## cr18160 ## Source details **Canonical URL:** [cr18160](https://www.imf.org/-/media/files/publications/cr/2018/cr18160.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18160.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18160.pdf.json) --- ### Executive summary — macrofinancial setting and recent developments - Romania’s real GDP growth surged to 6.9 percent in 2017. - Bank assets are about 52.7 percent of GDP (September 2017). - Number of banks: 35 (29 foreign‑owned: 22 subsidiaries and 7 branches). - Largest five banks account for about 60 percent of total deposits and 57 percent of all loans. - Loans by NBFLs account for just over 10 percent of total loans and the share is increasing. - Banking sector return on assets (ROA) increased to 1.3 percent. - NPLs fell from a peak of 21.9 percent in 2013 to 6.4 percent in December 2017. - Provisioning ratio (including general provisions) is about 65 percent. - Parent funding declined to about EUR 7 billion (approximately 7 percent of total liabilities) in 2017, about one‑third of the 2011 level. - Deposits from the domestic private sector increased from about 48 percent of banks’ total liabilities in 2011 to about 66 percent in 2017. - System-wide loan-to-deposit ratio fell to around 77 percent in 2017 from 131 percent in 2008. - Bucharest Stock Exchange market capitalization is about 20 percent of GDP. - Fixed-income market: about 80 bonds traded at the BVB (including 16 corporate bonds) with total value traded of US$403 million in 2017. ### Key vulnerabilities facing the Romanian financial system - Large sovereign exposures - Banks’ holdings of domestic sovereign paper have grown large; banks’ exposure to the Romanian sovereign was about 22 percent of assets as of December 2017, increasing from below 5 percent in 2008. - Stock of public debt: 36.8 percent of GDP at year-end 2017. - Overall (weighted) average duration of sovereign bonds is around three years; some banks have durations as high as seven years. - Government guarantees under the Prima Casa program (state guarantees 50 percent of the mortgage; minimum down payment 5 percent; interest rate ROBOR +250 bps) create additional indirect sovereign exposure. - Interest-rate and housing risks - Housing loans increased from 21 percent of loans to households to more than 54 percent between 2008 and 2017. - 36 percent of total private sector credit reflects real estate lending to households (predominantly at variable rates). - Average mortgage maturity: just over 24 years. - Property prices annual growth rate: 6.2 percent as of September 2017. - Prima Casa undermines LTV limits by allowing LTV ratios of up to 95 percent for program beneficiaries. - FX risks and corporate hedging - Share in stock as of June 2017: 43 percent of corporate loans and 38 percent of household loans were in foreign currency. - Nonperforming ratio: approximately 12 percent for FX loans versus 3 percent for loans in lei. - Share of new bank lending in foreign currency slowed to just below 20 percent in June 2017. - NBFL lending to the corporate sector is predominantly in FX: 84 percent. - Nonbank financial lenders (NBFLs) - 35 NBFLs analyzed; leasing companies: 22 firms, about 2/3 of NBFL asset share. - NPL ratios almost four times larger for non-leasing firms compared to banks’ consumer credit portfolio. - Sensitivity tests indicate almost 80 percent of the NBFL sector would fall below minimum capital requirements as a result of a fairly mild depreciation, driven by highly euroized balance sheets. - NBFLs provide credit to SMEs and households often at high interest rates and DSTI ratios, potentially creating loan traps and reputational risk for banks. - Low financial intermediation - Financial intermediation remains among the lowest in the EU, which could amplify adverse impacts of shocks. ### Stress tests and resilience findings - Stress test framework - Perimeter: top 12 banks by share of assets (80 percent of total assets); baseline date December 2016; stress horizon 2018–20; static balance sheet assumption. - Macroeconomic adverse (V-shaped) scenario: cumulative decline of GDP of two standard deviations over two years; included large depreciation, sharp rise in domestic policy rates, and increase in sovereign spreads. - Solvency stress test results (adverse scenario) - CET1 ratio for 12 banks declines from 17.1 percent at end-2017 to 8.2 percent at end-2020 in the adverse scenario. - Leverage ratio (T1 Capital to Total Assets) decreases from 9.3 percent to 4.8 percent over the stress horizon. - Total capital drop drivers: - Credit risk: total drop of 750 bps in capital during the three-year horizon. - Credit loss impairments increase from -2.2 percent of RWA in 2017 to -3.5 percent of RWA in 2019 (peak provisioning). - Composition of credit losses: real estate mortgages account for 54 percent of total credit losses; SME backed by real estate account for 20 percent of total. - Market/trading losses on sovereign securities: total drop of 300 bps in capital over the three-year horizon. - Trading gains of 0.6 percent of RWA in 2017 turn to a market loss of 3.6 percent of RWA in 2018. - Exchange rate depreciation: roughly 15 percent of total credit losses can be attributed to exchange rate depreciation. - Net interest income: decreases by almost 40 percent through the stress test horizon. - Contribution of net interest income to CET1 averages 280 bps per year through the horizon, compared to 525 bps in 2017. - Banks face losses of close to 900 basis points in capital under the combined scenario (interest-rate increase plus growth shock comparable to 2008 crisis); a number of the 12 stressed banks fail to meet the minimum CET1 threshold. - Sensitivity tests (single-factor) - A 500 bps increase in sovereign yields leads to a systemwide decrease in Tier I capital by 510 bps; impact up to 970 bps for some banks. - A 50 percent haircut on sovereign exposures would lead to a number of banks falling below regulatory minima. - A 500 bps shock to policy rates reduces the system Tier 1 ratio by 120 bps. - Liquidity stress testing - HQLA composition: lion’s share composed of claims on the public sector (government bonds and central bank reserves). - Retail deposits are the largest funding source; secured funding is almost non-existent. - Aggregate liquidity is more than comfortable under retail deposit-run and wholesale funding shock scenarios. - Currency-differentiated outcomes: some banks can meet either their lei LCR or their euro LCR but not both; recommendation to enforce currency-differentiated LCR and monitor currency-differentiated NSFR. - NBFLs stress and contagion - Leasing firms and non-leasing firms show significantly inferior asset quality relative to banks. - Sensitivity tests show many NBFLs would fall below minimum capital requirements following depreciation, funding cost increases, or higher NPLs. - Banks’ losses could amount to around 9 percent of total banking sector capital in case of an adverse shock leading to NBFL failures. - Parent banks are particularly vulnerable to distress of affiliated NBFLs via reputational risks and depositor runs. ### Policy recommendations (selected, near‑term emphasis) - Macroprudential and systemic risk measures - Apply a stressed DSTI limit to household loans and continue scaling back the Prima Casa program. - Enforce a currency-differentiated LCR and monitor a currency-differentiated NSFR for significant currencies. - Introduce a carefully calibrated Systemic Risk Buffer (SRB) to increase resilience against risks from large exposures to the sovereign. - Strengthen NCMO accountability by: i) requiring proposed policy actions and distribution of votes to be publicly disclosed in the summary of meetings; and ii) developing a common assessment of systemic risk at each NCMO meeting. - Ensure provisioning requirements for NBFLs tighten in line with the application of IFRS 9 to banks. - Supervisory enhancements - Ensure consistency and objectivity in Supervisory Review and Evaluation Process (SREP) scores, findings and supervisory measures. - Enhance supervisory tools by incorporating more forward-looking views (e.g., bottom up stress testing tools) and conducting more thematic reviews. - Strengthen bank corporate governance (increase number of independent board members; improve content and periodicity of exchanges between the NBR and board members). - Invest in more and more qualified IT staff, particularly in cyber resilience, and implement a formal project management methodology. - Crisis management and resolution - Finalize and implement an Emergency Liquidity Assistance (ELA) scheme and provisions for FX liquidity support; develop an ELA policy that accepts a more diverse asset pool as collateral, including FX securities, and provide liquidity facilities for the FGDB. - Diversify FGDB investment policy (reduce holdings of domestic sovereign bonds and bank deposits) and establish operational procedures with the NBR that allow FGDB to have accounts in the central bank and a repo line. - Prepare an interagency simulation exercise including the NBR, ASF, MoPF and FGDB. - Ensure Romania’s interests are addressed in recovery and resolution plans for Romanian subsidiaries of foreign banks. - Seek an exemption from the Procurement law for bank resolution purposes and include MoPF officers linked to bank resolution under personal legal protection provisions. - AML/CFT and sectoral oversight - Address remaining gaps in the AML/CFT preventive framework, including with respect to PEPs and entity transparency; assess and mitigate ML/TF risks. - Adopt the PFMI and formalize and strengthen cooperation between the NBR and the ASF for supervision of the Bucharest Stock Exchange CSD. - Financial sector development - Adopt a comprehensive strategy for financial development to coordinate fragmented public initiatives; consider establishment of a Financial Sector Development Committee. ### Organizational and supervisory priorities - NBR supervisory transition and capacity building - Implement the new EBA SREP Guidelines beyond initial stages. - Conduct more risk-focused, industry-wide thematic analyses and develop off-site monitoring tools, including bottom-up stress tests. - Build specialized expertise, particularly in IT and cybersecurity, to support oversight of payment and securities settlement systems being transferred to the NBR. - Crisis preparedness - Continue upgrading crisis management and resolution procedures; BRRD adoption improved preparedness of the NBR, the MoPF, and the FGDB. - Further inter-agency coordination, simulation exercises, and operational arrangements recommended. - Supervisory process improvements - Improve post-examination processes: issue draft reports to banks within 60 working days (current practice often exceeds six months). - Establish an independent review process to ensure consistency and accuracy of SREP scoring and sanctions. - Enhance cooperation and regular meetings with the ASF to improve consolidated and group-level supervision. ### The Systemic Risk Buffer (SRB) — design, calibration, and impact (selected) - Rationale and objectives - SRB aims to ensure resilience through increased loss absorbing capacity; provide disincentives against excessive sovereign concentration; avoid unintended side-effects. - SRB is legally possible under CRR and is presented as preferable to risk-weight increases or large-exposure limits due to flexibility and lower procyclicality. - Example marginal calibration (by exposure to sovereign as a share of RWA) - < 15: 0 percent marginal SRB add-on - 15-30: 2 percent marginal SRB add-on - 30-40: 4 percent marginal SRB add-on - 40-50: 6 percent marginal SRB add-on - >50: 8 percent marginal SRB add-on - Example outcome: a bank with sovereign exposures of 45 percent of RWA would face a 1 percent SRB surcharge (0*15 + 0.02*15 + 0.04*10 + 0.06*5 = 1.0). - Quantitative impact (example/upper-bound) - Implied increase in required bank capital: close to 1 percent of RWA or RON 1.7 billion. - Assets of the largest 12 Romanian banks: RON 317 billion as of end-2016. - Exposure to government securities: close to 22 percent of total assets, or roughly RON 69 billion. - Increase in banks’ cost of funding (annual): RON 174 million. - Resulting increase in government yields: just over 30 bps (presented as an upper bound). - Reasons why 30 bps is an upper bound - Partial adjustment of cost of equity could halve the impact (roughly 15 bps under a 50 percent adjustment). - Bank debt may be more expensive than deposits, leading to smaller marginal funding-cost increases. - Not all additional capital may need to be raised; existing buffers may absorb part of the requirement. - Inter-bank redistribution of sovereign holdings could reduce aggregate SRB cost (example aggregate capital would fall to RON 1.2 billion; SRB add-on to 0.7 percent of RWA). - Investor base adjustments and other holders (parents, pension funds, foreign investors) could absorb increased yields. - Phased-in example (system-wide additional capital as percent of RWA) - Year 1: 0.6 percent of RWA - Year 2: 0.8 percent of RWA - Year 3: 1 percent of RWA - Estimated upper-bound impacts on government bond yields under phased-in approach - Year 1: on the order of 20bps - Year 2: on the order of 25bps - Year 3: on the order of 30bps - Impact on banks’ profitability - Assume ROE = 12 percent and ROA ≈ 1.3 percent for top 12 banks. - Additional RON 1.7 billion raised reduces debt/equity from 8.5 to 8.1, implying reduced ROE = 11.4 percent (0.6 percentage points lower). - Conclusion: impact on banking sector profitability is very limited. - Impact on liquidity and FX liquidity - Sovereign securities comprise 78 percent of all leu-denominated HQLA. - Under conservative assumptions, aggregate SRB buffer to meet leu LCR needs would amount to just 0.1 percent. - SRB could encourage holdings of FX-denominated HQLA; banks have 32 percent of total deposits in FX. ### AML/CFT, legal framework, and FIU - Progress and reforms - Romania made good progress since MONEYVAL 2008 assessment and 2013 targeted reassessment. - AML/CFT law amended to strengthen FIU independence and the CFT framework. - Draft law aimed at transposing the EU 4th AML/CFT Directive prepared (expected to be discussed by Parliament in May 2018, per source note). - FIU staff increased from 15 (2009) to 107; reporting of suspicious transactions increased. - Remaining deficiencies and recommendations - Preventive framework falls short notably with respect to PEPs and intra-EU correspondent banking relationships. - Transparency of beneficial ownership is insufficient. - Understanding of ML/TF risks appears fragmented; number of investigations and convictions for ML remains low. - Recommended actions: address PEPs gap; increase entity transparency; transpose 4th EU Directive; assess ML/TF risks and ensure appropriate mitigation and sanctioning. ### Financial safety nets, crisis management, FGDB, and ELA - Resolution and safety-net reforms - BRRD transposition strengthened NBR powers: intervention, purchase and assumption, cancellation of debt instruments, bail-in. - FGDB role expanded: administrator of bank resolution fund; on track to reach funding target by end-2024. - Operational gaps and recommendations - Procurement law applies to bank resolution, potentially constraining swift action; recommend exemption for resolution. - Legal protection for MoPF officers linked to bank resolution not yet in place. - Legal instrument to implement MoPF contingent funding to FGDB not yet executed. - NBR should finalize an operational ELA framework including conditions, haircuts, maximum terms, and extend eligible collateral to FX securities. - Given 41 percent of banks’ liabilities are in foreign currency, ELA must incorporate FX illiquidity response strategies. - FGDB operational recommendations: diversify investment policy (three quarters currently in domestic T-bills; rest in bank deposits), obtain an account at the central bank, and access to NBR repo facility. ### Financial sector development, markets, inclusion - Capital markets and insurance - Capital market liquidity and investor base improved; risks include government support, corporate governance of SOEs, and private pension changes. - Insurance sector underdeveloped with low penetration; recent turmoil in non-life sector affected trust and regulator independence. - Recommendations: external assessment of regulatory and supervisory framework; develop homeowners’ catastrophe property, health, and life insurance segments. - Banking depth and inclusion - Banking market depth lags peers; constraints include poverty, rurality, informality, low enterprise density, and many foreign‑owned firms. - Access to credit limited for MSMEs, start-ups, and rural areas. - Financial inclusion lagging due to thin/declining branch network; zero fee account law covers about 50 percent of population. - Recommendations: use Posta Romana branch network; incentivize digital finance expansion; promote financial literacy and consumer protection. - Governance and coordination - Public initiatives to support access to finance are fragmented; recommendation to consider establishing a Financial Sector Development Committee with monitoring, evaluation, and accountability. ### Selected macroeconomic and financial indicators (figures from source) - Real GDP growth (percent change): 2008: 8.3; 2009: -5.9; 2010: -2.8; 2011: 2.0; 2012: 1.2; 2013: 3.5; 2014: 3.1; 2015: 4.0; 2016: 4.8; 2017 Prel.: 6.9. - Output gap (percent of potential GDP): 2008: 13.4; 2009: 3.7; 2010: -1.6; 2011: -2.5; 2012: -4.0; 2013: -3.3; 2014: -3.4; 2015: -2.8; 2016: -1.5; 2017 Prel.: 1.5. - CPI (average): 2008: 7.8; 2009: 5.6; 2010: 6.1; 2011: 5.8; 2012: 3.3; 2013: 4.0; 2014: 1.1; 2015: -0.6; 2016: -1.6; 2017 Prel.: 1.3. - Fiscal balance (percent of GDP): 2008: -4.6; 2009: -6.9; 2010: -6.3; 2011: -4.2; 2012: -2.5; 2013: -2.5; 2014: -1.7; 2015: -1.5; 2016: -2.4; 2017 Prel.: -2.8. - Current account (percent of GDP): 2008: -11.5; 2009: -4.7; 2010: -5.1; 2011: -5.0; 2012: -4.8; 2013: -1.1; 2014: -0.7; 2015: -1.2; 2016: -2.1; 2017 Prel.: -3.4. - Gross general government debt (percent of GDP): 2008: 11.3; 2009: 20.6; 2010: 27.8; 2011: 32.0; 2012: 35.4; 2013: 36.6; 2014: 38.1; 2015: 37.1; 2016: 36.8; 2017 Prel.: 34.7. - Nominal GDP (in billions of lei): 2008: 538.0; 2009: 526.3; 2010: 529.6; 2011: 562.1; 2012: 595.4; 2013: 637.5; 2014: 668.1; 2015: 712.7; 2016: 762.3; 2017 Prel.: 858.3. - Gross international reserves (in billions of euros): 2008: 28.3; 2009: 30.9; 2010: 36.0; 2011: 37.3; 2012: 35.4; 2013: 35.4; 2014: 35.5; 2015: 35.5; 2016: 37.9; 2017 Prel.: 37.1. - Gross international reserves (in months of next year's imports): 2008: 7.8; 2009: 7.6; 2010: 7.6; 2011: 7.9; 2012: 7.3; 2013: 6.8; 2014: 6.4; 2015: 5.9; 2016: 5.6; 2017 Prel.: 5.0. _Italic: Source: IMF Financial System Stability Assessment — Romania and related FSAP chapters and analysis as provided in the source content (cr18160)._ ### EXECUTIVE SUMMARY __________________________________________________________________________ 6 ### EXECUTIVE SUMMARY ### Macrofinancial setting and recent developments - Romania’s real GDP growth surged to 6.9 percent in 2017. - Bank assets are about 52.7 percent of GDP (September 2017). - There are 35 banks, 29 of which are foreign-owned (22 subsidiaries and 7 branches). - The largest five banks account for about 60 percent of total deposits and 57 percent of all loans. - Loans by NBFLs account for just over 10 percent of total loans and the share is increasing. - Banking sector return on assets (ROA) increased to 1.3 percent. - NPLs fell from a peak of 21.9 percent in 2013 to 6.4 percent in December 2017. - Provisioning ratio (including general provisions) is about 65 percent. - Parent funding declined to about EUR 7 billion (approximately 7 percent of total liabilities) in 2017, about one‑third of the 2011 level. - Deposits from the domestic private sector increased from about 48 percent of banks’ total liabilities in 2011 to about 66 percent in 2017. - System-wide loan-to-deposit ratio fell to around 77 percent in 2017 from 131 percent in 2008. - The Bucharest Stock Exchange market capitalization is about 20 percent of GDP. - Fixed-income market: about 80 bonds traded at the BVB (including 16 corporate bonds) with total value traded of US$403 million in 2017. ### Key vulnerabilities facing the Romanian financial system - Large sovereign exposures: - Banks’ holdings of domestic sovereign paper have grown large, exposing them to valuation losses if interest rates or sovereign spreads rise. - Banks’ indirect exposures to government guarantees through the Prima Casa program strengthen the sovereign–bank nexus. - Interest-rate and housing risks: - A potential increase in interest rates or adverse economic shocks may negatively impact NPL ratios on rapidly growing mortgage portfolios, which are at variable rates. - FX risks and corporate hedging: - The share of FX‑denominated loans and deposits decreased significantly but remains relatively high. - A large share of corporate borrowers is unhedged; exchange rate depreciation is an important driver of credit losses in FX loans. - Nonbank financial lenders (NBFLs): - Lending practices of NBFLs may lead to loan defaults and reputational risks for the banking sector. - Low financial intermediation: - Financial intermediation remains among the lowest in the EU, which could amplify the adverse impact of shocks. ### Stress test and resilience findings - Stress test scenario (three-year horizon) combining a sharp increase in interest rates with a growth shock comparable to the 2008 crisis: - Banks face losses of close to 900 basis points (bps) in capital. - Losses arise from trading losses on sovereign securities portfolios and credit losses on loan portfolios. - A number of the 12 stressed banks fail to meet the minimum threshold for the common equity Tier 1 capital ratio (CET1). - Banks’ net interest income decreases by almost 40 percent through the stress test horizon. - Exchange rate depreciation materially increases credit losses on FX loans. ### Policy recommendations (selected, near‑term emphasis) - Macroprudential and systemic risk measures: - Apply a stressed DSTI limit to household loans and continue scaling back the Prima Casa program. - Enforce a currency-differentiated Liquidity Coverage Ratio (LCR) and monitor a currency-differentiated Net Stable Funding Ratio (NSFR) for significant currencies. - Introduce a carefully calibrated Systemic Risk Buffer to increase resilience against risks from large exposures to the sovereign. - Strengthen the National Committee for Macroprudential Oversight (NCMO) accountability by: i) requiring proposed policy actions and distribution of votes to be publicly disclosed in the summary of meetings; and ii) developing a common assessment of systemic risk at each NCMO meeting. - Ensure provisioning requirements for NBFLs tighten in line with the application of IFRS 9 to banks. - Supervisory enhancements: - Ensure consistency and objectivity in Supervisory Review and Evaluation Process (SREP) scores, findings and supervisory measures. - Enhance supervisory tools by incorporating more forward-looking views (e.g., bottom up stress testing tools) and conducting more thematic reviews. - Strengthen bank corporate governance (increase number of independent board members; improve content and periodicity of exchanges between the NBR and board members). - Invest in more and more qualified IT staff, in particular in the area of cyber resilience, and implement a formal project management methodology. - Crisis management and resolution: - Finalize and implement an Emergency Liquidity Assistance (ELA) scheme and provisions for FX liquidity support; the NBR should develop an ELA policy that accepts a more diverse asset pool as collateral, including FX securities, and provide liquidity facilities for the FGDB. - Diversify the investment policy of the FGDB (reduce holdings of domestic sovereign bonds and bank deposits) and establish operational procedures with the NBR that allow the FGDB to have accounts in the central bank and a repo line. - Prepare an interagency simulation exercise including the NBR, ASF, MoPF and FGDB. - Ensure Romania’s interests are addressed in recovery and resolution plans for Romanian subsidiaries of foreign banks. - Seek an exemption from the Procurement law for bank resolution purposes and include MoPF officers linked to bank resolution under personal legal protection provisions. - AML/CFT and sectoral oversight: - Address remaining gaps in the AML/CFT preventive framework, including with respect to PEPs and entity transparency; assess and mitigate ML/TF risks. - Adopt the PFMI and formalize and strengthen cooperation between the NBR and the ASF for supervision of the Bucharest Stock Exchange CSD. - Financial sector development: - Adopt a comprehensive strategy for financial development to coordinate fragmented public initiatives; consider establishment of a Financial Sector Development Committee. ### Organizational and supervisory priorities - The NBR is transitioning to a risk-based supervisory approach; further enhancements needed: - Implement the new EBA SREP Guidelines beyond initial stages. - Conduct more risk-focused, industry-wide thematic analyses and develop off-site monitoring tools, including bottom-up stress tests. - Build specialized expertise, particularly in IT and cybersecurity, which will support oversight of payment and securities settlement systems being transferred to the NBR. - Crisis preparedness: - Continue upgrading crisis management and resolution procedures; BRRD adoption improved preparedness of the NBR, the MoPF, and the FGDB. - Further inter-agency coordination, simulation exercises, and operational arrangements are recommended. *Source: IMF Financial System Stability Assessment — Romania (EXECUTIVE SUMMARY).* ### 7. Concerns about the stability of Romania’s financial system, identified by the FSAP ### 7. Concerns about the stability of Romania’s financial system, identified by the FSAP ### Main systemic concerns identified - Four main issues: - Banks’ exposure to the government through large positions in domestic sovereign debt and guarantees for Prima Casa loans. - Growing exposures of banks to the real estate market at variable interest rates. - Exposures of banks and NBFLs to an increase in NPLs, both on domestic and foreign currency loans, with corporates leverage still high. - Growing lending by NBFLs leading to vulnerabilities and reputational risks for the banking sector. ### Banks’ exposure to sovereign risk - Banks’ exposure to the Romanian sovereign was about 22 percent of assets as of December 2017, increasing from below 5 percent in 2008. - Public debt and related indicators: - Stock of public debt: 36.8 percent of GDP at year-end 2017. - NBR analysis points to a debt level between 40 and 45 percent of GDP as a threshold for a material increase in the likelihood of recession and detrimental impact on debt refinancing capacity. - Sovereign debt duration and valuation risk: - Overall (weighted) average duration of sovereign bonds is around three years. - Some banks have durations as high as seven years. - Long-duration domestic sovereign debt exposes banks to losses from increases in interest rates. - Prima Casa guarantees: - Government guarantees under the Prima Casa loan program create additional indirect exposure of banks to the sovereign. - Program features: state guarantees 50 percent of the mortgage; minimum down payment 5 percent; interest rate ROBOR +250 bps. ### Real estate and household lending risk - Mortgage and real estate lending concentrations: - Housing loans increased from 21 percent of loans to households to more than 54 percent between 2008 and 2017. - 36 percent of total private sector credit reflects real estate lending to households (predominantly at variable rates). - Average mortgage maturity: just over 24 years. - Loans to corporates collateralized by real estate account for a further 33 percent of private sector credit. - House prices and LTV concerns: - Property prices annual growth rate: 6.2 percent as of September 2017. - Prima Casa undermines LTV limits by allowing LTV ratios of up to 95 percent for program beneficiaries. - Interest rate sensitivity: - Majority of mortgage contracts are at variable rates; loan performance could deteriorate and default rates rise if interest rates increase. ### Foreign-currency lending and NPLs - FX lending and asset quality: - Nonperforming ratio: approximately 12 percent for FX loans versus 3 percent for loans in lei. - Share in stock as of June 2017: 43 percent of corporate loans and 38 percent of household loans were in foreign currency. - Share of new bank lending in foreign currency slowed to just below 20 percent in June 2017. - NBFL lending to the corporate sector is predominantly in FX: 84 percent. - Currency mismatch mitigants: - NBR enforces a strict net open position limit. - Households’ deposits in FX have recently been increasing. ### Corporate leverage and funding - Corporate leverage: - Leverage (total non-equity liabilities over capital) declined 2008–12 then rebounded 2012–16. - Rebound associated with increased external borrowing, trade credit, and “shareholders” loans. - External portfolio debt in foreign currency loans remains significant. ### Nonbank financial lenders (NBFLs) vulnerabilities - Sector structure and asset quality: - 35 NBFLs analyzed (Special Register of the NBR). - Leasing companies: 22 firms, forming the majority by number and about 2/3 of the asset share. - Asset quality: NPL ratios almost four times larger for non-leasing firms compared to banks’ consumer credit portfolio. - Capitalization and sensitivity: - Capital levels (non-leasing subsector) are comfortably above the minimum requirement of 7 percent of assets, but variation is significant. - Leasing companies’ capital levels are much closer to minimum requirements. - Sensitivity tests indicate almost 80 percent of the NBFL sector would fall below minimum capital requirements as a result of a fairly mild depreciation, driven by highly euroized balance sheets. - Reputational and financial exclusion risks: - NBFLs provide credit to SMEs and households, often at high interest rates and DSTI ratios, potentially creating loan traps and financial exclusion. - Conduct of NBFLs can create reputational risk for the wider financial sector. ### Financial sector resilience — stress testing framework - Tests performed: - Scenario-based solvency tests and single-factor sensitivity tests for sovereign, interest rate, and concentration risks. - Credit loss assessments under a severe adverse macro scenario (three-year horizon, V-shaped profile with a two-standard deviation GDP growth shock in year two), including large depreciation, sharp rise in domestic policy rates, and increase in sovereign spreads. - Liquidity stress tests including retail deposit-run scenario and wholesale funding stress scenario; a 15 percent haircut applied to government debt securities in both liquidity scenarios. - Sensitivity analyses and contagion assessment for NBFLs (see Stress Testing Matrix). ### Solvency stress test results (adverse scenario) - Sector capital ratio impacts: - CET1 ratio for 12 banks considered declines from 17.1 percent at end-2017 to 8.2 percent at end-2020 in the adverse scenario. - Leverage ratio (T1 Capital to Total Assets) decreases from 9.3 percent to 4.8 percent over the stress horizon. - Drivers of losses and capital depletion: - Credit risk: total drop of 750 bps in capital during the three-year horizon. - Credit loss impairments increase from -2.2 percent of RWA in 2017 to -3.5 percent of RWA in 2019 (peak provisioning). - Composition of credit losses: real estate mortgages account for 54 percent of total credit losses; SME backed by real estate account for 20 percent of total. - Market/trading losses on sovereign securities: total drop of 300 bps in capital over the three-year horizon. - Trading gains of 0.6 percent of RWA in 2017 turn to a market loss of 3.6 percent of RWA in 2018. - Some banks incur provisions for hold-to-maturity securities in line with increased sovereign credit spreads. - Exchange rate depreciation: roughly 15 percent of total credit losses can be attributed to exchange rate depreciation (estimated by comparison to a hypothetical constant-exchange-rate scenario). - Net interest income: decreases by almost 40 percent through the stress test horizon. - Contribution of net interest income to CET1 averages 280 bps per year through the horizon, compared to 525 bps in 2017. - Contributing factors: large NPL formation compressing interest income; net interest margin compressed by higher funding costs not matched by lending rates tied to the Lombard rate; positive interest rate risk as ROBOR increases. ### Sensitivity tests (single-factor) - Sovereign yield shock: - A 500 bps increase in sovereign yields leads to a systemwide decrease in Tier I capital by 510 bps; impact up to 970 bps for some banks. - A 50 percent haircut on sovereign exposures would lead to a number of banks falling below regulatory minima. - Policy rate shock: - A 500 bps shock to policy rates reduces the system Tier 1 ratio by 120 bps, reflecting positive interest rate risk for a majority of banks. ### Liquidity tests and funding structure - HQLA composition: - The lion’s share of banks’ High Quality Liquid Assets is composed of claims on the public sector (government bonds and central bank reserves). - Funding profile: - Retail deposits (sight or very short terms) are the largest funding source; secured funding is almost non-existent. - Large holdings of government securities imply a relatively low requirement for stable funding under NSFR. - Liquidity stress outcomes: - Tests included retail deposit-run and wholesale funding shock; aggregate liquidity is more than comfortable. - Results suggest the need for currency-differentiated liquidity requirements: some banks can meet either their lei LCR or their euro LCR but not both. - Almost all banks meet the 100 percent NSFR ratio in both lei and euro. ### NBFLs stress and contagion analysis - NBFL sensitivity: - Leasing firms and non-leasing firms show significantly inferior asset quality relative to banks. - Sensitivity tests show many NBFLs would fall below minimum capital requirements following depreciation, funding cost increases, or higher NPLs. - Contagion and network findings: - Network and direct exposure analysis (Espinoza-Vega and Sole, 2010 approach) show some NBFLs exert greater systemic impact than banks because banks’ exposures to NBFLs exceed interbank exposures. - Banks’ losses could amount to around 9 percent of total banking sector capital in case of an adverse shock leading to the failure of NBFLs. - Parent banks are particularly vulnerable to distress of affiliated NBFLs when reputational effects induce depositor runs on the parent; impacts on parent banks’ capital ratios and liquidity positions would be meaningful. *Source: IMF FSAP team analysis as presented in chapter section 7 of the provided document.* ### 24. While domestic interbank contagion appears to be limited, cross-border exposures of ### While domestic interbank contagion appears to be limited, cross-border exposures of Romania’s banking sector remain significant ### Interbank interconnectedness and contagion risk - Network analysis indicates very limited risk of contagion within the domestic banking system, owing to small interbank exposures. - Exposures to foreign banking systems remain large, albeit reduced relative to pre-crisis-era levels, mainly due to foreign liabilities. - Methodology notes: - Analysis based on a matrix of bilateral domestic bank-bank or bank-NBFL gross credit exposures. - For bank-NBFL interconnectedness analysis, the test assumes a 100 percent loss of claims in case of default of a counterpart. - For NBFLs partially owned by banks, a 100 percent loss of claims is assumed in case the NBFL fails. - Reputational risk reflected through runs on deposits: 20 percent run-off rate on retail deposits. - Rollover rate assumptions: 50 and 30 percent for foreign and domestic banks, respectively. - Asset fire-sale haircut assumed at 50 percent. ### Macroprudential framework A. Macroprudential Framework - The NBR has long experience implementing macroprudential policy measures and a relatively sophisticated systemic risk monitoring framework. - Monitors several indicators derived from the nationwide credit register and related data sources and constructs summary indicators. - Uses various economic models to assess macro-financial developments and policy effects. - Conducts regular solvency and liquidity stress tests. - Data gaps remain, for instance due to extensive NPL exposures sold to debt collection agencies that do not have to report to the credit registry. - Institutional arrangements: - A new National Committee for Macroprudential Oversight (NCMO) established in April 2017; by law it is the national macroprudential authority. - NCMO is chaired by the Governor of the NBR and its Secretariat resides within the NBR. - NCMO composition: nine-member committee; number of NBR representatives reduced from the proposed five to three, giving the NBR the same number of representatives as the ASF and the MoPF. - As of April 2018, the NCMO has held five meetings and issued ten recommendations, including quarterly recommendations on the countercyclical capital buffer. - Technical Commissions on Systemic Risk and Financial Crisis Management are still to become operational. - Accountability, transparency, and coordination issues: - Policy inaction bias is a recognized challenge; the setup leaves scope for inaction. - Currently, the NBR can be outvoted without disclosure of the decision or linking to a common overall risk assessment. - Recommendations to strengthen the framework: - Require public disclosure of proposed policy actions and distribution of votes in the summary of meetings. - Develop a common assessment of systemic risk at each NCMO meeting to foster consensus and common ownership of actions, including on risks from large and concentrated sovereign exposures. B. Macroprudential Policies - Recent changes and existing tools: - EU Capital Requirements Directive and Regulation (CRD/CRR) framework becoming operational in Romania. - Authorities have implemented, or are phasing-in, a number of capital buffers and the LCR. - Longer-standing borrower tools remain but have narrow scope: stressed DSTI limits currently only apply to consumer loans; maximum LTV ratios on mortgages are not applied to mortgages under the Prima Casa program. - Regulatory arbitrage and NBFLs: - Scope for regulatory arbitrage due to direct external borrowing and lending from NBFLs is a concern. - NBR introduced measures to strengthen oversight over the NBFL sector, where lending to SMEs and low-income households was increasing rapidly. - Recommendations: - Align NBFL provisioning regime with that of banks to limit arbitrage. - Require debt collecting agencies (specializing in NPL purchases) to report to the credit registry to close data gaps. - Further analysis of corporate sector leverage due to increasing borrowing from abroad. - Strengthening the toolkit: - Apply a stressed DSTI limit to mortgages to mitigate risks of excessive credit growth and defaults given household vulnerabilities; calibration could draw on joint NBR-IMF analysis using loan-level information from the Romanian credit register. - Continue scaling down the Prima Casa program to mitigate housing sector imbalances and support effectiveness of LTV limits. - Enforce a currency-differentiated LCR for significant currencies and monitor a currency-differentiated NSFR to address FX liquidity risks and potential revival of FX lending reliant on wholesale funding. - Systemic Risk Buffer (SRB) and sovereign-bank nexus: - Romanian banking system characterized by exceptionally concentrated and large exposures towards the domestic sovereign. - The risk analysis finds these concentrated sovereign exposures pose an important risk for individual banks and the system. - A carefully calibrated SRB should be considered to: - Enhance resilience through increased loss absorbing capacity. - Provide disincentives against excessive concentration of risks. - Minimize unintended side-effects (e.g., excessive reduction of liquidity, bond market sell-off). - Appendix IV (in source) provides an example of a SRB calibration aimed at ensuring resilience for banks with concentrated exposures while minimizing adverse impacts. - Complementary measures suggested: - Expand the NBR’s collateral framework to include euro area government bonds (potentially with minimum credit ratings or additional haircuts) to diversify banks’ bond holdings away from the domestic sovereign. - Further reforms to the government’s debt management strategy to broaden the investor base and reduce reliance on the banking system when placing sovereign debt. - Note: In its December 2017 meeting, the NCMO recommended use of the SRB to facilitate continued reduction of NPLs. NPL share fell below 7 percent as banks are subject to NPL targets, but high concentration of sovereign exposures remains largely unaddressed. ### Sectoral supervision - Institutional responsibilities: - Prudential supervision responsibilities split between the NBR and ASF. - NBR: administratively independent central bank; supervises credit institutions; maintains registers for NBFLs. - ASF (established 2013): supervises capital markets, insurance, and private pension fund sector. - Other authorities with relevant roles: MoPF (monitoring of credit unions), Consumer Protection Agency, Competition Authority. A. Bank supervision and regulation - EU framework and cross-border supervision: - Romania is subject to the common EU regulatory framework for banking supervision (CRR/CRD IV). - Single Supervisory Mechanism (SSM) is a key partner; as of 2017 the NBR identified 11 banks as systemically important, of which 8 are supervised at group level by the SSM. - Supervisory approach and improvements needed: - NBR adopted EBA SREP Guidelines into national supervisory practices in January 2016; SREP is the core supervisory tool. - New SREP methodology is in early implementation; processes for consistency and accuracy of scoring, findings, and supervisory measures need formalization and documentation. - NBR should enhance off-site monitoring with a more forward-looking perspective (e.g., bottom up stress testing), and undertake more risk-focused and thematic industry-wide analyses. - Need to build expertise in specialized areas such as IT and market risk; devote more attention to banks’ risk models. - Corrective actions and sanctions framework should be reviewed to ensure protection from undue legal challenges and more consistent application across the banking system. - Post-examination processes should be enhanced to ensure prompt implementation of supervisory measures. - Intensify engagement with non-executive/independent board members for more proactive supervision. - Regulatory gaps and concentration risk: - Regulations on related party transactions and country/transfer risk include high-level principles but lack specificity. - NBR should provide clearer guidance through amended regulations, instructions, or an on-site handbook. - Enhance oversight of concentration risk and intra-group transactions, even when exposures comply with regulatory limits. - NPLs and asset quality: - NPLs peaked at 21.9 percent in 2013 and declined to close to 6 percent in 2017. - NBR’s proactive measures led to timely recognition, realistic provisioning and disposal of NPLs; maintains annual bank-by-bank supervisory targets for NPL reductions. - Given still substantial levels of nonperforming and forborne exposures, NBR should continue close monitoring and ensure proactive cleanup measures. - Corporate governance: - Corporate governance requirements strengthened and are central to supervisory approach. - NBR requires some banks (i.e., subsidiaries) to have an “adequate” number of independent board members, but banks usually have only one or two independent board member(s), which is insufficient. - NBR does not yet organize regular exchanges with non-executive and independent members. B. Financial Market Infrastructures - Oversight and cooperation: - NBR oversees the RTGS payment system and SaFIR (the central securities depository for government securities and NBR securities). - ASF supervises the clearing and settlement systems of the BVB. - Legal framework for FMIs strengthened through EU legislation. - NBR adopted the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI) and assessed FMIs under its purview against these principles. - Recommendations: - ASF should adopt the PFMI. - NBR and ASF should increase cooperation in oversight and supervision of the CSD of the BVB to avoid overlap and inconsistent requirements. - Internalization of payment and settlement infrastructure: - Currently RTGS and CSD systems technically operated by Transfond S.A., privately owned by the NBR (33.3 percent) and Romanian banks. - A project to internalize these systems within the NBR was scheduled to be finished in the first half of 2018 to mitigate NBR’s dependence on Transfond S.A. - Implementation risks and mitigants: - NBR drafted and tested fallback scenarios and is performing a parallel run to address lack of technical operating experience. - Additional investments recommended in experienced IT staff and/or external expertise. - Implement a formal project management methodology at the NBR to increase resilience against operational risks and information security threats, such as cyber-attacks. C. Anti-Money Laundering and Combating the Financing of Terrorism - (Section heading present in source; substantive AML/CFT text not included in supplied excerpt.) *Source: IMF Financial Sector Assessment (Romania), excerpt provided in the supplied content unit.* ### 43. Romania made good progress in strengthening its AML/CFT framework since it was ### 43. Romania made good progress in strengthening its AML/CFT framework since it was ### AML/CFT progress and implementation - Romania made good progress in strengthening its AML/CFT framework since it was last assessed. - MONEYVAL 2008 assessment and 2013 targeted reassessment against the (then) 40+9 FATF recommendations noted deficiencies in: - customer due diligence requirements including for Politically Exposed Persons (PEPs); - the CFT framework; - the structure and resources of the Finance Intelligence Unit (FIU); - law enforcement efforts. - Amendments and actions taken: - AML/CFT law amended to strengthen the independence of the FIU and the CFT framework. - A draft law aimed at transposing the EU 4th AML/CFT Directive was prepared (footnote: The draft law broadly meets the technical requirements of the FATF standard. It is expected to be discussed by Parliament in May 2018). - Some measures to assess ML/TF risks in the banking sector; a national risk assessment is scheduled to start this year. - Training on AML/CFT provided to a range of reporting entities. - Supervision by the NBR and the FIU was strengthened. - Reporting of suspicious transactions has increased, particularly by banks, exchanges, transfer services, and notaries. - The FIU was provided with additional resources and updated analytical tools. ### Remaining AML/CFT deficiencies and recommendations - Deficiencies that remain: - The preventive framework falls short of the standard, notably with respect to PEPs and the intra-EU correspondent banking system. - Transparency of beneficial ownership of legal persons and arrangements is insufficient. - Understanding of Romania’s ML/TF risks appears fragmented. - The number of investigations into, and convictions for, ML remains low despite MONEYVAL’s conclusion on Romania’s ML risk. - Recommended actions: - Address gaps in the preventive framework, including with respect to PEPs. - Increase entity transparency (beneficial ownership). - Transpose the 4th EU Directive to assist in addressing preventive framework and transparency gaps. - Assess ML/TF risks, take appropriate mitigating action, and ensure ML is pursued and sanctioned in line with those risks. ### Financial safety nets and crisis management — overview of reforms - The bank resolution and crisis management framework has been significantly revamped since the last FSAP. - Implementation of the BRRD in Romania enhanced the NBR’s powers to deal with failing banks and increased FGDB involvement. - As resolution authority, the NBR received powers to: - take control of an institution (intervention); - transfer the shares or any other instruments of ownership, rights, assets or liabilities (purchase and assumption); - cancel debt instruments; - write down/convert into common shares or other instruments of ownership the eligible liabilities of an institution under resolution (bail-in). - In exceptional circumstances, public equity support and temporary public ownership may be applied if all other resolution tools are insufficient and financial stability remains at stake. ### Coordination, operational readiness, and remaining legal gaps - Progress made: - NBR enhanced internal organization of resolution and supervision and coordination across crisis management functions. - MOPF and FGDB adapting to new responsibilities and helping operationalize the toolkit. - Intensified international coordination through information-sharing agreements and NBR participation in supervisory and resolution colleges. - A domestic interagency simulation exercise (involving the NBR, FGDB, ASF, and the MOPF) is planned for 2018 to test practical elements and identify coordination issues and legal constraints. - Legal and operational elements still to address (priority): - The public procurement law applies to bank resolution action, potentially limiting swift action and constraining viable resolution options; a comprehensive solution that exempts bank resolution from the procurement law would be preferred. - Legal protection for NBR officers in charge of key decisions exists, but staff from the MoPF are not included; this gap should be addressed. - The legal instrument to implement MoPF support to the bank resolution and deposit insurance framework (contingent funding to the FGDB if resources are exhausted) has yet to be formally executed. - The NCMO established in 2017 is not yet fully operational; the NCMO’s Technical Commission on Financial Crisis Management should be activated. ### Cross-border issues, resolution planning, and FGDB role - Cross-border context: - Important presence of subsidiaries of major international banks under the Single Resolution Board calls for intense cross-border coordination and a domestic capital market strategy. - Ensure Romanian interests are represented in recovery and resolution planning at parent bank level. - NBR’s resolution planning for foreign subsidiaries is based mainly on single point of entry considerations; incorporating multiple point of entry alternatives will require a medium-term strategy to develop loss-absorbing eligible instruments in the domestic capital market. - Under multiple point of entry, resolution planning must ensure separability and autonomy of Romanian subsidiaries from parents financially and operationally. - FGDB responsibilities and trajectory: - FGDB’s role has grown from a paybox to a vehicle for bank resolution. - 2015 law empowered FGDB as administrator of the newly created bank resolution fund—which is on track to reach its funding target by end-2024. - FGDB mandated roles include serving as temporary administrator, special administrator of a credit institution under resolution, shareholder of a bridge institution, or shareholder of an asset management vehicle. - FGDB operational recommendations: - Diversify investment policy while keeping principles of liquidity and security; currently, three quarters of FGDB’s funds are invested in domestic T-bills and the rest is deposited in the banking system it insures. - Gradual migration towards first-rate paper from domestic and international issuers is warranted. - NBR should provide FGDB operational access to its facilities: provide an account at the central bank to reduce deposits in the banking system to minimum operational levels, increase flexibility and liquidity. - Provide FGDB access to the NBR’s repo facility to obtain liquidity against treasury bills and other assets in reduced market liquidity scenarios. ### Liquidity support and ELA - NBR has a liquidity provision framework for monetary policy purposes, but an ELA scheme is still lacking. - Key points on ELA: - Liquidity support is critical for crisis management both prior to resolution and once a resolution path has been established (e.g., for a bridge bank or a bailed in institution). - ELA arrangements provided for in law have not been fully implemented and there is very limited experience with ELA in the country. - An operational framework for ELA policy is under development and should be concluded, including: - establishing appropriate conditions; - stipulating necessary operational elements (e.g., haircuts, maximum terms, etc.); - extending eligible collateral to a more diverse asset pool, comprising FX securities. - Given significant presence of FX transactions in Romania’s system—e.g., 41 percent of banks’ liabilities are in foreign currency, including a sizable share of retail deposits—the ELA framework will have to incorporate a strategy for crisis response to cases of illiquidity in FX. ### Financial sector development — capital markets, insurance, banking depth, and inclusion - Capital markets: - Romania has made significant progress in capital market development; positive momentum needs to be maintained. - Reforms have brought more liquidity, deepened domestic and foreign investor base, and increased medium to longer term investment. - Risks to progress include government support for market development, corporate governance of state-owned enterprises, and changes to the private pension system. - Market-level issues remain to further increase liquidity and successfully introduce new products. - Insurance sector: - The insurance market continues to be underdeveloped, characterized by low penetration and concentration in the motor-third party liability segment. - Recent turmoil in the non-life sector has undermined trust in the industry and affected independence of the regulator. - Regulation and supervisory standards revised in alignment with EU standards; new country-specific regulation enacted, including a resolution regime for insurers and a new motor-third party liability law. - A thorough external assessment of the regulatory and supervisory framework is warranted. - Efforts to develop other market segments (homeowners’ catastrophe property, health, and life insurance) are warranted. - Banking market depth and credit access: - Depth of the Romanian banking market is lagging relative to peers. - Constraints include poverty, rurality, informality, low enterprise density, poor health of the enterprise sector, and a high number of foreign owned firms. - On the supply side, access to credit remains restricted for most companies, with notable gaps for MSMEs, start-ups, and rural areas. - Legal frameworks enabling credit, such as insolvency laws, are well designed but their implementation should be further improved. - Financial inclusion: - Financial inclusion is lagging, in part due to a thin and declining bank branch network, especially in rural areas. - Recent law introducing zero fee accounts for about 50 percent of the population may enhance inclusion but could have adverse effects (higher interest and fees for other clients, or acceleration of banks’ retrenchment from rural areas). - Suggested broader solutions: - better use of the Posta Romana network of branches; - adoption of incentive mechanisms to accelerate expansion of digital finance solutions; - promotion of financial literacy and effective consumer protection mechanisms. *IMF staff report excerpt.* ### 56. Closing these financial sector development gaps would require clear development ### Closing these financial sector development gaps would require clear development ### Financial sector development policy and coordination - Public initiatives to support access to finance are "too fragmented and lack efficiency and coordination." - Recommendation: adopt a holistic view and "consider establishing a Financial Sector Development Committee with a clear development mandate, an effective monitoring and evaluation system and accountability mechanism." ### Macroeconomic developments (selected findings and indicators) - Economic growth resumed and accelerated in the last two years, driven mostly by an increase in private consumption and fueled by expansionary fiscal policy and wage growth, resulting in the output slack to be absorbed. - Monetary conditions remained supportive of growth in the context of subdued inflation and weak credit growth, but fiscal and external balances have started to deteriorate. - Real GDP growth (percent change): 2008: 8.3; 2009: -5.9; 2010: -2.8; 2011: 2.0; 2012: 1.2; 2013: 3.5; 2014: 3.1; 2015: 4.0; 2016: 4.8; 2017 Prel.: 6.9. - Output gap (percent of potential GDP): 2008: 13.4; 2009: 3.7; 2010: -1.6; 2011: -2.5; 2012: -4.0; 2013: -3.3; 2014: -3.4; 2015: -2.8; 2016: -1.5; 2017 Prel.: 1.5. - Consumer price index (CPI, average): 2008: 7.8; 2009: 5.6; 2010: 6.1; 2011: 5.8; 2012: 3.3; 2013: 4.0; 2014: 1.1; 2015: -0.6; 2016: -1.6; 2017 Prel.: 1.3. - Fiscal balance (percent of GDP): 2008: -4.6; 2009: -6.9; 2010: -6.3; 2011: -4.2; 2012: -2.5; 2013: -2.5; 2014: -1.7; 2015: -1.5; 2016: -2.4; 2017 Prel.: -2.8. - Current account (percent of GDP): 2008: -11.5; 2009: -4.7; 2010: -5.1; 2011: -5.0; 2012: -4.8; 2013: -1.1; 2014: -0.7; 2015: -1.2; 2016: -2.1; 2017 Prel.: -3.4. - Gross general government debt (direct debt only, percent of GDP): 2008: 11.3; 2009: 20.6; 2010: 27.8; 2011: 32.0; 2012: 35.4; 2013: 36.6; 2014: 38.1; 2015: 37.1; 2016: 36.8; 2017 Prel.: 34.7. - Nominal GDP (in billions of lei): 2008: 538.0; 2009: 526.3; 2010: 529.6; 2011: 562.1; 2012: 595.4; 2013: 637.5; 2014: 668.1; 2015: 712.7; 2016: 762.3; 2017 Prel.: 858.3. - Gross international reserves (in billions of euros): 2008: 28.3; 2009: 30.9; 2010: 36.0; 2011: 37.3; 2012: 35.4; 2013: 35.4; 2014: 35.5; 2015: 35.5; 2016: 37.9; 2017 Prel.: 37.1. - Gross international reserves (in months of next year's imports): 2008: 7.8; 2009: 7.6; 2010: 7.6; 2011: 7.9; 2012: 7.3; 2013: 6.8; 2014: 6.4; 2015: 5.9; 2016: 5.6; 2017 Prel.: 5.0. ### Financial sector structure and developments - Banks dominate the financial sector, though the share of other financial institutions increased between 2010–2016. - Total assets of the financial sector by subsectors (in billions of lei) are shown for 2010–2016 (figure-based detail in source). - Bank funding trends: parent funding declined; deposits (RON and FX) increased (figure-based detail in source). - Regulatory capital ratios strengthened relative to regional peers (figure-based detail in source). - Housing and mortgage: mortgage lending growth and house prices in Bucharest showed correlated movements (figure-based detail in source). ### Stress tests and risk scenarios - Macroeconomic stress scenarios presented: Baseline, Adverse, and GFC scenarios for 2017–20. - Common Equity Tier 1 Capital Ratio (Fully-loaded, in percent) path under scenarios: Dec-17: 17.1%; Dec-18, Dec-19, Dec-20 shown (figure-based detail in source). - Leverage Ratio (Fully-loaded Tier 1/Total assets, in percent) path: Dec-17: 9.3%; subsequent path under Baseline and Adverse (figure-based detail in source). - Factors contributing to a drop in capital ratios under the Adverse scenario include trading losses, change in Risk weighted assets, dividends, interest rate risk, loss provisions (Credit Risk), and net profit reductions (figure-based detail in source). - Composition of credit losses in adverse scenario (share ranges across institutions): Consumer 17%; RetailMort 54%; SME non-RE 9%; SME_RE 20% (figure-based detail in source). - Mortgage and consumer losses in the Adverse scenario: Losses without depreciation and additional losses from depreciation are presented in millions of lei (figure-based detail in source). - Large exposure sensitivity tests: Example outcomes include system losses arising from a 50 percent haircut on sovereign exposures and from failure of top five NFCs (figure-based detail in source). ### Funding, liquidity, and buffer structures - Structure of funding (RON): Retail deposits 60%; Non-operational deposits 25%; Other unsecured funding 15%; Secured - w/ CB and Secured - w/ NCB (figure-based detail in source). - Structure of funding (EUR): Retail deposits 56%; Non-operational deposits 25%; Other unsecured funding 19% (figure-based detail in source). - RON HQLA composition: Coins and banknotes 14%; Central bank assets 8%; Central government assets 78% (figure-based detail in source). - Euro HQLA composition: Coins and banknotes 11%; Central bank assets 19%; Central government assets 65%; Multilateral and int. Org. assets 5% (figure-based detail in source). - Regulatory liquidity ratios: LCR and NSFR by currency with system-wide, minimum, and median values (figure-based detail in source). ### Nonbank financial institutions (NBFL) vulnerabilities and contagion - Capitalization ratios for leasing companies close to the minima; NBFLs’ asset quality poorer compared to banks. - NPLs and coverage: leasing and non-leasing subsectors show materially different NPL and coverage profiles (figure-based detail in source). - Stress sensitivity for NBFLs: scenarios of 10% depreciation, 5% additional NPLs, and 300 bps increase in cost of funding show an impact on capital and number of failures for leasing companies; non-leasing companies are less vulnerable (figure-based detail in source). - Bank-NBFL contagion analysis (network approach): Network indices of contagion and ranges of direct and indirect losses due to NBFL failure are presented (figure-based detail in source). - Range of drop in LCR due to NBFL failure shown in percentage points (figure-based detail in source). ### Stress-test and large-exposure sensitivity outcomes (selected results) - Initial capital ratio example: 19.2%; resulting capital ratios after shocks are illustrated for sovereign haircut and top-five NFC failure (figure-based detail in source). - System losses due to a 50 percent haircut on sovereign exposures and due to failure of top five NFCs are quantified in charts (figure-based detail in source). ### Implementation status of 2010 FSAP recommendations (Appendix I, selected) - Crisis Management and Safety Net: - Strengthen capital positions and set medium-term targets for increasing minimum CARs: "Implemented in all material cases. Alignment to EU standards completed." - Strengthen monitoring of bank loan portfolios and problem loan workout procedures and capacity: "Implemented. Loan classification, collateral valuation, and provisioning have been strengthened. NPLs dropped significantly." - Accelerate crisis management planning and cross-border coordination: "Implemented to a great extent by the transposition of the BRRD. In 2013 a simulation exercise was conducted with support from the World Bank." - Consider additional measures to provide liquidity, especially under ELA: "Not implemented yet. Arrangements remain vague and limited by the types of collateral accepted. However, the NBR is working on the implementation of the ECB’s standards for ELA." - Review bank resolution framework: "Implemented through the transposition of the BRRD." - Strengthen deposit insurance funding arrangements and speed up payouts: "FGDB has reached its target for the deposit insurance fund. The institution’s workplan includes increasingly complex tests to enhance its ability to provide fast payouts." - Cross-Sectoral Issues: - Align independence and financial autonomy of nonbank regulators with NBR: "Partly implemented. The ASF Law has been implemented, however, the FSAP found that the ASF’s independence still needs improvement." - Issue consistent valuation methodologies for financial assets: "Following the IFRS implementation, credit institutions use professional judgment for drawing up their own provisioning methodologies for financial assets consistent with IFRS." - Strengthen information exchange and cooperation among regulators and the Ministry of Economy and Finance: "Partly implemented. Arrangements have been in place to facilitate and ensure cooperation with relevant domestic authorities. However, meetings with ASF are too infrequent to allow effective exchanges and coordination." - Expand resources of the Financial Intelligence Unit (ONPCSB): "Implemented. The number of staff at the FIU has increased from 15 (2009) to 107." - Banking Sector: - Strengthen judicial, accounting and auditing standards; and communication between NBR and regulated entities: "(i) Implemented. (i) Banks have been required to prepare their financial statements in accordance with IFRS since 2012. Law 162/2017 on the statutory audit transposes the 2014 EU directive (2014/56) ... Law 162/2017 creates a public oversight body for the audit profession in Romania. (ii) Implemented. NBR meets on a regular basis with regulated entities, including banks and their external auditors both at individual and industry levels ..." - Securities and Capital Markets: - Concentrate primary issuance of government bonds on benchmark maturities: "Issuance concentrated in benchmark securities (3 ,5, 7, 10, 15 years), liquidity has increased post crisis and due to government bond market development efforts." - Revise contracts of primary dealers and establish rotation policy: "Implemented. The new legal framework governing primary dealer activity on domestic market, in force starting January 2017, including incentives." - Amend Law of Capital Markets to remove limit on voting rights in regulated market operators: "Expected to be implemented. The draft law amending Law on Capital Markets and ensuring transposition of MIFID II is not including provisions on limitations of holdings in regulated market operators." - Insurance and Pension Sectors: - Review law on obligatory house insurance: "Partly implemented. ... A change to the law is being discussed to better enforce compliance. It is unclear by when there will be a decision and what the impact will be." - Clarify interpretation of minimum contribution guarantee and weighted average return guarantee: "Implemented (Norm No. 13/2012 ... Norm No. 10/2009 ... Norm No. 7/2010)." - Revise investment management fees: "Not implemented (Law No. 411/2004 ... Law No. 204/2006 ...)." - Establish unique valuation methodology and responsibility: "Implemented (Norm No. 11/2011 regarding investment and valuation of private pension funds’ assets)." _Italic: Source: cr18160 - Closing these financial sector development gaps would require clear development (chapter/section), IMF staff, material and figures as provided in the source content._ ### 1. Institutional ### 1. Institutional ### Perimeter and Data - Institutions included: The top 12 banks by share of assets. - Market share: 80 percent of total assets in the banking system. - Latest data / baseline date: December 2016. - Supervisory data sources: balance sheet information, Corep and Finrep, LCR and LE templates provided by the authorities; further supervisory information on default rates, by portfolio and bank. - Scope of consolidation: banking activities of the consolidated banking group. - Coverage of sovereign and non-sovereign securities exposures: held to maturity, available for sale, and fair value accounts, valued at MTM or fair-value respectively at starting point. - Note on stress test horizon: While the data is as of December 2016, the stress test horizon covered 2018–20. The assumption was that the balance sheet of the banks remained exactly in their December 2016 position. This is supported by data available as of Q3 2017 (unaudited) which shows that CAR for the banking sector stood at 19 percent, and T1 capital ratio at 17.1 percent (see FSR, NBR, December 2017). ### Channels of Risk Propagation and Methodology - Macroeconomic scenarios quantified using the NBR’s Quarterly Projections Model (QPM). - FSAP team satellite models and methodologies; balance-sheet regulatory approach. - Satellite models: FSAP team estimated models for credit losses on four portfolios: Consumer, Mortgages, SME backed by RE and SME not backed by RE. The PDs for the large corporates were calibrated to the 80th percentile. The estimates relied on time-series default rates. - Stress test horizon: 2018–20. ### Tail Shocks and Scenario Analysis - Macroeconomic scenario analysis: agreed with the authorities. - Baseline: based on latest IMF staff projections, with inputs from the authorities’ QPM model on variables for which projections were not available. - Adverse (V-shaped) scenario: based on a cumulative decline of GDP of two standard deviations over two years. Shocks simulated: an external demand shock affecting Romania’s main trading partners; a risk premium shock to generate the nominal depreciation of the exchange rate; and an additional internal confidence shock due to increased risk aversion. - Sensitivity analysis: - Failure of the largest 1, 2, 5, and 10 corporate exposures; failure of largest non-corporate exposure. - Sensitivity tests to various risks (credit, interest, and market risks). ### Risks Assessed and Behavioral Assumptions - Risks/factors assessed: - Credit losses by exposure type and country. - Losses from debt instruments (sovereign and other issuers) in the banking and trading books. - Impact of funding cost shocks on net interest income. - Market risk, including foreign exchange risk. - Behavioral adjustments: - Static balance sheet. - Dividends can only be paid out by banks that remain adequately capitalized and have positive profits. Payout rates consistent with past experience. ### Regulatory and Market-Based Standards and Parameters - Calibration of risk parameters: PDs and LGDs: point in time for credit losses and through the cycle for stressed RWA calculations. - Regulatory risk parameters for standardized banks. - Regulatory/accounting and market-based standards: - Hurdle rate: Pilar I requirements plus relevant systemic buffers. - Capital metrics: Fully loaded Basel III regulatory requirements. - Metrics referenced: CET1, T1, CAR, leverage ratio. ### Reporting and Output Presentation - Outputs presented: - Capital shortfall system wide, and share in whole system. - Dispersion of capital ratios: min., avg., max.; percentage of assets that fail. --- ### Banking Sector: Liquidity Risk ### Perimeter and Data - Institutions included: The top 12 banks by share of assets. - Market share: 80 percent of total assets in the banking system. - Latest data / baseline date: December 2016. - Source: supervisory data. - Scope of consolidation: consolidated banking group. ### Channels of Risk Propagation and Methodology - Cashflow-based using data on the time structure of undiscounted cashflows for up to one year. - Variants of LCR ratios by currency. - NSFR. ### Risks, Scenarios and Standards - Risks: Funding liquidity; Market liquidity. - Scenarios: Retail shock; Wholesale shock. - Regulatory standards: Liquidity gap, survival period; Consistent with Basel III draft standards (LCR). ### Reporting and Output Presentation - Outputs presented: - Liquidity gap by bank. - Survival period in days by bank, number of banks that still can meet their obligations. --- ### Contagion Risk (Domestic and Cross-border) ### Perimeter and Data - Domestic network analysis: interbank exposure conducted on the top 12 banks by share of banking sector assets; the rest of the banks treated as a single institution. - Bank–NBFL contagion analysis: based on the top 12 banks, and the 34 NBFLs in the special register. - Cross-border coverage: Romania and 14 BIS reporting countries. - Market shares: - The top 12 banks account for 80 percent of total assets in the banking system. - The top 34 NBFLs account for 90 percent of total NBFLs assets. - Data and relevant date: interbank exposures data; banks–NBFLs exposure data, including participations; December 2016. BIS Locational Statistics: July 2016. ### Methodology and Tail Shocks - Methodology: Network analysis using interbank and bank–NBFLs exposures (Espinosa-Sole approach); network analysis using BIS data (Espinosa-Sole approach). - Tail shocks (domestic / cross-border specifications): - 100 percent loss given default (LGD); 65 percent roll-over of funding; 50 percent haircut on asset fire sales. - 100 percent loss given default (LGD); 30 percent roll-over of funding; 50 percent haircut on asset fire sales. ### Reporting and Output Presentation - Outputs presented: - Capital shortfall, by institution. - Capital shortfall, system wide. - Failure of individual institutions. - Interconnectedness measures. - Failure of banking systems. --- ### NBFLs: Solvency Sensitivity Tests ### Perimeter and Data - Institutions included: The 34 NBFLs in the special register. - Market share: 90 percent of total assets in the NBFLs. - Latest data / baseline date: December 2016. - Source: supervisory data. ### Tests and Standards - Sensitivity analysis: Sensitivity tests to credit risk and funding risk. - Regulatory standards: NBR regulation governing capital requirements. ### Reporting and Output Presentation - Outputs presented: Losses system-wide and as a share of sectoral assets. --- ### Risk Assessment Matrix (RAM) — Main Threats, Likelihood, and Expected Impact on Financial Stability - 1. Re-emergence of financial stress in European banks followed by risk aversion in global markets. - Likelihood: Medium. - Expected impact on financial stability: High. - Channels: knock-on effects on sovereign yields in Romania; negative spillovers from financial, trade and investment channels; risk aversion may lead to steepening of the yield curve. - Consequences: sudden rise in risk premia on Romanian government bonds exposes banks to losses on domestic government bond positions; adverse effect on economic activity and social tensions. - 2. Policy uncertainty and divergence and a weakening of confidence in the Romanian economy. - Likelihood: High. - Expected impact on financial stability: High. - Channels: procyclical fiscal stance and growing macroeconomic imbalances may lead to a sharp recession, economic disruption, adverse market sentiment, increased borrowing costs, impact on Romania’s credit rating, sudden capital outflows and slower growth. - 3. Surges in global financial market volatility, associated with the exit from unconventional monetary policies. - Likelihood: High. - Expected impact on financial stability: High. - Channels: rapid and significant rise in interest rates, steepening of the yield curve, currency depreciation; NPLs likely to rise from interest rate increases and leu depreciation; banks face losses on domestic government bond positions. - 4. A protracted period of slower growth in advanced and emerging economies. - Likelihood: Medium. - Expected impact on financial stability: Medium. - Channels: weak growth in European trading partners could slow the Romanian economy through declines in trade and remittances; slower growth could increase NPLs and impact bank profitability. Note: The RAM shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). It reflects current staff views on the sources of risk surrounding the baseline, their relative likelihood, and the overall level of concern. --- ### Appendix IV — The Systemic Risk Buffer: Design and Impact ### Objectives and Rationale - Recommendation: introduction of prudential policy measures to mitigate risks from the sovereign-bank nexus. - Policy aims: ensure resilience through increased loss absorbing capacity; provide disincentives against excessive concentration of risks; avoid unintended side-effects (excessive reduction of liquidity, bond market sell-off, or other unwarranted macro-financial dynamics). - SRB suitability: - SRB is a macroprudential tool available in EU legislation, flexible in implementation, and suitable to address common exposures and risks otherwise unaccounted for in the CRR framework. - SRB increases banks’ resilience to losses from sovereign exposures and encourages limits to excessive concentration of sovereign exposures. - SRB can be calibrated gradually to limit costs and unintended side-effects. - Comparison with alternative measures: - SRB legally possible under the current CRR and avoids procyclicality compared to positive risk weights on sovereign exposures. - SRB avoids “cliff-effects” associated with large exposure limits and is price-based. - SRB addresses the issue transparently and holistically at the NCMO level, unlike Pillar 2 measures. ### Calibration of the SRB (example scheme) - Principle: calibrated to levels commensurate to risks associated with sovereign exposures in Romania; gradual calibration recommended. - Example marginal calibration (by exposure to sovereign as a share of RWA): - < 15: 0 percent marginal SRB add-on - 15-30: 2 percent marginal SRB add-on - 30-40: 4 percent marginal SRB add-on - 40-50: 6 percent marginal SRB add-on - >50: 8 percent marginal SRB add-on - Example outcome: a bank with sovereign exposures of 45 percent of RWA would face a 1 percent SRB surcharge (calculated as 0*15+0.02*15+0.04*10+0.06*5 = 1.0). ### Benefits of the Proposed Buffer - Incentivizes intra-financial system trade of sovereign bond holdings: banks with high exposure face higher buffer rates and have incentives to trade with banks with smaller exposures, producing a more even distribution and lowering system-wide capital surcharges due to non-linearity in the schedule. - Debt management side-effect: if banks sell parts of sovereign holdings or reduce share of new issues purchased, investor base could become more diversified (higher share of other domestic institutional investors and foreign investors), aiding lengthening of debt maturity and reducing rollover risks. - Reduces distortion from zero risk-weight on sovereign bonds, which incentivizes expanding sovereign portfolios at the expense of lending to the real economy; SRB helps level this distortion and could marginally support credit growth to the non-financial private sector and enhance fiscal discipline. ### Quantitative Impact on Government Borrowing Costs (example calculation and assumptions) - Key assumptions: banks’ funding costs affected by increase in capital requirements; Modigliani-Miller does not hold; increase in funding costs fully reflected in bond yields; no adjustment in quantity of bonds issued or purchased (adjustment occurs through prices). - Implied increase in required bank capital: close to 1 percent of RWA or RON 1.7 billion. - Context figures: Assets of the largest 12 Romanian banks stood at RON 317 billion as of end-2016. Their exposure to government securities was close to 22 percent of total assets, or roughly RON 69 billion. - Increase in banks’ cost of funding (annual): RON 174 million. - Calculation basis: difference between cost of equity and cost of debt (assumed deposits), using ROE for Romanian banks of 12 percent as of end 2017, deposit rates close to 2 percent on average, and a tax rate of 16 percent. - Resulting increase in government yields: just over 30 bps. - Assumes increase in funding costs fully reflected in government bond yields and impact is the same for all maturities (parallel shift in the yield curve). - Formula referenced: ∆ Cost of funding = ∆ yield * stock of outstanding debt * (1−t). *Source: IMF staff (cr18160 - 1. Institutional).* ### 12. The 30 bps increase in government bond yields is likely to be an upper bound: ### 12. The 30 bps increase in government bond yields is likely to be an upper bound ### Reasons why 30 bps is an upper bound - Increase in capital reduces bank risk and likely decreases the cost of equity relative to current levels. - Analysts typically assume a positive pass-through; a common assumption is a halfway adjustment between Modigliani-Miller (no change in the cost of funding) and the baseline assumption here (no change in the demanded return on equity). - Assuming a 50 percent adjustment would cut the increase in yields in the baseline scenario into half, or roughly 15 bps. - Bank debt may be more expensive than deposits, reducing the marginal increase in funding costs from more equity. - In the absence of a good estimate for the cost of bank debt other than deposits, deposit rates have been used here as a conservative estimate for the cost of non-equity funding. - In reality, banks also have other types of funding (for instance borrowing from parents) which are more expensive than deposits, thus leading to a smaller increase in the cost of funding. - Not all additional capital may need to be raised. - Many banks have significant capital buffers above regulatory requirements and could absorb the increase due to the SRB surcharge, making the actual capital increase smaller than the baseline estimate. - Inter-bank trade could lower aggregate capital requirements because of the non-linearity of the SRB scheme. - If sovereign debt were redistributed so all banks held the same exposure as a share of RWA, overall capital requirements due to the SRB add-on would decrease to RON 1.2 billion (compared to RON 1.7 billion in the baseline case). - The SRB rate add-on would decrease to 0.7 percent of RWA (compared to 1.0 percent of RWA in the baseline case). - Adjustment in investor base or quantities of bank debt holdings could further mute price impact. - Other investors (parent banks, pension funds, investors abroad not subject to SRB) may increase holdings given higher yields, reducing ultimate impact below 30 bps. ### Consistency with literature - Post-GFC studies find limited impacts of higher capital requirements on lending costs: - Basel Committee on Banking Supervision (2010): impact on lending rates of a 1 percent increase in capital requirements estimated between 9–20 bps. - Schanz et al. (2011) for the United Kingdom: increase in capital ratio by 1 percentage point would imply an increase in lending spreads by about 7.4 basis points. - Elliott (2009) and Kashyap, Stein, and Hanson (2010) for the United States: limited impact on lending rates. ### Public debt sustainability considerations - The projected increase is relatively limited in absolute and relative terms: - Romania 10-year government bond yields fluctuated around 4.5 percent during the first four months of 2018; a 30 bps increase is about 1/16 or less than 7 percent of this level. - Romania’s government debt-to-GDP is relatively low, so the impact on debt sustainability is likely limited. - A scenario in the Public Debt Sustainability Analysis in the 2018 Article IV Staff Report considered a far greater increase in borrowing costs without substantial impact on debt sustainability. - A price increase of roughly 30 bps would make the banking sector indifferent between no SRB surcharge on bonds or holding them at the higher yield, implying banks’ demand for government securities can be secured by an increase of this magnitude if a change in investor base is not desired or is expected only over time. ### A phased-in approach to introducing SRB - A gradual phase-in over three years can limit initial impact and account for uncertainty. - Example phase-in (system-wide additional capital as percent of RWA): - Year 1: 0.6 percent of RWA - Year 2: 0.8 percent of RWA - Year 3: 1 percent of RWA - Estimated upper-bound impacts on government bond yields under phased-in approach: - Year 1: on the order of 20bps - Year 2: on the order of 25 bps - Year 3: on the order of 30 bps - Calibration table (Marginal SRB add-on by exposure to sovereign as a share of RWA, in percent): - Exposure < 15: Year 1 = 0; Year 2 = 0; Year 3 = 0 - Exposure 15–30: Year 1 = 1; Year 2 = 2; Year 3 = 2 - Exposure 30–40: Year 1 = 2; Year 2 = 3; Year 3 = 4 - Exposure 40–50: Year 1 = 4; Year 2 = 5; Year 3 = 6 - Exposure >50: Year 1 = 5; Year 2 = 6; Year 3 = 8 ### Impact on banks’ profitability - Methodology and assumptions: - Prior exercise assumed banks pass entire increase in cost of funding to the sovereign (bank ROE constant). - Opposite extreme here: banks absorb entire increase in funding costs (lower ROE), with bank ROA assumed to remain the same. - Relationship used: ROA * (1 + debt/equity) = ROE. - Banks assumed not to change asset structure as a result of SRB surcharge; ROA remains the same. - Quantitative findings: - Assume ROE = 12 percent and current leverage ratio of the banking sector results in ROA for the top 12 banks of approximately 1.3 percent. - Additional RON 1.7 billion raised due to SRB requirement would reduce the debt to equity ratio from 8.5 percent to 8.1 percent. - Implied reduced ROE = 11.4 percent, i.e., 0.6 percentage points lower compared to the current level. - Conclusion: impact on banking sector profitability from the proposed SRB is very limited. ### Impact on banks’ liquidity positions and FX liquidity - Sovereign securities comprise 78 percent of all leu-denominated HQLA. - Assessment of capital charges if banks needed HQLA to reach 100 percent LCR on a leu basis, assuming the only available HQLA were government securities: - Under these conservative assumptions, most banks would not face a positive capital buffer. - Aggregate SRB buffer for the banking sector would amount to just 0.1 percent. - Conclusion: cost associated with meeting the LCR imposed by the SRB is very small. - SRB surcharge could reduce FX liquidity risks by encouraging banks to hold FX-denominated HQLA: - Banks in Romania have significant FX-denominated deposits: 32 percent of total deposits. - To hedge currency risk, a significant part of loans are issued in FX, exposing banks to credit risk from unhedged borrowers. - Encouraging more FX-denominated securities holdings could: - Reduce the need to extend loans in FX given a certain level of FX savings in the economy. - Help banks meet HQLA requirements in FX via highly rated foreign bonds, aligning with the team’s liquidity recommendation. *Source: IMF staff calculations and report text.* ### 12. More risk-focused, banking industry-wide thematic analyses and examinations across ### 12. More risk-focused, banking industry-wide thematic analyses and examinations across ### Risk-focused, industry-wide thematic analyses and examinations - The Financial Stability Department (FSD) publishes financial stability reports on a half yearly basis, performs top-down stress testing, and shares the results with banking supervisors. - The results of the FSD have limited applicability and are not directly communicated to individual banks for supervisory purposes. - During 2016 and 2017, there were no thematic inspections carried out at the banking system level. - The NBR does not differentiate the frequency of full-scope examinations based on the outcome of a risk profile analysis of banks; instead, asset size and the overall SREP score of the previous year determine scope and intensity. - Recommendation: Authorities should consider a more risk-focused approach such as conducting thematic analysis and/or examination across the banking system with a mix of off- and on-site activities for a specific type of risk. ### Cooperation, off-site monitoring, and stress testing - Improvements needed in: - Intensifying cooperation with other domestic supervisors (notably ASF). - Developing bottom-up stress tests. - Monitoring intra-group exposures. - More frequent off-site monitoring on a consolidated basis. - Current arrangements: - NBR and ASF share relevant data and supervisory findings but have no regular meetings and no systematic process to prepare on-site examinations of banking groups, develop a joint view on risks for banking groups, align supervisory approaches, or discuss potential concerns on banking group or subsidiaries. - Main quarterly monitoring tools of the NBR do not embed a forward-looking view of a bank’s risk profile (e.g., no bottom up stress testing tools) and quarterly KRIs are monitored on a solo basis. - Recommendation: NBR should consider developing a bottom-up stress testing methodology and enhance intra-group exposures monitoring and consolidated supervision, in coordination with the ASF where relevant. ### Corrective and sanctioning powers (CP 11) - NBR has sanctioning powers and tools in almost all respects, but the sanctioning and order issuance process needs enhancement. - Internal process shortcomings: - Insufficient analysis to ensure consistency, accuracy and justification of inspection outcomes and sanctions across the banking system. - No consistent internal independent review process to ascertain that applied measures or corrective actions are adequate and consistent. - Recommendation: Establish an independent review process and/or introduce relevant guidance. - Limitation: NBR, as competent authority of credit institutions, cannot impose any measures regarding the merger process or acquisition by a third party per Banking Law. ### Post-examination processes and follow-up - Post-examination weaknesses: - Time frames in internal rules of the NBR are not always adhered to. - Issuance of supervisory reports and written orders is often delayed. - Draft should be sent to banks within 60 working days according to NBR internal procedures, but many examination reports were issued to banks more than six months later with the issuance of written orders taking even longer. - Formal wrap-up meetings after on-site inspections do not always take place, hindering prompt implementation of supervisory measures. - Recommendation: Improve post-examination processes to guarantee more effective implementation of corrective actions. ### Cooperation and cross-border banking supervision (CPs 3, 13) - Cooperation among EU supervisors is intense; EU banking groups control three quarters of banking assets in Romania. - NBR is a member of 15 EU colleges of supervisors. - Arrangements exist for cooperation with relevant domestic and foreign authorities; close coordination for crisis management and resolution at domestic level with NBR’s resolution arm and within EU supervisory and resolution colleges for large banks active in Romania. - All Romanian banks have prepared recovery plans; resolution plans were also prepared for almost all of these institutions (and their groups where applicable). - Domestic cooperation: organized but meetings with the ASF are too infrequent to allow effective coordination. ### Corporate governance, risk management, internal control and audit (CPs 14, 15, 26) - Independent directors and communication: - Increased emphasis needed on the role of independent directors and direct and regular communication between the NBR and non-executive Board members. - NBR conducts comprehensive interviews before approving members of the management body and during on-site full-scope examinations. - NBR only requires subsidiaries to have an “adequate” number of independent members; banks usually have only one or two independent member(s). - NBR does not meet on a regular basis with non-executive and independent members. - Control functions: - Regulations set detailed and demanding requirements for control functions. - NBR has not yet developed detailed internal methodologies to facilitate comprehensive and consistent reviews of risk management, internal controls and audits. - Recommendation: Conduct reviews of practices at industry level to inform the supervisory process. ### Capital adequacy and liquidity risk (CPs 16, 24) - RCAP findings: - The Regulatory Consistency Assessment Program (RCAP) of the BCBS reviewed the EU-wide capital and liquidity framework and concluded that certain features deviated from Basel standards. - RCAP concluded that the EU requirements follow Basel standards broadly but with divergences where the EU is less conservative than the BCBS, which positively impacts ratios. - The most significant divergences do not seem material for Romanian banks; a noted deviation concerns SME exposures under the Standardized Approach in credit risk where less stringent capital requirements appear to be applied. - Internal models and supervision: - No dedicated team or unit within NBR’s supervisory department (SD) responsible for evaluating, approving, reviewing and overseeing banks’ internal models. - Two banks have been approved to use the advanced approach to calculate regulatory capital for credit risks and three banks for operational risks. - The FSD has a quantitative assessment division that assists the SD when supervisors need to approve the advanced approach or validate internal models, but they are not involved in supervision and examination on an ongoing basis. - Recommendation: Increase supervisory attention to banks’ risk models, focus on periodic validations and independent testing even when models are not used for regulatory capital inputs. ### Credit risk and problem assets (CPs 17–18) - Historical NPE trajectory and actions: - NPEs increased rapidly after 2007 and peaked at 22 percent in 2013 before declining to 6.4 percent in December 2017. - NBR led efforts to clean up banks’ balance sheets, strengthening the framework for credit risk management and conducting close monitoring including annual examinations. - NBR initiatives included interim June audits, independent collateral revaluations, full provisioning of high risk exposures, write-offs, etc. - NBR continues to closely monitor NPEs through detailed and regular reporting requirements and proactive implementation of requirements on problem loans. ### Related party transactions, concentration, and country risks (CPs 19–21) - Related parties (RP): - Current RP regulation has deficiencies against the CP. - Definition of affiliated parties is narrower than CP requirements; fails to capture any person in a key position or a major individual shareholder of other group entities within a banking group, including the parent bank/company. - No explicit presumption power of the NBR in regulation, although NBR may exercise discretion case by case. - No explicit provisions requiring that the “write-off” of RP exposures exceeding specified amounts be subject to prior Board approval. - Off-site supervision RP information is not sufficiently granular. - Recommendation: NBR should review and amend regulation on affiliated party transactions in a more prudent manner. - Concentration risk: - NBR applies the EU large exposure regime and assesses banks’ concentration risk in SREP, but there is no explicit regulatory requirement that bank policies require all material concentrations to be regularly reviewed and reported to the board. - High level of sovereign debt concentration in the banking industry makes explicit inclusion in regulation important. - Assessors noted examples where exposures warrant further examination for concentration risk or RP transaction management. - Recommendation: Consider conducting a thematic review on concentration risks across banks (particularly focusing on banks where the large exposure limit is set at EUR 150 million or 100 percent of capital, and banks that have high concentration risks). - Authorities informed assessors that a thematic review on large exposure limits and concentration across banks will be performed during 2018. - Country and transfer risk: - NBR regulation on country and transfer risk management is not sufficiently comprehensive and includes only high-level principles similar to the Basel Core Principles text. - NBR will check policies and processes if country and transfer risks are significant, but there is little specific guidance for banks or supervisors via regulations, instructions, or the on-site handbook. - No specific regulatory provisioning standards for country risk and transfer risk in Romania. - No specific regulatory requirements for banks to include scenarios reflecting country and transfer risk into stress testing programs. - It is not clear how supervisors perform banking group-wide country risk analysis across each entity. ### Market risk, IRRBB, and operational risk (CPs 22, 23, 25) - Market risk: - Market risk level is low for most Romanian credit institutions as they do not have complex instruments. - As of June 2017, RWAs for market risk were around three percent of total RWAs. - None of the banks use the advanced approach for computing market risk capital charges. - CRR and EBA SREP guidelines are comprehensively stipulated; NBR conducts on-site inspection on all credit institutions annually. - There is no market risk specialist in the supervision department; recommendation to assign one to build expertise. - Interest rate risk in the banking book (IRRBB): - Basel Committee published new guideline on standards for IRRBB in April 2016, but NBR has not updated its IRRBB rules accordingly. - Authorities mention they are in the process of amending regulations for IRRBB. - Operational risk and ICT/cyber: - A guideline on cyber security and ICT for banks has not been implemented yet. - SD has one IT systems specialist but no dedicated unit and does not use outside IT experts; this may be insufficient given increasing demand. - Authorities plan to hire more IT risk experts and implement new EBA Guidelines on ICT Risk Assessment (2017) starting January 2018. ### Financial reporting, auditing and disclosure (CPs 26–28) - Harmonization and requirements: - Financial reporting, auditing and disclosure requirements are largely harmonized at the EU level. - Banks required to prepare financial statements in compliance with IFRS and have them certified by an external auditor who complies with international audit standards. - External auditors belong to the networks of the four biggest global auditing firms and a large French auditing firm (except credit cooperative network). - Rotation requirements implemented since 2014, either for the firm or signing partner; most banks rotating firms. - Five small banks appointed their external auditor in 2001–08 and only rotated the signing partner; NBR confirmed tenure of these signing partners did not exceed seven years. - No internal methodology defining criteria used by the NBR to assess adequacy of banks’ rotation policies. - Financial and prudential disclosure requirements are detailed and largely unified at the EU level and fully apply to banks incorporated in Romania. - NBR verifies individual disclosure requirements and publishes detailed and updated information on banking activities and risks. - Recommendation: A review of disclosure practices across the entire industry could usefully be conducted. ### Abuse of financial services (CP 29) — AML/CFT - Strengthening and alignment: - AML/CFT supervision by NBR strengthened to align with changes imposed by Directive (EU) 2015/849. - NBR is in early stages of implementing a risk-based approach to AML/CFT supervision; NBR has assessed ML/TF risks, ranked banks, and established a detailed methodology for risk-based AML/CFT supervisory activities. - A newly enhanced AML/CFT law is to be submitted for the Parliament legislative procedure. - Remaining shortcomings: - Under Romanian law, only correspondent banking relationships with banks outside the EU are subject to enhanced due diligence measures. - Under FATF standard, enhanced due diligence should apply to all correspondent banking relationships; no exception currently for intra-EU correspondent banking relationships. - Simplified due diligence is imposed in specific circumstances without a sound assessment establishing those circumstances present low ML/TF risks. ### Annex Table 1 — Summary of Compliance with Basel Core Principles (selected points) - Core Principle 1 (Responsibilities, objectives and powers): - Banking supervision in Romania falls exclusively within the responsibility of the central bank. Laws and regulations are regularly updated. - Core Principle 2 (Independence, accountability, resourcing and legal protection for supervisors): - NBR possesses stable governance arrangements and effective operational independence. - NBR dedicates a large amount of resources to supervision in staff, equipment and other variable costs. - Detailed arrangements to prevent and manage conflicts of interest at all levels have been adopted. - Fit and proper criteria of standing committees of Parliament responsible for appointment of Board members are unknown. - The Minister of Public Finance (and its State Secretary) is allowed by law to attend NBR Board meetings which could compromise independence. - NBR as an institution is not protected against lawsuits for actions taken and/or omissions made while discharging duties in good faith. - Reasons for removal of a Board member do not have to be disclosed and there is no post-employment or cooling-off period framework covering situations where a staff or Board member intends to take (or takes) a position in a bank supervised by the NBR. *Source: cr18160 - 12. More risk-focused, banking industry-wide thematic analyses and examinations across* ### 3. Cooperation and ### 3. Cooperation and collaboration ### Cooperation and collaboration (general) - Arrangements exist to facilitate and ensure cooperation with relevant domestic and foreign authorities. - Cooperation among domestic authorities is organized, including with the ASF which regulates insurance, pension and capital market activities, and cooperation with EU authorities is intense. - There are no regular meetings between the NBR and ASF to discuss the situation and risk profiles of individual institutions and groups active in banking and other sector(s) supervised by the ASF, and the issues of common interest or coordinate or agree on (joint) supervisory actions. ### Permissible activities - Only licensed credit institutions can provide banking services. ### Licensing criteria - The NBR has exclusive competence for granting and withdrawing the license of banks incorporated in Romania and branches of banks located outside the EU. - The last time the NBR licensed a bank was in 2009. - The licensing framework defines clear criteria for licensing. - The ownership structure of locally incorporated banks and branches of EU banks is transparent. ### Transfer of significant ownership - The NBR implements a rigorous definition of transfer of significant ownership, in line with the provisions of CRD IV, as well as requirements on the transparency of bank ownership. - This may largely, but not fully, cover the transfer of beneficial ownership. - There is no specific requirement that banks notify the NBR as soon as they become aware of any material information which may negatively affect the suitability of a major shareholder or a party that has a controlling interest. ### Major acquisitions - The NBR has a detailed framework to review major acquisitions. - As part of consolidation of the Romanian banking system, the NBR reviewed and approved four requests for acquisitions in the past five years (all related to mergers between banks licensed in Romania). ### Supervisory approach - The Romanian regulatory framework has implemented the provisions of CRR, CRD IV and BRRD (resolvability assessment). - As of January 2016, the NBR Board approved the implementation of the EBA SREP Guidelines into national supervisory practices. - The new EBA SREP methodology is still in the early stage of implementation. - Observations and shortcomings: - There is no systematic process with the ASF before on-site examinations of banking groups to discuss a common view of risks, supervisory approaches, and potential concerns. - The off-site monitoring tools do not seem to have embedded a forward-looking view of a bank’s risk profile. - More risk-focused, banking industry-wide thematic analyses and thematic examinations across systems seem to be limited. ### Supervisory techniques and tools (SREP and information powers) - The SREP is a core supervisory tool and deploys a mix of onsite and offsite supervisory tools and techniques. - The NBR has broad information collecting powers by legislation; the Central Credit Register allows supervisors to access high-granularity data. - Weaknesses in quality assurance and consistency: - There is no structured, independent review to ensure consistency and accuracy on SREP scoring, findings, and supervisory measures. - The significant off-site function that approves/rejects requests concerning amendments in a bank’s situation (including approvals of middle managers of each bank) could limit the NBR’s capacity for deeper risk analysis. - There is no systematic process of regular meetings with non-executive/independent members after on-site examinations to discuss findings and remedial actions. ### Supervisory reporting - The Romanian banking system has been required to report financial information based on IFRS at consolidated level since 2006 and at individual level since January 2012. - Supervisory reporting/validation rules and templates are mainly governed by a harmonized EU reporting framework; solo FINREP templates are consistent with EU requirements. - Shortcomings: - There are no explicit guidelines/criteria for hiring third parties who conduct supervisory tasks, for assessing the quality of their work, or for requiring them to report promptly any material shortcomings identified. - There is no explicit/regular evaluation process to periodically review that additional prudential returns satisfy supervisory needs (except those collected according to the common European reporting framework). ### Corrective actions and sanctioning powers of supervisors - The NBR has a range of supervisory and sanctioning measures and administrative penalties and, in practice, applies corrective actions and sanctioning powers in a forceful manner to banks, management, boards, and/or individuals. - Internal process weaknesses: - The NBR conducts insufficient review and analysis to ensure consistency, accuracy and justification of inspection outcomes and measures and sanctions across the banking system. - There is no consistent internal independent review process to ascertain that applied measures or corrective actions are adequate according to law and regulations, and consistent across the banking system. - Time frames in internal rules for supervisory follow-ups are not always adhered to; issuance of supervisory reports and written orders was in many cases delayed; official wrap-up meetings after on-site inspections do not always take place. - Overall follow-up procedures are set by internal rules in the NBR, not by laws or regulations. - The NBR does not have the explicit power under Banking Law to facilitate a takeover by or merger with a healthier institution as required by the EC4. - There is no systematic or regular process informing nonbank related financial entities (including ASF) of the NBR’s actions, and no process to coordinate supervisory actions. - Case statistics: - Approximately 45 cases were submitted to the board within a five-year period with 18 cases being contested in court. ### Consolidated supervision - The majority of credit institutions are subsidiaries of European banking groups; consolidated supervision of the whole group is performed by the ECB or respective authorities while the NBR supervises the Romanian subsidiary at individual and sub-consolidated levels. - The NBR conducts SREP assessments on a consolidated basis. - Observed gaps: - Limited systematic procedures for overall monitoring and assessment of contagion and reputation risks. - Quarterly key risk indicators are mainly monitored on a solo basis rather than on a solo and consolidated basis. - Formal fit and proper reviews of owners and senior management of parent corporates are conducted at acquisition or licensing stage, but not on a regular basis. ### Home-host relationships - The NBR is a host supervisor and a member of 15 EU colleges of supervisors, enabling effective information sharing and unified supervisory actions (including joint decisions). - Close coordination exists for crisis management and resolution domestically with the resolution arm of the NBR and within EU supervisory and resolution colleges for large banks active in Romania. - All Romanian banks prepared recovery plans starting in 2016; resolution plans were also prepared for almost all of these institutions (and their groups where applicable). ### Corporate governance - Corporate governance requirements were strengthened at the EU level and transposed in Romania starting in 2013. - Regulations and supervisory process make the management body responsible for safe and sound operation; the NBR conducts thorough reviews including comprehensive interviews before approving management body members and as part of on-site full-scope examinations. - Shortcomings and observations: - The NBR only requires subsidiaries to have an “adequate” number of independent members; banks usually have 1 or 2 independent member(s), which is insufficient to challenge other members and lead specialized committees (only the audit committee currently has to be chaired by an independent member). - The NBR does not meet regularly with non-executive and independent members as part of off-site or on-site processes. - The NBR sends letters detailing serious shortcomings or transmitting on-site inspection reports to senior management, rather than to the management in its supervisory capacity. - Regulations do not include (i) an explicit provision for banks to notify the supervisor as soon as they become aware of any material and bona fide information that may negatively affect the fitness and propriety test of a board or senior management member and (ii) requirements regarding nomination and appointment of board members across the banking group. - The NBR has not performed qualitative analyses on corporate governance arrangements and practices at the industry level to complement individual work and SREP analyses. ### Risk management process - Regulations set detailed and demanding risk management requirements; NBR emphasizes risk management during on-site inspections. - The NBR has not developed an internal methodology to guide review of risk management aspects beyond the SREP guideline. - Areas where explicit requirements would usefully complement supervisory practices: - Boards and senior management understand limitations and uncertainties relating to model outputs and risks in their use. - Boards and senior management understand risks inherent in major management initiatives (changes in systems, processes, business model, major acquisitions). - Uncertainties attached to risk measurement need to be recognized. ### Capital adequacy - Romania applies the CRR and CRD IV under the EU common regulatory framework. - Two banks have been approved to use the advanced approach to calculate credit risk regulatory capital and three banks for operational risk. - For those banks using the advanced approach, the contribution to total own funds requirement is: credit risk: 17 percent, operational risk: 38 percent. - Noteworthy points: - In December 2014, the RCAP reviewed the EU-wide capital framework and concluded that certain features deviated from Basel standards. - There is no dedicated team or unit within the SD responsible for evaluating, approving, reviewing and overseeing banks’ internal models. ### Credit risk - Key regulatory requirements regarding credit risk management exist and were significantly strengthened following new EU requirements, taking into account Romania’s experience with problem assets. - The NBR implemented a thorough supervisory process with emphasis on credit risk and regularly requires corrective actions or sanctions where appropriate. - For subsidiaries of EU banking groups and main branches, credit risk management is addressed by supervisory colleges. ### Problem assets, provisions, and reserves - NPEs increased rapidly after 2007 with a peak at 2013, but declined to 6.4 percent in December 2017. - The NBR promoted rapid NPE reduction through initiatives: interim June audits, independent collateral revaluations, full provisioning of high risk exposures, write-offs, etc. - The NBR continues to closely monitor NPEs through detailed and regular reporting. - The NBR intends to amend existing requirements to incorporate key elements of the EBA 2017 guidelines on credit risk management practices and accounting for expected credit losses. ### Concentration risk and large exposure limits - The NBR applies the EU large exposure regime and assesses banks’ concentration risk as part of SREP. - The CRR allows competent authorities to set a lower absolute limit than EUR 150 million, but the NBR has not exercised this option. - As a result, as of June 2017, around 29 percent of Romanian banks apply the LE limit of EUR 150 million (i.e., 100 percent of capital limit) instead of 25 percent of capital. - Assessors note some credit institutions have exposures to a group entity of around 80–90 percent of capital at some point in time. - It is not entirely clear how the NBR determines appropriateness of internal limits and relevant transactions. - There is no explicit regulatory requirement that banks’ policies require all material concentrations to be regularly reviewed and reported to the bank’s board. ### Transactions with related parties - Current regulation on related party (RP) transactions does not meet important ECs under this CP. - Specific deficiencies: - The definition of affiliated parties is not comprehensive enough and fails to capture persons in key positions or major individual shareholders of other group entities, and does not explicitly include “special purpose entities.” - Identification of related parties: the NBR may exercise discretion case by case, but there is no explicit presumption power in the regulation. - No explicit provision requiring that a “write-off” of RP exposures exceeding specified amounts be subject to prior approval by the board. - Information collected on RP transactions is not sufficiently granular for off-site supervision. - RP regulations only describe high level principles, lack clear guidance to banks, and lack sufficient substance. ### Country and transfer risks - The NBR will check country/transfer risk policies and processes if such risks are significant for a bank or group. - The NBR regulation for country and transfer risk management is not sufficiently comprehensive to meet the ECs in this CP. - Specific issues: - Regulation includes only high-level principles similar to BCP text; no further/specific guidance or on-site inspection manual exists for these risks. - Regulation is silent on essential areas banks should develop and supervisors should examine (e.g., contingency plans, exit strategies, oversight mechanisms, periodic board review). - There are no specific regulatory provisioning standards for country risk and transfer risk. - No regulatory stipulation that banks include appropriate scenarios for country and transfer risk in stress testing programs. - FINREP/COREP reporting contains geographical breakdowns, but necessary information for country risk management (risk classification or country rating) is not included. - It is unclear how supervisors perform banking group-wide country risk analysis across entities to form a comprehensive view. ### Market risk - Market risk levels are low for most Romanian credit institutions that do not have complex instruments. - As of June 2017, RWAs for market risk were around three percent of total RWAs. - No banks use the advanced approach for computing market risk capital charge. - CRR and EBA SREP guidelines are comprehensively stipulated and the NBR conducts on-site inspection on all credit institutions annually. - There is no market risk specialist in the supervision department; one should be assigned to build expertise. ### Interest rate risk in the banking book (IRRBB) - The NBR assesses IRRBB risk management, risk profile, appetite, tolerance and stress tests during yearly on-site examinations. - Observations: - The Basel Committee published new guideline on standards for IRRBB in April 2016, but the NBR has not yet updated IRRBB rules, since updating is based on the EU-wide regulatory amendment process. - There is no explicit provision requiring “independent” validation of any models used by functions tasked with managing interest rate risk (including review of key model assumptions). *Source: cr18160 - 3. Cooperation and* ### 24. Liquidity risk Banks are required to have a strategy that enables prudent management of liquidity ### 24. Liquidity risk Banks are required to have a strategy that enables prudent management of liquidity risk and compliance with liquidity requirements, including regular stress testing and contingency funding plans ### Liquidity supervision and requirements - Banks are required to have a strategy that enables prudent management of liquidity risk and compliance with liquidity requirements, including regular stress testing and contingency funding plans. - The NBR conducts on-site inspections annually and off-site quarterly for all banks. - The EU-wide requirement follows the LCR set by the BCBS broadly, but with some divergences that could positively impact ratios. However, generally the impact is not significant for Romanian banks. ### Operational risk (related observations) - In Romania, three banks have been allowed to use the Advanced Measurement Approach. - Two banks use the Standard Approach. - The rest use the Basic Indicator Approach to calculate operational risk regulatory capital. - As of June 2017, RWAs for operational risk have been around 15 percent of total RWAs. - A comprehensive guideline on cyber security and information technology for banks has not been implemented yet. - Regarding ICT resources, the Supervisory Department has one ICT systems specialist but does not have a dedicated unit. - With respect to operational risk reporting, the scope of reporting is not sufficiently broad as this EC requires. There is no framework specifying the minimum elements the bank should report to the NBR, and timing is also unclear. ### Internal control and audit - The NBR regularly assesses for each bank incorporated in Romania compliance with its detailed requirements on internal control and audit. - Beyond regulatory and SREP requirements (which cover essential topics but with limited details), there is no internal methodology to guide on-site inspections on banks’ internal control and audit (detailed scope, criteria to assess specific areas, group approaches etc.) and ensure these aspects are reviewed in a comprehensive and consistent manner. - Banks are not specifically required to ensure that the internal audit is kept informed in a timely manner of any material changes made to the bank’s risk management strategy, policies or processes. - Industry level analyses are not conducted on internal control and audit. ### Financial reporting and external audit - Banks are required to prepare financial statements in compliance with IFRS, should be certified by an external auditor which complies with international standards on audit and is approved by the NBR. - Banks’ external auditors belong to the networks of the four big global audit firms and a large French audit firm (with the exception of the credit cooperative network). - Rotation requirements are implemented since 2014, either for the firm or the signing partner. All banks adopted specific policies and most rotated the firm. - Five small banks appointed their external auditor in 2001-2008 and only rotated the signing partner. The NBR confirmed that the tenure of these signing partners did not exceed seven years. - There is no internal methodology defining criteria used by the NBR to assess the adequacy of banks’ policies on rotation and the NBR has not set an explicit maximum time limit to guide supervisory assessments. ### Disclosure and transparency - Financial and prudential disclosure requirements applied to banks are detailed and largely unified at the EU level. - The NBR verifies individual disclosure requirements and published detailed and updated information on banking activity and risks. ### Abuse of financial services / AML/CFT supervision - AML/CFT Supervision was strengthened in recent years to align with Directive 2015/849 and its risk-based supervision requirements. - In 2016, 39 inspections were conducted, and one narrowly‑targeted thematic inspection was also conducted. - Shortcomings noted: - Under Romanian law, only correspondent banking relationships with banks outside the EU are subject to enhanced due diligence measures. Under the FATF standard, however, enhanced due diligence measures should be implemented with respect to all correspondent banking relationships, and no exception is currently made for intra-EU correspondent banking relationships. - Simplified due diligence is imposed in specific circumstances without a sound assessment that would have established that these circumstances present low ML/TF risks. ### Key statistic - NPL ratio: from a peak of 21.9 percent in 2013, to 6.4 percent as of December 2017. ### Recommended actions (selected from Annex Table 2 relevant to liquidity/operational/internal control/AML/CFT) - Risk management and supervisory tools - Prepare a detailed internal methodology covering relevant risk management aspects for on-site inspections (including criteria to be applied where judgment is needed, approaches to test specific aspects, e.g., incorporation of risk in internal pricing, group risk management framework in the cases of subsidiaries, etc.). - Devote further supervisory attention to risk models, including the advanced approach for regulatory capital calculation (e.g., establish a dedicated unit for more periodic and rigorous model reviews and validation). - Build up supervisory capacity by having a dedicated market risk specialist. - Include explicit requirement that banks conduct independent (internal or external) validation of any models used by the functions tasked with managing interest rate risk (including review of key model assumptions). - Update current regulation based on EU-wide regulatory amendment process reflecting the new standards for IRRBB, which were published in April 2016. - Operational risk and ICT - Introduce guidelines on a comprehensive assessment of ICT risks as intended. - Enhance IT risk supervisory capacity (e.g., establish a specialized unit/ increase IT specialists). - Expand the scope and required items of reporting on operational risk events to keep the NBR apprised of developments affecting operational risk in a timely and comprehensive manner. - Specifically require banks to ensure that the internal audit is kept informed in a timely manner of any material changes made to the bank’s risk management strategy, policies or processes. - Consider conducting industry level analyses on internal control and audit. - AML/CFT - Continue implementing a risk-based approach to AML/CFT supervision. - Ensure that simplified due diligence is authorized only in instances of proven low ML/TF risks. - Ensure that banks are required to implement customer due diligence measures with respect to foreign politically exposed persons in line with FATF Recommendation 12. - Ensure that the requirements related to correspondent banking relationships also apply to intra-EU correspondent banking relationships. - Supervisory process and governance - Ensure consistency and objectivity in SREP score, findings and supervisory measures (e.g., establish an independent review function, develop an on-site and off-site supervisory assessment handbook, and improve the electronic platform to more effectively manage findings, measures, and follow-ups). - Prepare an internal methodology defining criteria used by the NBR to assess the adequacy of banks’ policies on rotation of external auditors (and set a maximum time limit to guide supervisory assessments). - Consider the opportunity to require banks, at least significant banks, to provide more frequent disclosures. - Consider conducting a review of disclosure practices on governance aspects across the industry. ### Authorities’ response (high-level points) - The NBR thanks the IMF, the World Bank and the FSAP mission team and values the assessment and recommendations. - The NBR notes that Basel Core Principles introduce requirements that represent a challenge worldwide and that implementation must consider EU-level regulatory harmonization obligations. - Since the last FSAP mission to Romania in 2008–09, substantial improvements include: - Strengthening of banks’ capital positions and setting medium-term targets for increasing minimum CARs. - Strengthened NBR monitoring of banks’ loan portfolios and problem loans workout procedures and capacity. - Reviewed the bank resolution framework to facilitate rapid action and options for bank restructuring. - Strengthened deposit insurance funding arrangements and significantly lowered the payout period. - Introduced risk-based supervision. - Fully implemented IFRS. - NBR Board actions on FSAP recommendations: - The NBR Board, in its meeting from February 28, 2018, thoroughly analyzed the FSAP recommendations. - Three recommendations have already been implemented and six more will be implemented by end of May 2018. - A detailed action plan and timeline for implementing the remaining recommendations have been approved; responsible NBR line departments have been tasked with specific steps and are providing weekly updates on implementation status. - The NBR will enter into a process of regulatory framework review to the fullest extent possible, given limitations imposed by the applicable EU legal and regulatory framework, in the context of the FSAP recommendations. - The independence of the NBR continued to be strong as part of a broader process in the context of euro adoption, involving compliance with European Commission and ECB recommendations included in the Convergence Reports. *Source: cr18160 - 24. Liquidity risk Banks are required to have a strategy that enables prudent management of liquidity risk and related sections in the supplied PDF content.* ### 36. Under the current Statute, NBR Board members and personnel tasked with prudential ### cr18160 - 36. Under the current Statute, NBR Board members and personnel tasked with prudential ### Legal protection, removal transparency, and amendment intent - Under the current Statute, NBR Board members and personnel tasked with prudential supervision have legal protection against lawsuits while exercising their duties, in good faith, and their legal costs are covered by the NBR. - NBR will pursue amending the NBR Statute to “Introduce a legal provision protecting the NBR as an institution against lawsuits for actions taken and/or omissions made while discharging its duties in good faith.” - NBR welcomes the recommendation to “Introduce a legal provision that the reason(s) for removal of a Board member have to be publicly disclosed.” - NBR notes that, given the NBR Statute and the two Chambers of the Romanian Parliament’s Internal Regulation on joint activities (which stipulates that the meetings of the joint parliamentary standing committees are generally open to the public), the causes for dismissal are supposed to be publicly-available, although this is not explicitly stated in the law. ### Ethics, conflicts of interest, whistleblowing, and cooling-off measures - NBR has recently implemented a Code of Ethics, applicable to its staff and Board members; the enactment expressly regulates conflicts of interests and other cases of misconduct. - Detection of conflicts of interest is promoted by an updated whistleblowing framework, in line with international best practices, aimed at encouraging staff to file reports. - To “Adopt and implement a post-employment or cooling-off period framework covering situations where a staff or Board member intends to take (or takes) a position in a bank supervised by NBR (or that it has directly supervised),” the NBR will implement policies in line with this recommendation. ### Supervisory approach, techniques, and tools (CP 8 and 9) - FSAP mission provided specific recommendations on supervisory practices; NBR views these as an opportunity for improvement and will adjust practices to become as fully compliant as possible with the Basel Core Principles for effective banking supervision. - NBR asserts that, despite some internal processes not exhaustively formalized, all banks are adequately supervised within the current framework and the NBR has a good understanding of both individual banks and the banking industry as a whole. - NBR highlights that some key indicators have been maintained well above the EU banking system average, and that it took important decisions, with good results, to decrease NPLs stock and strengthen NPL supervision. - Supervisory manuals and processes have been revised to align with international best practices as part of an ongoing improvement framework. As a result, the following will be enhanced: - consistency and objectivity in SREP score, findings and supervisory measures/sanctions (e.g., through an independent unit in charge with the quality review of SREP assessment outcomes and management of findings, measures, and follow-ups data base); - forward-looking components of the supervisory framework and a more risk focused based approach (e.g., bottom up stress-testing tools, performing thematic reviews etc.); - dialogue between supervisors and non-executive/independent banks board members through regular meetings after on-site examinations. ### Home-Host relationships and resolution preparedness (CP 13) - FSAP evaluation contributes to strengthening the bank resolution function and further developing internal preparedness for dealing with failing banks. - NBR acknowledges the importance of continuous tests and has planned a simulation exercise for 2018 to test resolution operational readiness/preparedness. ### Country and transfer risks (CP 21) - The report notes that “There are no specific regulatory provisioning standards for country risk and transfer risk in Romania.” - NBR reiterates that starting in 2018, EU Member States will no longer be allowed to impose additional deductions from banks’ capital (according to Article 481 paragraph 1 of Regulation (EU) No 575/2013 of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012). - NBR states that prudential provisioning would affect capital so that EC4 could not be implemented without harming observance of the above-mentioned EU Regulation. ### Operational risk (CP 25) - NBR acknowledges the necessity to enhance IT risk supervisory capacities and expertise in internal risk models assessment and review. - Capacity enhancement to be achieved either by recruitment or by identifying proper training for staff in charge of these tasks. ### Abuse of financial services (CP 29) - NBR attributes legal shortcomings mentioned in the report mainly to the regime accepted and applicable at the EU level and derived from former EU Directives. - NBR notes that Directive (EU) 2015/849 addresses these problems, and its mandatory transposition into national law will solve the deficiencies revealed. *Source: IMF staff report excerpt (cr18160).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18160.pdf_