## ROMANIA — BALANCE SHEET ANALYSIS (Section 1) ## Source details **Canonical URL:** [ROMANIA — BALANCE SHEET ANALYSIS (Section 1)](https://www.imf.org/-/media/files/publications/cr/2018/cr18162.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18162.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18162.pdf.json) --- ### INTRODUCTION - Analysis objective: analyze macro-financial interlinkages, sectoral dependencies, and potential balance sheet vulnerabilities for all resident sectors using sectoral balance sheets compiled by the National Bank of Romania (NBR). - Data source and coverage: financial accounts database compiled by the NBR, covering end-of-year stocks for the years 2008, 2012, and 2016; analysis completed on May 18, 2018. ### KEY FINDINGS — A. Overview of Sectoral Exposures and Imbalances - Aggregate size and trend: - Overall amount of balance sheet exposures stood at approximately 400 percent of gross domestic product (GDP) throughout the periods considered. - Gross and intersectoral exposures have been growing steadily since 2008. - Composition changes 2008–16: - Intersectoral claims increased particularly in the short-term debt and “other assets” categories. - Short-term financial assets defined as assets with an original maturity of one year or less. - “Other assets” include trade credit, financial derivatives and assets other than equity and debt instruments; for corporates, shareholders’ loans are included in this item. - Net borrowing positions (percent of GDP): - Corporates are the largest net borrowers: 80 percent of GDP. - Government is a net borrower: 20 percent of GDP. - Households and Rest of the World (ROW) provide approximately equal amounts of funding to the economy. - Currency and instrument shifts across subperiods: - 2008–12: exposures increased mainly through FX borrowing and FX deposits. - 2012–16: increase driven by national currency exposures — government placing securities with the banking system and corporates using large amounts of trade credit. - Government position and sovereign-bank nexus: - Government net financial position changed from positive to negative between 2008 and 2016, driven by repeated budget deficits. - Between 2008 and 2012 the government mainly borrowed externally; in more recent periods it placed a significant amount of securities with the domestic banking system, strengthening the sovereign-banks balance sheet nexus. - Mitigating vulnerability from the banks-sovereign linkage is a key recommendation of stress testing and risk analysis. - Disintermediation: - Ultimate creditors largely unchanged, but significant disintermediation out of bank lending channel occurred over time: corporates’ external borrowing increased and direct financing of corporates by households rose (shareholders’ loans). - FX balance sheet exposures: - Overall FX exposures were approximately 148 percent of GDP in 2016, compared with approximately 141 percent of GDP in 2008. - Corporates issued a third of overall FX debt: 56 percent of GDP in 2016 (approximately unchanged from 2008). - Households’ borrowing in FX decreased substantially between 2008–16, making households a small net lender in FX through deposits. - Changes in FX outstanding amounts reflect both financial transactions and valuation effects due to exchange rate movements. ### KEY FINDINGS — B. Nonfinancial Sector Developments - Households: - Net financial wealth of households increased significantly between 2008–16. - Main drivers: accumulation of bank deposits (including in FX) and large amount of shareholders’ loans to corporates. - Households’ indebtedness in percent of GDP declined slightly and stands at approximately 20 percent of GDP. - Corporates: - Corporate leverage (total nonequity liabilities over capital) declined sharply between 2008–12 due to a large reduction in short-term inter-company debt. - Corporate debt rebounded during 2012–16 despite sustained decline in corporate bank lending, driven by increased funding from abroad and nonfinancial lenders. - Large share of corporates operate with negative equity: approximately 40 percent of firms (representing 25 percent of total corporate liabilities). - Potential contagion channel: high intra-corporate balance sheet exposures (e.g., trade credit) could transmit shocks if corporates fail to service reciprocal claims, possibly spilling over to the financial sector if default rates on corporate loans pick up. - Corporate funding structure and data considerations: - Domestic funding of corporates shifted out of financial sector lending; loans from financial institutions represent less than a quarter of corporates’ domestic funding sources. - Corporates heavily rely on short-term trade credit (mostly from other corporates) and shareholders’ loans (mostly from domestic households). - Decline in reported corporate loans (2012–16) partly reflects NBR actions to remove nonperforming corporate loans from banks’ balance sheets through write-offs and sales to debt collecting agencies; such transactions can lower outstanding loan values in the dataset. - External funding and FX buffers: - Inward FDI has been an important source of corporate external borrowing; external portfolio debt in foreign currency loans remains significant. - Corporate FX buffers were relatively small: FX corporate deposits equal three percent of GDP in 2016. - Assessing vulnerability from capital inflows would require further data disaggregation by type of corporate (e.g., export-oriented) to account for natural hedges. ### KEY FINDINGS — C. Financial Sector Developments - Size and interconnectedness: - Intra-financial sector (excluding the central bank) exposures increased from five percent of GDP in 2008 to approximately seven percent of GDP in 2016. - Banking system is central to intra-financial sector connections and is an overall net borrower that channels funds to other domestic sectors. - Funding of bank liabilities by domestic financial institutions rose to close to 10 percent of banks’ nonequity liabilities in 2016. - Banks have credit exposures to nonbank financial institutions, particularly Other Financial Institutions (OFIs). - New bank funding channels and diversification: - Increased bank funding from pension funds (PF), investment funds (IF), and OFIs: PFs began to purchase bank equities and IF shares; IFs almost tripled exposure to bank equities and debt. - This increases exposures of nonbank financial institutions to bank liabilities, which could present vulnerabilities to shocks to these funding sources, but also diversifies the investor base in bank equity and diversifies nonbank portfolios. - FX exposures migration and euroization: - Euroization of bank balance sheets decreased; both gross and net FX exposures became much smaller as percent of GDP. - Drivers: corporate credit disintermediation (corporates obtaining FX funds from abroad) and a substantial decline in household FX borrowing between 2008–16. - Recent increases in household FX deposits have led banks to become net borrowers of FX from individuals. - Maturity transformation and OFI funding profiles: - Banks’ assets composed of approximately equal amounts of long- and short-term assets; banks’ liabilities are almost entirely financed by short-term customer deposits, with long-term funding effectively disappearing in the 2016 vintage — indicating a large maturity mismatch and increased maturity transformation by banks. - OFIs have a very large share of long-term assets, financed mainly through long-term bank loans and equity. ### CONCLUSION — Key implications and recommendations - Sovereign-bank nexus: - As government financing needs grew during 2012–16, banks became significant holders of government debt, reinforcing the need for risk-mitigating measures to address sovereign-bank linkages. - Corporate vulnerabilities and data gaps: - Corporate leverage increased during 2012–16 despite reduced bank lending, reflecting disintermediation and strengthening of nonbank funding channels (trade credit and direct lending from abroad). - High prevalence of corporates with negative equity represents an important share of outstanding corporate liabilities and increases systemic vulnerability. - Policy focus areas implied by the analysis: - Mitigate sovereign-bank balance sheet linkage risks. - Enhance monitoring and data coverage of corporate liabilities beyond bank credit (trade credit, shareholders’ loans, external borrowing) and disaggregate corporate data by type to assess natural hedges and FX risk. - Monitor maturity mismatch in bank funding and the increasing exposures between banks and nonbank financial institutions (PFs, IFs, OFIs). ### SECTION 2 — Data gaps and corporate vulnerabilities - Need for improved data collection: - A more in-depth analysis of corporate vulnerabilities would have to rely on improved data collection (e.g., to cover NPLs of companies operating with negative equity and distinguishing corporates with external funding by type of business). - The World Bank analyzed the supply and demand factors explaining the low financial intermediation, and recommended authorities to adopt a comprehensive view of financial development. - Corporate debt held by debt collection agencies: - Corporate indebtedness cannot be fully understood without a comprehensive overview of outstanding debt. - Following the recent cleanup of banks’ balance sheets, including through the selling of corporate NPLs to debt collection agencies, some corporate liabilities may not be correctly captured by the sectoral balance sheets as debt collection agencies do not report any data on their holdings of debt. - Inclusion of debt held by collection agencies in the credit register is therefore warranted, and can be achieved by amending the primary legislation in this regard. ### SECTION 2 — Maturity mismatches (chart metadata) - Chart title: Romania: Maturity Mismatches (In percent of GDP) - Series labels: ST Assets, LT Assets, ST Liabilities, LT Liabilities, Equity - Panel labels: Banks (LHS), OFIs (RHS) - Axis tick and label values and sequences: - "-10 -8 -6 -4 -2 0 2 4 6 8 10" - "-80 -60 -40 -20 0 20 40 60 80" - "20 0820 1220 1620 0820 1220 16" - Sources: NBR and IMF staff calculations. ### SECTION 2 — Banks–OFI interdependencies and policy recommendation - Interdependencies: - The balance sheet analysis applied to the financial sector provides the general context for the in-depth network analysis of bank-NBFL interconnectedness discussed in the stress testing and risk analysis technical note. - The reciprocal exposures between banks and OFIs shows that OFIs provide a significant amount of funding to banks, while banks channel some of their lending through the OFIs, possibly creating a problem of regulatory arbitrage. - Policy recommendation: - Tightening of provisioning requirements for OFIs in line with the application of IFRS9 to banks may prevent regulatory arbitrage. *Prepared by Monetary and Capital Markets Department, International Monetary Fund; Technical Note on Balance Sheet Analysis for Romania. May 18, 2018.* ### Section 1 ### ROMANIA — BALANCE SHEET ANALYSIS (Section 1) ### INTRODUCTION - Analysis objective: analyze macro-financial interlinkages, sectoral dependencies, and potential balance sheet vulnerabilities for all resident sectors using sectoral balance sheets compiled by the National Bank of Romania (NBR). - Data source and coverage: financial accounts database compiled by the NBR, covering end-of-year stocks for the years 2008, 2012, and 2016; analysis completed on May 18, 2018. ### KEY FINDINGS — A. Overview of Sectoral Exposures and Imbalances - Aggregate size and trend: - Overall amount of balance sheet exposures stood at approximately 400 percent of gross domestic product (GDP) throughout the periods considered. - Gross and intersectoral exposures have been growing steadily since 2008. - Composition changes 2008–16: - Intersectoral claims increased particularly in the short-term debt and “other assets” categories. - Short-term financial assets defined as assets with an original maturity of one year or less. - “Other assets” include trade credit, financial derivatives and assets other than equity and debt instruments; for corporates, shareholders’ loans are included in this item. - Net borrowing positions (percent of GDP): - Corporates are the largest net borrowers: 80 percent of GDP. - Government is a net borrower: 20 percent of GDP. - Households and Rest of the World (ROW) provide approximately equal amounts of funding to the economy. - Currency and instrument shifts across subperiods: - 2008–12: exposures increased mainly through FX borrowing and FX deposits. - 2012–16: increase driven by national currency exposures — government placing securities with the banking system and corporates using large amounts of trade credit. - Government position and sovereign-bank nexus: - Government net financial position changed from positive to negative between 2008 and 2016, driven by repeated budget deficits. - Between 2008 and 2012 the government mainly borrowed externally; in more recent periods it placed a significant amount of securities with the domestic banking system, strengthening the sovereign-banks balance sheet nexus. - Mitigating vulnerability from the banks-sovereign linkage is a key recommendation of stress testing and risk analysis. - Disintermediation: - Ultimate creditors largely unchanged, but significant disintermediation out of bank lending channel occurred over time: corporates’ external borrowing increased and direct financing of corporates by households rose (shareholders’ loans). - FX balance sheet exposures: - Overall FX exposures were approximately 148 percent of GDP in 2016, compared with approximately 141 percent of GDP in 2008. - Corporates issued a third of overall FX debt: 56 percent of GDP in 2016 (approximately unchanged from 2008). - Households’ borrowing in FX decreased substantially between 2008–16, making households a small net lender in FX through deposits. - Changes in FX outstanding amounts reflect both financial transactions and valuation effects due to exchange rate movements. ### KEY FINDINGS — B. Nonfinancial Sector Developments - Households: - Net financial wealth of households increased significantly between 2008–16. - Main drivers: accumulation of bank deposits (including in FX) and large amount of shareholders’ loans to corporates. - Households’ indebtedness in percent of GDP declined slightly and stands at approximately 20 percent of GDP. - Corporates: - Corporate leverage (total nonequity liabilities over capital) declined sharply between 2008–12 due to a large reduction in short-term inter-company debt. - Corporate debt rebounded during 2012–16 despite sustained decline in corporate bank lending, driven by increased funding from abroad and nonfinancial lenders. - Large share of corporates operate with negative equity: approximately 40 percent of firms (representing 25 percent of total corporate liabilities). - Potential contagion channel: high intra-corporate balance sheet exposures (e.g., trade credit) could transmit shocks if corporates fail to service reciprocal claims, possibly spilling over to the financial sector if default rates on corporate loans pick up. - Corporate funding structure and data considerations: - Domestic funding of corporates shifted out of financial sector lending; loans from financial institutions represent less than a quarter of corporates’ domestic funding sources. - Corporates heavily rely on short-term trade credit (mostly from other corporates) and shareholders’ loans (mostly from domestic households). - Decline in reported corporate loans (2012–16) partly reflects NBR actions to remove nonperforming corporate loans from banks’ balance sheets through write-offs and sales to debt collecting agencies; such transactions can lower outstanding loan values in the dataset. - External funding and FX buffers: - Inward FDI has been an important source of corporate external borrowing; external portfolio debt in foreign currency loans remains significant. - Corporate FX buffers were relatively small: FX corporate deposits equal three percent of GDP in 2016. - Assessing vulnerability from capital inflows would require further data disaggregation by type of corporate (e.g., export-oriented) to account for natural hedges. ### KEY FINDINGS — C. Financial Sector Developments - Size and interconnectedness: - Intra-financial sector (excluding the central bank) exposures increased from five percent of GDP in 2008 to approximately seven percent of GDP in 2016. - Banking system is central to intra-financial sector connections and is an overall net borrower that channels funds to other domestic sectors. - Funding of bank liabilities by domestic financial institutions rose to close to 10 percent of banks’ nonequity liabilities in 2016. - Banks have credit exposures to nonbank financial institutions, particularly Other Financial Institutions (OFIs). - New bank funding channels and diversification: - Increased bank funding from pension funds (PF), investment funds (IF), and OFIs: PFs began to purchase bank equities and IF shares; IFs almost tripled exposure to bank equities and debt. - This increases exposures of nonbank financial institutions to bank liabilities, which could present vulnerabilities to shocks to these funding sources, but also diversifies the investor base in bank equity and diversifies nonbank portfolios. - FX exposures migration and euroization: - Euroization of bank balance sheets decreased; both gross and net FX exposures became much smaller as percent of GDP. - Drivers: corporate credit disintermediation (corporates obtaining FX funds from abroad) and a substantial decline in household FX borrowing between 2008–16. - Recent increases in household FX deposits have led banks to become net borrowers of FX from individuals. - Maturity transformation and OFI funding profiles: - Banks’ assets composed of approximately equal amounts of long- and short-term assets; banks’ liabilities are almost entirely financed by short-term customer deposits, with long-term funding effectively disappearing in the 2016 vintage — indicating a large maturity mismatch and increased maturity transformation by banks. - OFIs have a very large share of long-term assets, financed mainly through long-term bank loans and equity. ### CONCLUSION — Key implications and recommendations - Sovereign-bank nexus: - As government financing needs grew during 2012–16, banks became significant holders of government debt, reinforcing the need for risk-mitigating measures to address sovereign-bank linkages. - Corporate vulnerabilities and data gaps: - Corporate leverage increased during 2012–16 despite reduced bank lending, reflecting disintermediation and strengthening of nonbank funding channels (trade credit and direct lending from abroad). - High prevalence of corporates with negative equity represents an important share of outstanding corporate liabilities and increases systemic vulnerability. - Policy focus areas implied by the analysis: - Mitigate sovereign-bank balance sheet linkage risks. - Enhance monitoring and data coverage of corporate liabilities beyond bank credit (trade credit, shareholders’ loans, external borrowing) and disaggregate corporate data by type to assess natural hedges and FX risk. - Monitor maturity mismatch in bank funding and the increasing exposures between banks and nonbank financial institutions (PFs, IFs, OFIs). *Prepared by Monetary and Capital Markets Department, International Monetary Fund; Technical Note on Balance Sheet Analysis for Romania. May 18, 2018.* ### Section 2 ### Section 2 ### Data gaps and corporate vulnerabilities - A more in-depth analysis of corporate vulnerabilities would have to rely on improved data collection (e.g., to cover NPLs of companies operating with negative equity and distinguishing corporates with external funding by type of business). - The World Bank analyzed the supply and demand factors explaining the low financial intermediation, and recommended authorities to adopt a comprehensive view of financial development. - Corporate debt held by debt collection agencies: - Corporate indebtedness cannot be fully understood without a comprehensive overview of outstanding debt. - Following the recent cleanup of banks’ balance sheets, including through the selling of corporate NPLs to debt collection agencies, some corporate liabilities may not be correctly captured by the sectoral balance sheets as debt collection agencies do not report any data on their holdings of debt. - Inclusion of debt held by collection agencies in the credit register is therefore warranted, and can be achieved by amending the primary legislation in this regard. ### Maturity mismatches (chart and labels) - Chart title: Romania: Maturity Mismatches (In percent of GDP) - Series labels: ST Assets, LT Assets, ST Liabilities, LT Liabilities, Equity - Panel labels: Banks (LHS), OFIs (RHS) - Axis tick and label values and sequences (preserved exactly as in source): - "-10 -8 -6 -4 -2 0 2 4 6 8 10" - "-80 -60 -40 -20 0 20 40 60 80" - "20 0820 1220 1620 0820 1220 16" - Sources: NBR and IMF staff calculations. ### Banks–OFI interdependencies and policy recommendation - The balance sheet analysis applied to the financial sector provides the general context for the in-depth network analysis of bank-NBFL interconnectedness discussed in the stress testing and risk analysis technical note.7 - The reciprocal exposures between banks and OFIs shows that OFIs provide a significant amount of funding to banks, while banks channel some of their lending through the OFIs, possibly creating a problem of regulatory arbitrage. - Policy recommendation: - Tightening of provisioning requirements for OFIs in line with the application of IFRS9 to banks may prevent regulatory arbitrage. *IMF staff.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18162.pdf_