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NATIONAL BANK OF ROMANIA. Policy Measures to Overcome the Crisis in Romania. The lending perspectives. Florin Georgescu First Deputy Governor National Bank of Romania. International Conference: "The Cost of the Financial Crisis: Planning an Exit Strategy" Athens, 27 May 2009. OVERVIEW. - PowerPoint PPT Presentation
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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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 3
I. Recent banking sector developments
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 4
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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 5
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*
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 6
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*
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 7
60
50
40
30
20
10
0
10
20
30
40
50
60
70
2004 2005 2006 2007 2008 Mar.2009
Source: National Bank of Romania
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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 8
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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 9
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
Source: National Bank of Romania
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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 10
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
Source: National Bank of Romania
-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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 11
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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 12
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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 13
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%
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 14
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.
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 15
II. Policy response to the financial crisis
II.2. The IMF Stand-By Arrangement – actions for
further strengthening of the financial sector
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 16
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.
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 17
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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 18
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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 19
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)
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 20
“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)
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 21
III. The perspectives of lending
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 22
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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 23
Confidence Effect: Spreads on Eurobonds
(German Benchmark) Have Decreased Significantly
0
100
200
300
400
500
600
700
800
Ja
n-0
7
Fe
b-0
7
Ma
r-0
7
Ma
y-0
7
Ju
n-0
7
Ju
l-0
7
Se
p-0
7
Oc
t-0
7
De
c-0
7
Ja
n-0
8
Fe
b-0
8
Ap
r-0
8
Ma
y-0
8
Ju
l-0
8
Au
g-0
8
Se
p-0
8
No
v-0
8
De
c-0
8
Ja
n-0
9
Ma
r-0
9
Ap
r-0
9 0
200
400
600
800
1000
1200
Bulgaria
Hungary
P oland
Romania (rhs)
Turkey (rhs)
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 24
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
NATIONAL BANK OF ROMANIANATIONAL BANK OF ROMANIA 25
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