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September 27, 2022

IMF: Banks’ exposure to government bonds and guarantees, one of the Romanian financial sector’s vulnerabilities

The banks’ exposure to government bonds and guarantees, the large share of mortgage loans, the growth in non-performing loans and the lending practices of non-bank financial lenders (NBFLs) are the main vulnerabilities that the Romanian financial sector is facing, according to a report authored by International Monetary Fund experts as part of the Financial Sector Assessment Program (FSAP).

IMF experts claim that rapid measures are needed to respond to these risks and to consolidate financial stability and emphasise that the authorities are already considering a debt-service-to-income limit on mortgage loans. “The gradual scaling back of the Prima Casa program should continue to mitigate risks of housing sector imbalances and to support the effectiveness of the existing loan-to-value limits,” the IMF experts point out. Moreover, strengthened monitoring of non-bank financial lenders is necessary to avoid reputational risks. “The mission also recommends introducing capital buffers to increase resilience and guard against risks from large sovereign exposures,” the IMF report reads.

The IMF experts emphasise that the banks’ exposure to government bonds and guarantees has reached 22 percent of assets in December 2017, one of the highest levels in the EU, up from less than 5 percent in 2008. “In an environment of very short-term funding, the relatively long duration of domestic sovereign debt means that banks are heavily exposed to losses from increases in interest rates. The government guarantees issued in the context of the Prima Casa loan program create an additional indirect exposure of the banking sector to the sovereign,” the IMF report reads.

Likewise, IMF experts warn that the Romanian banking sector is becoming increasingly exposed to the real-estate sector. From 2008 to 2017, the share of housing loans has grown from 21 percent to more than 54 percent of total household loans. The growth of mortgage loans has generated a hike in property prices. “Moreover, since the large majority of mortgage contracts are at variable rates, loan performance could deteriorate and default rates rise if interest rates increase,” the IMF warns.

Finally, the growth in lending from non-bank financial lenders may generate vulnerabilities and reputational risks for the banking sector. Non-bank financial lenders are providing credit to SMEs, mainly in forex, as well as to households, often at lower income and at high interest rates. “A macroeconomic downturn may negatively impact highly indebted households and increase non-performing loans in this sector. The conduct of non-bank financial lenders can create reputational risk for the financial sector that already has a negative public reputation,” the IMF report emphasises.

The team of IMF experts and the representatives of the National Bank of Romania assessed the banking sector’s resilience against the identified vulnerabilities by starting off from the hypothesis of a three-year adverse scenario that includes an increase in sovereign spreads, a sharp depreciation of currency, a hike in interest rates, a shock to GDP as well as a drop in property prices, combined with a rise in the cases of default.

“In the event of a sharp increase in interest rates, combined with a shock to growth that is comparable to the 2008 crisis, banks’ capital is impacted significantly. Stress test results indicate that, over a three-year horizon, banks face losses of close to 900 basis points in capital, resulting from trading losses on their sovereign securities portfolios, and credit losses on their loan portfolios. A number of the 12 stressed banks fail to meet the minimum threshold for the common equity Tier 1 capital ratio (CET1),” the IMF report shows. The CET1 capital ratio for the 12 banks considered drops from 17.1 percent at the end of 2017 to 8.2 percent at the end of 2020, in the adverse scenario. Likewise, the capital to total assets ratio decreases sharply, from 9.3 to 4.8 percent during the same period.

Included among the Financial Sector Assessment Program’s recommendations that should be implemented immediately, namely in a year’s time, are the following: supplementary investment in IT specialists, in particular in the area of cyber resilience; address the remaining gaps in the anti-money laundering and combating the financing of terrorism preventive framework; prepare an interagency simulation exercise that includes the National Bank of Romania, Ministry of Finance, Financial Supervisory Authority and the Fund for the Guarantee of Bank Deposits, exercise that would help improve Romania’s crisis management framework.

As part of the Financial Sector Assessment Program (FSAP), IMF experts draft a report titled Financial Sector Stability Assessment (FSSA), document that identifies the main vulnerabilities of the Romanian financial sector and offers a set of recommendations to address them.

The report was drafted based on the work of a team of IMF experts led by Erlend Nier, who visited Romania in November 2017 and January 2018 and had meetings at the National Bank of Romania, Ministry of Finance, Financial Supervisory Authority, Fund for the Guarantee of Bank Deposits, Competition Council, Consumer Protection Authority, Bucharest Stock Exchange, and also met the representatives of banks, investment companies, insurance companies and financial sector associations.


FinMin Teodorovici: This week, we’ll officially launch the issue of government securities for the population 


The issue of government securities for the population, called Centenary, will be launched this week, the bonds being for five years with an interest rate of over 4.5% per annum, and the amount expected to be attracted by the state is RON 4 billion, Finance Minister Eugen Teodorovici said on Monday.

“This week we will officially launch this issue of government securities for the population, called Centenary, the period is five years and the interest rate is over 4.5% per annum”, the Finance Minister mentioned at Ploiesti.

“I say that people will react positively, because the interest rate is a very good one, as I told you, it is over 4.5% per annum, it’s an interest rate that the banks don’t offer today by far; moreover, this interest rate is not subject to taxation by the Romanian state, while the banks’ interest is. There are also other benefits: the state definitely guarantees even 100% for the amounts deposited, as well as for the corresponding interests, so I think people will be attracted” the Minister said.

Eugen Teodorovici mentioned that the state expects to attract RON 4 billion by selling the securities, and if the amount will not be attracted, the necessary changes will be made so that buying the government securities will be as attractive as possible for the population.

“If we will not attract the expected amount of RON 4 billion, this means we must adjust the terms set for this issue of government securities, so people will be even more attracted by the government securities for the population” the Minister said.

The official mentioned that the main idea for this approach was that “it isn’t fair for “me, the state’, to sell government securities to the banking system at a certain interest rate, while the banks apply a much lower interest rate for the deposits in RON, with a very high difference, and I believe that it’s a normal thing for the population to borrow, let’s say so, the state, by buying these government securities”.


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