Download the implications of the global financial crisis on the romanian

THE IMPLICATIONS OF THE GLOBAL FINANCIAL CRISIS
ON THE ROMANIAN BANKING SECTOR
Student: Ana-Maria-Georgiana ZAPAN
Faculty of Economics and Business
Administration,“Alexandru Ioan Cuza” University, Iasi, Romania
[email protected]
Student: Ştefania AGACHE
Faculty of Economics and Business
Administration, „Alexandru Ioan Cuza” University, Iasi, Romania
[email protected]
Abstract
In terms of the difficult economic environment characterized by global economic crisis,
our study aims to present the implications of the current crisis on the banking sector in
Romania. The international financial crisis that currently exists is a serious event that
confronted modern economy, because it affected many banking systems globally and
implicitly Romanian banking system. Although the Romanian banking sector was not
exposed to toxic assets, it has been affected by the economic crisis because of the high
degree of connectivity with the European banking system by the large share of foreign
capital held by banks in Romania, which caused a transfer of crisis from European
banks to subsidiaries. So, the paper aims to highlight the effects generated by the
economic crisis on the Romanian banking sector and main challenges post-crisis.
Keywords: banking sector, financial crisis, non-performing loans
JEL Classification: G01, G21
1. INTRODUCTION
Financial and economic crisis appears to be unprecedented in the last half
century. In the current situation, the financial and economic crisis has spread
rapidly worldwide, the economies of the EU Member States confronted with
serious difficulties, both in the banking system and the real economy.
In this research we will present the causes of the current financial crisis and
how it affects the Romanian banking sector. Crisis in the U.S. mortgage market,
called the "subprime" crisis, was the trigger of the global financial crisis. The
deep causes were both macroeconomic and microeconomic nature. Romania
had to adjust their macroeconomic policies to the new context created by the
international financial crisis, imposing the need for recalibrating the mix of
economic policies in line with the challenges determined by the crisis. Also
extremely negative effects of the crisis have determined unprecedented
reactions from the National Bank of Romania, materialized in the adoption of
measures, to help restore financial balance.
In this context, our paper is divided into three parts: first part contains
introduction remarks regarding the importance and relevance of the approached
theme, the second part present the main effects from the global crisis on the
Romanian banking sector and the last part provides the concluding remarks of
the research.
2. THE INTERNATIONAL FINANCIAL CRISIS AND ITS
IMPLICATIONS ON THE ROMANIAN BANKING SECTOR
The banking sector is an important part of the financial system and it holds
an important role in the development of socio-economic activity. The proper
functioning of the banking system and ensuring its stability and viability
contribute to the economic development of a country. Although, the quality and
level of development of the banking sector depends on the economic
environment in which it operates.
The banking activity has an important role in the contemporary economic
life because it encourages domestic and foreign trade transactions of a state and
allows investment both through direct participation in the financing and the
placement and management of savings.
In an economy, the banking sector should ensure attraction and concentrate
of monetary resources from population and channelling them through the
process of loan allocation to investments more efficient. Banks are the main
channel of monetary policy transmission.
The international financial crisis that currently exists is a serious event that
confronted modern economy, because it affected many banking systems
globally. This crisis started in 2007 in the United States, the main cause being
mortgage loans with promotional interest rates and overvalued collateral and
having the effect of bankruptcy of some of the largest banks in the world.
Therefore, this crisis is also known as the “subprime crisis”.
In the years preceding the financial crisis, 2005-2006, Romania was in a
favourable situation in terms of financial stability and it is considered that the
Romanian banking sector is able to resist systemic shocks, it can efficiently
allocate resources to the real economy and identify and manage risks. In this
period the banking sector consolidated its leading position in the system,
supported by a dynamic credit by maintaining financial stability indicators to
acceptable levels.
However, given the fact that Romania is an emerging country, it has a
lower capacity to cope with possible tensions that may arise because of the
visible signs of the global crisis.
In the banking sector in Romania, the current international financial crisis
began to unfold in the fall of 2008, when there was a speculative attack against
the national currency. The economic crisis has appeared due to an
underestimation of the risk associated with holding cash. This risk was
determined by changes in the cost of the main freely convertible currency,
leading to an increase in illusory wealth. When liquidity which supported this
growth disappeared, there was a strong adjustment in the price of all assets,
resulting a recession and the need to adopt austerity measures.
In Romania, the financial crisis of the banking system did not have the
same basis as international level because the share of housing loans was much
smaller compared with the Eurozone and banks had no investments in
derivative instruments based on the securitization of loans.
The banking sector in Romania was not directly affected by this crisis,
because it was not exposed to toxic assets, but due to the high degree of
connectivity with the European banking system, with large share in the structure
of banking institutions holding foreign capital, there was a transfer of the crisis
from parent banks to their subsidiaries. Thus, our country has confronted
liquidity shortages, which were provided by banking groups in Western Europe
(Roman & Chirlesan, 2012).
Table 1: The evolution of the number of credit institutions in the
banking sector in Romania, in the period 2008-2013
Credit institution
Credit institutions
with fully or
majority stateowned capital
Credit institutions
with major private
capital
Credit institutions
with majority
foreign capital
Branches
of
foreign banks
2008
2009
2010
2011
2012
2013
43
42
42
41
40
40
3
2
2
2
2
2
41
40
40
39
38
39
37
35
35
34
34
36
10
10
9
8
8
9
(Source: NBR, 2013, p.28)
The financial crisis has not led to major changes in the structure of the
banking sector in Romania (Table 1), the number of banks in the system are
approximately the same.
The main challenges for the banking system in Romania in the context of
the current financial crisis were (NBR, 2008):
 decrease in the volume of loans to customers, especially population;
 increasing the share of overdue loans, especially for small loans, for
consumption and unsecured;
 increase interest rates on bank deposits and loans;
 the growth of deposits volume with banks, especially from the
population;
 Diminishing trends expansion of banking activity in the area and
reducing the number of employees.
Romanian banking sector was confronted with a growth in lending to the
private sector and in particular for consumer credit that had a very large
increase. It is considered to be the factor that triggered the economic crisis in
the Romanian banking system. Thus, in the period following the onset of the
economic crisis has been a tendency to reduce their, due to the tightening of
lending condition by banks, because of the reluctance of the population, due to
the uncertainty manifested by the crisis.
Figure 1: Evolution of private sector credit by categories of beneficiaries,
in Romania, in the period 2008-2013
(Source: NBR, 2013, p.58)
In the period 2008-2013 the trend of growth of volume credit to the private
sector was tempered (figure 1). If we follow the evolution of the credits in the
period analyzed we find that the loans decreased from 2008 until early 2010 and
then recorded a slight increase. Also it can be seen that the volume of loans to
households followed a descending trend, this being the one of the main
problems confronting by the banking sector.
However, the banking sector has proven to be strong during the crisis, it
continues to provide financing of the Romanian economy, in the proportion of
about 92% of total funding granted by the Romanian financial system.
Economic growth prospects generated by the stake of attracting European
funds, the degree of financial intermediation, of almost 40% and 57%, make
Romania an attractive destination for investors in the banking system.
The crisis has left its mark on the number of employees and banking units,
because the credit institutions want to reduce the costs by reducing their
number.
An important indicator to measure the impact of the international economic
crisis on the banking system in Romania is the level of non-performing loans.
NPL ratio is calculated based on prudential reporting about loan classification.
The dynamic still modest in economic activity, so appear the tendency to
restrict lending, which led to the further accumulation of non-performing loans,
which affect the quality of banks loan portfolio.
NPL in Romania has increased significantly in 2008-2013 (figure 2), as
effect of the recession, because individuals and corporations was confronted
with difficulties in repaying outstanding loans. Thus, if in March 2008 the NPL
in Romania was 1.7%, in December 2013 it equalled 21.87%, while analysts
expected an increase of this indicator in 2014.
Figure 2: Evolution of the non-performing loans in Romania, in period
2008-2013
(Source: NBR, 2013, p.28)
The main reason for these negatives changes are worsening economic
environment and financial resources more expensive. Also rising
unemployment in Romania, significantly reducing public sector wages and
reduced activity or bankruptcy of companies were determined continuous
decrease repayment capacity and thus the increase in non-performing loans.
These factors had a significant influence on the quality of the loan portfolio of
commercial banks and led to a significant rise in provisions, fact which also
affect the profitability of banks in the Romanian banking sector.
The deterioration of the loan portfolio was a common feature in European
banking system and manifested simultaneously with the decrease of growth, so
that the situation of credit institutions was exacerbated by losses from the
sovereign debt crisis (ECB, 2010). Countries such as Greece, Bulgaria,
Hungary, and Slovenia have a much more negative situation than Romania
(figure 3).
Figure 3: Comparative evolution of NPLs in some countries of the
European Union, in period 2008-2012
(Source: NBR, 2013, p.28)
To improve the effects of the global crisis on the lending process and to
reduce the numbers of non-performing loans in the banking system were
adopted more severe conditions for providing loans.
Figure 4: Evolution of the main profitability indicators in the Romanian
banking sector in 2008-2013
(Source: NBR, 2013, p.72)
The difficult economic environment, characterized by the current financial
crisis has had a major impact on the financial results of the Romanian banking
institutions, these have reported in 2010-2012 a negative results, due to the
substantial increase in the volume of credit risk provisions, amid the
depreciation of the quality of financial assets and the revaluation of collateral.
According to the NBR, in 2013 the main indicators of profitability, Return on
Equity (ROE) and Return on Assets (ROA) had positive values (figure 4).
During the crisis, banks have become more cautious, these passing from
the providing of quantitative loans to the qualitative loans and trying to
implement a new business model, but that would require the additional costs.
The crisis caused a slowdown in lending in our country; banks have changed
their orientation from a fast expansion to a prudence-oriented strategy. The
banking institutions had to adapt strategy, the territorial expansion plans and the
range of products and services offered to customers and perform a more careful
control of operational costs.
The main short and medium term trends of the banking system in Romania
will be (Ensight Management Consulting, 2011):
 increasing financing pressures;
 reducing lending activity:
 attracting projects co-financed from EU funds;
 controlling costs and optimizing the branch network;
 changes in the competitive environment;
 enhanced competition to attract customers.
Also, are expected constraints on the lending to small and medium
enterprises (SMEs) because of European recommendations to restrict foreign
currency lending and to apply the provisions of the new agreement on capital
requirements - Basel III. Application of the European Systemic Risk Board
recommendations which aim discouraging foreign currency lending to nonfinancial entities that do not have income foreign currency, will reduce the
lending capacity and will follow appropriate risk management.
A difficult economic environment, the implementation of Basel III, credit
risk and reduce exposure in the absence of alternative investment also remain
important challenges to the Romanian banking system.
The crisis has multiple effects on Romania. From a financial perspective, it
resulted in a decrease liquidity of the banking system, increase interest rates,
reducing current transfers from abroad, increase costs, both private sector and
budget deficit financing. Approached by the economic nature as crisis
manifested by reducing economic growth, decrease in foreign investment,
increase unemployment and leaving the market of a large number of small and
medium enterprises. On the social side, the crisis affected population by
decreasing job security, which determining the possibility or impossibility of
returning the loan.
During the economic recession, National Bank of Romania acted to
stimulate aggregate demand. Thus, was gradually reduced the interest rate
monetary policy, to the 3.5% minimum established in February 2014 and have
been performed ample reductions in minimum reserve requirements.
Besides the two main measures taken by the National Bank of Romania, to
reduce both the interest rate monetary policy and the level of the reserve
requirement, also observes that it introduced stricter requirements for loans to
unhedged borrowers for moderate the boom of foreign currency loans, took
steps to flexible lending to households, it introduced the regulation and
supervision of non bank financial institutions, took measures provided to
improve the liquidity of banks, has provided temporary liquidity of credit
institutions to prevent systemic risk and has modified regulatory measures in
the solvency.
Although the National Bank of Romania has taken measures to counteract
the crisis, did not achieve the desired effects, because the banking system is still
affected and not achieved the desired economic growth.
3. CONCLUSION
As regards the banking sector in Romania, we can affirm that in the
previous period of financial crisis, this had financial stability and has managed
an efficient allocation of resources to the real economy, through sustained
dynamics of credits. However, the international economic crisis has made its
mark on the banking sector in our country; its effects are felt since the fall of
2008.
The main factor behind the crisis in the Romanian banking system has been
the development of lending to the private sector, mainly of consumer loans, in
our country level, compared to other countries where real estate loans have a
smaller share. The impact of the current financial crisis caused a moderation in
lending activity and restriction of banking activities by reducing the number of
banking units and the number of employees. Also, in the context of difficult
economic environment, commercial banks have had to increase interest rates to
increase the volume of deposits attracted.
The internal and external climate has had a negative effect on the quality of
loan portfolios, NPL has registered significant increase, also and the financial
results of the banking institutions was negative, in the years 2011 and 2012.
The National Bank of Romania intervened to counter the effects of the
crisis, mainly by reducing interest rates of monetary policy and by reducing
reserve requirements.
It can not determine exactly when Romania will overcome this period of
economic recession, but must take the advantage by any opportunity of
economic relaunching.
Currently, the banking system is trying to implement a new business
model, based on the relationship between bank and customer and that avoid
repeating past mistakes.
In terms of the outlook for Romanian banking sector, it is anticipated that
the growth rate of NPL will slow, however a full recovery of the banking
system it does not seem probable, given that the advance of economy will be
moderated and banks currently focuses on solving the problem of nonperforming loans and not of lending.
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