NATIONAL BANK OF ROMANIA 1. 2 OVERVIEW I. Recent banking sector developments II. Policy responses to the financial crisis II.1. Proactive measures undertaken.

NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 1NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA

NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 2

OVERVIEW

I. Recent banking sector developments

II. Policy responses to the financial crisis

II.1. Proactive measures undertaken by the National Bank of Romania for mitigating the effects of the financial crisis

II.2. The IMF Stand-By Arrangement – actions for further strengthening of the financial sector

III. The perspectives of lending


I. Recent banking sector developments


0

50

100

150

200

250D

ec.

05

Mar.

06

Jun.0

6

Sep.0

6

Dec.

06

Mar.

07

Jun.0

7

Sep.0

7

Dec.

07

Mar.

08

Jun.0

8

Sep.0

8

Dec.

08

Mar.

09

RON billion, end of period

(in real terms)

loans to the private sector

loans to the government sector total

Source: National Bank of Romania

(de

flate

d b

y C

PI,

Marc

h 2

009=

100)

Evolution of Domestic Credit


9.414.1

16.4 16.6

11.3

12.7

19.522.7

7.411.4

19.7

13.3

15.4

18.6

19.6

6.34

10.24

4.8

17.311.8

39.3

26.8

20.7

16.6

35.9

0

5

10

15

20

25

30

35

40

45

2004 2005 2006 2007 2008

Source: National Bank of Romania, National Institute of Statistics

percent

loans to non-financial corporations a.o.

loans to households

foreign-exchange-denominated loans

RON-denominated loans

*) loans to the private sector / GDP

Financial Intermediation*


Loans to Private Sector

Source: National Bank of Romania, National Institute of Statistics

0

20

40

60

80

100

120

Dec.

05

Mar.

06

Jun.0

6

Sep.0

6

Dec.

06

Mar.

07

Jun.0

7

Sep.0

7

Dec.

07

Mar.

08

Jun.0

8

Sep.0

8

Dec.

08

Mar.

09

RON-denominated loans

total

foreign-exchange-denominated loans

0

20

40

60

80

100

120

Dec.

05

Mar.

06

Jun.0

6

Sep.0

6

Dec.

06

Mar.

07

Jun.0

7

Sep.0

7

Dec.

07

Mar.

08

Jun.0

8

Sep.0

8

Dec.

08

Mar.

09

households

total

non-financial corporations

real annual percentage change*

*) based on CPI

real annual percentage change*


60

50

40

30

20

10

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 Mar.2009


RON billion

60

50

40

30

20

10

0

10

20

30

40

50

60

70RON-denominated deposits RON-denominated loans

foreign-exchange-denominated deposits foreign-exchange-denominated loans

net position, RON net position, FX

RON billion

Non-Financial Corporations' Loans and Deposits


80

70

60

50

40

30

20

10

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 Mar.2009Source: National Bank of Romania

RON billion

80

70

60

50

40

30

20

10

0

10

20

30

40

50

60

RON-denominated deposits RON-denominated loansforeign-exchange-denominated deposits foreign-exchange-denominated loansnet position, RON net position, FX

RON billion

Households' Loans and Deposits


0

5

10

15

20

25

30

35

Jan.0

4

Apr.

04

Jul.0

4

Oct

.04

Jan.0

5

Apr.

05

Jul.0

5

Oct

.05

Jan.0

6

Apr.

06

Jul.0

6

Oct

.06

Jan.0

7

Apr.

07

Jul.0

7

Oct

.07

Jan.0

8

Apr.

08

Jul.0

8

Oct

.08

Jan.0

9

Apr.

09


0

5

10

15

20

25

30

35

NBR policy rate

NBR interest rate on flow of sterilization operations (deposit taking, reverse repo, CDs)

new RON-denominated loans to non-financial corporations and households

new RON-denominated time deposits from non-financial corporations and households

percent per annum percent per annum

Interest Rates in the Banking System


0.31 0.28 0.260.20 0.22

0.35

0.66

21.120.621.1

18.1

13.812.3 12.0

9.410.212.7

15.6 15.6

18.1

-2.9

2.2 2.0 1.6 1.3 1.0 1.7

-0.3

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4D

ec.

03

Dec.

04

Dec.

05

Dec.

06

Dec.

07

Dec.

08

Mar.

09


-5

0

5

10

15

20

25

30

35overdue and doubtful loans /total loans portfolio (net value)solvency ratio (>8%)*; rhsROE (net income / total equity); rhsROA (net income / total assets); rhs

percent

* Starting with 2007, according to Regulation No.13/2006 and Order No.12/2007; (>12%) until end-2006.

percent

Analysis Ratios for the Banking System


II. Policy response to the financial crisis

II.1. Proactive measures undertaken by the National Bank of Romania for mitigating the effects of the financial crisis


Effects of the Global Financial Crisis on Romania from the Lending Perspective

Financial channel

Wealth and balance sheet

channel

Confidence channel

Exchange rate channel

Diminished access to external financing => impact on lending volume, especially FX loans

Lower foreign currency inflows => downward pressure on the RON

Risk aversion of foreign investors relative to emerging economies => decline in foreign investments

Deterioration of households’ and companies’ net assets because of FX loans debt service increase and reduction in asset prices

Global financial

crisis


II.1. Proactive Measures by the NBR since September 2008 II.1. Proactive Measures by the NBR since September 2008 when the Crisis Emerged (1)when the Crisis Emerged (1)

a. Liquidity management and money market functioning measures

Use of lending facility, FX swaps and repo operations

Minimum reserve requirement reduction:

• for RON-denominated liabilities from 20% to 18% => starting with Nov. 2008

• for FX-denominated liabilities with residual maturities of over 2 years from 40% to 0% => starting with May 2008

Amending rules for interbank interest rates

b. Interest rate decisions (monetary policy rate)

Feb. 2008 => rate cut from 10.25% to 10%

May 2009 => rate cut from 10% to 9.5%


II.1. Proactive Measures by the NBR since September 2008 II.1. Proactive Measures by the NBR since September 2008 when the Crisis Emerged (2)when the Crisis Emerged (2)

c. Supervisory actions Liquidity: Strengthening of bank liquidity monitoring

Recommendations to diversify financing resources Request for alternative financing arrangements etc.

Solvency: Strengthening of solvency monitoring Requests for capital increases Requests for maintaining solvency ratios above

minimum level of 8% etc. Lending: Recommendations to reduce sectoral concentrations

Requirements to improve banks’ risk management frameworks etc.

d. Regulatory actions Simplify mortgage lending rules (NBR Regulation 2/2009) Adapt provisioning requirements for loans overdue for more than 90 days (NBR Regulation 3/2009) Allow for interim profit to be included in own funds (NBR/NSC Regulation 6/3/2009) etc.


II. Policy response to the financial crisis

II.2. The IMF Stand-By Arrangement – actions for

further strengthening of the financial sector


The International Financing Arrangement for Romania

The total size of the support is EUR 20 billion (2009-2011):• IMF Stand-By Arrangement of EUR 12.95 bn. • EU balance of payments financing facility of EUR 5 bn.• World Bank, EBRD commitments of EUR 2 bn.

The program aims to cushion the effects of a sharp drop in private capital inflows and to facilitate an orderly adjustment of the external deficit, thus easing excessive pressures on the exchange rate

To attain these objectives, the program intends to:1. strengthen fiscal policy2. bring inflation within the NBR’s target range and

maintain it there3. maintain adequate bank capitalization and liquidity4. secure adequate external financing and improve

confidence.


Rationale for Banking System Actions

Strengths ChallengesBanking system is sound and well capitalized

The parents of the main banks operating in Romania have pledged any support necessary for their subsidiaries, committing to maintaining their global exposures to Romania and to recapitalizing subsidiaries

The macroeconomic environment is difficult, including from the perspective of the economic downturn

The global economic and financial outlook is still negative, which maintains the investors’ uncertainty and risk aversion

Need for actions aimed at further strengthening the

banking system


Main Actions Part of the Stand-by Arrangement (1) I. Maintain a strong capitalization of the banking system

on the medium term

Banks are required to secure by 30 September 2009 sufficient resources to ensure solvency ratios above 10%

II. Improve the capacity to respond in a timely and effective fashion in the event of bank distress

Strengthen the special administrator’s ability to deal with banks in weak financial positions

NBR’s will be empowered to request that significant shareholders financially support the bank and to prohibit or limit profit distribution

Other legal amendments: simplify and strengthen the court-based proceedings for winding-up of banks


III. Ensure the confidence in the banking system

RDGF will have access to government privatization receipts

Deposit insurance payment period will be shortened to 20 working days

IV. Continuously improve the supervision and regulation framework

Improve bank liquidity regulations

Raise minimum level of the capital adequacy ratio from 8% to 10%

Adopt International Financial Reporting Standards (IFRS)

V. Promote some measures to ease the debt servicing by borrowers during the crisis

Seek an agreement with commercial banks to facilitate the restructuring of household debt contracted in foreign currency

Main Actions Part of the Stand-by Arrangement (2)


“Vienna Initiative”

The continuing involvement of foreign banks in Romania enhances the successful implementation of the macroeconomic reform program

On March 26 in Vienna, the parent banks of the nine largest foreign banks (from Austria, Greece, France and Italy) operating in Romania have committed to:

– maintain their overall exposure to our country and – increase the capital of their subsidiaries as needed

A follow up meeting was held on May 19 in Brussels, when the nine parent banks agreed to submit specific bilateral commitment letters in the coming weeks to fulfill the objectives agreed upon in Vienna.

Main Actions Part of the Stand-by Arrangement (3)


III. The perspectives of lending


Measures Already Undertaken and Those Announced Started Improving Fundamentals

Increased confidence in Romania

Sound macroeconomic and financial sector

policies

are creating strong fundamentals for

lending revitalization


Confidence Effect: Spreads on Eurobonds

(German Benchmark) Have Decreased Significantly

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Bulgaria

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Turkey (rhs)


The Perspectives of Lending (1)

NBR is prepared to undertake further measures which will have a positive effect on bank lending, including a gradual ease of the reserve requirements if monetary and macroeconomic conditions have favorable developments

The external financing from IFIs will increase the availability of funds in the economy, which will encourage lending expansion

However much will depend on how the supply and the demand for loans will adjust to the new conditions


The Perspectives of Lending (2)

Supply of loans Bank lending will resume, although the pace of growth will

be slower than that recorded previously (e.g. 2007)

A downward adjustment is expected for deposit interest rates, which will also push down lending interest rates

The banks will undergo a restructuring process following increasing pressure on profitability and from competitors

Demand for loans The decreasing cost of borrowing will stimulate the demand

for loans

Any measures supportive of borrowing, such as supplementing the capacity of guaranteeing the loans will be beneficial

Confidence will increase as economic prospects improve

NATIONAL BANK OF ROMANIA 1. 2 OVERVIEW I. Recent banking sector developments II. Policy responses to the financial crisis II.1. Proactive measures undertaken.

Documents

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world bank

financial sector slide

banking system slide

adequate bank capitalization

perspectives of lending

private sector slide

financial intermediation