions among credit
institutions and non-financial corporations.
Other instruments the NBR can use to fulfil this objective are:
(i) margin and haircut requirements for clearing through central counterparties
in order to mitigate the contagion risk in case of a participants default, central
counterparties (CCPs) should apply strict participation conditions, collect appropriate
initial margins and hold a guarantee fund and other liquid financial resources in order
to cover potential losses. CCPs may include, subject to setting appropriate haircuts,
NATIONAL BANK OF ROMANIA

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Financial stability report 2015

government securities, covered bonds, guarantees callable on first demand granted

by a member of the ESCB, and commercial bank guarantees;
(ii) structural systemic risk buffer aims primarily to strengthen the resilience of the
banking system and its subsets to possible shocks stemming from changes in
legislation or accounting standards, the contagion effects from the real economy,
from excessive concentration or a large financial system relative to GDP amid financial
innovation that increases complexity.

5.3. Capital buffers with a view to preserving

financial stability
The CRD IV/CRR regulatory package makes available a set of macroprudential
instruments that national competent authorities can resort to with a view to
preventing the emergence of cyclical systemic risks or mitigating structural systemic
risks, as follows: a) the capital conservation buffer; b) the countercyclical capital buffer;
c) the buffer relating to other systemically important institutions (O-SII buffer); d) the
systemic risk buffer. Regulating capital buffers through a European Directive and a
directly applicable Regulation aimed to (i) ensure a level playing field across EU
Member States, as an essential pre-requisite for the functioning of the internal
market, (ii) prevent regulatory arbitrage, (iii) ensure maximum harmonisation, and
(iv) enhance transparency and predictability in the macroprudential field.

5.3.1. The capital conservation buffer

The capital conservation buffer is aimed at increasing credit institutions resilience,
namely their capacity to absorb potential losses arising from the banking activity.
The buffer is comprised of Common Equity Tier 1 capital equal to 2.5 percent of the
total risk exposure amount, and its implementation can be tailored to country-specific
situations, as follows: a) accelerated build-up, in line with a schedule set by the
national competent authorities; b) phased in between 1 January 2016 and 1 January
2019 in equal increments of 0.625 percent per annum. To date, the NBR has not opted
for the accelerated build-up of the capital conservation buffer.

5.3.2. The countercyclical capital buffer

The countercyclical capital buffer (CCB) is one of the macroprudential instruments
introduced by the CRD IV/CRR legislative package93 and recommended by the
European Systemic Risk Board (ESRB) for reducing and preventing excessive credit
growth and leverage. The primary objective of the CCB tool is to improve banking
sector resilience to possible shocks. The decision to activate the buffer is based on the
evidence provided by the deviation from its long-term trend of the credit-to-GDP ratio
(an indicator recommended by the ESRB94), which can be complemented with the
analysis of other indicators capturing the risk of unsound credit and leverage

138

93

The countercyclical capital buffer is defined under articles 135-140 of CRD IV.

94

ESRB Recommendation on guidance for setting countercyclical buffer rates (ESRB/2014/1).

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5. Financial stability, regulatory framework and macroprudential policies

developments. The CCB should be released either as a result of the risk materialising
or due to its significant mitigation. The effectiveness of the indicator is also
strengthened by the principle of jurisdictional reciprocity of the measures to
implement the CCB across EU Member States. The European countries that have
implemented this instrument at a CCB rate of over 0 percent are Sweden (1.5 percent)
and Norway (1.5 percent).
Chart 5.1. Analysis of the countercyclical capital buffer
in Romania (2000 Q1 2015 Q2)
3.5

percent

percentage points

15
10

2.5

2.0

1.5

-5

1.0

-10

0.5

-15

0.0

-20
2000 Q1
2000 Q4
2001 Q3
2002 Q2
2003 Q1
2003 Q4
2004 Q3
2005 Q2
2006 Q1
2006 Q4
2007 Q3
2008 Q2
2009 Q1
2009 Q4
2010 Q3
2011 Q2
2012 Q1
2012 Q4
2013 Q3
2014 Q2
2015 Q1
2015 Q2

3.0

countercyclical capital buffer rate, =1,600

countercyclical capital buffer rate, =400,000
deviation from the trend of total credit to GDP, =400,000 (rhs)

deviation from the trend of total credit to GDP, =1,600 (rhs)

Source: NBR, NIS, NBR calculations

The findings for Romania95 of the analysis that would

include the ESRB-recommended indicator alone
point to upside risks starting June 2006. This would
have meant applying the CCB as of June 2007 at the
latest, along with the need to keep it in place for
approximately three years since implementation96
(Chart 5.1). The breakdown shows that the leverage
of both households and non-financial corporations
would have hinted at excessive credit growth. Given
the short data history (March 2000 March 2015) and
the structural changes seen at the end of the 1990s,
an assessment relying strictly on the ESRBrecommended indicator is debatable in the case of
Romania. The NBR has developed and permanently
enhanced a set of indicators monitoring risks to
financial stability posed by lending to companies and
households.

Chart 5.2. Additional indicators monitored by the NBR

75%
50%
25%
0%
-25%
-50%

minimum - maximum interval

value in June 2015

Deviation of the bank assets Deviation of the LTD ratio Deviation from the trend** Deviation from the trend** Deviation from the trend**
to capital ratio from the from the 2005 Q3 2006 Q2 of the non-government of the household debt-toof the non-financial
2005 Q3 2006 Q2*
average
foreign currency
GDP ratio
corporations' debt-to-GDP
average
debt-to-GDP ratio
ratio
Banking sector

DSTI*** deviation
from the trend**

Indebtedness
Monitored indicators (%)

Note: Findings for the period March 2005 June 2015.

* The average for the period between September 2005 and June 2006 (considered as signal interval) has been used as the reference value for the bank
assets to capital ratio and the LTD ratio. Developments during the said period complement the information provided by the standard indicator for
calculating the ESRB-recommended indicator and the decisions related to the implementation of the CCB.
** The deviation from the trend was computed using a one-sided recursive HP filter with a lambda smoothing parameter of 400,000.
*** The DSTI is the ratio of debt service to net income and is calculated for household loans.

Source: NBR, NIS, MPF

95

This is an update of the findings in the 2013 Financial Stability Report, Section 7.1.1 Capital requirements laid down in
CRD IV/CRR, with the following amendments: (i) the definition of indebtedness was expanded as follows: credit is defined
from the perspective of borrowers, non-financial corporations and households, and encompasses bank credit (including
sold assets), credit from domestic NBFIs and credit from non-resident financial institutions; (ii) a one-sided recursive
Hodrick-Prescott filter was used, and (iii) the sensitivity of results to the smoothing parameter (lambda) was tested.

96

Using a debt cycle smoothing parameter of 1,600 (corresponding to a shorter cycle) would have pointed to a shorter period
(around two years) of keeping the buffer in place.

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Financial stability report 2015

At this point in time, the still relatively subdued developments in lending (for further
details, see Section 1.3. Non-financial private sector indebtedness) do not highlight
any urgent pressure from private sector leverage that might warrant the activation of
the buffer. The breakdown by borrower does not reveal any pressure from household
or corporate indebtedness, with the debt-to-GDP ratio running below the long-term
level (Chart 5.2). Other indicators under scrutiny stand at the lowest readings for the
analysed period (except for the DSTI ratio). However, the significant pick-up in lending
visible on certain segments calls for increased attention and possibly early
macroprudential measures to avoid excessive credit growth.
The CCB tool is defined for risk management based on the monitoring of credit
market developments at aggregate level. Risk assessment is also warranted on certain
segments of lending so as to identify any disproportionate build-up of risks
(e.g. a concentration of foreign currency lending). In this case, the instrument needs to
be complemented with other macroprudential tools, such as the LTV or the DSTI
ratios, or sectoral limits, as set forth in ESRB recommendations as well.

5.3.3. The capital buffer relating to other systemically

important institutions
The NBR has implemented at national level the methodology for identifying
systemically important credit institutions in line with the EBA Guidelines. The criteria
for assessing domestic systemically important institutions are as follows:
(a) in the first step, a score is calculated based on the mandatory indicators laid down in
the EBA Guidelines on the assessment of O-SIIs, at the highest consolidation level,
for the entities under the national competent authoritys jurisdiction, including
subsidiaries in other Member States and third countries. This mandatory stage helps
achieve an appropriate degree of convergence in terms of identifying O-SIIs across
Member States and making the assessment of O-SIIs comparable, transparent and
comprehensible;
(b) in the second step, the national competent authority uses additional indicators
selected from the list of optional indicators in the EBA Guidelines. The additional
indicators should reflect the specificities of the national banking sector, with a view to
identifying all systemic institutions, including smaller ones, which have not been
automatically designated as systemic during the first stage. The need for this step
arises from the differences across Member States in terms of the size and features
of national financial systems.
The two steps strike a balance between convergence, comparability and flexibility in
identifying systemic institutions. The criteria and mandatory indicators used in the
first step of assessing the systemic importance of credit institutions are listed in
Table 5.2.

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5. Financial stability, regulatory framework and macroprudential policies

Table 5.2. Criteria and mandatory indicators laid down in the EBA Guidelines on the assessment of O-SIIs
Criterion
Size

Mandatory indicators
Total assets

Value of domestic payment transactions

Importance (including
substitutability/financial system Private sector deposits from depositors in the EU
infrastructure)
Private sector loans to recipients in the EU
Value of OTC derivatives (notional)
Complexity/cross-border
Cross-jurisdictional liabilities
activity
Cross-jurisdictional claims
Interbank liabilities
Interconnectedness
Interbank assets
Debt securities outstanding

Weight (%)
25.00
8.33
8.33
8.33
8.33
8.33
8.33
8.33
8.33
8.33

All four criteria have equal weights of 25 percent each in determining the final score of
each credit institution, while the indicators are weighted equally within each criterion.
The framework of mandatory indicators generates a ranking of institutions in terms of
degree of systemic importance, with institutions above the 350 basis points threshold
being automatically designated as O-SIIs.
As part of the second assessment step, the NBR procedure provides for the use of a set
of additional indicators, in the form of an analysis of quantitative and qualitative
factors specific to the Romanian banking system (Table 5.3). The additional criteria
selected by the NBR capture in detail the nexus between banks and the real economy,
as well as the links among financial entities, thereby contributing to a more in-depth
analysis of credit institutions systemic importance.
According to the EBA provisions, national authorities should publish the scores of
relevant entities designated as O-SIIs by 1 December of each year, as well as the
additional capital requirements applicable thereto starting 1 January 2016. The buffer
relating to other systemically important institutions should consist of Common Equity
Tier 1 capital, calibrated at up to 2 percent of the total risk exposure amount. The NBR
shall conduct periodic assessments of credit institutions in terms of systemic
importance and shall communicate the findings both by notifying the relevant
entities, the Commission, the ESRB and the EBA, and by disclosing the updated list of
systemically important banks duly identified.

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Table 5.3. Additional indicators included in the NBR Procedure for assessing systemically important
institutions, based on the room for flexibility left by the EBA Guidelines
Criterion

Indicators

a) The credit institutions contribution to financing the

real economy, calculated based on the volume of
corporate loans and the degree of substitution of
lending to non-financial corporations

The share of the credit institutions corporate loans

in total credit extended to non-financial
corporations by the banking sector, overall and by
major group of economic sectors

b) The credit institutions contribution to financial

intermediation, calculated via the volume of corporate
and household deposits

The share of corporate and household deposits

with the respective credit institution in total bank
deposits of non-financial corporations and
households

c) The credit institutions activity on the interbank

market and assessing the contagion effect by
incorporating the feedback loops generated by the
real sector

1) The number of cases in which the capital

adequacy ratio falls below the required level
following a banks default (as a result of direct
exposures via the interbank market)
2) Market share (in terms of assets) of credit
institutions whose capital adequacy ratio would fall
below 8 percent (as a result of direct exposures via
the interbank market and the feedback loops
generated by the real sector)
3) Credit institutions interconnectedness
1) The volume and share of each banks
transactions within the ReGIS payment system in
total transactions

d) Determining systemically important institutions in

the ReGIS payment system

2) Connectivity index (calculated based on the

number of connections and the volume of
transactions for each bank)
3) The total volume of unsettled payment orders
and the number of banks in default by contagion
following the running of the stress test scenario

e) The credit institutions activity on the government

securities market

1) The volume and share of each banks

transactions on the (primary and secondary)
government securities market
2) The volume and share of the stock of
government securities held by credit institutions
1) The importance of the bank in the transmission
of a shock within the conglomerate by country of
origin of the capital

f) Vulnerability to contagion in the parent-subsidiary

relationship via the common lender channel
(country of origin of the capital)

2) The vulnerability of the other banks in the

conglomerate to the shock sent by the bank in
distress
3) The importance of the common lender (country
of origin of the capital) that the bank in distress is
also part of

5.3.4. The systemic risk buffer

The systemic risk buffer aims to prevent and mitigate long-term structural systemic
risk or macroprudential risk with the potential of serious negative consequences to the
financial system and the real economy. The buffer must be of at least 1 percent
Common Equity Tier 1 capital based on the relevant exposures. It may apply to
exposures located in Romania, in third countries, as well as to exposures located in other
Member States. The buffer may be set in gradual or accelerated steps of adjustment of

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0.5 percentage points, to range between 0 percent and 5 percent of total exposures
(or above 5 percent in justified cases). The systemic risk buffer requirement shall be
posted on the NBR website and must be reviewed at least every second year.
To date, the systemic risk buffer has not been activated, in view of the NBRs
regulatory measure regarding the further use of national prudential filters97
introduced in 2012 (also as of 2012, banks in Romania have been applying the IFRS
standards as an accounting basis) during the implementation of the CRD IV/CRR
legislative package (2014-2018).

5.4. Implementation by the NBR of ESRB macroprudential

recommendations
The European Systemic Risk Board (ESRB) issued seven recommendations98 aimed at
putting in place a macroprudential policy framework and limiting certain sectoral
vulnerabilities identified within the European financial system. In all ESRB evaluations,
Romania is fully compliant or largely compliant with the issued recommendations.
1) ESRB Recommendation on the macroprudential mandate
of national authorities (ESRB/2011/3)
The recommendation shows that a well-defined framework is a necessary condition
for effective macroprudential policy, given its contribution to safeguarding the
stability of the financial system as a whole, including by strengthening the resilience
of the financial system and decreasing the build-up of systemic risks (Recommendation A).
Member States should designate in the national legislation an authority, institution or
board entrusted with the conduct of macroprudential policy, establish the mechanism
for cooperation among the authorities in case of setting up a board, as well as ensure
that the central bank plays a leading role in the macroprudential policy and that
macroprudential policy does not undermine its independence. The macroprudential
authority should cooperate and exchange information also cross-border, in particular
with the ESRB (Recommendation B). Moreover, the macroprudential authority has the
role of identifying, monitoring and assessing risks to financial stability and of
implementing policies to mitigate those risks. It has the power to require and obtain
all national data and information relevant for the exercise of its tasks (Recommendation C).
With a view to promoting transparency, macroprudential policy decisions and their
motivations should be made public in a timely manner. Finally, the recommendation
includes provisions on accountability to the national parliament (Recommendation D)
and operational independence (Recommendation E).
Romania is currently in the process of designating the macroprudential authority, in
line with the ESRB Recommendation, as there is a draft law on the macroprudential
oversight of the national financial system. It provides for the establishment of the
National Committee for Macroprudential Oversight as an inter-institutional
97

The most important national prudential filter relates to the positive difference between the provisions calculated in line
with prudential regulations and the impairment adjustments recognised based on the IFRS accounting standards.

98

One of them concerns solely the European Commission (ESRB Recommendation on money market funds), so it will not be
analysed in this chapter.

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cooperation forum and non-legal entity, which aims to ensure coordination in the
field of macroprudential supervision of the domestic financial system by defining the
macroprudential policy and determining the adequate tools for its implementation.
Consequently, Romania was found to be largely compliant with Recommendations
A-E, as well as in the overall assessment of the Follow-up Report on the ESRB
Recommendation on the macroprudential mandate of national authorities.
Table 5.4. Level of implementation of the ESRB Recommendation on the macroprudential mandate
of national authorities
Macroprudential mandate of national authorities
Recommendations

Overall*

Romania

LC

LC

LC

LC

LC

LC

Austria

FC

LC

LC

FC

LC

LC

Belgium

LC

PC

LC

LC

FC

LC

Bulgaria

LC

LC

LC

PC

PC

LC

Croatia

FC

FC

FC

FC

FC

FC

Cyprus

LC

PC

LC

LC

FC

LC

Czech Republic

LC

FC

FC

FC

FC

FC

Denmark

LC

LC

LC

LC

FC

LC

Estonia

LC

PC

LC

LC

FC

LC

Finland

MN

MN

MN

LC

FC

PC

France

LC

LC

LC

FC

LC

LC

Germany

LC

FC

FC

FC

LC

FC

Greece

FC

FC

LC

PC

FC

LC

Hungary

FC

FC

FC

LC

FC

FC

Ireland

LC

LC

LC

PC

LC

LC

Italy

PC

PC

PC

PC

PC

PC

Latvia

LC

LC

LC

LC

FC

LC

Lithuania

LC

LC

LC

LC

FC

LC

Luxembourg

LC

PC

LC

LC

PC

LC

Malta

FC

FC

FC

PC

FC

LC

Netherlands

PC

PC

LC

LC

LC

LC

Norway

LC

PC

LC

MN

PC

PC

Poland

MN

PC

PC

MN

PC

PC

Portugal

FC

FC

FC

LC

FC

LC

Slovakia

LC

LC

LC

FC

FC

FC

Slovenia

FC

FC

FC

FC

FC

FC

Spain

PC

MN

PC

PC

FC

PC

Sweden

LC

LC

LC

FC

FC

LC

United Kingdom

FC

LC

FC

FC

FC

FC

* Grades are assigned for the overall compliance with the ESRB Recommendation, as well as for complying
with each of Recommendations A-E: FC = fully compliant, LC = largely compliant, PC = partially compliant,
SE = inaction sufficiently explained, MN = materially non-compliant.
Source: ESRB

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5. Financial stability, regulatory framework and macroprudential policies

2) ESRB Recommendation on intermediate objectives and instruments

of macroprudential policy (ESRB/2013/1)
The ultimate objective of macroprudential policy, i.e. safeguarding financial stability,
can be attained by identifying intermediate objectives. The ESRB Recommendation
focuses on the definition of objectives, namely: to mitigate and prevent excessive
credit growth and leverage; to mitigate and prevent excessive maturity mismatch and
market illiquidity; to limit direct and indirect exposure concentrations; to limit moral
hazard and strengthen the resilience of financial infrastructures (Recommendation A).
The selection of macroprudential instruments and the monitoring of their adequacy,
with a view to attaining the ultimate objective, should be carried out on an ongoing
basis and, where the available instruments are found to be insufficient, additional
instruments should be determined (Recommendation B). Along with the
aforementioned principles, a policy strategy should be defined, establishing a sound
framework to pursue the ultimate and intermediate objectives of macroprudential
policy (Recommendation C). Macroprudential authorities are recommended to
periodically assess the intermediate objectives and macroprudential instruments and
report to the ESRB any change in the set of intermediate objectives and
macroprudential instruments that are under their direct control (Recommendation D).
Finally, the Commission is recommended, in the framework of forthcoming revisions
of Union legislation, to take account of the need to establish a coherent set of
macroprudential instruments affecting the financial system, including financial
intermediaries, markets, products and market infrastructures (Recommendation E).
The NBR policy regarding the intermediate objectives and the instruments of
macroprudential policy is presented in Section 5.2. The NBRs macroprudential
objectives and the instruments of macroprudential policy for achieving the objectives.
3) ESRB Recommendation on guidance for setting countercyclical buffer rates
(ESRB/2014/1)
The Recommendation is based on the fact that the pro-cyclical amplification of
financial shocks has been one of the most destabilising elements of the recent
financial crisis. The global crisis has highlighted the importance of building up
additional capital in the banking sector which, in periods of system-wide stress,
will help absorb unexpected losses, while continuing to provide credit to the real
economy. Consequently, the ESRB has formulated several principles for the
measurement and calculation of appropriate countercyclical capital buffer rates. For a
description of these principles and the manner in which this instrument would have
functioned in Romania in the previous period, see Section 5.3. Capital buffers with a
view to preserving financial stability.
4) ESRB Recommendation on lending in foreign currencies (ESRB/2011/1)
Addressing asymmetric information between borrowers and lenders improves
borrowers risk awareness and hence fosters responsible lending. Therefore, national
supervisory authorities are recommended to require financial institutions to provide
borrowers with adequate information regarding the risks involved in foreign currency
lending and to encourage financial institutions to offer customers domestic currency
loans as well as financial instruments to hedge against foreign exchange risk

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(Recommendation A). Furthermore, national supervisory authorities are

recommended to monitor levels of foreign currency lending and of private
non-financial sector currency mismatches in particular and adopt the necessary
measures to limit foreign currency lending. In the context of determining borrowers
creditworthiness, financial institutions should consider setting more stringent
underwriting standards, such as debt service-to-income and loan-to-value ratios
(Recommendation B).
Table 5.5. Level of implementation of the ESRB Recommendation on lending in foreign currencies

Lending in foreign currencies

Recommendations
C
D
E.1
E.2
F

Romania

LC

FC

FC

FC

FC

FC

FC

FC

Austria

FC

FC

FC

FC

FC

FC

FC

FC

Overall

Belgium

LC

LC

SE

SE

LC

FC

IE

LC

Bulgaria

PC

PC

SE

PC

LC

FC

SE

PC

Croatia

FC

LC

FC

FC

FC

FC

SE

FC

Cyprus

SE

LC

FC

SE

LC

FC

SE

LC

Czech Republic

SE

SE

FC

SE

SE

FC

SE

FC

Denmark

SE

SE

SE

FC

FC

FC

IE

LC

Estonia

FC

SE

FC

LC

FC

SE

SE

FC

Finland

SE

SE

SE

SE

SE

SE

SE

LC

France

IE

SE

FC

SE

SE

FC

SE

LC

Germany

LC

SE

FC

FC

SE

FC

SE

FC

Greece

FC

SE

SE

SE

SE

SE

FC

FC

Hungary

FC

FC

FC

FC

PC

FC

SE

LC

Ireland

SE

LC

FC

SE

SE

LC

SE

LC

Italy

LC

SE

SE

SE

SE

SE

FC

LC

Latvia

SE

LC

FC

LC

LC

FC

SE

LC

Lithuania

LC

LC

FC

FC

PC

LC

SE

LC

Luxembourg

FC

FC

FC

FC

FC

FC

SE

FC

Malta

FC

FC

FC

FC

FC

FC

FC

FC

Netherlands

SE

SE

SE

SE

SE

SE

SE

LC

Poland

FC

FC

FC

FC

FC

FC

SE

FC

Portugal

FC

FC

SE

SE

SE

FC

SE

FC

Slovakia

FC

SE

SE

SE

SE

SE

SE

FC

Slovenia

LC

LC

SE

SE

SE

LC

SE

LC

Spain

LC

SE

SE

FC

FC

FC

SE

FC

Sweden

SE

LC

SE

FC

SE

SE

SE

LC

United Kingdom

SE

SE

SE

LC

SE

LC

LC

LC

Source: ESRB

Supervisory authorities are recommended to monitor whether foreign currency

lending is inducing excessive credit growth as a whole and, if so, to adopt new or
more stringent rules (Recommendation C). The ESRB recommends national
supervisory authorities to address guidelines to financial institutions so that they

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5. Financial stability, regulatory framework and macroprudential policies

better incorporate foreign currency lending risks in their internal risk management
systems (Recommendation D). Supervisory authorities should require financial
institutions to hold adequate capital to cover risks associated with foreign currency
lending, particularly the risks stemming from the non-linear relation between credit
and market risks (Recommendation E). National supervisory authorities are
recommended to monitor funding and liquidity risks taken by financial institutions
in connection with foreign currency lending, together with their overall liquidity
positions (Recommendation F). Finally, national supervisory authorities of the home
Member States of relevant financial institutions should impose measures addressing
foreign currency lending at least as stringent as the measures in force in the host
Member State (Recommendation G).
The Follow-up Report on the ESRB Recommendation on lending in foreign currencies
shows that Romania fares well in this respect, with an overall assessment of fully
compliant. Looking at Recommendations A-G, the only exception is A, with a largely
compliant grade, because it has been considered that the interest rate shock
stipulated in NBR Regulation No. 17/2012 on certain lending conditions is somehow
underrated in relation to historical fluctuations. The NBR is contemplating a
reassessment of shocks that are pooled for determining the indebtedness ceiling
in the case of borrowers applying for consumer loans, as laid down in the said
Regulation, with a view to recalibrating macroprudential instruments.
5) ESRB Recommendation on funding of credit institutions (ESRB/2012/2)
The scope of the Recommendation includes the changes in credit institutions funding
structures and asset portfolios, affected by the strong links between credit institutions
and sovereigns as well as by the uncertainties over asset quality and the sustainability
of current business models. In order to restore confidence in the European banking
sector, the ESRB recommends that national supervisory authorities intensify their
assessments of the funding and liquidity risks incurred by credit institutions and put in
place risk management policies to define their approach to asset encumbrance. With
a view to complying with the Recommendation on funding of credit institutions, the
Romanian authorities have drafted the bill on mortgage bond issues, so as to ensure
enhanced investor protection and mitigate the risks generated by the issuance of
mortgage bonds. In addition, several provisions of the Recommendation have been
included in NBR Regulation No. 5/2014 supplementing NBR Regulation No. 5/2013 on
prudential requirements for credit institutions.
6) ESRB Recommendation on US dollar denominated funding
of credit institutions (ESRB/2011/2)
There is a material maturity mismatch in the US dollar assets and liabilities of EU credit
institutions, with short-term wholesale funding being used to finance longer-term
activities and assets. Therefore, national supervisory authorities are recommended to
closely monitor US dollar funding and liquidity risks. Given the low share of
USD-denominated balance sheet items in the domestic banking sector (below
3 percent of liabilities and below 2 percent of assets respectively), the US dollar is not
a material currency for credit institutions in Romania. Following the ESRB

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Recommendation, no changes have been made in terms of monitoring US dollar

funding and liquidity, as the reporting and supervisory framework in place at the time
of the assessment and the subsequent implementation of the CRD IV/CRR package
have been considered adequate for this purpose. Therefore, Romania was assigned
the sufficiently explained grade (the equivalent of largely compliant), given that
the low volume of US dollar assets and liabilities is not a source of systemic risk for the
domestic banking sector, and hence no additional action is needed to manage and
mitigate this risk.

5.5. Developments of the Central Credit Register

in order to obtain the information necessary
for monitoring macroprudential objectives
The analysis of financial stability risks and the adoption of macroprudential policy
decisions imply the use of various data concerning both creditors and borrowers.
Many such data were not available to the decision-making bodies. As a result, at
international level, attention was particularly attached in recent years to establishing
and developing credit registers that focus on collecting information concerning
mainly borrowers debt service payment capacity. The National Bank of Romania has
an over decade-long experience in using a central credit register, yet the international
macroprudential developments required additional improvements for this
instrument.
In order to achieve the above-mentioned objective, two significant directions can be
identified in the CCR activity: (i) enhancing the scope of the reporting institutions that
report credit risk information; apart from credit institutions, the scope now includes
non-bank financial institutions listed in the Special Register, payment institutions with
significant lending activity and electronic money institutions with significant lending
activity; (ii) collecting and managing new data necessary for financial stability reviews,
for the conduct of stress test scenarios, for macroprudential oversight at the NBR level
and for the implementation of advanced techniques to determine credit risk for
reporting institutions.
The information already included in the CCR database refers to: (i) the identification
data of a borrower, natural entity or non-bank legal entity, (ii) loans and/or
commitments whose cumulative level exceeds the reporting threshold (lei 20,000) for
each borrower, (iii) the groups of natural and/or legal entities representing a
connected group of clients/a single borrower and (iv) card frauds committed by
holders.
The identification data of a borrower refer to the name, identification code, special
situation, borrowers risk status, economic activity, ownership, institutional sector,
country, county, legal entity branch, mergers and splits.
Loan and commitment data refer to the granted amounts, drawn and undrawn
amounts, overdue amounts, currency, granting date, maturity date, type of loan, credit

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5. Financial stability, regulatory framework and macroprudential policies

card/debit card with an overdraft facility/leasing, granting period, loan/commitment

taken on own account/together with other borrowers, the status of loans in the
portfolio of the reporting entity (loans that were previously sold), the amounts of loans
previously sold, the amounts of unrecovered loans recorded as losses, the type and total
value of collateral, the rating grade, the probability of default, the debt service, the loan
identifier.
Due to the need of having an EU-wide definition of non-performing loans, the
European Banking Authority redefined the non-performing exposure and the
unlikeliness to pay in Regulation (EU) No 575/2013 (Capital Requirements Regulation),
so that these two indicators can be determined and subsequently reported uniformly
to the ECB by central banks in EU Member States. Moreover, the establishment of the
National Committee for Macroprudential Oversight (NCMO) in line with EU
requirements calls for increasingly complex and thorough information adjusted to
Basel III requirements for a documented rationale behind the decisions on
safeguarding financial stability.
In this context, in early 2014, the CCR took significant steps to develop, expand and
increase the database complexity and diversity by adding new credit indicators, such
as the non-performing exposure and the unlikeliness to pay, default, impaired loans,
debt service the granularity of the past-due class of more than 90 days, monthly
instalment (total, principal, interest), the annualised interest rate on the loan, the
annual percentage rate of charge (APR), real estate collateral and its value, the
loan-to-value ratio (LTV), the legal organisation and leverage of the borrower,
off-balance-sheet debts (principal, related claims and amortisation, related claims
accumulated after the removal from the balance sheet), forbearance, the value of riskweighted assets, the conversion factor associated with off-balance-sheet items, the
exposure to credit risk, the individual adjustments for impairment, the type of
adjustments for impairment, the distinct recognition of credit lines within exposures,
and the reason for the CCR database inquiry.
In addition, the NBR participates in the ECB project to collect granular credit data
(Analytical Credit Dataset AnaCredit). Firstly, the project aims to harmonise the
definitions and concepts used by central banks credit registers to identify a common
set of attributes specific to the credit registers that meet the ECBs analysis requirements.
Secondly, credit registers will collect new information necessary for the ECBs own
analyses. The ECB will issue a Regulation (currently a draft) representing the legal
grounds for the national banks to report the required information. The Regulation will
comprise provisions on reporting requirements, reporting entities, database access,
information use, data protection, etc. Some information on borrowers and loans/
commitments as well as on creditors, deposits and financial derivatives are not in the
CCR database, which will imply additional collection efforts.
The additional borrower data are the size of the company and the date of assessing
this indicator, the companys address, the initiation date of special legal proceedings,
the annual turnover, the number of employees. The credit data refer particularly to
minimum and maximum interest rates, the interest rate margin, the period when only
interest is paid, the accounting standard applicable to CCR reporting entities, loan

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securitisation, the provisions calculated for the off-balance-sheet exposure, the

loan-to-income ratio (for legal entities), including the date of assessment, the
collateral issuer, the location of the real estate collateral, the date of collateral
valuation, etc.

5.6. EU regulations with implications on financial stability

5.6.1. Banking Union and Capital Markets Union
The Banking Union and Capital Markets Union are the most recent and important
European projects in the field of financial market integration, their establishment
being part of a larger plan to consolidate and take a more in-depth approach to the
Economic and Monetary Union. The Capital Markets Union (CMU) will be different
from the Banking Union, the latter representing a platform for stability which will
support the CMU development in all EU Member States, while capital market
integration will, in its turn, contribute to consolidating the resilience of the Economic
and Monetary Union.
5.6.1.1. Banking Union
In response to the economic and financial crisis, a series of financial reforms are
implemented at EU level, aimed at strengthening financial system resilience to future
shocks. The reforms are included in a single set of regulations (single rulebook) and
refer to: (i) stricter prudential requirements for credit institutions99; (ii) enhanced
protection of depositors100, and (iii) a single framework for the resolution of failing
banks101.
In view of the financial crisis evolving and transforming into a sovereign debt crisis in
the euro area, the need for even a better integration of the single market and the
European banking system became apparent. Specifically, the European institutions
agreed to create the Banking Union, based on a single set of regulations.
The Banking Union rests on three major pillars: (i) the Single Supervisory Mechanism;
(ii) the Single Resolution Mechanism, and (iii) a Single Deposit Guarantee Scheme.
The objectives of the Banking Union are to ensure a sound banking sector at EU level,
to break the negative feedback loop between banks and sovereigns, to reduce the
fragmentation of the single market and to consolidate the financial stability of the euro
area and the EU as a whole. The Banking Union encompasses euro area countries, as
well as non-euro area EU countries that volunteer to participate in the project.
The Single Supervisory Mechanism is a new system of banking supervision for Europe
which implies the transfer from national to European level of the main supervisory

150

99

Directive 2013/36/EU of the European Parliament and of the Council on access to the activity of credit institutions and the
prudential supervision of credit institutions and investment firms.

100

Directive 2014/49/EU of the European Parliament and of the Council on deposit guarantee schemes.

101

Directive 2014/59/EU of the European Parliament and of the Council establishing a framework for the recovery and
resolution of credit institutions and investment firms.

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5. Financial stability, regulatory framework and macroprudential policies

tasks and which comprises the ECB and the national supervisory authorities of the
participating countries. Starting with November 2014, the ECB directly supervises
123 systemically important banks, which hold around 82 percent of banking assets in
the euro area, while all other credit institutions are further supervised by national
competent authorities, but in close cooperation with the ECB.
The Single Resolution Mechanisms objective is to ensure an orderly resolution
of failing banks with minimal costs for taxpayers and to the real economy.
The mechanism has been partly implemented since the beginning of 2015 and
applies to banks in all euro area countries and in those non-euro EU Member States
that choose to join the Banking Union. The components of the Single Resolution
Mechanism are the Single Resolution Board and the Single Resolution Fund.
The Single Resolution Board is the resolution authority at EU level which manages the
Single Resolution Fund. The Single Resolution Fund has been operational since the
beginning of 2015 and is financed by the banking sector via ex ante contributions,
consisting of national compartments that will gradually be merged over an 8-year
period at the end of which the fund resources should reach 1 percent of the
guaranteed deposits of all credit institutions in the Banking Union Member States.
The Single Deposit Guarantee Scheme is the third pillar of the Banking Union for
which no project has been made yet, but which ranks among the priorities in the
period ahead. A Single Deposit Guarantee Scheme will have an increased resilience to
future systemic crises as compared with nationally established schemes and will be
less dependent on sovereigns, as the risks will be more dispersed and the
contributions will be collected from more institutions.
5.6.1.2. Capital Markets Union
The EU capital markets are underdeveloped compared with other jurisdictions, feature
a high degree of fragmentation and are generally organised based on national rules.
The Capital Markets Union (CMU) is a plan that aims to create a single capital market
for all 28 Member States by removing barriers to cross-border investment, diversifying
funding sources for the economy and lowering the costs of access to capital markets.
The CMU project contributes to the sustainable increase in long-term investment,
aiming to improve the access to financing for all companies and infrastructure
projects in Europe, and particularly for SMEs. At the current juncture, the European
business environment is largely financed via the banking system, while capital
markets are an underutilised alternative. Consolidating this market segment, as a
funding source complementary to bank financing, may foster the allocation of
additional investment to large companies and SMEs, fuelling at the same time the
inflows of external funds in the EU.
The establishment of the Capital Markets Union will contribute to consolidating the
resilience of the Economic and Monetary Union, while the harmonisation of national
legislation, as well as the removal of barriers limiting the access to financing will
ensure high transparency and, implicitly, a higher level of investor protection.
Diversifying the available sources of funding will mitigate the concentration risk,
i.e. the excessive reliance of some economic sectors on classical financing sources,

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which will have positive effects on the development of companies, SMEs in particular.
Considering the significant contribution of non-financial corporations to economic
growth, the recommended measures can help consolidate financial stability across
the EU, by defining harmonised development frameworks (the Banking Union, the
Capital Markets Union) for all financial market segments.
The Romanian authorities consider that, prior to establishing the basic CMU elements,
it is necessary to make thorough analyses that take account of factors such as: (i) the
different development stages of capital markets in each Member State; (ii) the
diversity and complexity of financial products and entities on the capital market, and
(iii) the heterogeneous structure of capital market segments. Additionally, the action
plan on building the CMU should highlight the expected impact on less liquid markets
with a low level of capitalisation, given the possibility of capital flight to developed
markets in the absence of a complete harmonisation of the regulatory framework at
EU level.

5.6.2. The recovery and resolution framework

for credit institutions
Directive 2014/59/EU establishing a framework for the recovery and resolution of
credit institutions and investment firms (BRRD) institutes a single EU framework for
the resolution of failing credit institutions and large investment firms, as well as
cross-border cooperation arrangements for the resolution of financial holding
companies. The BRRD provides the resolution authorities with a set of instruments for
intervening in all stages of a banking crisis, namely prevention, early intervention and
resolution measures. Credit institutions should draw up recovery plans in case of
financial distress, while resolution authorities may review such plans so as banks can
prevent insolvency. When insolvency occurs, resolution authorities have a set of
instruments and measures for the orderly restructuring of those credit institutions,
which ensure that shareholders and creditors bear losses, in line with a previously
established resolution plan, thereby ensuring the continuity of critical functions
without recourse to public funds.
Part of the Directive provisions became effective starting with 2015, while the bail-in
instrument will be implemented as of 2016. In Romania, the draft law transposing the
BRRD into the national legislation is currently under approval.
For resolution instruments to be implemented and in order to avoid contagion risk,
the BRRD requires credit institutions to meet at all times a minimum requirement for
own funds and eligible liabilities (MREL). The resolution authority establishes the
MREL amount for each credit institution based on six criteria set forth in the BRRD.
In July 2015, the European Banking Authority issued the Final Draft Regulatory
Technical Standards102 providing a more detailed description of such criteria and
ensuring similar MREL levels for credit institutions with similar risk profiles, systemic
importance and characteristics irrespective of their jurisdictions.
102

152

EBA Final Draft Regulatory Technical Standards on criteria for determining the minimum requirement for own funds and
eligible liabilities under Directive 2014/59/EU (EBA/RTS/2015/05).

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5. Financial stability, regulatory framework and macroprudential policies

According to the first criterion, the MREL consists of (i) a loss absorption amount,
calculated as total own funds, including capital buffers and any other additional
capital requirements imposed by the supervisory authority and (ii) an amount of
recapitalisation which would be required following the resolution strategy chosen
by the resolution authority. The latter amount will not be required from credit
institutions that will undergo winding-up proceedings without resolution instruments
being applied to them. Based on the second criterion, the MREL requirement should
take account of the credit institution eligibility to enter resolution, which is
determined based on its systemic importance. Moreover, the resolution authority
should consider the possibility that certain classes of liabilities are excluded from
contributing to loss absorption or recapitalisation (the third criterion), as well as the
extent to which the Deposit Guarantee Scheme could contribute to the financing of
resolution (the fourth criterion). The final two criteria refer to the size, business model,
funding model and risk profile of the credit institution and to the potential adverse
effects on financial stability of the failure of the institution respectively.

5.7. The new EU-wide harmonised definition

of non-performing exposures
In response to the differing national practices for bank asset quality review, which
have distorted the findings of EU-wide analyses on the level of non-performing loans
reported by various countries, the European Banking Authority has issued the
Implementing Technical Standards on supervisory reporting on forbearance and
non-performing exposures. According to this document, the information on
forbearance and non-performing exposures is included into the FINREP the new
consolidated financial reporting framework, being available with a quarterly reporting
frequency (the first reference date was 30 September 2014).
The Regulation is directly applicable to EU credit institutions and aims to provide
information for the assessment on a comparable basis across the European Union of
the level of forbearance activities and non-performing exposures. EBAs harmonised
definition of non-performing exposures includes:
(a) material exposures103 which are more than 90 days past-due; and/or
(b) exposures in relation to which the debtor is assessed as unlikely to pay its credit
obligations in full without realisation of collateral, regardless of the existence of any
past-due amount or of the number of days past due.
Exposures that have been found impaired (for which provisions are set up in
accordance with the applicable accounting framework) and exposures in respect
of which a default is considered to have occurred (in accordance with prudential
rules Article 178 of Regulation (EU) No 575/2013) shall always be considered as
non-performing exposures.

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Materiality shall be assessed in accordance with Article 178 of Regulation (EU) No 575/2013, according to which competent
authorities shall define a materiality threshold to reflect a level of risk that they consider to be reasonable.

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The national definition currently used by the NBR for the non-performing loan ratio
takes into consideration loans overdue for more than 90 days and/or in which case
legal proceedings were initiated (the following financial asset components are
considered: principal, related claims and amortisation). Non-performing loans are
recorded at gross value, i.e. book value, without taking into account the existence
of any collateral or adjustments for impairment. The calculation methodology is
compliant with the provisions of the Compilation Guide on Financial Soundness
Indicators prepared by the International Monetary Fund and is the most widely used
in the world.
The key differences between the EBA methodology for reporting non-performing
exposures and the methodology employed by the NBR for determining
non-performing loans refer to:
(a) Non-performance criteria the criterion regarding the past-due days of the
loan/exposure under review is similar in both methodologies (more than 90 days), but
in the case of the latter criterion the EBA methodology implies a more extensive
approach, by including all exposures for which full repayment is unlikely (without
taking into account the amounts recovered from collateral), not only those in relation
to which legal proceedings were initiated (the NBR approach).
(b) Scope the new methodology refers to both on- and off-balance sheet exposures
(financial guarantees given, loan commitments given and other commitments given).
With respect to on-balance sheet ones, all types of exposures are taken into
consideration, except those held for trading (whereas the NBR methodology takes
into account only loans and investments).
(c) Materiality threshold the EBA methodology provides for the inclusion under
non-performing exposures of any exposures that are past due by more than 90 days
and that, in addition, exceed a materiality threshold set by the competent authorities
to reflect a level of risk considered to be reasonable. The NBR methodology does not
include any such additional criterion (all non-performing loans are taken into account,
irrespective of the volume of overdue payments).
(d) Contagion principle according to the EBA methodology, whenever an individual
debtor is considered as non-performing it is advisable to monitor the situation of
other debtors in the same group, to apply a contagion effect and consider them
as non-performing as well, if necessary, even though the other entities, taken
individually, do not meet the requirements to be included in the non-performing
exposures category. The NBR methodology applies the contagion principle at debtor
level.
(e) Reporting level the indicators related to non-performing exposures in line with the
EBA definition are reported on a consolidated basis104, according to the prudential
consolidation scope105, whereas the non-performing loan ratio determined by the NBR
in line with the national definition is calculated at individual level.

154

104

Although the Implementing Technical Standards on supervisory reporting on forbearance and non-performing exposures
under article 99(4) of Regulation (EU) No 575/2013 do not include provisions concerning the enforcement of the FINREP
framework on an individual basis, the NBR has made sure this reporting framework continues to apply on an individual
basis as well, by issuing a national regulation in this sense, also in effect starting 30 September 2014.

105

Does not include insurance companies and non-financial corporations.

NATIONAL BANK OF ROMANIA

5. Financial stability, regulatory framework and macroprudential policies

As regards the loans removed from the balance sheet, the EBA methodology provides
for the explicit exclusion of the amounts for which, in compliance with the applicable
accounting regulation framework and own policies, banks resort to the recognition of
impairment losses by means of write-offs. The NBR methodology applies a similar
treatment to non-performing loans removed from the balance sheet.
Table 5.6 lists the actual levels of key asset quality indicators, calculated based on the
Implementing Technical Standards on supervisory reporting on forbearance and
non-performing exposures published by the EBA, as of 31 December 2014.
The indicators calculated for the Romanian banking system point to a medium risk as
compared with those reported by the other Member States, given that the higher
non-performing exposure ratio is mitigated by the increased coverage with IFRS
provisions.
Table 5.6. Key asset quality indicators (based on consolidated reporting)

Country

Romania
EU average
Austria
Belgium
Croatia
Cyprus
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Poland
Portugal
Slovakia
Slovenia
Spain
Sweden

percent
Accumulated
Gross non-performing
Net non-performing
impairment/Total gross
debt instruments/Total debt instruments/Total
non-performing debt
debt instruments
own funds
instruments
15.8
61.7
59.7
9.4
54.3
49.4
6.2
30.1
55.8
3.3
26.2
45.3
12.9
40.5
59.1
35.6
277.2
33.9
5.1
45.9
35.0
2.6
9.0
43.9
1.4
13.8
36.0
3.6
21.0
61.1
2.5
21.3
39.1
34.0
210.2
45.1
14.2
60.3
66.0
16.3
74.9
49.9
15.8
91.1
48.1
7.6
34.8
33.0
6.5
35.9
36.2
0.7
5.7
52.9
3.2
20.9
38.1
3.0
24.7
43.2
5.4
20.2
64.1
12.7
89.3
48.2
1.5
1.8
93.7
16.6
80.5
58.8
6.9
47.0
56.9
1.4
14.3
31.6

Note: Countries that have not reported asset quality indicators in line with the EBA definition: Bulgaria,
Czech Republic, United Kingdom.

NATIONAL BANK OF ROMANIA

155

Special feature. Romanias public

debt sustainability seen from the
perspective of financial stability

The connection between financial stability, on one hand, and public finance
sustainability, on the other, has gained increasing importance in recent years, as the
interdependence between the financial and public sectors has strengthened.
Romanias public debt is lower than that of most EU Member States, yet its
accelerated dynamics and the pro-cyclical nature of the fiscal policy warrant close
scrutiny.
Romanias total public debt (domestic and external) stood at 39.9 percent of GDP
at end-2014 (around EUR 59.3 billion), based on standard European methodology.
However, it also includes the foreign currency buffer of the MPF, which neared
EUR 7 billion at end-2014, meaning that the net public debt actually stood at
35.3 percent of GDP.
External public debt only accounts for approximately one third of the total external
debt. External private debt, which has shed about EUR 7 billion in the past three years,
amid the withdrawal of the financial sectors financing lines, remains a potential
source of risk for public debt as well, as shown by the 1997 Southeast Asian crisis and,
more recently, by the financial crises in Spain and Ireland. In 2009, Romania recorded a
significant level of short-term external debt (around 80 percent of forex reserves) and
this was one of the reasons behind the decision to sign a financing arrangement with
international institutions (European Union, International Monetary Fund and the
World Bank). The share of short-term external debt in foreign currency reserves
currently stands at 67 percent (as of June 2015).
The rise in government debt from 13.2 percent of GDP in 2008 to 34.2 percent of GDP
in 2011 (up 21 percentage points of GDP) and then to 39.9 percent of GDP in 2014 (up
5.7 percentage points of GDP against 2011) was primarily driven by the build-up of
considerable primary budget deficits during 2009-2011. The foreign currency buffer of
the MPF, which qualifies as an asset, has been gradually set up starting 2011, in line
with the provisions of the financing arrangement signed with international partners.
The sustainability of public debt should be assessed from at least four perspectives: its
size, the residual maturity, the financing costs and the composition of the investor
base.
Looking at the size of public debt, the econometric model used in our analysis shows
the critical threshold standing between 40 percent and 45 percent of GDP (any value

156

NATIONAL BANK OF ROMANIA

Special feature. Romanias public debt sustainability seen from the perspective of financial stability

above it increases the likelihood of a recession to over 50 percent). The level of debt
currently stands below, yet not far from the critical threshold thus caution is
warranted.
Hence, even assuming that the current public debt costs are kept in place and the
economy continues to grow at potential, a budget deficit of around 3 percent of GDP
per annum would mean exceeding the public debt critical threshold within the next
three years. Maintaining the deficit within the limits set by the MTO and approved by
law, a level reached in 2014, would accommodate the rise in nominal public debt,
amid a slower pace of increase of debt relative to economic growth. This shows that
the MTO level was not set arbitrarily, but aimed as well at reversing the rising trend of
public debt.
Financing costs have dwindled steadily, from over 6 percent of total debt in 2008 to
below 4 percent of total debt in 2015 Q1, in a context in which debt has tripled.
Annual interest expenses have remained relatively unchanged 2009 through 2014,
ranging between 1.5 percent and 1.7 percent of GDP, with the higher debt stock
being offset by the lower financing costs. A source of risk is the potential increase in
financing costs amid the normalisation of monetary policies globally.
The average residual maturity of government debt has risen from 3 years in 2008 to
5.4 years in 2015 Q1. This is essential for cutting the annual financing requirements
and hence mitigating the refinancing risk. The episodes that Romania went through
in 1999 and 2009 showed that the refinancing risk may be even more dangerous in
terms of public debt sustainability than the actual debt level.
The concentration of the investor base in government securities on the domestic
primary market dropped from over 60 percent in 2009 to around 20 percent in 2014.
Public sector financing on the domestic market is significant and is concentrated in
the banking sector, which points to limited room for portfolio growth in this direction.
The rise in banks portfolio of government securities has also had positive effects on
financial stability in the previous years, via at least two channels: it helped cushion the
contagion risk, especially amid the uncertainty in the region, and avoid disorderly
deleveraging. The strengthening of economic growth, the recovery of credit demand
and the implementation in the years ahead of the European proposals on higher
capital requirements for sovereign exposures will probably bring about a shift in
banks strategy regarding their holdings of government securities.

1. How much does Romanias public debt amount to?

There are several methodologies for calculating government debt (Table 1), the most
important being: (i) the EU or Maastricht methodology, (ii) the extended ESA 2010
methodology, and (iii) the national methodology. For the scope of this analysis, only
data in line with the Maastricht methodology will be used for public debt, because
this approach ensures EU-wide comparability and is used by the Commission when
assessing macroeconomic imbalances.
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Financial stability report 2015

Table 1. Public debt

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Gross debt (as a share of GDP)
Maastricht methodology*

15.7

12.3

12.7

13.2

23.2

29.9

34.2

37.3

38.0

39.9

Extended ESA 2010 methodology**

20.0

15.7

18.0

19.8

32.0

37.6

42.6

45.8

44.9

45.8

National methodology***

20.3

18.3

19.7

20.9

28.9

36.4

39.5

40.4

41.9

44.4

34.7

34.1

35.3

Net debt (as a share of GDP)

Maastricht methodology

15.7

12.3

12.7

13.2

23.2

28.3

32.2

* Maastricht debt is defined in Council Regulation (EC) No 479/2009, as subsequently amended, as the total general government
consolidated gross debt at nominal value outstanding at the end of the year.
** Unlike the Maastricht methodology, when calculating public debt other financial instruments are included as well, such as
insurance, pensions and standardised guarantee schemes and other accounts payable, according to the extended framework of the
European System of Accounts 2010 (ESA 2010).
*** Unlike the aforementioned definitions, the national methodology includes all central and local government guarantees, in line
with Government Emergency Ordinance No 64/2007, as well as the loans from the available funds of the State Treasury.
Source: MPF, NBR

Romanias public debt stands at 38.4 percent of GDP (as of March 2015), with external
debt accounting for almost half the figure, namely 18.8 percent of GDP. The current
level of the total public debt is below the 60 percent ceiling stipulated in the
Maastricht Treaty and trails behind the levels reported by most EU Member States (the
fourth lowest reading across the EU, Chart 1). However, the rise from below 15 percent
of GDP (the 2005-2008 average was 13.5 percent of GDP) to the current level, of
almost 40 percent of GDP, occurred in a short time span (Chart 2). The expansion of
debt in the period from 2009 to 2011 (as a result of covering large budget deficits) was
mainly ascribable to borrowings from international institutions (IMF, EU, World Bank)
and government bond issues on the domestic market, as well as on foreign capital
markets starting March 2010, in the context of restrictive conditions on global
financial markets in 2009.

20
IT
PT
IE
CY
BE
ES
FR
UK
HR
AT
SI
HU
DE
NL
MT
FI
SK
PL
DK
SE
CZ
LT
LV
RO
BG
LU
EE

0
public debt, 2008
Source: Eurostat

158

public debt, 2014

45
40
35
30
25
20
15
10
5
0

2014

40

2013

2005

60

2012

80

2011

100

2010

120

percent

EUR bn.

2009

45
40
35
30
25
20
15
10
5
0

2008

percent

2007

140

Chart 2. Public debt and external public debt (gross and net*)

2006

Chart 1. Public debt comparison between 2008 and 2014

general government gross external debt

general government gross domestic debt
public debt (% of GDP) (rhs)
net public debt (% of GDP) (rhs)
* Net external debt is the gross external debt minus the
foreign currency buffer of the MPF. Foreign claims have
not been taken into account.
Source: NBR, MPF

NATIONAL BANK OF ROMANIA

Special feature. Romanias public debt sustainability seen from the perspective of financial stability

Another major aspect in analysing public debt

sustainability in terms of access to international
financial markets is the level of Romanias total
external debt106, which rose after the outbreak of the
global financial crisis. The public sector and the NBR
accessed external resources in order to stabilise the
financial system and counterbalance private sector
deleveraging (Chart 3).

Chart 3. Romanias external debt

100
90
80
70
60
50
40
30
20
10
0

EUR bn.

The NBR has almost fully repaid the IMF loan, while
the Ministry of Public Finance has fully repaid the
Dec.10
Dec.11
Dec.12
Dec.13*
Dec.14*
Jun.15*
IMF loan and only to a small extent the funds taken
NBR's external debt
gross external public debt
from the World Bank and the Commission (Chart 4).
private external debt
It is important for the analyses on public debt to
* Starting December 2013, values have been calculated in line with
the new international statistical standards, according to which SDR
take into consideration the net value of the
allocations from the IMF are included in the NBRs external debt.
indicator as well (similarly, when analysing the
Source: MPF
evolution of the NBRs foreign currency reserves,
the focus should also be on the central banks net foreign assets). When looking at the
net value, public debt is significantly lower (33.6 percent of GDP, as of March 2015).
The difference owes to the foreign currency buffer of the MPF to address any
unexpected financing need for at least four months (Chart 5).
The foreign currency buffer proved useful in February 2014, when Romania managed
to avoid the increase in financing costs amid the spillover from a crisis on emerging
markets.
Chart 5. Foreign currency buffer of the MPF

Chart 4. The financial assistance package provided

by international institutions (IMF, EC, IBRD) to Romania in 2009
EUR bn.

40
35
30
25
20
15
10

Dec.08
Dec.09
Dec.10
Dec.11
Dec.12
Dec.13
Dec.14
Jun.15

EUR bn.

Dec.08
Dec.09
Dec.10
Dec.11
Dec.12
Dec.13
Dec.14
Jun.15

12
10
8
6
4
2
0

Outstanding balance
Outstanding balance
of the loan to MPF
of the loan to NBR
NBR-IMF loan
MPF-IBRD (WB) loan
MPF-EC loan
MPF-IMF loan
foreign currency reserves (rhs)
NBR's net external assets, excl. gold (rhs)
Note: Starting December 2013, values have been calculated in line with
the new international statistical standards, according to which SDR
allocations from the IMF are included in the NBRs external debt.

EUR bn.

7
6
5
4
3
2
1
0
2009

2010

2011

2012

2013

2014

2015
Mar.

foreign currency buffer of the MPF

4-month gross financing requirements
Source: MPF

Source: NBR, MPF

106

NATIONAL BANK OF ROMANIA

Dianu, D. (2015), ndatorarea: ct i cum se face reprezint problema, article published in Ziarul Financiar, 5 August 2015,
http://www.zf.ro/opinii/indatorarea-cat-si-cum-se-face-reprezinta-problema-14665173.

159

Financial stability report 2015

2. Why has government debt gone up?

Several periods can be distinguished depending on the factors that contributed to the
increase in public debt: (i) the period ahead of the global financial crisis (2005-2008),
(ii) the period of fiscal consolidation (2009-2011), and (iii) the period of public debt
stabilisation (from 2012 onwards).

-9
2014

-9
2013

-6
2012

-6
2011

-3

2010

-3

2009

2008

2007

2006

2005

2004

2003

annual change in the foreign currency buffer of the MPF

interest expenditure
primary deficit (national methodology)
exchange rate effect
other changes in public debt
annual change in public debt
Source: MPF, Eurostat, ECB

percent of GDP

2000

2014

2013

2012

2011

2010

2009

2008

2002

percent

2007

12
10
8
6
4
2
0
-2
-4
-6

Chart 7. Public investment spending and budget deficit

2001

Chart 6. Annual change in public debt by main component

(share of GDP)

budget deficit
public investment spending
public investment spending/budget deficit (rhs)
Source: MPF, Eurostat

The global macroeconomic and financial developments in the run-up to the crisis, as
well as the European integration process, created extremely optimistic expectations
on future income developments, which led to the adoption of pro-cyclical policies.
Public spending set at that particular point in time ignored the economys position in
the business cycle, i.e. the fact that the former was not sustainable over the medium
and long term. However, the budget deficits incurred at the time had modest effects
on the ratio of public debt to GDP (Chart 6), also as a result of the increase in GDP and
the significant strengthening of the leu against the euro, so from a mathematical
point of view debt expansion was offset by an alert pace of economic growth.
The global financial crisis that broke out in 2008 added to a challenging domestic
environment, which seriously restricted Romanias access to international capital
markets. Under the circumstances, the country could only resort to financing provided
by international institutions, such as the IMF, the EU and the World Bank, conditional
on taking restructuring steps domestically. Hence, the key driver behind the soaring
public debt 2009 through 2011 (21 percentage points in GDP) was the need to finance
the budget deficit (Chart 6).

160

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Special feature. Romanias public debt sustainability seen from the perspective of financial stability

Table 2. General government budget deficit

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
National methodology
Budget deficit (% of GDP)

-0.7

-1.4

-3.1

-4.8

-7.3

-6.3

-4.2

-2.5

-2.5

-1.7

-2.9
-1.2
-1.6
1.7
5.1

-2.2
-0.5
-1.5
1.7
4.6

-1.5
0.2
-1.0
1.7
4.0

Maastricht methodology
Budget deficit (% of GDP)
Primary deficit* (% of GDP)
Structural deficit** (% of GDP)
Interest payable (% of GDP)
Interest payable/Gross public debt

-1.2
0.0
-2.5
1.2
7.8

-2.2
-1.4
-4.4
0.8
6.8

-2.9
-2.2
-5.2
0.7
5.7

-5.7
-5.0
-8.6
0.7
6.4

-9.0
-7.5
-8.8
1.5
6.5

-6.6
-5.1
-5.8
1.5
5.2

-5.3
-3.7
-4.4
1.6
5.0

* The primary deficit is the government deficit excluding interest payable.

** A structural deficit occurs if the fiscal balance is in deficit when computed at potential output level.

Source: MPF, Eurostat

Fiscal consolidation was successful in terms of restoring the budget balance, but this
came at the cost of tougher adjustments than those brought about by the global
financial crisis. During that time, in addition to domestic restructuring, several
decisions were taken with a view to temporarily curbing spending (via wage cuts),
which actually postponed the implementation of more sizeable budget corrections.
The consolidation process also consisted in cutting public investment. Specifically,
public investment dropped from 6.7 percent of GDP in 2008 to 4.3 percent of GDP in
2014 (Chart 7). However, part of the investment had a low multiplying effect, while the
high level of investment was also distorted by overvalued costs in many instances,
as subsequently indicated by the investigations conducted by law-enforcement
agencies. Moreover, investment was also conditional on the low budget revenues,
owing both to economic challenges and some economic agents lack of payment
discipline. Nevertheless, it should be pointed out that, after 2011, Romania observed
the golden rule of public finance, according to which the investment volume should
exceed the budget deficit. Even amid lower budgetary allocations for investment and
tight and lasting budget constraints, investment efficiency can increase markedly
provided the public investment prioritisation process initiated through Government
Emergency Ordinance No 88/2013 is implemented.
Furthermore, the 5.6 percent of GDP budget adjustment in the period from 2010 to
2014 occurred primarily on the expenditure side, while the increase in revenues was
due solely to improved absorption of EU funds. The budget adjustment based on the
ESA methodology was even larger, i.e. 7.5 percent of GDP, mainly by curbing losses of
state-owned companies monitored under the arrangements with international
partners and by reducing arrears.
In order to weather the unfavourable developments generated by the global financial
crisis and to offset the marked reduction in private capital flows (the short-term
external debt was significant in 2009, around 80 percent of the value of forex
reserves), in 2009 Romania turned to the international institutions (European Union,
International Monetary Fund and the World Bank) for financial assistance worth
almost EUR 20 billion. In 2010, an amount of around EUR 0.4 billion of the Stand-by
Arrangement with the IMF was reallocated from the NBR to the MPF. Consequently,

NATIONAL BANK OF ROMANIA

161

Financial stability report 2015

Chart 8. The MPFs external public debt service in relation

to the financial assistance package

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

EUR mill.

2009

2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0

the external public debt surged to EUR 30.8 billion

as of December 2014 (Chart 2). At this point in time,
the amounts borrowed by the Government of
Romania from the International Monetary Fund
have been repaid, with EUR 604 million of those
used for international reserves still outstanding (as
of June 2014). On the other hand, the loans taken
from the European Commission and the World Bank
are due for repayment in the years ahead (20152019 and 2022-2023 respectively), which might lead
to a reduction of the external public debt stock in
the upcoming period (Chart 8).

total debt service - IMF

total debt service - EU
total debt service - IBRD
Source: NBR, MPF

Starting 2012, against the background of restoring

macroeconomic balances, the public debt dynamics
slowed down. The fiscal consolidation measures
and, afterwards, the maintenance of fiscal policy
within a prudent framework led to Romanias return on the private capital market and
to improved public debt sustainability. As a matter of fact, the structural budget
deficit (another indicator reflecting fiscal and budget sustainability) recorded high
levels during 2008 and 2009 (8.6 percent of GDP and 8.8 percent of GDP respectively).
These readings were subsequently corrected down to 1 percent of GDP in 2014, which
is precisely Romanias medium-term fiscal objective (Table 2).

A driver behind the increase in public debt after 2012 was the set-up of a foreign
currency buffer of the MPF for covering liquidity needs of the general government
(it accounted for 2.6 percentage points in GDP out of the 5.6 percentage points in
GDP rise in government debt December 2011 through December 2014). This buffer
currently covers the external public debt service entirely and approximately
50 percent of the total public debt service.

3. Is Romanias public debt sustainable?

There is no single threshold for public debt sustainability, as each country has its
own specificities. Emerging countries, Romania included, usually have a lower
sustainability threshold than developed economies, because they are not reserve
currency issuers, some have a high degree of dollarisation/euroisation, a lower
capacity for revenue collection, etc. Advanced economies boast a higher borrowing
capacity than emerging countries and also ampler room for manoeuvre, including
in terms of a balance-of-payments risk.
The sustainability of government debt should be appraised from at least four
standpoints: (i) its size; (ii) maturity; (iii) financing costs, and (iv) the composition of the
investor base.
The rise in public debt has been accompanied by the strengthening of debt
sustainability indicators. The average residual maturity has gone up, interest

162

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Special feature. Romanias public debt sustainability seen from the perspective of financial stability

payments have diminished, while the composition of the investor base has diversified
(Chart 9). Therefore, the sustainability of government debt has improved in recent
years, counterbalancing the increase in public debt. However, close monitoring of the
evolution of the public debt stock is warranted, given its considerable expansion
versus the 2008 level.

Chart 9. The sustainability of Romanias public debt

Average residual maturity of total public debt

Public debt
40

percent of GDP

years

35

30
4

25

20
15

10
1

0
2008

2009

2010

2011

gross public debt

2012

2013

2014

2008

2015 Q1

2010

2011

2012

2013

2014 2015 Q1

net public debt

Herfindahl-Hirschman index of the investor base in

primary market government securities

Public debt stock-related cost as a share of public debt

2009

percent

7,000

6,000

5,000

4,000

3,000

2,000

1,000

points

0
2008

2009

2010

2011

2012

2013

2014

2015 Q1

2008

2009

2010

2011

2012

2013

2014 2015 Q1

Source: NBR, MPF, FSA

3.1. Public debt size

Maintaining public debt at a sustainable level over the medium and long term is one
of the objectives of the domestic fiscal and budgetary policy, in line with the
European framework for economic governance. The set of rules introduced by the
Fiscal and Budgetary Responsibility Law has been defined with a view to limiting any
slippages from the short- and medium-term objectives of fiscal indicators, yet they are
not backed by a sufficiently-rigorous correction mechanism, while the intermediary

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163

Financial stability report 2015

caps on public debt (i.e. 45 percent, 50 percent and 55 percent of GDP) are higher
than the sustainable level that would be acceptable for an economy such as
Romanias.
The actual debt size is not the only important element in analysing the sustainability
of public debt, but also the access to the private capital market and the composition
of the investor base. Thus, even though public debt was low in 2008 (13.2 percent of
GDP), at the time Romania lacked access to global financial markets, owing mainly to
considerable macroeconomic imbalances, to which added investors high risk
aversion, amid the financial crisis becoming manifest worldwide. Against this
backdrop, exceeding the current critical level could pose similar problems, despite it
being lower than in other countries (40 percent of GDP versus the EU average of
70 percent in 2014).
In addition, the assessment of public debt sustainability should also take into account
private sector debt. The latter may behave similarly to public debt if the government
needs to step in and support the private sector to improve its repayment capacity.
Unlike other countries, in Romania there has been no need for public financial support
directed to the banking sector since the outbreak of the global financial crisis.

Box 8. Methodological aspects underlying the analysis

of public debt sustainability

Two different models were used for assessing public debt sustainability: (i) an
empirical model and (ii) a structural model. Both approaches aim to determine the
safe level of debt rather than its response to a number of key macro-financial
variables. Both models indicate that any public debt level of up to around 40 percent
of GDP will not impair Romanias future economic growth. The level is calculated for
the gross public debt.
The empirical model107 is a multivariate logit panel model in assessing the probability
of a recession and builds on the specification used by Baum et al. (2013)108. Along
with the variable of interest to this analysis (public debt), the model also includes
other relevant variables to control the potential effects of other macroeconomic
variables on GDP developments.
,

[1]

The dependent variable in the regression model (yi,t) takes the shape of a binary
recession indicator, built based on quarterly growth data. This indicator is assigned
the value 1 if GDP dynamics stay in negative territory for two consecutive quarters or

164

107

Further details on the methodological aspects and the results of the two models for assessing public debt sustainability will
be available in Voinea, L., Dragu, F., Alupoaiei, A. and Neagu, F. (2015), Adjustments in the balance sheets is it normal this
new normal?, nearing completion.

108

Baum, A., Checherita-Westphal, C., and Rother P. (2013), Debt and growth: New evidence for the euro area, Journal of
International Money and Finance, No. 32, pp. 809-821.

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Special feature. Romanias public debt sustainability seen from the perspective of financial stability

the value 0 otherwise. The other independent variables taken into consideration were
the unemployment rate, household consumption (as a share in GDP), government
budget deficit, interest rate and the inflation rate. The estimation of the logit model
was carried out in a panel of six CEE countries109, over the years 2004-2014, by
introducing fixed effects for each individual country. A four-quarter lag was applied
to each independent variable. The robustness of the model was checked by changing
the lag to two and eight quarters respectively. The discrimination capacity of the
model was appraised via the Accuracy Ratio (AR), which came in at 79.1 percent.
For analysing the obtained results it was deemed that public debt has an adverse
effect on economic growth if the estimated probability of recession stands around
50 percent. In this vein, several government debt thresholds were tested, ranging
between 20 percent and 200 percent of Romanias gross domestic product.
The coefficient on the public debt variable is positive, indicating that a rise in public
debt will translate into a higher probability of recession (direct relation between the
two variables). According to this model, the critical level of public debt (above which
the probability of recession reaches approximately 50 percent) is of 45 percent of
GDP. However, a more prudent share of public debt in GDP is indicated, namely
40 percent, with an associated probability of recession of 37 percent (Chart A).
Moreover, the findings for other countries in the region, included in the estimation
of the regression model, show that the level of debt nears the critical threshold in
most of the cases under review (Chart B).
Chart A. The estimated probability of recession
for various levels of public debt (based on the
regression model)
percent
100
90

Probability of recession

80
70
60
50

45

40

40

30
20
10

20
30
40
50
60
70
80
90
100
110
120
130
140
150
160
170
180
190
200

0
Public debt (% of GDP)
Source: NBR

Chart B. International comparison the level

of the signal threshold in the case of public debt
(regression model)
percent of GDP
100
90
80
70
60
50
40
30
20
10
0
LV
BG
SI
RO
CZ
HU
public debt level (2014)
signal threshold (regression model)
Source: NBR

The structural model finds a critical threshold level of the public debt-to-GDP ratio at
39.4 percent (Chart C). The model is based on the method used by Mendoza et al.
(2007)110 and seeks to identify a maximum threshold of public debt, above which
economic growth would be negatively affected.
109

Bulgaria, Czech Republic, Latvia, Hungary, Romania and Slovenia.

110

Mendoza, E. and Ostry, J. (2007), International Evidence on Fiscal Solvency: Is Fiscal Policy Responsible?, IMF Working
Paper, WP/07/56.

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Financial stability report 2015

[2]

Starting from the Euler

equation, in the condition
above D is the level of debt,
is a certain state of the
economy, and represent
government revenues and
spending respectively, is the
subjective discount factor,
denotes the expectation
operator, while is the
marginal utility of consumption,
the aim is to equalise the
present value of consumption
for certain states of the
economy. The level of
consumption is subject to the
economys resource constraints. Specifically, at any date t, the state of the economy is
determined by a combination between output (GDP) and government spending.
Given the uncertain environment, a Markov process is used to model the dynamics of
the economy, which involves defining a transition function between successive states.
Finally, the objective is to find the stimulus which will prompt the private agent to
give up a unit of consumption at date t and re-allocate that consumption to date t+1.
Chart C. Calibrating the optimal level of public debt using
the general equilibrium condition

By means of standard budget constraints for optimizing and deriving general

equilibrium conditions, and of observing the necessary solvency conditions for
conducting sustainability tests, the following equation was used for calculating the
maximum threshold of public debt:

[3]

The optimal level of government debt was calculated using condition [3], where E[Dt]
is the maximum level of public debt at date t so as not to affect economic growth,
denotes the difference in the long-run averages of the real interest rate and the
growth rate of real GDP, is the response function of the primary deficit to the
prevailing level of government debt, while represents a long-term average of the
primary balance. The optimal level of public debt represents the point of maximum
likelihood. One can notice an inverse correlation between the optimal level of
government debt and the response function of the primary deficit to past values of
public debt. In other words, if the government resorts to wider primary deficits at
present (given high levels of debt in the past), this will translate into a lower capacity
to take on new debt in the future.
As for the general equilibrium model, the maximum debt level was simulated for
various scenarios on the levels recorded, at the same moment in time, by the

166

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Special feature. Romanias public debt sustainability seen from the perspective of financial stability

response function of the primary deficit to the prevailing level of government debt
and by the long-term budget balance. The two ranges were built based on the
dispersion of the values of the two parameters around their central tendencies.
For the difference in the long-run averages of the real interest rate and the growth
rate of real GDP, the following approach was taken: the results yielded by
Cox-Ingersoll-Ross and Vasicek models for the term structure of rates were used for
the interest rate, while the central tendency was used for economic growth.

The current level of public debt is sustainable, yet it has neared the critical threshold
above which there would be major negative consequences on economic growth (with
a probability of recession of over 50 percent) and on the subsequent borrowing
capacity in adequate conditions. The analyses conducted at the National Bank of
Romania, based also on relevant international approaches (see Box 8 for details),
highlight the risks stemming from both the breakdown and especially the dynamics of
government debt. Depending on the method used, estimates of the critical threshold
in the case of Romania range between 40 percent and 45 percent of GDP. The results
of the estimates may differ depending on the model used and the assumed
hypotheses. Calculations are made based on gross public debt data, without taking
into account the foreign currency buffer of the MPF (the equivalent of 4.6 percent
of GDP).
Chart 10. Public debt sustainability in the long run
60
50

percent

Scenario 1 Scenario 2
(decreasing (stabilising
public debt) public debt)

Public debt critical threshold

40
30
20
10
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025

public debt/GDP

Scenario 1

Scenario 2

Scenario 3

Scenario 3
(rising
public
debt)

Interest rate on
public debt (%)

4.051

4.05

4.05

Primary
government
budget balance
(% of GDP)

+0.302

-0.40

-1.50

Growth rate of
real GDP (%)

2.803

2.80

2.80

Note: 1) Public debt interest payments as a ratio to average public debt in 2014.
2) The primary government budget balance of 0.3 percent of GDP corresponded to a structural deficit of around 1 percent of GDP
(MTO Medium-Term Budgetary Objective) in 2014.
3) 2.8 percent is the real growth rate in 2014.

Source: MPF, NBR calculations

A primary deficit of up to 0.4 percent of GDP in the years ahead would enable the
stabilisation or even the reduction of government debt, provided the economic
growth rate, the public debt costs and the exchange rate stick to their 2014 levels.
A significant widening of the primary deficit, for instance up to 1.5 percent of GDP,
may translate into government debt exceeding 50 percent of GDP, with a serious
detrimental impact on economic activity and the debt refinancing capacity (Chart 10).

NATIONAL BANK OF ROMANIA

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Financial stability report 2015

3.2. Public debt maturity

The maturity structure of public debt has improved recently, ensuring predictability of
repayments and keeping financing costs within an acceptable range. Nevertheless,
Romania has still one of the lowest debt-to-GDP ratios over the long term. Public debt
with a maturity of more than 10 years accounts for 27 percent of the total (compared
to 41 percent in Poland and 58 percent in the Czech Republic in 2014, according to
Eurostat). On the domestic market, there are still limitations stemming from the
structure and development stage of the financial sector, which depress demand for
long-term debt, but recent developments point to an improvement (Chart 11).
Residual maturity for locally-issued government securities nears three years, whilst for
the securities issued on external markets it stands at 7.4 years (weighted average,
June 2015).
Chart 11. Maturity structure of new domestically-issued
government securities
60

lei bn.

Chart 12. Breakdown of the current stock of government securities

by maturity year (July 2015)
10

50

percent

EUR bn.

25

20

15

10

10

40

< 1 year
5 years< M 10 years
Source: NBR

1 year < M 5 years

> 10 years

volume

2044

2027

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

20

2015

30

share of outstanding amount (rhs)

Source: NBR

The steps aimed at achieving fiscal consolidation and restoring macroeconomic

equilibria, Romania being upgraded by the major rating agencies, as well as the
inclusion of Romanian government securities into the calculation of global
benchmark indices for investments in emerging market assets prompted an increase
in the average maturity of newly-issued bonds and an improvement in secondary
market liquidity.
Over the period ahead, special attention should be devoted to managing the need for
refinancing the older issues, with a peak in public debt being expected for 2016
(Chart 12). Moreover, approximately 29 percent of outstanding government securities
(EUR 11.8 billion) fall due in 2015-2016, with the remainder being scheduled until
2044. Under the circumstances, the budgetary and fiscal policy stance for 2015-2016
should remain prudent, aiming to ensure debt repayment as conveniently as possible
in terms of cost and maturity.

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Special feature. Romanias public debt sustainability seen from the perspective of financial stability

3.3. Public debt financing cost

Public debt financing cost dropped markedly during the reviewed period (to 4 percent
in 2014, from 6.5 percent in 2009, Table 2). Behind this stood the same factors
mentioned above, i.e. fiscal consolidation and a brighter macroeconomic picture, as well
as the inclusion of Romanian government securities into the calculation of global
benchmark indices for investments in emerging market assets. However, total interest
payments remained relatively steady at 1.7 percent of GDP in 2014, compared to
1.5 percent in 2009), as the improvement in financing conditions was countered by the
swiftly-growing public debt stock. Thus, a prudent fiscal policy stance is a prerequisite
for ensuring access to the international financial markets at low costs.
A risk factor for public debt sustainability is a possible increase in financing costs,
given that interest rates are currently at all-time lows and for the coming period the
monetary policies of some of the worlds major central banks are expected to get back
to normal. Furthermore, the fact that a significant share of the financing cost change is
associated with the risk premiums should not be overlooked. As for Romania, the
analysis of developments in CDS spreads is indicative of their going hand in hand with
the exchange rate, i.e. short-lived swings around the long-term average (Chart 13).
The explanation for the reduction in public debt financing costs lies with favourable
external conditions (very low interest rates and abundant liquidity), as well as with the
domestic macroeconomic structural adjustments (narrowing of government deficit,
curbing of inflation) and the liquidity conditions on the money market in Romania.
Chart 13. CDS spreads, interbank money market rate
and exchange rate*

55

0.0

0.90
Jan.13

3M ROBOR

5Y CDS

* relative to January 2015

Source: Bloomberg, NBR

Apr.15

35

Oct.14

0.95
Jan.15

0.2
Jul.14

40

Jan.14

1.00

Apr.14

0.4

Jul.13

45

Oct.13

1.05

Apr.13

0.6

Jul.12

1.10

Oct.12

0.8

Apr.12

1.15

Jan.12

1.0

EUR/RON (rhs)

percent of GDP

3% interest cost
5% interest cost

2025

2024

2023

2022

2021

2020

2019

2015

50

2018

1.20

2017

index

index

2016

1.2

Chart 14. Scenario-based evolution of public debt stock-related

interest payments

4% interest cost
6% interest cost

Note: Scenarios assume a real 2.8 percent economic growth rate

(as recorded in 2014) and a primary deficit of 0.4 percent of GDP
(in line with stabilising public debt over the long term).

Source: NBR calculations

A further falling interest rate on public debt111 might push the debt lower, but a
significant interest rate hike might lead to a long-run increase in the government
deficit and public debt, unless the government deficit is subject to adjustment
(Chart 14). Moreover, public debt could become unsustainable over the long term
if the average rate on the debt stock were to reach 6 percent.
111

NATIONAL BANK OF ROMANIA

In 2014, interest payments on public debt neared 4 percent of the debt stock (NBR calculations).

169

Financial stability report 2015

3.4. Investor base

The Herfindahl-Hirschman index reflecting the concentration of the base of investors
in government securities on the domestic market dropped from 6,124 points in 2009
to 3,360 points in 2014. Moreover, the concentration of the government bond
investor base on the primary market fell from over 60 percent in 2009 to around
20 percent in 2014.
Behind this positive development stood largely the joint action of at least three
factors: participation of new investor classes (pension funds in particular) after the
launch of a 30-year USD-denominated Eurobond issue in January 2014, JP Morgans
decision to include Romanias sovereign bonds into its GBI-EM Global Diversified
Investment Grade index as from July 2014, and Standard & Poors upgrading the
sovereign rating to BBB- in May 2014 (as some investors could invest only in securities
issued by investment-grade countries, rated as such by all major agencies). As a
matter of fact, these developments sent financing costs down as well.
Chart 15. Public debt breakdown by type of investor

100

percent

80
60

52
82

40
20
0

31
6

2005
rest of the world (non-residents)
households
pension funds
insurance companies
investment funds
credit institutions
non-financial corporations

2014

Note: Data taken from National Accounts (including Maastricht

debt instruments at market value).
Source: NBR, MPF

Chart 16. Breakdown of locally-issued government securities

by type of investor
100
90
80
70
60
50
40
30
20
10
0

percent
10

67

2010

12

13

21

20

17

64

63

56

52

52

2011

2012

2013

2014

2015
May

banks
insurance companies
investment funds

pension funds
non-residents
other investors

Source: MPF, FSA, NBR

Public debt breakdown by type of investor reveals a moderate contagion risk induced
by a possible shift in investor sentiment on the worlds financial markets (Chart 15).
Although the share of government securities in total public debt widened in terms of
volume to 70 percent in 2014, against 34 percent in 2008, they are held largely by
residents (57 percent, December 2014), with local credit institutions making a
significant contribution (41 percent of total government paper). The share of
non-resident investors in total locally-issued government securities is decreasing
(17.5 percent in June 2015 versus 21 percent in December 2013) and trails behind
other countries in the region (50 percent in Poland and Hungary, May 2015).
Since 2012, Romania has diversified its external financing sources by tapping the
US market. Currently, USD-denominated bonds account for one third of the value
of Romanias government securities on external financial markets (July 2015).
A widening of the fiscal deficit will most likely have to be financed mainly by
170

NATIONAL BANK OF ROMANIA

Special feature. Romanias public debt sustainability seen from the perspective of financial stability

non-residents (considering the residents already large exposure to such portfolios; for
further details, see below). The growth of non-residents share in public debt financing
would augment the contagion risk that could materialise if international financial
markets witness shifts in investors risk appetite.

4. Can the local financial system further cope with

the rising public debt financing?
Public sector financing on the local market is significant and concentrated in the
banking sector, so that future tapping of this market for government debt expansion
will come at the cost of higher risks to financial stability. Domestic public debt stood
at 19 percent of GDP in 2014, up from 5.3 percent in 2008. The banking sector holds
about 67 percent of the debt, accounting for 21 percent of credit institutions assets,
making it the largest exposure of an EU banking sector to the government sector
(Chart 17).
Chart 18. Total public debt and private debt by component

Chart 17. Exposure of monetary financial institutions

to the government sector (in total assets)
25

percent

20
2008

2014

15
10
5

percent of GDP

Total public debt

Romania
Slovenia
Slovakia
Poland
Italy
Czech Rep.
Hungary
Spain
Bulgaria
Portugal
Belgium
Germany
Austria
Greece
France
Cyprus
Netherlands
Malta
Finland
Estonia
Sweden
Denmark
UK
Ireland
Luxembourg

50
45
40
35
30
25
20
15
10
5
0

Source: ECB

2008

External debt: External debt: non- Domestic debt:

banks and NBFIs financial private non-financial
sector
private sector

2009

2010

2011

2012

2013

2014

Source: Eurostat, NBR

Other non-bank financial institutions in Romania also have significant exposures to

the public sector, which points to limited room for portfolio growth in this direction.
Insurance sector exposure stands at lei 5 billion (34 percent of the assets covering
technical reserves), investment fund exposure at lei 10.3 billion (25 percent of total
assets) and pension fund exposure at lei 13.7 billion (68 percent of total assets in
December 2014, with the investment ceiling being set at 70 percent).
Over the past few years, the increase in government securities holdings by the
resident banking sector benefitted financial stability: (i) by helping improve banks
liquidity position, since such instruments are eligible collateral to access the central
banks lender-of-last-resort facilities, (ii) by supporting an orderly deleveraging, as
banks substituted part of the exposure to the private sector by government paper,
amid balance sheet adjustments by non-financial corporations and households
(Chart 18), and (iii) direct contagion risk to Romanias debt instruments was low.

NATIONAL BANK OF ROMANIA

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Financial stability report 2015

A further increase in government securities holdings by banks tends to become

counterproductive, given that banking sector profitability remains weak, credit
demand shows signs of recovery, the risk of a rate hike should not be overlooked, and
regulatory bills at EU level provide for stronger capital requirements112 related to
sovereign exposures. From an economic perspective, the opportunity of being
exposed to the public administration is conditional on the risk-adjusted yield
difference among the various exposure classes. During a recession, with credit risk
materialising, credit institutions prefer assets which are not significantly affected by
this risk (assets for which the likelihood of a payment default to occur is very low
and/or the loss in case of default is moderate). With economic growth strengthening,
this recessionary behaviour appears set to change.

112

172

At present, prudential regulations provide for a differentiated treatment of these exposures: (i) zero capital requirements
for credit risk, (ii) no limits on large exposures, and (iii) they are classified as high-quality liquid assets.

NATIONAL BANK OF ROMANIA

Abbreviations
BSE

Bucharest Stock Exchange

CB

Credit Bureau

CCR

Central Credit Register

CDS

credit default swaps

CRR/CRD IV Capital Requirements Regulation and Directive

DSTI

debt service-to-income

EBA

European Banking Authority

EBIT

Earnings Before Interest and Taxes

EC

European Commission

ECB

European Central Bank

EIOPA

European Insurance and Occupational Pensions Authority

ESA

European System of Accounts

ESRB

European Systemic Risk Board

EU

European Union

Eurostat

Statistical Office of the European Union

FDI

foreign direct investment

FSA

Financial Supervisory Authority

GDP

gross domestic product

IFRS

International Financial Reporting Standards

IMF

International Monetary Fund

LTD

loan-to-deposit

LTV

loan-to-value

MPF

Ministry of Public Finance

NCMO

National Committee for Macroprudential Oversight

NBFIs

non-bank financial institutions

NBR

National Bank of Romania

NIS

National Institute of Statistics

NPLs

non-performing loans

NTRO

National Trade Register Office

PIR

Payment Incidents Register

ReGIS

Romanian electronic Gross Interbank Settlement

ROA

return on assets

ROBOR

Romanian Bid Offered Interest Rate

ROE

return on equity

SENT

Electronic Net Settlement System

SMEs

small- and medium-sized enterprises

NATIONAL BANK OF ROMANIA

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Financial stability report 2015

Tables
Table 2.1

Credit migration matrix by days past due (June 2014 June 2015)

37

Table 3.1

Structural indicators of the Romanian banking system

69

Table 3.2

Asset structure of credit institutions operating in Romania

73

Table 3.3

Liability structure of credit institutions operating in Romania

74

Table 3.4

The main components of loans to the private sector

81

Table 3.5

The average bank interest rates on outstanding loans and deposits

83

Table 3.6

The average bank interest rates on new loans and deposits

83

Table 5.1

Classification of Member States based on the institutional arrangements

regarding the implementation of Recommendation ESRB/2011/3
and the designated authority for CRD IV/CRR instruments

133

Criteria and mandatory indicators laid down in the EBA Guidelines

on the assessment of O-SIIs

141

Additional indicators included in the NBR Procedure for assessing

systemically important institutions, based on the room
for flexibility left by the EBA Guidelines

142

Level of implementation of the ESRB Recommendation

on the macroprudential mandate of national authorities

144

Level of implementation of the ESRB Recommendation on lending

in foreign currencies

146

Key asset quality indicators (based on consolidated reporting)

155

Table 5.2
Table 5.3

Table 5.4
Table 5.5
Table 5.6

Special feature
Table 1

Public debt

158

Table 2

General government budget deficit

161

Charts
Box 2
Chart A

Foreign exposures and the effect on corporate and household lending

14

Chart 1.1

GDP (expressed in PPS) per capita relative to the euro area average
(regional comparison)

16

Chart 1.2

Labour market developments in Romania and the EU

16

Chart 1.3

Gross public debt and its components

17

Chart 1.4

Corporate and household indebtedness by creditor

19

Chart 1.5

Corporate and household indebtedness, regional comparison

19

Chart 1.6

Loantodeposit ratio

19

Chart 1.7

Growth rate of non-financial private indebtedness from resident

and non-resident financial institutions by currency

19

Loans to SMEs and large companies, from resident banks

and NFBIs and non-resident banks

21

The role in economy of non-financial corporations with sustainable

borrowing potential

23

Chart 1.8
Chart 1.9

174

NATIONAL BANK OF ROMANIA

Chart 1.10

Potential borrowing volume of the best-performing firms by sector,

December 2014

23

Chart 1.11

New entrants into the credit market and their importance for bank credit

24

Chart 1.12

New entrants into the credit market by sector in terms of loan balance
and the number of companies, December 2014

24

Chart 1.13

Current account total and components

26

Chart 1.14

Euro area economic growth and Romanias export dynamics

26

Chart 1.15

Annual growth rate of exports, imports and GDP in EU-10

26

Chart 1.16

Balance on trade in goods with Romanias major trading partners

26

Chart 1.17

Balance on trade in goods by added value

27

Chart 1.18

Foreign trade in motorcars

27

Chart 1.19

Indicators for foreign trade companies versus non-financial corporations,

December 2014

29

Chart 1.20

Funding of foreign trade companies

29

Chart 1.21

Net foreign capital flows in Romania

30

Chart 1.22

Financial standing of direct investment enterprises

and companies incurring external debt

30

Chart 2.1

Financial soundness indicators for non-financial corporations

34

Chart 2.2

Financial performance of non-financial corporations by sector (2014)

34

Chart 2.3

Financial soundness indicators for non-financial corporations

by technological intensity

36

Chart 2.4

Non-performing loans by currency

37

Chart 2.5

Non-performing loan ratio by company size

38

Chart 2.6

Loan stock and non-performing loan ratio by sector

38

Chart 2.7

Breakdown of overdue payments across the economy

40

Chart 2.8

Default rate on commercial liabilities by ownership

40

Chart 2.9

Receivables collection period

41

Chart 2.10

New major payment incidents

41

Grafic 2.11

Aggregate loss of firms with negative net results by ownership

(nominal values)

42

Number of firms by ownership

42

The annual default rate across the non-financial corporations sector

according to the macroeconomic baseline scenario

44

Chart 2.13

Number of newly-established firms and insolvency cases

45

Chart 2.14

Non-performing loans generated by insolvent/bankrupt companies

46

Chart 2.15

The financial soundness of newly-insolvent companies

in the year before entering insolvency proceedings

46

Major payment incidents generated by insolvent companies,

by year of entering insolvency proceedings

46

Chart 2.17

Developments in lending and the NPL ratio real-estate collateral

49

Chart 2.18

NPL ratio by LTV bucket in June 2015

49

Chart 2.19

Household indebtedness aggregate indicators

51

Chart 2.20

Distribution of household indebtedness to banks by monthly net wage

(individual data)

51

Chart 2.12
Box 3
Chart A

Chart 2.16

NATIONAL BANK OF ROMANIA

175

Financial stability report 2015

Chart 2.21

Distribution of the number of borrowers, natural entities,

by monthly net wage (individual data)

52

Correlation between the value and the average interest rate

of new mortgage loans in lei

52

Distribution of borrowers with CHF-denominated loans

by monthly net wage (June 2015)

54

Distribution of borrowers with CHF-denominated loans

by loan size (June 2015)

54

Chart 2.23

Households position vis--vis banks (asset sales included) and NBFIs

55

Chart 2.24

Loan-to-deposit ratio for households

55

Chart 2.25

Households net wealth

56

Chart A

Change in the level of indebtedness under a stress scenario (June 2015)

57

Chart 2.26

Banks NPL ratio by loan type

59

Chart 2.27

Breakdown of non-performing loans

59

Chart 2.28

Banks NPL ratio by loan type and currency, June 2015

60

Chart 2.29

NPL ratio by the quarter of credit agreement (2003 Q1 2015 Q1)

over a three-year moving window

60

Chart 2.30

NPL ratio by monthly net wage bracket

61

Chart 2.31

Developments in residential property prices

62

Chart 2.32

NPL ratio by current LTV ratio (June 2015)

62

Chart 3.1

Structure of the Romanian financial system (assets as a share in GDP)

65

Chart 3.2

Relative sizes of banking and nonbank financial sectors in CEE countries

65

Chart 3.3

The share of exposures to and funds raised from domestic

financial institutions in the balance sheet of credit institutions

66

The share of exposures to credit institutions

in the assets of financial sectors

67

Chart 3.5

Share capital by country of origin

67

Chart 3.6

Credit institutions share capital as a percentage of total capital

and their market share by country of origin

70

Market share and number of credit institutions with foreign capital

(international comparison)

70

Chart 3.8

Number of bank branches and employees

71

Chart 3.9

Financial intermediation (international comparison)

71

Chart 3.10

Asset concentration (international comparison)

71

Chart 3.11

Developments in the main indicators relevant to assessing

the magnitude of deleveraging

75

Chart 3.12

Total own funds and Tier 1 capital

76

Chart 3.13

Capital adequacy indicators

76

Chart 3.14

Comparative developments in solvency ratio

77

Chart 3.15

Bank distribution by total capital ratio

77

Chart 3.16

Bank asset distribution by total capital ratio

77

Chart 3.17

Comparative developments in leverage ratio

78

Chart 2.22
Box 4
Chart A
Chart B

Box 5

Chart 3.4

Chart 3.7

176

NATIONAL BANK OF ROMANIA

Chart 3.18

Bank assets and loans to private sector

80

Chart 3.19

Annual real growth rate of loans to private sector

80

Chart 3.20

The annual dynamics of private sector loan components

82

Chart 3.21

Interest rate margins on outstanding loans and deposits

84

Chart 3.22

Interest rate margins on new loans and deposits

84

Chart 3.23

Non-performing loans at aggregate level (national definition)

85

Chart 3.24

Non-performing exposures at aggregate level (EBA definition)

85

Chart 3.25

Loan portfolio quality in selected EU Member States

(share of non-performing loans in total loans)

86

Chart 3.26

Coverage of non-performing loans in selected EU Member States

87

Chart 3.27

Private sector loan-to-deposit ratio (regional comparison)

88

Chart 3.28

Private sector loan-to-deposit ratio for banks

with majority Greek and Austrian capital

88

Chart 3.29

Foreign liabilities

88

Chart 3.30

Liquidity provided by and frequency of repo operations

89

Chart 3.31

Net daily balance of EUR-denominated funds raised via currency swaps

with non-resident financial institutions

90

Net daily balance of CHF-denominated funds raised via currency swaps

with non-resident financial institutions

91

Chart 3.33

Balance sheet recognition of security holdings

92

Chart 3.34

Credit institutions ranked by the impact of a 200 bp shock on own funds

92

Chart 3.35

Banks' return on equity regional comparison

93

Chart 3.36

Distribution of credit institutions market share by ROA

94

Chart 3.37

Net profit/loss and ROE

94

Chart 3.38

Annual real growth rates of operating revenues, expenses and profit

95

Chart 3.39

Annual real growth rates of interest revenues, expenses

and net interest income

95

Chart 3.40

Correlation between insurance sector and GDP dynamics

97

Chart 3.41

Dynamics of gross premiums written as a share in GDP

comparison across EU Member States

98

Chart 3.42

Insurance sector Return on assets (ROA)

98

Chart 3.43

Contributions to Pillar II

99

Chart 3.44

Composition of investment portfolios

99

Chart 3.45

Exposure of pension funds to credit institutions

100

Chart 3.46

Lending and the GDP dynamics

101

Chart 3.47

Breakdown of NBFIs loan portfolio by borrower and currency

102

Chart 3.48

Breakdown of loans to non-financial corporations by sector

102

Chart 3.49

Non-performing loans

103

Chart 3.50

Profitability of the NBFIs sector

103

Chart 3.51

Breakdown of loans taken by NBFIs, by main country of origin

103

Chart 3.52

Changes in the composition of the financial system March 2009

through March 2015

105

Chart 3.53

Developments in investment fund assets

105

Chart 3.54

Investment fund assets

106

Chart 3.32

NATIONAL BANK OF ROMANIA

177

Financial stability report 2015

Chart 3.55

Outstanding fund units

106

Chart 3.56

Exposures of the Romanian financial system

107

Chart 3.57

Average interbank money market rates

108

Chart 3.58

Spread between money market rates in the region

and those in the euro area

108

Chart 3.59

Stochastic volatility of interbank money market rates

109

Chart 3.60

Transition probabilities between stress regimes

in interbank money market

109

Chart 3.61

5Y CDS quotes for selected countries in the region

110

Chart 3.62

5Y CDS quotes for selected euro area countries

110

Chart 3.63

Main exchange rates across the region

110

Chart 3.64

Stochastic volatility of the EUR/RON exchange rate

110

Chart 3.65

Spread between yields on 5Y government securities

in Romania and other European countries

111

Transactions in government securities

on the interbank secondary market

111

Chart 3.67

Yield curve in the secondary market

112

Chart 3.68

Slope of the yield curve in the secondary market

112

Chart 3.69

Benchmark rates on the secondary market

for government securities (bid/ask rate average)

113

Volatility of benchmark rates on the secondary market

for government securities (bid/ask rate average)

113

Chart 3.71

Regional stock market index dynamics (reference period: January 2013)

114

Chart 3.72

Dynamic correlations between the BET and other

regional stock market indices (10-day moving average)

114

Chart 3.73

Stock market capitalisation and annualised liquidity

115

Chart 3.74

Stock market capitalisation of CEE countries

115

Chart 3.75

Cumulative distribution of dividend growth rate

116

Chart 3.76

Stock market volatility and daily trading volume on the BSE

116

Chart A

CoVaR computed for the financial institutions listed on the BSE

117

Chart 4.1

Value of transfer orders settled in ReGIS

119

Chart 4.2

Maximum number of transfer orders settled in ReGIS on a monthly basis

119

Chart 4.3
Chart 4.4
Chart 4.5

Liquidity usage ratio in ReGIS

Maximum value of waiting queues in ReGIS
Queuing time of instructions

120
120
120

Chart 4.6
Chart 4.7
Chart 4.8

Availability ratio of SENT

Value of securities recorded in SaFIR
Transactions processed in SaFIR by type of securities

121
123
123

Chart 4.9
Chart 4.10

Value of transactions settled in SaFIR

The value of transactions settled in systems owned by central banks
as a share in GDP

124
124

Analysis of the countercyclical capital buffer in Romania

(2000 Q1 2015 Q2)
Additional indicators monitored by the NBR

139
139

Chart 3.66

Chart 3.70

Box 7

Chart 5.1
Chart 5.2

178

NATIONAL BANK OF ROMANIA

Special feature
Chart 1

Public debt comparison between 2008 and 2014

158

Chart 2

Public debt and external public debt (gross and net)

158

Chart 3

Romanias external debt

159

Chart 4

The financial assistance package provided by international institutions

(IMF, EC, IBRD) to Romania in 2009

159

Chart 5

Foreign currency buffer of the MPF

159

Chart 6

Annual change in public debt by main component (share of GDP)

160

Chart 7

Public investment spending and budget deficit

160

Chart 8

The MPFs external public debt service in relation

to the financial assistance package

162

The sustainability of Romanias public debt

163

The estimated probability of recession for various levels of public debt

(based on the regression model)

165

International comparison the level of the signal threshold

in the case of public debt (regression model)

165

Calibrating the optimal level of public debt using

the general equilibrium condition

166

Chart 10

Public debt sustainability in the long run

167

Chart 11

Maturity structure of new domestically-issued government securities

168

Chart 12

Breakdown of the current stock of government securities

by maturity year (July 2015)

168

Chart 13

CDS spreads, interbank money market rate and exchange rate

169

Chart 14

Scenario-based evolution of public debt stock-related interest payments

169

Chart 15

Public debt breakdown by type of investor

170

Chart 16

Breakdown of locally-issued government securities by type of investor

170

Chart 17

Exposure of monetary financial institutions to the government sector

(in total assets)

171

Total public debt and private debt by component

171

Chart 9
Box 8
Chart A
Chart B
Chart C

Chart 18

NATIONAL BANK OF ROMANIA

179

Financial
Stability Report
2015