## Romania — Financial System Stability Assessment (FSAP Update)

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### Executive summary and mission
- Report prepared by the Monetary and Capital Markets Department and the European Department; approved by José Viñals and Marek Belka on April 28, 2009.
- FSAP Update mission visited Romania from 3-14 November, 2008; findings discussed during a Staff Visit in January 2009.
- Team included Scott Roger (Co-Lead, IMF/MCM), Sophie Sirtaine (Co-Lead, World Bank), Tonny Lybek (IMF/EUR), Jochen Andritzky, Abdullah Al-Hassan (IMF/MCM), Martin Melecky, Michel Noel, Tony Randle, Heinz Rudolph (World Bank), and consultants Michael Ainley, Susan Quill, and Richard Pratt.
- Scope: stability of the financial system as a whole; does not cover institution-specific risks such as asset quality, operational or legal risks, or fraud.

### Macroeconomic and market developments
- Sharp deterioration in outlook and market access:
  - By end-March 2009, the leu had depreciated roughly 25 percent from its mid-2007 peak against the Euro.
  - NBR policy rate history in source: 7 percent (September 2007); 10.25 percent (August 2008); cut to 10.0 percent (February 2009).
  - Bucharest stock exchange capitalization declined nearly 80 percent from its 2008 peak.
- Real economy and credit:
  - Lending in lei declined at an annualized rate of 4.4 percent (6.9 percent excluding overdue loans) over September–February.
  - Foreign currency lending fell at a rate of 10 percent (36 percent excluding overdue loans), after adjusting for depreciation of the leu.
  - NPLs (including doubtful and loss, unadjusted for collateral): 4 percent (end-2007); 5.3 percent (September 2008); 6.5 percent (end-2008).
  - Consensus GDP growth forecasts for 2009 revised: 5.2 percent (August 2008) → 4.5 percent (October 2008) → 0.8 percent (January 2009) → -2.3 percent (April 2009).

### Financial structure and vulnerabilities
- System composition and ownership:
  - Banks account for 83 percent of total financial system assets; leasing companies 7 percent.
  - Of 43 banks, 37 (including 10 branches) were foreign-owned and accounted for 88 percent of total bank assets at end-2008.
  - Austrian, Greek, French, and Italian banks hold over 76 percent of total bank assets.
- Rapid credit growth yet limited depth:
  - Private sector credit grew at an average annual rate of 50 percent since 2003, rising from 15 percent of GDP to 39 percent by end-2008.
- Funding and currency risks:
  - Loan-to-deposit ratio: 131 percent (by end-2008).
  - Foreign liabilities: 31 percent of total liabilities (by end-2008).
  - Share of lending in foreign exchange rose: overall from 50 to 58 percent (2005–2008); household FX share from 44 to 59 percent (2005–2008).
  - Direct borrowing of large firms from abroad rose from 4 percent (net basis) of GDP in 2005 to nearly 11 percent in 2007.

### Banking system cushions and stress-test results
- Pre-crisis capital and liquidity:
  - CAR for entire banking system: 13.8 percent (end-2008).
  - Tier-1 capital ratio: just over 8 percent.
  - High reserve requirements cited: 18 percent on lei deposits and 40 percent on foreign currency deposits (historical context).
- Stress testing (FSAP mission and updated tests):
  - Coverage: 14 largest banks (about 81 percent of banking system assets in some exercises).
  - Central scenario features: sharp growth decline, large leu depreciation, higher interest rates, marked property price fall.
  - FSAP central scenario estimated losses and capital needs:
    - Losses for all banks: € 2.1-2.6 billion (equivalent to 1.8-2.3 percent of GDP).
    - Capital needed to restore CARs to end-June 2008 levels: € 1.6 billion (equivalent to 1.4 percent of GDP).
  - Updated (end-2008 data) tests estimate recapitalization needs around € 1 billion:
    - Lower figure reflects a 10 percent CAR target in updated scenario versus restoring pre-shock levels averaging 12.8 percent in the FSAP analysis and capital increases already undertaken by several banks.
    - If FSAP had used a 10 percent CAR, estimated recapitalization need would have been around € 800 million for the 14 largest banks.
    - Targeting CARs of at least 12.8 percent in the updated scenario would have increased recapitalization needs by around € 1 billion compared with a 10 percent minimum.
- Mission macro Scenario II (hard landing) aggregated stress-test outcomes:
  - Total losses estimated: between RON 9 to RON 11 billion (1.8-2.3 percent of GDP) for all banks.
  - Number of banks with CARs falling below 8 percent: 6 banks.
  - Capital shortfall to meet 8 percent CAR: around RON 2 billion (0.4 percent of GDP).
  - Cost to restore initial (June 2008) CARs: RON 7 billion (1.4 percent of GDP).
  - Updated estimates (including later capital increases) reduced recapitalization needs to around € 1 billion in some analyses.

### Key risks and channels
- Principal risks identified:
  - Sharp contraction of capital inflows (including FDI and foreign bank lending) — categorized as High concern and Severe likelihood in the next 1–3 years.
  - Severe and prolonged euro area recession — High concern, Moderate likelihood.
  - Damaging domestic fiscal and wage policies — Moderate concern, Severe likelihood.
- Transmission mechanisms of a funding shock:
  - Contraction or reversal of inflows could dry up credit, deepen the economic slump, and raise loan defaults.
  - Downward pressure on the exchange rate would worsen balance sheets of unhedged FX borrowers and raise NPLs and losses.
  - Securing external lines of credit from foreign parents is crucial; Vienna initiative accord (March 26) with top 9 foreign-owned banks noted as important.

### Crisis management, liquidity, and resolution frameworks
- Crisis management and safety net priorities:
  - Strengthen cross-border bilateral and regional cooperation.
  - Accelerate cross-sectoral cooperation on crisis management planning and simulation exercises.
  - Review and strengthen bank resolution framework to enhance NBR capacity to restructure troubled banks (consider earlier imposition of Special Administration and clarifying powers of special administrators).
  - Remedy weaknesses in deposit insurance: RDGF resources inadequate for medium/large bank failure; coverage increase (to € 50,000) exacerbates adequacy concern; payouts must start within three months after liquidation initiation—recommend faster payout and additional funding (including government line of credit).
  - Clarify and formalize Emergency Lending Arrangements (ELA) terms, collateral, haircuts, coordination, and termination conditions.
- NBR actions already taken:
  - Established a special unit focused on crisis management.
  - Led contingency planning and enhanced transparency and public communications.
  - Participated in Vienna initiative to coordinate parent bank support for Romanian subsidiaries.

### Regulatory, cross-sectoral, and supervisory recommendations
- Cross-sectoral:
  - Align independence and financial autonomy of non-bank regulators (CNVM, CSA, PPSSC) with those of the NBR — Near term.
  - Issue consistent valuation methodologies for financial assets — Near term.
  - Strengthen information exchange and cooperation among regulators and the MEF — Near term.
  - Expand resources of the FIU (ONPCSB) — Near term.
- Banking supervision:
  - Move toward full adoption of IFRS for banks (commitment included in proposed Fund arrangement; timing to be determined by NBR).
  - Continue Basel II implementation, build local resources and skills, and shift to a risk-based supervisory approach.
  - Strengthen judicial, accounting and auditing standards; improve NBR communication with regulated entities.
  - Strengthen monitoring of loan portfolios and problem loan workout capacity; banks to establish proactive identification and restructuring guidelines.
  - Seek strengthening of capital positions for some banks and set medium-term targets for increasing minimum CARs; prefer fresh Tier 1 capital and retaining 2008 profits where feasible.
- Securities markets and capital market development:
  - Concentrate primary issuance of government bonds on one or two maturity points until liquidity is enhanced; revise primary dealer contracts and establish PD rotation policy.
  - Amend Law of Capital Markets to remove limit on voting rights in regulated market operators.
  - Improve market infrastructure: CSD correspondent relationships, settlement without pre-validation, OTC settlement, T+1 minute OTC reporting for government bonds, and reduce issuance/registration costs.
- Insurance and pensions:
  - CSA to build skills for Solvency II transition and adopt risk-based supervision.
  - Review premiums and potential fiscal risks under Law on Obligatory House Insurance; consider additional capital requirements for MTPL and CASCO classes.
  - PPSSC to clarify Minimum Contribution Guarantee and Weighted-Average Return Guarantee interpretations; establish unique valuation methodology; revise investment management fees; continue contribution increases of 0.5 percent per annum (medium term).

### Priority recommendations (timeframe preserved as in source)
- Immediate:
  - Strengthen capital positions of some banks and set medium-term targets for increasing minimum CARs.
  - Strengthen monitoring of bank loan portfolios and problem loan workout procedures and capacity.
  - Accelerate crisis management planning, communications, simulation exercises, and strengthen cross-border and cross-sectoral coordination.
  - Consider additional measures to provide liquidity, especially under ELA.
  - Review bank resolution framework to facilitate rapid action and options for bank restructuring.
  - Strengthen deposit insurance funding arrangements and speed up payouts.
- Near term:
  - Align independence and financial autonomy of non-bank regulators with NBR.
  - Issue consistent valuation methodologies for financial assets.
  - Strengthen information exchange among regulators and the MEF.
  - Expand resources of the FIU (ONPCSB).
  - Strengthen judicial, accounting and auditing standards; improve NBR communication with regulated entities.
  - Concentrate primary issuance of government bonds on one or two maturities; revise PD contracts and establish PD rotation policy; amend Law of Capital Markets to remove limit on voting rights.
  - Review Law on Obligatory House Insurance; clarify pension guarantees; revise investment management fees; establish unique valuation methodology and responsibility.

### Stress-test methods, scenario design, and caveats
- Approaches:
  - Single-factor sensitivity analyses (interest rate, exchange rate, liquidity).
  - Two macro scenarios (soft landing; hard landing) using bottom-up (banks) and top-down (NBR/mission) techniques.
- Hard landing scenario mission regression results:
  - Increase of NPL ratio of 11.2 percentage points decomposed as: fall in growth +3.6 percentage points; increase in inflation +1.3 percentage points; real leu depreciation +6.3 percentage points.
- Limitations:
  - Stress tests based on data to end-June 2008 (many tests updated to end-2008 later) and do not capture all subsequent macro-financial changes.
  - Tests do not isolate specific effects of a sharp slowing of foreign funding or include off-balance sheet liabilities comprehensively.
  - Results sensitive to CAR target choice (10 percent vs. pre-shock 12.8 percent) and to inclusion/exclusion of subsequent capital injections and half-year profits.

### Selected macro and financial indicators (examples preserved exactly as in source)
- Financial soundness (selected):
  - Capital adequacy ratio 1/: 20.6 21.1 18.1 13.8 13.0 12.8 11.9 12.3
  - Non-performing loans, in percent of loans 4/: 8.1 8.3 8.0 9.7 9.8 10.3 11.1 13.8
  - Loan to deposit ratio, in percent 7/: 72.1 80.0 95.8 114.8 123.3 126.6 133.5 130.8
  - Lending in foreign exchange, in percent of non-gov. credit: 61.8 54.7 47.3 54.3 55.0 55.1 56.1 57.8
- Macro indicators (selected sequence): Real GDP: 4.1 7.9 6.2 7.1 -4.1; CPI (end of period): 8.6 4.9 6.6 6.3 4.5; Unemployment rate: 5.8 5.4 4.3 4.0 8.9.

*International Monetary Fund — Financial System Stability Assessment, Romania (FSAP Update), approved April 28, 2009 (excerpts from _cr1047).*

### 2009. The views expressed in this document are those of the staff team and do not necessarily reflect

### Romania — Financial System Stability Assessment

### Executive Summary: context and scope
- Report prepared by the Monetary and Capital Markets Department and the European Department; approved by José Viñals and Marek Belka on April 28, 2009.
- FSAP Update mission visited Romania from 3-14 November, 2008; findings discussed during a Staff Visit in January 2009.
- FSAP update team members included Scott Roger (Co-Lead, IMF/MCM), Sophie Sirtaine (Co-Lead, World Bank), Tonny Lybek (IMF/EUR), Jochen Andritzky, Abdullah Al-Hassan (IMF/MCM), Martin Melecky, Michel Noel, Tony Randle, Heinz Rudolph (World Bank), and consultants Michael Ainley, Susan Quill, and Richard Pratt.
- Report focuses on stability of the financial system as a whole; does not cover institution-specific risks such as asset quality, operational or legal risks, or fraud.
- Copies available from International Monetary Fund • Publication Services; Price: $18.00 a copy.

### Financial stability assessment: main findings
- Romania’s financial sector regulatory authorities have made significant progress in adopting international best practice, including transposition of EU directives and implementation of many 2003 FSAP recommendations.
- Banking system dominates the financial sector and entered the crisis well capitalized with high liquidity buffers.
- Rapid deterioration in economic conditions and depreciation of the leu will put strains on bank capital positions; stress testing suggests some banks may be at risk of becoming undercapitalized as the downturn continues.
- Nearly 90 percent of the banking system is foreign owned, increasing the importance of cooperation with home supervisors and maintaining parent bank lines of credit to subsidiaries and corporate borrowers in Romania.
- A large part of banking system growth in recent years was funded from abroad; sharp contraction or reversal of inflows could:
  - Dry up credit to the private sector, causing a sharper slump in economic activity and larger increases in loan defaults.
  - Put additional downward pressure on the exchange rate, adversely affecting households and companies with substantial unhedged foreign currency debts.
- Stress testing exercises (including additional tests undertaken in March-April 2009 in the context of the IMF-supported program) indicate most banks are fairly well placed to cope with deterioration to date, but further deterioration could lead to undercapitalization of some banks.

### Crisis management and safety net: priorities and recommendations
- In the current environment, strengthen crisis management systems and financial safety nets to enable rapid, effective response and maintain public confidence.
- Priority areas for modification or clarification:
  - Intensify cross-border bilateral and regional cooperation.
  - Accelerate cross-sectoral cooperation on crisis management planning.
  - Review and strengthen bank resolution framework to enhance NBR capacity to restructure troubled banks.
  - Remedy weaknesses in deposit insurance framework; strengthen deposit insurance funding arrangements and speed up payouts.
  - Consider additional measures to provide liquidity, especially under ELA.
- NBR actions already taken:
  - Established a special unit focused on crisis management issues.
  - Taken lead in developing contingency plans and enhancing transparency and public communications.
  - Participated actively in the Vienna initiative to coordinate support by parent banks for Romanian subsidiaries (accord reached in Vienna on March 26 with the top 9 foreign-owned banks active in Romania).

### Regulatory framework and cross-sectoral issues
- Significant progress since 2003 FSAP, including introduction of consolidated supervision and transposition of EU directives associated with EU accession.
- Emerging cross-sectoral themes:
  - Need for better cross-sectoral cooperation in supervision, especially of financial groups.
  - Further movement toward a more risk-based approach to supervision across authorities.
  - Adoption of IFRS accounting is encouraged.
  - Review appointment process for Board members of non-bank supervisory agencies to strengthen credibility and autonomy.
- Specific near-term cross-sectoral recommendations:
  - Align independence and financial autonomy of non-bank regulators with those of the NBR.
  - Issue consistent valuation methodologies for financial assets.
  - Strengthen information exchange and cooperation among regulators and the MEF.
  - Expand resources of the FIU (ONPCSB).

### Banking supervision: challenges and actions
- Virtually all weaknesses identified in the 2003 FSAP have been addressed.
- Three principal ongoing challenges:
  - Adopt a fully IFRS accounting system, consistent with international best practice.
  - Continue implementation of Basel II, requiring augmented resources and skills.
  - Continue transition toward a more risk-based approach to regulation and supervision; developing necessary skills will take time and deliberate effort.
- Near-term banking recommendations:
  - Strengthen judicial, accounting and auditing standards.
  - Improve communication and consultation between NBR and regulated entities.
  - Strengthen monitoring of bank loan portfolios and problem loan workout procedures and capacity.
  - Seek strengthening of capital positions of some banks and set medium term targets for increasing minimum CARs.

### Capital markets, insurance, and pensions
- Capital markets:
  - Romania’s securities market remains shallow despite integration in the single market.
  - Market development hampered by absence of liquid government bond benchmarks and deficiencies in market infrastructure (exchanges, OTC markets, CSD).
  - Recommend concentrating primary issuance of government bonds on one or two maturity points until liquidity is enhanced; revise primary dealer contracts and establish PD rotation policy; amend Law of Capital Markets to remove limit on voting rights in regulated market operators.
- Insurance:
  - As Romania moves to implement Solvency II, CSA needs stronger skills to adopt a more risk-based approach.
  - Pay attention to potential fiscal risks under the Law on Obligatory House Insurance; unclear whether premiums are adequate.
  - Consider requiring additional capital in MTPL and CASCO classes unless premiums adjusted; actuarial reviews of guarantee and protection funds needed.
- Pensions:
  - Authorities commended for major pension reform, but challenges remain:
    - Promote longer-term focus of pension fund portfolio management.
    - Require identical asset prices based on agreed methodologies and data.
    - Ensure PFMC governance so directors act in best interests of contributors when transacting with related entities.
  - Near-term pension recommendations:
    - Clarify interpretation of minimum contribution guarantee and weighted average return guarantee.
    - Revise investment management fees.
    - Establish unique valuation methodology and responsibility.

### Implementation status and program linkages
- Authorities have begun implementing FSAP update recommendations:
  - NBR strengthened stress testing capability and encouraged banks to strengthen capital positions pre-emptively.
  - RDGF proposed reforms aligned with FSAP recommendations.
  - In negotiations of a Fund program, authorities committed to implement priority recommendations including reforms to bank resolution and deposit guarantee arrangements, and adoption of IFRS accounting.
- The need to strengthen capital positions was addressed in inclusion of stress test–based assessment of additional capital needs of banks in the proposed Fund-supported program.
- The FSAP update assessment is based primarily on discussions and analysis around the November 2008 mission, and reports actions up to the IMF Board discussion beginning of May 2009; it does not take into account developments subsequent to that Board discussion.

### Priority recommendations (selected, with timeframes)
- Immediate:
  - Seek strengthening of capital positions of some banks and set medium term targets for increasing minimum CARs.
  - Strengthen monitoring of bank loan portfolios and problem loan workout procedures and capacity.
  - Accelerate crisis management planning, communications, simulation exercises, and strengthen cross-border and cross-sectoral coordination.
  - Consider additional measures to provide liquidity, especially under ELA.
  - Review bank resolution framework to facilitate rapid action and options for bank restructuring.
  - Strengthen deposit insurance funding arrangements and speed up payouts.
- Near term:
  - Align independence and financial autonomy of non-bank regulators with NBR.
  - Issue consistent valuation methodologies for financial assets.
  - Strengthen information exchange among regulators and the MEF.
  - Expand resources of the FIU (ONPCSB).
  - Strengthen judicial, accounting and auditing standards; improve NBR communication with regulated entities.
  - Concentrate primary issuance of government bonds on one or two maturities; revise PD contracts and establish PD rotation policy; amend Law of Capital Markets to remove limit on voting rights.
  - Review law on obligatory house insurance; clarify pension guarantees; revise investment management fees; establish unique valuation methodology and responsibility.
- Appendix I contains a complete listing of recommendations; Appendix II reports on implementation of the 2003 FSAP recommendations.

*International Monetary Fund — Financial System Stability Assessment, Romania (FSAP Update), approved April 28, 2009.*

### 1.      Romania’s macroeconomic and financial outlook has deteriorated dramatically as

### Romania’s macroeconomic and financial outlook has deteriorated dramatically as

### Macroeconomic outlook and market developments
- Access to external sources of finance has become much more constrained and demand for exports has plummeted.
- Sharp slowing of capital inflows reflects: generalized increase in risk aversion toward emerging markets; contagion from financial crises in several other European transition economies; concerns regarding sustainability of Romania’s large current account deficit; concerns about fiscal and wage policies; and health of foreign banks with subsidiaries or branches in Romania.
- International credit ratings were cut in late 2008 by an even larger margin than those of several other countries in the region.
- By end-March 2009, the leu had depreciated roughly 25 percent from its mid-2007 peak against the Euro, despite significant increases in domestic interest rates.
- NBR policy rate movements:
  - 7 percent in September 2007
  - 10.25 percent in August 2008 (to counter inflation pressures)
  - The NBR policy rate was cut to 10.0 percent in February 2009.
- Financial market impacts:
  - Nearly 80 percent decline in capitalization of the Bucharest stock exchange from its 2008 peak.
  - Recurrent bouts of downward pressure on the exchange rate, upward pressure on interest rates, and huge declines in equity values.

### Real economy and credit developments
- Strong agricultural production supported upward revisions for 2008 early in the year, but final months saw rapid contractions in construction, manufacturing, and services.
- Record declines in surveys of consumer confidence and business prospects.
- Credit aggregates shifted from rapid growth to decline; NPLs increasing rapidly.
- Lending changes since September 2008 (annualized rates over September–February, adjusted as stated):
  - Lending in lei declined at an annualized rate of 4.4 percent (6.9 percent excluding overdue loans).
  - Foreign currency lending fell at a rate of 10 percent (36 percent excluding overdue loans), after adjusting for depreciation of the lei.
- NPLs (including loans classified as doubtful and loss, unadjusted for collateral):
  - 4 percent of total loans at end 2007
  - 5.3 percent in September 2008
  - 6.5 percent by end-2008
- GDP growth forecasts cuts:
  - Average Consensus forecast for GDP growth in Romania in 2009: 5.2 percent in August 2008 → 4.5 percent in October 2008 → 0.8 percent in January 2009 → -2.3 percent in April 2009.
- Most likely prospect closer to the hard-landing scenario envisaged in the stress testing exercise.

### Policy response (NBR and prudential measures)
- Monetary policy framework: inflation targeting; inflation running above target partly due to leu depreciation in late 2008.
- NBR actions to maintain a firm policy stance to dampen downward exchange rate pressure and ensure inflation returns to target range.
- Measures introduced to discourage unhedged foreign currency borrowing, especially by households, and to constrain household debt exposures (especially mortgage debt).
- Minimum reserve requirement (MRR) changes:
  - In November 2008, as banking system liquidity shifted to a deficit, MRR on leu deposits cut from 20 percent to 18 percent.
  - More recently, MRR on foreign currency deposits with over 2 years residual maturity was reduced to zero.
  - NBR recognizes high MRR no longer needed to contain credit expansion but any easing likely to be gradual to avoid substantial capital outflows.
- Other actions: NBR acted to counter adverse spillovers on domestic money market liquidity and interbank interest rates; Romania followed the EU lead in raising household deposit insurance coverage.
- Transient and structural drivers of October–November interest rate pressures:
  - Transient: increased segmentation of the interbank market from loss of confidence among banks; downward adjustments in interbank exposure limits may also have played a role.
  - Structural: banking system’s shift to a net negative liquidity position vis-à-vis the NBR; generalized increase in demand for liquidity.

### Financial structure and vulnerabilities
- System composition:
  - Banks account for 83 percent of total assets of the financial system.
  - Leasing companies account for a further 7 percent of total assets.
  - Of 43 banks in Romania, 37 (including 10 branches) are foreign-owned and accounted for 88 percent of total bank assets at end-2008.
  - Austrian, Greek, French, and Italian banks dominate, with over 76 percent of total bank assets.
- Rapid banking system growth but still fairly small relative to GDP:
  - Since 2003, private sector credit grew at an average annual rate of 50 percent, rising from 15 percent of GDP to 39 percent by end-2008.
  - Shares of bank credit and deposits in GDP are amongst the lowest in Europe.
- Funding and currency mismatches:
  - Loan-to-deposit ratio rose to 131 percent by end-2008.
  - Foreign liabilities rose to 31 percent of total liabilities by end-2008.
  - Substantial dependence on funding from foreign parents is a key liquidity risk.
  - Direct borrowing of large firms from abroad increased from the equivalent of 4 percent (net basis) of Romanian GDP in 2005 to nearly 11 percent in 2007.
- Foreign exchange exposure:
  - Share of lending to households and non-financial firms in foreign exchange (mainly euro) rose from 50 to 58 percent between 2005 and 2008; household lending share in foreign exchange rose from 44 to 59 percent over 2005-2008, while share to non-financial firms declined slightly from 59 to 57 percent.
  - Foreign currency lending declined from a high of 62 percent in mid-2006 as a result of NBR measures.
  - Banking system’s direct net open foreign exchange positions are low because foreign currency borrowings are almost entirely offset by foreign currency lending, but indirect exposures via borrower balance sheets are significant.
  - Corporate sector exposure to currency risk greater than local borrowing suggests.

### Stability assessment of the banking system and stress test results
- Pre-crisis buffers:
  - Capital adequacy ratio (CAR) for entire banking system was 13.8 percent at end-2008 (well above the 8 percent EU minimum requirement).
  - Tier-1 capital ratio was just over 8 percent.
  - High reserve requirements: 18 percent on lei deposits and 40 percent on foreign currency deposits.
- Stress test findings (FSAP update and subsequent tests):
  - Stress tests based on data up to end-June 2008; updated tests use end-2008 data and assumptions closer to current WEO projections.
  - Central macroeconomic scenario features: sharp decline in growth, large depreciation of the leu, higher interest rates, marked fall in property values.
  - Credit deterioration is the key risk to the banking sector; NPL increases drive losses.
  - In the central scenario, NPL ratios increase by between 7 percent initially, and by up to 11 percentage points over the medium term; roughly half of the increase attributable to depreciation of the leu, one third to slower growth, remainder to decline in property prices.
  - Estimated losses and capital needs (central scenario):
    - Losses for all banks estimated at € 2.1-2.6 billion, equivalent to 1.8-2.3 percent of GDP.
    - Capital needed to restore CARs to end-June 2008 levels: € 1.6 billion, equivalent to 1.4 percent of GDP.
    - These figures do not take into account subsequent capital increases by several banks.
  - Updated stress tests (covering almost all banks, based largely on end-2008 data) estimate recapitalization needs of around € 1 billion.
    - Lower figure reflects using a 10 percent CAR target in the updated scenario versus restoring pre-shock levels averaging 12.8 percent in the FSAP analysis, and several banks having already received capital increases before end-2008.
    - If FSAP had used a 10 percent CAR, estimated recapitalization need would have been around € 800 million for the 14 largest banks.
    - If the updated scenario had targeted CARs of at least 12.8 percent, recapitalization needs would be around € 1 billion more than with a 10 percent minimum CAR.
- Liquidity vulnerability:
  - Most banks fairly well placed to cope with immediate liquidity shocks due to high reserve requirements, but sustained loss of credit lines or constrained access to parent bank funds could be much more damaging.
  - Contraction of external funding or direct lending by foreign banks would:
    - Lead to sharp contraction in lending by Romanian banks, accentuating the downturn and raising NPLs and losses.
    - Cause downward pressure on the exchange rate, worsening balance sheets of households and companies with unhedged foreign currency debts, again raising NPLs and losses.
  - Stress tests incorporate such effects to an important degree in the central scenario but cannot isolate specific effects of slowing foreign funding; impact could be large.
  - Securing banks’ external lines of credit is crucial; the recent agreement in Vienna of major foreign banks present in Romania to maintain funding of their subsidiaries is an important development.

### Key risks and policy implications
- Key risks to the macroeconomic and financial outlook include:
  - A further marked slowing of capital inflows, including FDI and lending by foreign banks, which would accentuate slowing of growth and incomes, weaken the exchange rate, and strain household and business financial positions, posing substantial risks to financial stability.
  - A severe and prolonged euro area recession, which would intensify pressures on household and business incomes and financial positions, with adverse consequences for banks.
  - Fiscal and wage policy slippages: market sentiment and creditworthiness assessments could react negatively if government does not act decisively to ensure public sector spending and wage increases are consistent with fiscal and monetary objectives.
- Policy recommendations and objectives:
  - For banks at risk of falling below minimum capital requirement, an increase in capital would be appropriate.
  - Increased capital buffers are recommended, with a medium-term objective of raising CAR norms—ideally through fresh Tier 1 capital injections.
  - Where raising new capital is difficult, retaining 2008 profits in capital rather than remitting them as dividends could materially strengthen capital positions.
  - NBR should signal a prudent medium-term CAR objective well above the 8 percent minimum and recognize that required increases might vary across banks depending on portfolio characteristics.
  - To avoid procyclical increases in CAR (for example, via lending cuts), NBR should indicate that raising CARs is a medium-term objective and emphasize capital increases rather than credit contraction.
  - Substantial efforts should be made to secure banks’ external lines of credit.

*Source: _cr1047 - Romania’s macroeconomic and financial outlook has deteriorated dramatically as (IMF staff report excerpt).*

### 18.      Banks should also step up measures to monitor and strengthen the quality of loan

### _cr1047 - 18.      Banks should also step up measures to monitor and strengthen the quality of loan portfolios. Recent initiatives to strengthen problem loan workout procedures and capacity are welcome, but need to be accelerated in recognition of the likelihood that many borrowers are likely to run into payment difficulties. In this regard, banks should take a proactive role in identifying potentially problematic loans, as well as establishing clear guidelines for restructuring loans and ensuring that they have the capacity to implement workouts expeditiously.

### Loan portfolio quality and bank actions
- Banks should step up measures to monitor and strengthen the quality of loan portfolios.
- Recent initiatives to strengthen problem loan workout procedures and capacity are welcome but need to be accelerated given the likelihood that many borrowers will run into payment difficulties.
- Banks should:
  - Take a proactive role in identifying potentially problematic loans.
  - Establish clear guidelines for restructuring loans.
  - Ensure they have the capacity to implement workouts expeditiously.
- Note: "profits would substantially cover recapitalization needs of most large banks. The NBR can request banks to raise capital, but it cannot compel them to retain profits as capital."

### Developments since the FSAP mission
- The NBR Supervision Department advised several banks to enhance capital, reflected in a rise in the aggregate solvency ratio of the banking system from 11.8 percent in September 2008 to 13.8 percent at year-end.
- Banks have taken steps to:
  - Establish debt workout units.
  - Develop loan refinancing policies.
  - Identify and contact corporate clients to restructure potentially troubled loans.
- The NBR participated in coordinating support of foreign banks for their subsidiaries in Romania, and undertook stress tests to assess capital needed to maintain CAR above 10 percent throughout the program period under alternative macroeconomic scenarios.

### Crisis management and safety net arrangements — overarching assessment
- Major elements of a crisis management and safety net framework are in place, but urgent improvements are needed to ensure authorities can act quickly and effectively.
- A National Committee for Financial Stability (NCFS) was established in 2007.
- The Domestic Standing Group (DSG) coordinates activities of the four supervisory authorities and the MEF; working groups and contingency plans are being developed.

### Crisis management, cooperation, and coordination — priority recommendations
- The DSG should:
  - Establish regular monthly or quarterly meetings, and strengthen public communication.
  - Publish a schedule of meetings on members’ websites.
  - Explain objectives and activities of the NCFS in broad terms to underpin public confidence.
- The MEF should:
  - Take a more active role in crisis management planning.
  - Rapidly strengthen its capacity to monitor and evaluate financial sector developments, possibly by establishing a Financial Sector Unit within the MEF with clear responsibility for financial stability issues.
- Crisis simulation exercises involving all NCFS members should begin as soon as possible.
- Cross-border coordination on crisis management should be intensified, including stepped up coordination with selected home country supervisors and joint crisis simulations.

### Actions taken on FSAP update recommendations
- A regular schedule of DSG meetings has been established and published.
- Coordinated communication measures have been taken to inform media on NCFS objectives and activities.
- The NBR has established a dedicated crisis management unit.

### Liquidity support — NBR measures and recommendations
- The NBR has enhanced monitoring and management of liquidity conditions in response to volatility and a net negative liquidity position since October 2008.
- Actions taken include stepped-up monitoring of trading activity and banks’ foreign currency debt payment schedules, repo operations to provide short-term liquidity, overnight Lombard lending, and occasional bilateral swaps against euro.
- Additional measures to strengthen liquidity provision include:
  - Broadening the range of eligible collateral for central bank lending (e.g., allowing RON-denominated bonds issued by International Financial Institutions (IFI) and Romanian government bonds denominated in foreign exchange).
  - Using FX-collateralized swaps more broadly, even if recourse is limited and costs are spread against the Lombard rate.
  - Extending the tenor of repo operations to address interbank market illiquidity at longer maturities.

### Emergency lending arrangements (ELA) — need for clarification
- Current ELA arrangements are vague; NBR should establish internal guidelines and a checklist covering:
  - The supervisory regime applied in conjunction with ELA (e.g., whether Special Supervision or Special Administration would be mandatory).
  - Terms and conditions of such lending (maturity, acceptable collateral and haircuts).
  - Procedures for information sharing and coordination with home authorities of parent banks, the MEF, and other domestic regulators.
  - Conditions under which ELA would be terminated.

### Banking sector intervention and resolution — issues and recommendations
- Romania’s framework allows for a graduated response in principle, but in practice offers limited scope under "Special Administration" to restructure problem banks rapidly and effectively.
- Recommendations include:
  - Consider imposing Special Administration at an earlier stage than past practice (currently may be triggered when a bank’s own funds fall to under half the minimum level of total capital requirements; i.e., to about 4 percent).
  - Make banks clearly aware of trigger levels to provide incentives for early action.
  - Share relevant information within the NFSC prior to imposition of Special Administration to consider implications and alternative resolution options.
  - Strengthen authorities’ powers to restructure or resolve banks under administration, including consideration of:
    - Allowing only the NBR to submit bankruptcy petitions for banks.
    - Strengthening or clarifying the special administrator’s powers to write down bank capital without general shareholder approval.
    - Limiting the scope for the Court of Appeal to return the bank to its owners and former administrators.
- Under the Fund program, authorities committed to clarifying the NBR’s authority to request shareholders to augment bank capital and strengthening the Special Administrator’s powers to restructure or resolve credit institutions rapidly and effectively.

### Deposit insurance — adequacy and payout speed
- The Romanian Deposit Guarantee Fund (RDGF) meets EU minimum requirements but has concerns regarding adequacy of resources and payout speed.
- Key findings:
  - At end-2007, RDGF resources, including member premiums and lines of credit from member banks, would have been inadequate to cover the failure of any medium-sized or large bank.
  - The increase in deposit coverage in October 2008 from € 20,000 to € 50,000 per depositor worsened the adequacy issue.
  - Pay outs currently must be started within three months after liquidation initiation; the EU has suggested countries reimburse depositors much faster.
- Recommendations and commitments:
  - RDGF resources should be increased, realistically through some form of public funding.
  - Measures should be taken to ensure faster pay outs, considering legal and practical challenges.
  - Under the proposed Fund program, authorities committed to adding a government line of credit to bolster RDGF funding and shortening the payout period.

### Financial sector development, regulation, and supervision — cross-sectoral issues
- Four financial sector authorities: NBR, National Securities Commission (CNVM), Insurance Supervisory Commission (CSA), and Private Pension System Supervisory Commission (PPSSC).
- Cross-cutting issues identified:
  - Degree of independence and financial autonomy of non-bank regulators should be aligned more closely with the NBR; review appointment procedures for Board members and ensure financial autonomy arrangements.
  - Cross-border cooperation: NBR and CNVM participate in joint inspections and information sharing; CSA and PPSSC should set up similar arrangements.
  - Cross-sectoral supervision: strengthen coordination through regular meetings, information sharing, and joint inspections, especially with the 2009 transposition of the EU Directive on Acquisition and Increases in Holdings.
  - Risk-based supervision: NBR is moving toward risk-based supervision; CNVM has commenced focus on risk but lacks a formal framework; other agencies should move to risk-based approaches.
  - Simplification of regulatory frameworks to reduce uncertainty for market participants and accompany laws with guidelines.
  - Valuation rules: aim for consistent valuation rules, prefer more liquid OTC prices or, where no active OTC market exists, mark to model methodologies following CESR or IASB principles.

### Banking sector — supervisory framework and further improvements
- The banking supervision framework has been strengthened with transposition of relevant EU directives; NBR has extensive powers and consolidated supervision was introduced.
- The overall assessment of the Basel Core Principles (BCPs) is favorable; progress in home-host cooperation via bilateral MOUs and a multilateral agreement with six South-East European countries.
- Areas for further improvement:
  - Move towards full adoption of the IFRS framework in place of existing Romanian accounting standards (a commitment to adopt IFRS is included in the proposed Fund arrangement, with timing to be determined by the NBR).
  - Review supervision approach for credit unions and credit mutual organizations (CMOs).
  - Make new EU directives operational, addressing judicial effectiveness, cross-institutional cooperation, NBR communication and consultation, and adequacy of the financial intelligence unit (ONPCSB) resources.
  - Implementation of Basel II: banks need to strengthen local resources and skills; NBR needs to strengthen capacity to assess impacts.
  - Continue transition towards a more principles- or risk-oriented system of supervision, building on the NBR’s risk rating system and peer group analyses.

*Source: _cr1047 - 18.      Banks should also step up measures to monitor and strengthen the quality of loan portfolios (PDF chapter/section).*

### 41.      Romania’s securities markets remain shallow. The equity market has a very small

### _cr1047 - 41.      Romania’s securities markets remain shallow. The equity market has a very small

### Securities market conditions and constraints
- The equity market has a very small number of issuers, IPOs, instruments, low liquidity, and market capitalization has fallen by roughly three-quarters during the financial crisis.
- The fixed-income market is also small, with 50 bonds traded at the Bucharest Stock Exchange (BVB).
- Corporate issues are undiversified with only one by a non-financial corporation.
- Development is hampered by the absence of liquid government bond benchmarks and deficiencies in market infrastructure.
- In current circumstances, quick results from measures to promote capital market development are unrealistic, but steps can be undertaken to facilitate economic recovery and reduce heavy reliance on bank-intermediated finance.

### Government bond benchmarks and issuance policy
- Government efforts to establish liquid benchmark bond yields have had little success to date; no government bond yield curve can serve as a reference for pricing non-government securities.
- Recommendation: MEF should consider concentrating issuance on just one or two maturities.
- Recommendation: Proceed with plans to revise primary dealer contracts to integrate clear market making performance.
- Noted trade-off: Limiting issuance to very few maturities normally goes against smoothing debt repayments; however, given current marketing constraints, concentrating issuance on very few maturities (e.g., a 6-month or 1-year maturity) could improve the situation.

### Market infrastructure, efficiency, connectivity, and transparency (CSD-related measures)
- Measures to be considered, especially by the Central Securities Depository (CSD):
  - CSD developing additional correspondent relationships with European clearing and settlement systems, subject to proper due diligence of the entities.
  - Extending to all participants and transactions the pilot settlement without pre-validation, lending and borrowing of shares, and omnibus accounts for brokers.
  - CSD making arrangements for the settlement of OTC trades in non-government securities.
  - Increasing the transparency of trades in Romanian securities consistent with MiFID requirements.
  - Developing an electronic trade reporting and information system, including reporting of government bond OTC trades within one minute.
  - A thorough review of the high issuance costs in the non-government securities market.

### Municipal bond market issues
- Development of a sound municipal bond market is undermined by moral hazard from perceptions of an implicit State guarantee on municipal debt due to ex ante approval by MEF and a low risk weight for loans to unrated local governments in CAR calculation.
- Passage of the Law on Financial Crisis and Insolvency of Local Government Units could help reduce the moral hazard problem.

### Securities market regulation and supervision (CNVM)
- CNVM is commended for a radical revision to its regulatory regime designed to meet the EU acquis and for achieving a high compliance with the IOSCO principles.
- Key challenges for CNVM:
  - Strengthen independence.
  - Adopt a more risk-based supervision approach.
  - Step up domestic regulatory cooperation.
  - Develop a more constructive dialogue with regulated entities.

### Investor protection and CNVM powers
- To improve investor protection:
  - CNVM should require intermediaries to make daily reconciliations of client accounts, keeping the records for inspection and audit.
  - Redemptions and subscriptions should be based on the price struck on the transaction day.
- CNVM inspection and investigation powers concerns:
  - Current provisions of the Capital Markets Law do not define the nature or scope of an inspection, leave implicit certain requirements (such as application to former license holders and the duty of an intermediary to co-operate), and could inadvertently lead to breaches of civil rights protections.
  - Recommendation: Review inspection and investigation powers to ensure they are comprehensive, specific and unambiguous, while safeguarding civil rights.

### Insurance and pensions — overview and key issues
- Insurance and pensions sectors are small but growing; risk management and appropriate pricing of assets and risks are key issues.
- Insurance sector:
  - CSA commended for improving technical skills within CSA and the industry.
  - Implementation of Solvency II will require a transition to more risk-based supervision and more skills; CSA should extend twinning arrangements with EU regulators prior to introduction.
  - Obligatory House Insurance (coming into effect in 2010) is a sensible prefunding mechanism; premiums should be reviewed to ensure sufficiency for effective reinsurance and government potential liability should be estimated and disclosed.
  - For MTPL and CASCO, CSA should ensure premiums are set relative to risks and consider requiring additional capital from insurers who do not do so.
  - CSA should review adequacy of guarantee and protection funds via regular independent actuarial reviews.

- Pension sector:
  - Second pillar legislation passed in 2006; enrolment finished in early 2008.
  - Almost 3.5 million workers participate in the second pillar through 14 Pension Fund Management Companies (PFMCs), mostly belonging to banking or insurance groups.
  - Recommended measures to encourage appropriate pension fund portfolios:
    - PPSSC clarification that the Minimum Contribution Guarantee applies only at the time of retirement (not whenever a contributor transfers to another fund), and that any shortfall between the payout and the net contributions is to be met from the Guarantee Fund.
    - Reduce uncertainty about the Weighted-Average Return Guarantee and promote competition, partly by limiting the weight of any one fund to no more than 20 percent in calculation of the Weighted Average Return.
    - Encourage asset class diversification by promoting a structure of investment fees that ensures PFMCs are entitled to be reimbursed from the fund for any arms length investment fees incurred.
  - Valuation and fees:
    - Bring valuation rules into line with internationally-recommended fair value methodologies; PPSSC should issue new fair value rules and require custodians to agree collectively on methodologies and data sources for each instrument.
    - Current fees are well below those in other EU New Members States with DC systems; planned increases in contribution rates should go ahead.
    - Inflation guarantees on pension funds should not be introduced before the domestic capital market provides instruments to hedge against inflation risk.
  - Governance:
    - PFMCs that are part of banking or insurance groups may face conflicts of interest; governance should ensure directors act in the best interests of contributors when transacting with other group members.

### Access to financial services and financial infrastructure
- Access has increased, but substantial parts of the population remain excluded.
- Key statistics at end-2008:
  - Ratios of private sector credit and deposits to GDP: 39 percent and 30 percent, respectively.
  - Only 27 percent of the population has a bank account.
  - 35 percent of the population has a payment card.
- Government credit guarantee schemes, especially for rural and SME lending, play a key role in market penetration.
- Recommendations to increase access and improve credit assessment:
  - Strengthen financial infrastructure: expand coverage of the trade registry to smaller companies and accelerate reform of the real estate registry.
  - Implement ROSC on Accounting and Auditing recommendations.
  - In the medium term, explore connecting various databases of information used by credit institutions.

### Anti-money Laundering / Combating Financing of Terrorism
- A detailed assessment of Romania's AML/CFT framework was conducted in May 2007 and finalized in July 2008 by MONEYVAL using the FATF 40+9 Recommendations and the 2004 Methodology.
- Appendix XI discusses findings and a separate ROSC will be provided to the Board.
- The BCP assessment concluded the ONPCSB, the agency primarily responsible for AML/CFT surveillance, is under-resourced.
- Recommendation: Expand resources of the FIU (ONPCSB).

### Main recommendations (selected, timeframe preserved as in source)
- Crisis Management and Safety Net
  - Seek strengthening of capital positions of some banks and set medium term targets for increasing minimum CARs — Immediate
  - Strengthen NBR monitoring of bank loan portfolios and problem loan workout procedures and capacity — Immediate
  - Consider additional measures to provide liquidity, especially under ELA — Immediate
  - Strengthen deposit insurance funding arrangements and speed up payouts — Immediate
- Cross-Sectoral
  - Align the degree of independence and financial autonomy of the non bank regulators with those of the NBR — Near term
  - Strengthen information exchange and cooperation among regulators and the MEF — Near term
  - Issue consistent valuation methodologies for financial assets — Near term
  - Expand resources of the FIU (ONPCSB) — Near term
- Securities and Capital Markets (selected)
  - Concentrate primary issuance of government bonds on one or two maturity points until liquidity is enhanced — Near term
  - Amend the Law of Capital Markets to remove the limit on voting rights in regulated market operators — Near term
  - Revise contracts of primary dealers and establish PD rotation policy to provide incentive for market making — Near/medium term
  - Encourage the Central Depository to open a correspondent relationship with Euroclear — Near/medium term
  - Remove all regulatory barriers preventing OTC trading of non-government securities — Near/medium term
  - Establish trade reporting system for government bonds, and issue regulation requiring reporting of OTC trades in system at T+1 minute — Near/Medium term
  - Reduce securities registration fees to a flat nominal fee comparable to other EU Member States and streamline registration procedures as on the EU single market — Near/Medium term
  - MEF should be ready to step in as ultimate market maker through buy-backs and re-issuance of issues — Medium term
  - Raise base risk weight ratio for unrated local government loans from 50% to 100% — Medium term
  - Allow settlement without prevalidation, lending and borrowing of shares, and omnibus accounts for brokers in connection with establishment of central counterparty — Medium term
- Pensions (selected)
  - Clarify interpretation of minimum contribution guarantee and weighted average return guarantee — Near term
  - Revise investment management fees — Near term
  - Establish unique valuation methodology and responsibility — Near term
  - Keep up with promised contribution rate increases of 0.5 percent per annum — Medium term
  - Do not introduce inflation guarantees before the domestic capital market provides instruments to hedge against inflation risk — Medium term

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1047.pdf*

### 2009. Pledge registry moved to electronic platform.

### 2009. Pledge registry moved to electronic platform.

### Real estate registry and cooperative supervision
- Strengthening of real estate registry to be accelerated.
- Develop an effective system for oversight of credit cooperatives and credit unions and CMOs.
- Credit cooperatives have been brought under the supervision of the NBR since 2002. Credit unions and CMOs remain unregulated and unsupervised.

### Implementation of 2003 FSAP Recommendations (selected)
- Capital markets
  - Strengthen disclosure, transparency, and integrity of capital markets by strengthening and using the enforcement powers of the Securities Commission.
  - Status: Substantial progress on legal, regulatory, supervisory reforms; substantial enforcement effort in terms of sanctions applied.
  - Listing requirements: Listing requirements enforced with greater vigor but compliance with accounting rules remains patchy. Ongoing legal dispute between BVB and CNVM about listings.
  - Financial Investment Funds: Regulation 15/2004 imposes transparency and disclosure obligations in line with EU requirements.
- Insurance
  - Continue to strengthen the capacity of the Insurance Supervisory Commission.
  - Status: Significant progress achieved through staff training. Further progress still needed especially with regard to analysis of risks.

### Selected macroeconomic indicators (Table 3 excerpts)
- Real GDP: 4.1 7.9 6.2 7.1 -4.1
- Consumer price index (CPI, end of period): 8.6 4.9 6.6 6.3 4.5
- Unemployment rate: 5.8 5.4 4.3 4.0 8.9
- Nominal wages: 17.0 18.9 22.6 23.6 5.9
- Gross domestic investment: 23.3 26.5 31.1 31.4 30.8
- Gross national savings: 14.7 16.1 17.6 19.1 23.2
- Revenue: 31.4 32.3 32.5 32.6 33.0
- Expenditure: 21.3 37.3 35.6 37.5 37.5
- Fiscal balance: -0.7 -1.4 -3.1 -4.9 -4.6
- Gross public debt (direct debt only): 5.6 15.4 17.5 20.1 23.6
- Broad money (M3): 36.5 28.1 33.7 17.6 6.6
- Credit to private sector: 5.8 54.5 60.4 33.7 15.9
- Current account balance: -8.6 -10.4 -13.5 -12.3 -7.5
- Merchandise trade balance: -9.8 -12.0 -14.4 -13.4 -7.5
- Capital and financial account balance: 8.1 9.7 14.0 13.4 -2.4
- Foreign direct investment balance: 6.6 8.9 5.7 6.8 3.1
- Gross official reserves: 22.9 23.5 22.0 20.7 23.4
- Gross external debt: 38.8 42.1 47.3 53.4 54.2
- Lei per euro (end of period): 3.7 3.4 3.6 4.0 -
- Real effective exchange rate CPI based (depreciation -): 17.9 7.6 9.0 -4.2 -10.3
- Nominal GDP (in bn RON): 289.0 344.7 412.8 504.0 531.3
- Nominal GDP (in bn euros): 79.7 97.8 123.6 136.8 119.7

Sources for Table 3: Romanian authorities; Fund staff estimates and projections; and World Development Indicators database.

### Financial soundness indicators (selected figures from Table 4)
- Capital adequacy ratio 1/: 20.6 21.1 18.1 13.8 13.0 12.8 11.9 12.3
- Own capital ratio 1/: 8.9 9.2 8.6 7.3 7.2 7.3 7.1 7.0
- Assets, in percent of GDP: 37.1 45.2 50.9 63.1 63.7 64.5 65.2 66.2
- Domestic credit, in percent of GDP: 17.8 21.9 27.8 38.2 40.3 41.5 42.9 42.7
- Private sector credit, in percent of GDP: 16.6 20.8 26.8 35.9 37.9 39.1 40.5 39.3
- Credit to households, in percent of GDP: 4.8 7.4 11.4 17.3 18.4 19.1 20.0 19.7
- Lending for real estate purchase, in percent of GDP 2/ 3/: 1.9 2.7 3.9 3.2 3.8 4.1 4.5 4.1
- Medium and long term credits, in percent of non-gov. credit: 58.4 63.9 68.4 76.0 76.1 76.1 76.2 76.9
- Non-performing loans, in percent of loans 4/: 8.1 8.3 8.0 9.7 9.8 10.3 11.1 13.8
- Specific provisions, in percent of non-performing loans 4/: 16.1 14.4 18.2 25.7 27.9 27.8 29.0 28.7
- Off-balance activities, in percent of assets: 14.8 15.0 17.1 16.6 16.5 15.6 16.1 16.5
- Net open position in foreign exchange, in percent of capital: -2.0 -0.6 0.6 0.3 -0.6 1.6 0.0 0.0
- Lending in foreign exchange, in percent of non-gov. credit: 61.8 54.7 47.3 54.3 55.0 55.1 56.1 57.8
- Foreign currency liabilities, in percent of total liabilities 5/: 46.8 44.3 44.1 42.5 39.9 38.3 38.8 38.8
- Deposits in foreign exchange, in percent of non-gov. dom. deposits: 41.2 34.6 32.3 32.1 33.3 34.1 34.4 34.8
- Liquidity ratio 6/: 2.3 2.6 2.3 2.1 2.3 2.3 2.5 2.6
- Liquid assets, in percent of total assets 5/: 63.6 61.8 54.4 48.3 47.2 0.0 44.3 44.3
- Liquid assets, in percent of short term liabilities 5/: 193.9 245.7 207.2 171.7 188.5 181.5 190.4 190.4
- Loan to deposit ratio, in percent 7/: 72.1 80.0 95.8 114.8 123.3 126.6 133.5 130.8
- Net foreign assets of credit institutions, in percent of GDP 5/: -2.1 -6.8 -9.8 -16.3 -17.0 -17.6 -18.5 -19.3
- Return on average assets: 2.5 1.9 1.7 1.3 1.5 1.4 1.8 1.7
- Return on average equity: 19.3 15.4 13.6 11.5 16.5 15.8 19.4 18.1
- Market share (assets) of five largest banks: 59.2 58.8 60.3 56.3 57.1 59.2 ... 54.4
- Memo: Stock market capitalization, in percent of GDP 8/: 17.1 22.3 24.4 26.7 31.4 28.0 21.2 11.3

Notes excerpted from Table 4:
- 1/ NBR amended capital adequacy requirements effective January 1, 2007; former 12 percent capital adequacy ratio and 8 percent Tier I ratio were substituted by a new 8 percent solvency ratio.
- 2/ Refers to loans and commitments to a single debtor above RON 20,000 according to the Central Credit Register (covers about 82 percent of total loans and commitments).
- 3/ During 2007, share of credit to households for house purchase remained relatively constant around 19–20 percent.
- 4/ Non-performing loans reflect unadjusted exposure to non-performing loans classified as "loss", "doubtful", and "substandard" as percent of total loans using the balance sheet approach.
- 5/ 2008 data as of September.
- 6/ Effective liquidity over required liquidity, the mandatory ratio is thus one.
- 7/ Loan-to-deposit ratio of domestic credit to resident deposits, including government.
- 8/ Covers the regulated market at Bucharest Stock Exchange, including SIFs, and RASDAQ. Derivatives traded at SIBEX excluded.

Sources: National Bank of Romania, Romanian National Institute of Statistics, and Fund staff estimates.

### NBR measures to contain credit expansion and credit risks (Table 5)
- Reserve requirements (selected measures)
  - March 2009: Minimum reserve requirement on FX-denominated liabilities, with remaining maturity over 2 years, is reduced to zero, effective May 2009.
  - November 2008: Minimum reserve requirement on RON-denominated liabilities, with maturities less than 2 years, is lowered from 20 to 18 percent.
  - July 2006: Minimum reserve requirement on RON-denominated liabilities, with maturities less than 2 years, is raised from 16 to 20 percent.
  - March 2006: Minimum reserve requirement on FX liabilities of banks increased from 35 to 40 percent.
  - January 2006: Minimum reserve requirement on FX liabilities of banks increased from 30 to 35 percent.
  - August 2005: Reserve requirement on FX liabilities of 30 percent is extended to all foreign currency denominated liabilities, regardless of their maturity or contract date.
  - August 2005: Minimum reserve requirement on RON-denominated liabilities, with maturities less than 2 years, is lowered from 18 to 16 percent.
  - August 2004: Minimum reserve requirement on FX liabilities of banks increased from 25 to 30 percent.
- Other administrative and prudential measures (selected)
  - September 2008: Debt-service restrictions on lending to households amended to: (i) require creditors using their own debt service ratio limits to take into consideration the interest rate risk and exchange rate risk when establishing the maximum level of indebtedness for each client category; and (ii) lower to 35 percent (from 40) the ceiling used by the banks not submitting internal rules for NBR validation.
  - February 2008: Provisioning requirements for FX credits extended to unhedged borrowers and broadened to include non-bank financial institutions.
  - March 2007: Debt-service restrictions on lending to households (introduced in August 2005) modified to allow creditors to draw up specific internal rules on lending to individuals, with limits subject to NBR approval.
  - September 2005: A limit of 300 percent of own funds placed on FX lending by credit institutions to unhedged borrowers. Limit lifted in January 2007.
  - August 2005: Regulations on limits to household-lending tightened: monthly debt-service ceiling of 40 percent of net monthly income; monthly debt service ceilings for consumer and real-estate credits limited to 30 and 35 percent respectively; loan to value ratio for real estate investments limited to 75 percent; collateral requirement set at 133 percent of loan value.
  - February 2004: Prudential regulations aimed at slowing consumer credit and mortgage credit growth (debt service ceilings, down payment, guarantees, etc.; mortgage credit: credit amount 75 percent of building value; guarantees 133 percent of credit amount; debt service ceiling of 35 percent of net income).

Source: NBR

### Financial stability diagnostic and assessment (Risk Assessment Matrix, Table 6) — selected threats and impacts
- 1. Sharp contraction of capital inflows
  - Overall level of concern: High
  - Likelihood of severe realization in next 1-3 years: Severe
  - Key risk factors and expected impacts:
    - Large current account deficit seen as potential trigger for a “sudden stop”.
    - SEE region experiencing significant increase in risk premia and downward pressure on exchange rates.
    - Liquidity problems of lenders in advanced economies could lead to liquidation of assets in Romania, including loans to bank subsidiaries and direct loans to corporations.
    - Severe expected impact: immediate credit crunch due to dependence on external liquidity; possible bank failures if parents cannot provide capital; sharp rise in NPLs; sharp weakening of the Leu with significant adverse consequences; property market slump (prices down around 30 percent anecdotal).
- 2. Severe recession in major European economies
  - Overall level of concern: High
  - Likelihood: Moderate
  - Expected impact: exporters and FDI adversely affected; remittances fall; higher unemployment and weaker business profitability raising NPLs; partial mitigation possible via countercyclical policy and terms of trade improvements.
- 3. Damaging domestic fiscal and wage policies
  - Overall level of concern: Moderate
  - Likelihood: Severe
  - Expected impact: profligate fiscal and wage policies could undermine investor confidence, drive up country risk premium, pressure the currency, and produce effects similar to a sharp contraction in capital inflows.

### Structure of the financial system (Table 7 and Table 8 selected)
- Financial intermediaries (in percent of GDP) 2003–2007 (selected)
  - Credit institutions: 30.8 36.6 44.6 50.6 61.5
  - Insurance companies: 1.8 1.9 2.2 2.5 3
  - Investment funds: 0.1 0.2 0.2 0.3 0.3
  - Financial investment companies (SIFs): 1.4 1.3 1.8 2.3 2.8
  - Leasing companies: 1.8 3 3.6 3.4 5
  - Other non-bank financial institutions: 0.4 0.6 0.9 1.3 1.5
  - Total: 36.3 43.6 53.3 60.4 74.1
- Memo: BIS reporting area net lending to non-banks: 1.8 2.7 4.1 6.7 10.7
- Structural indicators of banking system (selected)
  - Number of credit institutions*: 41 41 41 39 39 40 40 39 42
  - Number of banks with majority foreign capital: 26 29 32 32 29 30 30 33 36
  - Assets of top five banks/Total assets (%): 66.7 65.5 66.1 62.8 63.9 59.2 58.8 60.3 56.3

### Household financial exposures (selected findings)
- Rapid household borrowing growth with large unhedged FX exposure:
  - 2005 to June-2008: household disposable income grew at average annual rate of 20 percent; household debt increased at rate of 77 percent.
  - Debt/disposable income ratio rose from 25 percent at end-2005 to 66 percent by mid-2008.
  - Share of FX in total household debt rose from 45 percent to 56 percent by mid-2008.
- Net position:
  - Households moved from net creditor to net debtor, driven by increased FX borrowing; households remain net creditors in RON.
- Cross-country comparisons:
  - Household indebtedness rose from 5 percent of GDP in 2004 to 17 percent end-2007, still low versus peers: 72 percent of CEE average and 30 percent of MU-13 average in 2007.
- Banking exposure:
  - Share of lending to households rose from 28 percent of total lending in 2004 to 48 percent at end-2007.

### Non-financial corporate exposures (selected findings)
- Rapid corporate borrowing growth, majority FX:
  - Total borrowing grew at annualized rate of 44 percent between 2004 and mid-2008; indebtedness nearly doubled to 28 percent of GDP.
  - FX borrowing share declined from 78 percent to 71 percent of total corporate borrowing over the period.
  - Share of external borrowing rose to 37 percent of total borrowing by mid-2008.
- FX debt and exports:
  - Corporate FX debt doubled relative to export earnings between 2004 and mid-2008; FX debt/exports ratio at 62 percent.
- Cross-country comparison:
  - Corporate indebtedness in Romania remains low relative to other European transition economies; in 2007 only Poland had lower corporate debt/GDP.
- Maturity shift:
  - Share of medium and long-term debt in total corporate debt increased from 43 percent to 58 percent between 2004 and mid-2008.
  - For RON debt, medium and long-term share rose from 28 percent to 48 percent; for FX debt, from 50 to 66 percent.

*Source: IMF staff compilation of content in the chapter.*

### 60.      Stress tests were conducted to evaluate: (i) the main vulnerabilities of the Romanian

### _cr1047 - 60.      Stress tests were conducted to evaluate: (i) the main vulnerabilities of the Romanian

### Scope and objectives
- Stress tests evaluated: (i) the main vulnerabilities of the Romanian banking system; (ii) the impact of different shocks on individual institutions; and (iii) potential additional capital needs of the banking system.
- Coverage: 14 largest banks, accounting for 81 percent of banking system assets in Romania.
- Timing: completed in November 2008, based on data to end-June.

### Approaches and collaboration
- Techniques used:
  - Single factor sensitivity analyses for interest rate, exchange rate, and liquidity shocks.
  - Two macroeconomic scenarios (soft landing, hard landing) analyzed via “bottom up” (banks) and “top down” (NBR and mission team) approaches.
- Participants:
  - Bottom-up: 14 banks (about 80 percent of total bank assets) for single-factor shocks; 3 banks (45 percent total bank assets) for macro scenarios.
  - NBR: internal models developed by the Financial Stability Department using single factor shocks plus regression estimates of expected credit migrations from corporate financial data.
  - Mission team: single-factor shocks from anonymous individual-bank data provided by NBR; macro scenario results from direct effects of single-factor shocks combined with regression results of macro variables using ten years of data from 85 countries.

### Single-factor stress tests — design
- Credit risk: impact on provisioning assessed for increases in NPLs by 5, 10, and 15 percentage points.
- Liquidity risk: assessed via a drain of up to 25 percent of deposits, assuming limited access to credit lines and repo facilities, and contagion through the interbank market.
- Interest rate risk: tested using parallel shifts and tilts or twists of the yield curve of up to 300 basis points.
- Direct foreign exchange risk: tested using up to 30 percent changes in the nominal exchange rate.
- Benchmarking: existing provision levels benchmarked against expected losses using Fifth Quantitative Impact Study (BIS, 2006) and Fitch (2008) inputs.

### Single-factor stress tests — key findings
- Credit risk is the major risk factor for the Romanian banking system.
- Starting position: “comfortable capital basis and healthy semi-annual profits.”
- Banks could withstand a 2.5 percentage point increase in the NPL ratio without decreasing current CAR levels; further increases would significantly erode capital adequacy.
- Local banks assume increases in NPL ratios affect their CAR by about double the factor of foreign banks.
- Under a 10 percentage point increase in the NPL ratio:
  - Mission identifies four banks (combined market share of around 30 percent) that would fall below NBR’s minimum 8 percent CAR threshold.
  - Additional capital required to maintain 8 percent CAR: at least RON 690 million (0.1 percent of GDP, 3 percent of capital).
  - To restore initial CAR levels: RON 4.2 billion (0.9 percent of GDP, 20 percent of capital).
  - Capital increases since end-June would reduce but not eliminate shortfalls—three banks would still fall below the 8 percent minimum CAR.
- Aggregated CAR results (sample excerpts from table):
  - Before shock: BanksMission show CAR values such as 11.4% and 11.9% in different groupings.
  - After 5 percent NPL increase: CARs reported include 15.8%, 16.9%, 10.9%, 11.3%, 12.4%, 12.1% (various columns).
  - After 10 percent NPL increase: CARs reported include 9.7%, 9.9%, 12.8%, 15.6%, 9.3%, 9.2%, 10.5%, 10.4%.
  - After 15 percent NPL increase: CARs reported include 7.2%, 7.9%, 8.8%, 14.3%, 7.0%, 7.1%, 8.3%, 8.7%.
- Capital shortfalls from the table (preserved formatting values):
  - 5 percent increase in NPL: 1 bank, Capital need (RON bln) 0.0600.0010.0610.06
  - 10 percent increase in NPL: 4 banks, Capital need (RON bln) 0.6900.0040.6920.34
  - 15 percent increase in NPL: 7 banks, Capital need (RON bln) 2.6700.0072.6730.88

### Interest rate and direct FX risk
- Interest rate risk:
  - Direct vulnerability appears limited.
  - Local banks: large maturity transformation but demand deposit base remunerated at low and stable interest rates, relatively insulated from interest rate risk.
  - Foreign banks: relatively exposed to foreign interest rate risk due to foreign exchange funding at relatively long maturities, but impact on bank capital is small compared with credit risk.
- Time to repricing (net assets over total assets): examples reported:
  - Shorter than 1 month: 9% (Largest banks), 9% (Local banks), 9% (Foreign-owned banks), 12% (Banks with LTD > 130%).
  - Between 1 and 12 months: 17%, 1%, 19%, 25%.
  - Longer than 12 months: 5%, 34%, 2%,-15%.
- Interest rate shock scenarios (impact in percent of tier 1 and tier 2 capital; interest rate change in bps), examples:
  - Domestic Yield Curve Scenario 1 +300 +300 +300: 0.0% 0.6% -0.1% 0.6%
  - Domestic Yield Curve Scenario 2 -300 -300 -300: 0.0% -0.6% 0.1% -0.6%
  - External Yield Curve Scenario 7 +200 +200 +200: 2.5% 0.0% 3.0% 3.3%
- Direct foreign exchange risk:
  - Banks have very little direct exposure to exchange rate risk; foreign currency borrowing closely matched by foreign currency lending.
  - Net open FX position (in RON bln) examples: 0.9 0.4    0.1 0.1    0.9 0.3    0.1 0.1 (BanksMission columns).
  - Revaluation impact (in percent of capital) for 30% nominal appreciation of RON: -1.4% -0.5% -0.9% -1.1% -1.5% -0.4% -0.5% -0.4%
  - Revaluation impact for 30% nominal depreciation of RON: 1.4% 0.5% 0.9% 1.1% 1.5% 0.4% 0.6% 0.4%

### Macroeconomic scenarios — design and mission regression results
- Two scenarios:
  - Soft landing scenario:
    - Real GDP growth slows from 7.1 percent in 2008 to 4.1 percent in 2009.
    - Leu depreciates by 16 percent from its 2007 average.
    - House prices stabilize and inflation declines gradually.
    - Note: scenario largely overtaken by events due to rapid weakening since late 2008.
  - Hard landing scenario:
    - Global turmoil leads to sharp, world-wide recession in 2008–09.
    - Capital flows to Romania contract sharply; sovereign spreads increase.
    - Leu depreciates by 39 percent from the 2007 level.
    - Funding costs in lei and foreign currencies increase.
    - Investment and consumption fall; real estate prices fall sharply; real GDP declines by 1.3 percent in 2009.
    - Domestic credit growth slows rapidly; foreign credit growth stops entirely; system-wide liquidity deteriorates; banks’ loan portfolios deteriorate.
    - This hard landing scenario became the central downside scenario.
- Mission regression estimates for hard landing:
  - Increase of the NPL ratio of 11.2 percentage points.
  - Long-run decomposition of the 11.2 percentage points:
    - Fall in growth raises NPL ratio by 3.6 percentage points.
    - Increase in inflation raises NPL ratio by 1.3 percentage points.
    - Depreciation of the leu in real terms raises NPL ratio by 6.3 percentage points.
- Additional assumptions:
  - Collateral values proxied by real estate prices and weighted by portion of real estate loans in bank portfolios.
  - Most secured lending is in foreign currency leading to double effect from leu depreciation (higher debt service and lower loan-to-value ratios).
  - Assumed mark-to-market losses on trading book: 5 and 10 percent.
  - Half-year profits in 2008: RON 2.7 billion included in expected 2008 profits (mission).
  - NBR half-year profits for 14 banks: RON 2 billion included (NBR analysis reference).

### Macro stress test results — mission and NBR comparisons
- Scenario I (soft landing) excerpts:
  - CAR values and banks with CAR < 8% show minimal immediate shortfalls in some columns (table extracts).
  - Recapitalization cost (RON bln) examples: 0.2 0.2 0.0 0.0 0.2 0.2 0.2 0.2
  - Additional provisions (RON bln) examples: 5.8 2.2 0.2 0.2 5.6 2.1 1.1 0.7
  - Total loss (RON bln) examples: 5.9 2.4 0.2 0.2 5.7 2.2 1.1 0.7
  - Cost to restore initial CAR (RON bln) examples: 2.9 0.5 2.3 1.6
- Scenario II (hard landing) key aggregated mission findings:
  - Total losses estimated: between RON 9 to RON 11 billion (1.8-2.3 percent of GDP) for all banks.
  - Number of banks with CARs falling below 8 percent: 6 banks.
  - Capital shortfall under 8 percent minimum CAR: around RON 2 billion (0.4 percent of GDP, 10 percent of capital).
  - To restore individual bank CARs to initial (June 2008) levels: aggregate capital increase needed of RON 7 billion (1.4 percent of GDP).
  - NBR estimates point to higher provisioning needs but assume continued profit generation; when including half-year profits of RON 2 billion for the 14 banks, short-run impact looks manageable, but profitability is expected to suffer dramatically in 2009.
  - Capital increases since end-June 2008 would ameliorate but not eliminate the need for some banks to strengthen capital positions.
- Table Scenario II extracts:
  - CAR (various columns) examples: 9.5% 8.5% 15.7% 12.5% 8.7% 8.0% 10.8% 8.6%
  - Banks with CAR < 8% (counts): 3 6 0 0 3 6 1 4
  - (as % of system assets) examples: 27.6% 45.4% 0.0% 0.0% 27.6% 45.4% 4.8% 17.4%
  - Recapitalization cost (RON bln) examples: 2.1 2.0 0.0 0.0 2.1 2.0 0.7 0.8
  - Additional provisions (RON bln) examples: 10.2 7.9 0.4 0.6 9.8 7.3 2.0 2.5
  - Total loss (RON bln) examples: 11.2 8.9 0.5 0.8 10.7 8.1 2.0 2.7
  - Cost to restore initial CAR (RON bln) examples: 7.1 0.9 6.3 2.8

### Policy-relevant conclusions and implications
- Credit risk management and provisioning are the primary areas of vulnerability and demand attention.
- Recapitalization needs under severe macro scenarios are non-trivial:
  - Mission aggregate need to restore initial CARs under Scenario II: RON 7 billion (1.4 percent of GDP).
  - Capital shortfall to meet 8 percent CAR under Scenario II: around RON 2 billion (0.4 percent of GDP).
- Continued profit generation cannot be relied upon given expected sharp profitability declines in 2009; recapitalization amounts need to be higher than the regulatory minimum to ensure resilience.
- Liquidity stress and access to external funding are key concerns given assumed contraction in capital flows and potential cessation of foreign credit growth.

### Limitations and caveats of the analysis
- Stress tests use data to end-June 2008 and do not account for macro-financial developments and balance sheet changes since end-June.
- Tests do not explicitly assess the distinct effects of a sharp slowing of lending (“credit crunch” effect) arising from tightening credit standards or reduced funding from foreign parent banks.
- Off balance sheet liabilities of banks are not included in the analysis.
- NBR bottom-up approach benefits from portfolio-level granularity but relies on credit migration equations estimated over a short or potentially unrepresentative sample period; mission top-down regression uses panel data covering 45 countries over 10 years.

### Contextual summary (from Appendix IX excerpts)
- Assessment of Basel Core Principles was conducted during an FSAP mission from November 3 to November 14, 2008, based on laws, regulations, policies and practices in place at that time.
- Romanian financial system expanded from 31 percent of GDP in 2003 to 67 percent in 2008; banks represent 82 percent of financial sector assets; 88 percent foreign owned.
- Five largest banks account for 54.3 percent of total assets.
- Financial soundness indicators deteriorated: CAR fell from 21 percent in 2003 to 13.8 percent in December 2008 (above 8 percent minimum); ROA and ROE at end-2007 were 1.0 percent and 9.4 percent in Romania versus 2.5 percent and 25.4 percent in Bulgaria.
- NBR: independent public institution, authority for monetary and exchange rate policy and bank supervision; professional supervisory staff of 103.

*Source: National Bank of Romania and mission team (extracted from stress test analysis and Appendix IX).*

### 80.      The legal framework underpinning the banking sector in Romania is

### 80.      The legal framework underpinning the banking sector in Romania is

### Overview and market transparency
- The legal framework is described as comprehensive, but the judicial system has weaknesses in enforcing legislation in a timely and impartial manner.
- Romania’s equity markets provide market discipline for the 76 listed companies on the Bucharest Stock Exchange (BVB).
- Romania has not yet moved to fully adopt International Accounting Standards (IAS), which limits the transparency of the markets.

### Crisis management, safety net, and deposit insurance
- Most major elements of a crisis management and safety net framework are in place, but improvements are needed.
- Areas for improvement include:
  - Increasing the flexibility for an early bank resolution by the NBR.
  - Making adjustments to the deposit insurance scheme consistent with EU Directive 94/19/EC and subsequent amendments, preferably in advance of the EU deadline.
- Deposit coverage:
  - Coverage of deposits (both in lei and foreign currency) of households is currently € 50,000, the EU standard.
  - Coverage will be increased to this level for small and medium-sized enterprises by end-June 2009.

### Legal framework, objectives, independence, and powers
- The basic legal framework is set out in the 2004 Banking Act and subsequent ordinances and regulations.
- The Act and supporting regulations have been amended regularly to align with EU standards such as the EU capital directive.
- The Act gives the NBR powers to exercise supervision of credit institutions and establishes prudential requirements (minimum liquidity and solvency levels, maximum aggregate exposure, and specific risk provisions).
- The NBR is an independent entity with full authority and wide-ranging powers to fulfill its mandate; additional powers may be needed in cases of stress.
- Staffing and resources for bank supervision are considered sufficient and fully budgeted for in the NBR annual budget.
- A framework for cooperation between domestic supervisory authorities has been established (National Council for Financial Stability, established July 2007), but authorities may continue to operate in silos; scope exists for closer coordination and a more active role by the Ministry of Finance.

### Licensing, permissible activities, and industry coverage
- Under the Banking Act, entities must be authorized by the NBR to take deposits or other repayable funds from the public; authorization and transfer of ownership processes are comprehensive and rigorous.
- Permissible banking activities are defined by statute and generally include taking deposits and granting credit, including financial leasing.
- Credit unions and CMOs are not regulated entities; while the industry is small and not systemic, inclusion in a prudential framework merits consideration.

### Prudential regulations, risk management, and Basel/CRD implementation
- Laws and regulations require banks and groups to have sound risk management processes, including dedicated risk specialists and independent risk control units for major banking risks; board and senior management must be actively involved.
- NBR's prudential regulations are largely consistent with EU directives. Romania has adopted the EU capital requirements directive (CRD); banks are using the standardized approach.
- CRD implementation, particularly Pillar 2, poses challenges and requires strengthening of local resources.
- NBR supervision should continue shifting to a more risk-based approach; current practice places undue time on compliance with minor issues.

### Problem assets, provisioning, and accounting standards
- Significant departures from EU standards and Basel Core Principles involve methodology for identifying problem loans and allocating provisions:
  - Credit grading guidelines are largely formulaic with heavy reliance on financial ratios and limited qualitative inputs.
  - Romania uses a benchmark scheme to assign provisions (allocations stipulated based on credit ratings).
  - Romania does not provide provisioning guidance for country and transfer risks.
  - Recommendation: adopt a more judgmental rating process, particularly for large credits, and a provisioning scheme better aligned with inherent risk.
- Accounting and disclosure:
  - Financial statements must be published annually in accordance with IFRS for consolidated statements and with Romanian accounting standards (RAS) for solo statements.
  - Romania should fully adopt IFRS.
  - Financial statements are audited according to International Standards on Auditing; auditors meet periodically with the NBR and must inform the NBR of significant issues.
  - Footnote: Valuation principles used under RAS generally follow IFRS except in two substantive areas: provisioning and the amortization of loans. For provisioning, RAS uses a benchmark scheme. Such schemes generally result in higher provisions than IFRS, which is based on recognizing existing losses inherent in the portfolio. As a result, it is likely that the provisioning levels in Romania will decrease upon adoption of IFRS.

### Anti-money laundering (AML) and FIU/ONPCSB resources
- Rules and regulations regarding anti-money laundering are harmonized with the third EU money laundering directive.
- Banks and other financial institutions are in the initial stages of implementing the rules.
- Due to the nature and scope of the FIU’s/ONPCSB’s supervisory tasks, its staff of 15 appears insufficient; recommendation to increase supervisory resources.

### Supervisory methods and engagement
- Banking supervision includes both onsite and offsite examinations; onsite inspections assess risk profiles to focus on high-risk activity.
- Major focus has been compliance with rules and regulations, resulting in undue attention to minor issues; more risk-based supervision is advised.
- Information for offsite supervision is comprehensive and thorough; a robust independent validation process appears in place.
- There is regular and frequent contact between the NBR and bank management; industry perceives a need for timely contact with high-level NBR officials when warranted.

### Consolidated and cross-border supervision
- NBR’s approach to consolidated supervision appears comprehensive and effective; consolidated prudential returns are received semi-annually.
- Resources are available to visit foreign operations; NBR places a degree of reliance on overseas regulators.
- Foreign banks are supervised by the NBR in the same manner as Romanian banks.
- NBR’s approach to sharing information with overseas supervisors seems open and cooperative and where possible is supported by an MOU.

### Summary compliance with the Basel Core Principles (selected highlights)
- CP 1.1–1.4: Banking Act provides an appropriate framework; NBR independent and accountable; NBR responsible for authorizing and supervising banks; NBR has extensive legal powers.
- CP 1.6: Cooperation agreements exist among supervisors, but may not be fully utilized domestically.
- CP 2: Permissible activities are clearly defined; inclusion of credit unions and CMOs in prudential framework merits consideration.
- CP 3–5: Licensing and transfer of significant ownership processes are comprehensive; NBR can review and reject transfers.
- CP 6: Romania has adopted the EU capital directive; implementation will require further capacity strengthening.
- CP 7–9: Banks must have adequate risk management; credit classification process should increase emphasis on qualitative factors; provisioning approach is benchmark-based and warrants alignment with inherent risk.
- CP 11: Prudential standards focus on employees and directors but lack sufficient guidance relative to affiliates and other insiders.
- CP 12: Banks must have country and transfer risk policies; Romania lacks provisioning guidance for these risks.
- CP 14: NBR sets a minimum liquidity ratio; banks provide daily liquidity reports to the NBR.
- CP 18: AML rules harmonized with the third EU money laundering directive; ONPCSB staff of 15 appears insufficient.
- CP 19–21: NBR is implementing risk-based supervision but remains heavily rules based; NBR uses a balanced mix of on- and off-site supervision and receives wide-ranging supervisory reporting monthly.
- CP 22: Financial statements—IFRS for consolidated, RAS for solo; Romania should fully adopt IFRS.
- CP 23: NBR legal powers are wide ranging; powers could be reviewed to ensure Special Administration can be used swiftly; scope to consider raising solvency trigger and changing access to bankruptcy petitions and shareholders’ rights; strengthen the Deposit Insurance Fund.
- CP 24–25: Consolidated supervision comprehensive; home-host relationships cooperative and supported by MOU where possible.

### Recommended action plan (selected recommendations)
- CP 1.6: Coordinate supervisory activities between NBR and domestic regulators through regular meetings, information sharing, and joint inspections; strengthen crisis management arrangements coordinated by the NBR with the Ministry of Finance and other regulatory bodies.
- CP 2: Evaluate whether non regulated activities and non regulated institutions (credit unions and CMOs) should be included in the prudential framework.
- CP 6: Further strengthen capacity of NBR and local bank management to implement Basel II.
- CP 7: Continue cultural shift of NBR towards risk-based supervision and reduce undue attention to minor issues.
- CP 8: Adjust NBR credit classification system to increase emphasis on qualitative factors, particularly for large credits.
- CP 9: The Ministry of Finance and the NBR should impose IFRS provisioning guidelines on banks.
- CP 11: Develop and provide NBR guidance for banks to avoid conflicts of interest with affiliates and other insiders.
- CP 12: Provide NBR guidance for provisioning for country and transfer risk.
- CP 18: Increase the ONPCSB’s supervisory resources.
- CP 20: Increase contact between bank management and high level NBR officials.
- CP 22: Fully adopt IFRS for banks.
- CP 23: Provide NBR with additional powers (raising the solvency trigger, changing access to bankruptcy petitions and shareholders’ rights) and increase the effectiveness of the Deposit Insurance Fund consistent with EU Directive 94/19/EC and amendments.

### Authorities’ response (selected points)
- CP 2: NBR disagrees with IMF view on credit unions and CMOs; these entities are restricted in credit activities and are not permitted to accept deposits or perform other banking activities. NBR considers the industry non-systemic and incorporation into prudential framework would create costs rendering it unviable; NBR argues recommendation disregards proportionality and efficient allocation of resources.
- CP 7: NBR indicates shift toward more risk-based supervision began in 2003 and is ongoing.
- CP 9: NBR notes previous FSAP rated BCP8 (“Loan Evaluation and Loan-Loss Provisioning”) as “compliant” and considers current framework provides important variations in risk evaluation and high standards of provisioning.
- CP 12: NBR notes framework includes policies and procedures for country and transfer risks but considers such risks small because foreign assets represent only a small fraction of total bank assets.
- CP 18: NBR notes previous FSAP rating “compliant” and does not believe effectiveness of ONPCSB has deteriorated; indicates deficiencies in the 2008 Moneyval Report are being addressed.
- CP 22: NBR intends to fully adopt IFRS but requires approval of the Ministry of Finance, which has not yet been forthcoming.

### Appendix X — IOSCO assessment (CNVM)
- The Romanian CNVM has achieved a high level of compliance with the IOSCO Principles.
- Scope exists for reinforcing CNVM independence and clarifying powers and responsibilities to make them more robust.
- Practice of allocating nominating rights for Board appointments to political parties risks compromising independence and undermines advantages of appointment by the Parliament.
- Distribution of regulatory provisions between laws and Regulations is inconsistent and confusing; lack of definition of some key information gathering powers creates risk of gaps and legal challenge.
- CNVM should shift from focusing on finding breaches and imposing sanctions to a partnership-based approach with market participants to identify and address key areas of risk.
- CNVM is commended for high level of compliance and acceptance as a signatory to the IOSCO MMoU.

*Source: IMF staff report section titled "The legal framework underpinning the banking sector in Romania is" (extracted content).*

### Introduction

### _cr1047 - Introduction

### Assessment context and methodology
- Assessment conducted as part of a joint World Bank, IMF FSAP mission to Romania from November 3 to 14, 2008.
- Assessment conducted by Richard Pratt, external consultant to the World Bank.
- Methodology: 2008 version of the IOSCO methodology, supplemented by information from the authorities and market discussions.
- Sources examined: extensive CNVM self assessment, CNVM annual reports for 2006 and 2007, CNVM and other web sites, relevant laws and regulations including:
  - Law no 514 of 2002 on the establishment of the CNVM
  - Law no 297 of 2004 on the capital markets
  - Regulation 15 of 2004 on collective investment schemes
  - Regulation 13 of 2005 on the central depository
  - Regulation 1 of 2006 on issuers and operations with securities
  - Regulation 2 of 2006 on regulated markets
  - Regulation 3 of 2006 on the investor compensation fund
  - Regulation 15 of 2006 on the presentation of investment recommendations
  - Regulation 32 of 2006 on Investment Services
- Interviews conducted with CNVM staff, the exchanges and other market participants.

### Institutional and market structure—overview
- Regulator:
  - Romanian securities market regulated by the Romanian National Securities Commission (CNVM).
  - CNVM responsibilities: authorizing, supervising and imposing sanctions on exchanges, clearing houses, central depositories, market intermediaries and collective investment schemes; approving prospectuses for public offers; supervision of issuers’ reporting obligations.
- Regulated markets and operators:
  - Three regulated markets operated by two market operators.
  - Bucharest Stock Exchange (BVB): one spot market and one derivatives market; responsible for a second tier market—RASDAQ; BVB is a mutual organization.
  - Sibiu Monetary and Commodities Exchange: one derivatives market; has a somewhat broader shareholder base.
- Equity market statistics (CNVM information to IMF in October 2008):
  - Total equity market capitalization on the BVB rose from €3.0 billion in 2003 to €24.6 billion in 2008.
  - Number of listed securities: 68.
  - Top ten stocks account for around 90 per cent of market capitalization (€22.4 billion out of €24.6 billion).
  - Annual turnover: €22.4 million in 2003; €346.0 million in 2007; €181.0 million in 2008.
  - New issues: no more than 2 annually between 2003 and 2007; total value peaked in 2007 at €64 million.
  - Equities are cleared and settled through a central depository.
- Corporate bond and government securities:
  - Corporate bond market in 2008: six issuers (five credit institutions and one leading company).
  - Government bonds listed on the BVB since July 2008, but in practice little trading; main market is an OTC market supervised by the National Bank of Romania.
  - Municipal bonds: 11 issuers; trading on the BVB thin.
- Derivatives markets:
  - Sibiu derivatives market total market value: €51 million in 2003; €3.5 billion in 2007; €1.8 billion in 2008.
  - BVB derivatives market began in September 2007; market value of turnover rose to €3.8 million (CNVM information in October 2008).
  - Clearing houses of both derivative markets act as central counterparties.
  - The Romanian Clearing House (CRC) clears for the Sibiu Exchange using settlement banks.
  - The Bucharest Clearing House (CCB) clears through the National Bank of Romania.
- Market intermediaries and asset managers (figures relate to October 2008):
  - Total market intermediaries: 81.
  - Credit institutions among intermediaries: 10.
  - Additional intermediaries that are subsidiaries of banks: 13.
  - Authorized investment management companies: 25 (of which seven were foreign owned).
  - Custodians: seven.
  - Investment funds managed: some 61.

### Preconditions for effective securities regulation
- Romania became a member of the European Union in January 2007.
- To satisfy the European Commission on implementation of the EU acquis, authorities undertook extensive legal reviews.
- Key legislative acts in the securities market:
  - Law 514 of 2002 (approving Emergency Ordinance GEO 25/2002) establishing the National Securities Commission.
  - Law 297 of 2004, the Capital Markets Law.
- Accompanying extensive CNVM regulatory acts and updates to banking companies’ laws, insolvency laws, and introduction of International Financial Reporting Standards.
- Romania has satisfied EU authorities with respect to its judicial system and is subject to EU Competition laws.
- Conclusion: essential preconditions for securities regulation are in place.

### Main findings and overall assessment
- High level of compliance with IOSCO standards achieved (summary referenced at Table 1 in source).
- Significant effort focused on adopting the EU acquis; single capital markets law and separate legislation establishing the regulatory authority.
- New regulations introduced since 2005 for virtually every area of capital markets business to ensure compatibility with EU requirements and ease accession.
- Recommendations aim to strengthen the high level of compliance already achieved in laws and regulations.

### The Regulator (IOSCO Principles 1–5) — findings and recommendations
- Key issues:
  - Independence of the CNVM should be defended and strengthened.
  - Structure of the Law and regulations needs attention.
  - CNVM should resist attempts to curb its budgetary independence.
- Recommended actions:
  - Amend the process of appointment of Commission Board Members to strengthen independence.
  - Introduce more detailed appointment criteria, advertise Board appointments, and prepare short lists by professional firms before Parliament appointments.
  - Extend immunity from civil action in respect of decisions taken in good faith to staff and make it more secure.
  - Rationalize division of provisions between primary and secondary law to make the legal framework more coherent and easier to follow.

### Enforcement (Principles 8–10) — findings and recommendations
- Key issues:
  - CNVM should improve its relationship with market participants.
  - Need to accelerate move to risk-based supervision and review inspection and investigation powers.
- Recommended actions:
  - Adopt a formal and documented assessment of risks to regulatory objectives.
  - Adjust supervisory approach to move beyond finding rule breaches to identifying and addressing risks in partnership with regulated entities.
  - Review provisions in Article 2 of the Capital Markets Law which are broadly drafted, do not sufficiently define the nature or scope of an inspection and leave implicit certain requirements (application to former license holders, duty of an intermediary to co-operate).
  - Review inspection and investigation powers in the primary law to ensure they are comprehensive, specific and unambiguous.

### Cooperation (Principles 11–13) — findings and recommendations
- Achievements:
  - CNVM is joining the IOSCO MMOU.
- Recommended actions:
  - Supplement IOSCO MMOU membership with greater domestic co-operation.
  - Do not require an MOU to exchange information with foreign authorities outside the EU and IOSCO MMOU; allow such exchanges subject to appropriate ad-hoc agreements.
  - Enhance domestic co-operation beyond current legal and protocol arrangements that appear limited in scope and require written requests for assistance.

### Issuers (Principles 14–16) — findings and recommendations
- Key issues:
  - Enforcement of accounting standards needs to be stepped up.
- Observations and recommendations:
  - Regulations governing issuers have been substantially improved and provide a sound basis for investor protection.
  - Enforcement of accounting standards remains somewhat patchy and needs to be more consistent.
  - CNVM working with the Chamber of Financial Auditors (CAFR) and has developed criteria for establishing who can be an auditor of a listed company.
  - A formal power for the CNVM to approve or deny approval to auditors of regulated entities would strengthen CNVM’s position.

### Collective investment schemes (Principles 17–20) — findings and recommendations
- Key issues:
  - Pricing of CISs does not meet European standards; insufficient provisions on investor protection.
- Findings:
  - Redemptions are based on the previous day’s market valuations, resulting in losses to investors’ funds from redemptions in a falling market and vice versa.
  - Absence of any restrictions on churning of investors’ portfolios.
  - Marked lack of liquidity in most financial instruments increases importance of oversight of valuation and investment policy by CIS custodians.
- Recommended actions:
  - CNVM addressing valuation issues and other concerns.
  - Revert to previous regulation that a depository should not be a member of the same corporate group as the CIS (to strengthen oversight).

### Market intermediaries (Principles 21–24) — findings and recommendations
- Key issues:
  - Client segregation rules need strengthening.
  - CNVM needs to prepare contingency plans for market failures.
- Findings:
  - Within some intermediaries’ omnibus client accounts, funds belonging to one client are sometimes used to settle the obligations of other clients (against regulations).
- Recommended actions:
  - Enhance enforcement by requiring daily reconciliation of client accounts, with daily reconciliation records maintained for inspection.
  - Although CNVM has powers in law to appoint a trustee in bankruptcy, it needs to create a fully functioning contingency plan for operating the law’s procedures.

*Source: _cr1047 - Introduction (IMF/World Bank FSAP mission assessment, November 3–14, 2008).*

### 115.     The CNVM should address settlement reliability. The Sibex settlement system

### _cr1047 - 115.     The CNVM should address settlement reliability. The Sibex settlement system

### Settlement reliability and clearing/settlement arrangements
- The Sibex settlement system operates by using settlement banks and is therefore subject to the risk of a bank default.
- The CNVM should seek to enable CRC and CCB to have access to an account with NBR.
- As central counterparties, the clearing houses are having their own clearing and settlement systems and they cannot perform gross settlements using Real Time Gross Settlement (RTGS).
- The risk management of the BVB central depository should also be enhanced.
- The clearing system is subject to oversight by CNVM and NBR. The rules on clearing and settlement cover trade finality, matching and settlement on a DVP basis.
- The system could be strengthened by auditing the adequacy of the Guarantee fund and by allowing settlement for the Sibiu Exchange through the NBR.
- Cooperation between the different parties and the regulatory authorities should be enhanced.

### Summary implementation of the IOSCO Principles — grading and key findings
- Principle 1. The responsibilities of the regulator should be clearly and objectively stated
  - Grading: Broadly Implemented
  - Findings: Cooperation with other regulatory authorities, particularly the NBR needs to be improved. Laws and Regulations are confusing and difficult to follow because of the inconsistent distribution of provisions between different laws and regulations that lead to duplications and ambiguities.
- Principle 2. The regulator should be operationally independent and accountable in the exercise of its functions and powers
  - Grading: Broadly Implemented
  - Findings: The CNVM acts with a reasonable degree of independence but needs to continue to resist diminution of budgetary independence and should strengthen the independence of the appointment of Board members.
- Principle 3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers
  - Grading: Fully Implemented
  - Findings: The CNVM is well resourced and sufficient budget but should seek greater flexibility in the management of its budget.
- Principle 4. The regulator should adopt clear and consistent regulatory processes
  - Grading: Fully implemented
  - Findings: The CNVM gives reasons for decisions consults the markets about regulations and its decisions are subject to appeal. It should provide more feedback to the market on its response to comments made during consultation and should seek to achieve greater consistency in the use of sanctions.
- Principle 5. The staff of the regulator should observe the highest professional standards
  - Grading: Fully Implemented
  - Findings: There is a staff code and good ethical standards. There may be scope for enhancing the staff register of interests.
- Principle 6. The regulatory regime should make appropriate use of self-regulatory organizations (SROs)...
  - Grading: Not Applicable
- Principle 7. SROs should be subject to the oversight of the regulator...
  - Grading: Not Applicable
- Principle 8. The regulator should have comprehensive inspection, investigation and surveillance powers
  - Grading: Partly Implemented
  - Findings: Inspections, investigation and investigation powers are insufficiently defined, given that they are very intrusive. There are ambiguities in the drafting which may means there are gaps. There is no protection for the civil rights of those who are subject to investigation into offences that are designated as crimes (rather than administrative offences) by the capital markets law.
- Principle 9. The regulator should have comprehensive enforcement powers
  - Grading: Fully Implemented
  - Findings: Notwithstanding the ambiguities in the powers, the CNVM appears to be able to exercise an investigation and sanctioning power. There is ambiguity about whether or not unauthorized business could be effectively sanctioned.
- Principle 10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.
  - Grading: Fully Implemented
  - Findings: There is a well organized inspection program. However, its focus is on finding offences and punishing intermediaries. There should be more focus on identifying and addressing the risks in the intermediaries.
- Principle 11. The regulator should have the authority to share both public and non-public information with domestic and foreign counterparts
  - Grading: Fully Implemented
  - Findings: The CNVM is accepted as a signatory of the IOSCO MMoU. It should not insist on a MoU with other authorities before providing assistance. It should not insist on written undertakings from receiving authorities about onward transmission of information from the CNVM without prior CNVM permission.
- Principle 12. Regulators should establish information sharing mechanisms...
  - Grading: Fully Implemented
  - Findings: Membership of the group of signatories of the IOSCO MMoU indicates commitment to this principle.
- Principle 13. The regulatory system should allow for assistance to be provided to foreign regulators...
  - Grading: Fully Implemented
  - Findings: The CNVM can and does give assistance to other authorities and can do so even where there is no domestic interest in an investigation. There is ambiguity about whether its investigation powers are sufficient to obtain information from intermediaries where there is no domestic investigation.
- Principle 14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors' decisions
  - Grading: Fully Implemented
  - Findings: Regulations cover requirements of prospectus and continuing obligations of listed companies.
- Principle 15. Holders of securities in a company should be treated in a fair and equitable manner
  - Grading: Fully Implemented
  - Findings: The Companies Law and regulations provide for voting rights, meetings where appropriate for shareholders and for proper notice of meetings with appropriate disclosures for shareholders.
- Principle 16. Accounting and auditing standards should be of a high and internationally acceptable quality
  - Grading: Partly Implemented
  - Findings: CNVM have implemented IFRS but have said that compliance is not good enough. The implementation of IFRS, which is a principle based approach to accounting standards, does not sit easily with the previous highly detailed rules based approach.
- Principle 17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme
  - Grading: Broadly Implemented
  - Findings: The CNVM is the body that authorizes CISs. It appears to exercise the powers to enforce initial and ongoing requirements. There are, however, some gaps in the provisions that need to be rectified.
- Principle 18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets
  - Grading: Not Implemented
  - Findings: There are provisions relating to the structure and corporate governance of CISs. However, there is no requirement to ensure that a custodian is in a separate and independent group from the investment manager and no special provisions to provide safeguards against a loss of independence.
- Principle 19. Regulation should require disclosure... to evaluate the suitability of a collective investment scheme
  - Grading: Fully Implemented
  - Findings: The CNVM has implemented extensive disclosure provisions for prospectuses which cover all material matters. The provisions for advertisements are perhaps too detailed and impose an excessive burden.
- Principle 20. Regulation should ensure that there is a proper and disclosed basis for assets valuation...
  - Grading: Partly Implemented
  - Findings: There are detailed provisions for the valuation of CIS assets. There is room for doubt about the provisions for valuation of illiquid assets and the basis of pricing of redemptions. The CNVM have accepted these points and are implementing a new Regulation.
- Principle 21. Regulation should provide for minimum entry standards for market intermediaries
  - Grading: Fully Implemented
  - Findings: The CNVM Regulations provide for minimum entry standards, including requirements that an intermediary be fit and proper. There are some minor omissions in the requirements particularly the need to provide customers with access to the intermediaries’ disciplinary history.
- Principle 22. There should be initial and ongoing capital and other prudential requirements...
  - Grading: Fully Implemented
  - Findings: Capital requirements meet the terms of the Principle. CNVM is able to monitor compliance through its off-site review program. There could be enhanced early warning signals of a deterioration of capital between monthly reports.
- Principle 23. Market intermediaries should be required to comply with standards for internal organization and operational conduct...
  - Grading: Fully Implemented
  - Findings: The Regulations cover the intermediaries’ duties to the client, including segregation of client assets, complaints procedures and the need to avoid conflicts of interest. There are further requirements relating to the adequacy of organizational structures. There is scope for strengthening the client money rules.
- Principle 24. There should be a procedure for dealing with the failure of a market intermediary...
  - Grading: Fully Implemented
  - Findings: The CNVM has the power to appoint a trustee in bankruptcy to take over the affairs of a regulated entity. There is a compensation scheme for investors in failed intermediaries. The CNVM should ensure that their contingency planning is tested from time to time to ensure it is fully functioning.
- Principle 25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight
  - Grading: Fully Implemented
  - Findings: The CNVM has adequate powers to authorize, supervise and sanction exchanges and market operators.
- Principle 26. There should be ongoing regulatory supervision of exchanges and trading systems...
  - Grading: Fully Implemented
  - Findings: CNVM requires the exchanges have proper trading rules, which it must approve. It monitors trading for compliance with those rules and has Regulations that require market operators to do the same. There is a need to enhance relationships with the exchanges.
- Principle 27. Regulation should promote transparency of trading
  - Grading: Fully Implemented
  - Findings: Trading rules require the publication of bids and offers and the volumes bid and offered at those prices. There is also full post trade transparency.
- Principle 28. Regulation should be designed to detect and deter manipulation and other unfair trading practices
  - Grading: Broadly Implemented
  - Findings: The CHMV and the exchanges both have responsibility for monitoring trading for signs of market abuse but the primary responsibility for investigation lies with CNVM. There is not sufficient cooperation between exchanges for this purpose.
- Principle 29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption
  - Grading: Partly Implemented
  - Findings: The CNVM and NBR have published rules on the reporting of large positions and other prudential issues. Market operators can share information with the CNVM but not with each other, even where there is scope for contagion across markets, which is inappropriate.
- Principle 30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight...
  - Grading: Not rated
  - Findings: The assessor did not conduct a separate assessment of compliance with CPSS/IOSCO standards for this Principle (although the CNVM self assessment did so). The clearing system is subject to oversight by CNVM and NBR. The rules on clearing and settlement cover trade finality, matching and settlement on a DVP basis. The system could be strengthened by auditing the adequacy of the Guarantee fund and by allowing settlement for the Sibiu Exchange through the NBR. Cooperation between the different parties and the regulatory authorities should be enhanced.

### Recommended action plan (selected recommendations tied to Principles)
- Principle 1: Enhance cooperation with other regulatory authorities; establish joint task forces for specific banks or groups of banks important in the market and settlement system; institute joint inspections; establish common rules for the selling of similar investment products.
- Principle 2: Strengthen immunity provisions to include staff and further protect Commissioners; develop more transparent process for drawing up short list of Commissioners; ensure accounts are subject to external audit annually; include accounts in published annual report; continue to oppose any diminution in budgetary independence.
- Principle 3: Seek more flexibility in the Budget.
- Principle 4: Seek statutory (or adopt alternative requirement to consider costs of regulation); enhance feedback after consultations; introduce peer review of inspections; give more publicity to reasons for sanction decisions; step up discussions with market participants.
- Principle 5: CNVM should consider a more extensive register of staff interests in securities.
- Principle 8: Undertake a full review of inspection and investigation powers with a view to defining their scope and content.
- Principle 9: Seek amendment to the law to clarify that unauthorized investment business a criminal offence.
- Principle 10: Adopt and document a risk assessment and risk mitigation measures; identify key regulatory requirements and focus inspection process on compliance with those measures; move away from a “police and punish” approach to compliance and towards joint discussion with regulated entities of risks and their mitigation.
- Principle 11: Remove requirement to have an MoU before cooperating with a foreign regulatory authority who is not a Member State (if such a requirement appears to be in place); remove requirement for prior approval by CNVM before a recipient authority passes information to another authority.
- Principle 13: Seek legal advice on whether the legal provisions actually provide the power to conduct investigations on behalf of foreign regulatory authorities; seek amendment to the CNVM Statute that makes international co-operation an objective of the CNVM.
- Principle 16: There should be further discussions with accountancy firms to step up the quality of accounting and auditing.
- Principle 17: Seek an amendment to Regulations to cover churning, appropriate trading and underwriting.
- Principle 18: Amend Regulations to require custodians to be in a separate legal entity from fund managers (or introduce special safeguards to protect independence); consider amending Regulations to ensure that material changes to CISs should be subject to the approval of investors.
- Principle 19: Discuss with market participants ways of reducing cost and burden of rules on advertising.
- Principle 20: Discuss with other regulators an appropriate method of valuing illiquid instruments.
- Principle 21: Introduce a requirement that intermediaries should disclose their disciplinary history to investors, at least on request; review the authorization provisions in the Law 297 with a view to making them clearer to follow.
- Principle 22: Introduce a requirement for mandatory reporting of sharp falls in capital or reduction below 120 per cent of minimum.
- Principle 23: Introduce requirement to make intermediaries obtain a bank letter acknowledging that a client account cannot be used to offset the intermediaries’ liabilities; require intermediaries to undertake daily reconciliations of client accounts; require intermediaries’ complaints procedures to include assessment of the complaint by a person other than the one complained about and an appeal to the CEO or other senior officer.
- Principle 24: The contingency plan for implementing the power to appoint a trustee should be up to date and tested regularly.
- Principle 28: Establish a working party to develop better co-operation between exchanges.
- Principle 30: Assist the Sibiu Commodities Exchange in securing settlement in central bank money through the NBR payments system.

### Authorities’ response (summary of reactions)
- Paragraph 116: Authorities do not accept any compromise to the independence of the Commission; they note Parliamentary appointment can give a high level of independence. Authorities welcomed the recommendation on enhanced budgetary independence.
- Paragraph 117: Authorities are not convinced that the legal structure creates ambiguities; they suggest law and Regulations sufficiently define CNVM powers. They state none of the offences created in Law 297 are subject to civil rights protection concerns in preliminary investigations by the CNVM.
- Paragraph 118: Authorities are not convinced of the need for enhanced cooperation between domestic authorities, pointing to statutory duty to cooperate and existing task forces; they do not consider banks’ capital markets positions sufficient to justify closer cooperation and argue information obtainable via the NBR is sufficient.
- Paragraph 119: Authorities do not accept that inadequate implementation of IFRS should affect the rating for Principle 16, arguing the criteria require only that accounting standards include a cash flow statement and statement of changes in ownership.
- Paragraph 120: Authorities do not accept that provisions for custodian independence are inadequate but have accepted the recommendation on CIS valuation and implemented a new Regulation in February 2009.

### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) issues
- Paragraph 121: A detailed assessment of Romania’s AML/CFT framework was conducted in May 2007 and finalized in July 2008 by MONEYVAL using the 2004 Methodology based on the FATF 40+9 Recommendations.
- Paragraph 122: The assessment notes significant developments since 2002. The AML/CFT criminal legal framework and the preventive regime is quite comprehensive; Romania moved to a full “all crimes” approach and extended criminal liability to legal persons. The money laundering offense is in line with the FAFT standard and the UN Conventions, although the number of convictions is low. The offence of terrorist financing was introduced in 2004, but some issues of consistency with the FATF standard remain. Proceeds of crime are subject to compulsory seizure and confiscation and equivalent value confiscation is possible. The National Office for the Prevention and Control of Money Laundering is quite effective but staffing problems are noted. Law enforcement and prosecutorial authorities are adequately empowered and competent to investigate and prosecute money laundering and terrorist financing offenses.
- Paragraph 123: The major sources of illegal funds in Romania are related to tax evasion and fraud, offences related to the patrimony of legal companies and to the illegal use of electronic means of payments.
- Paragraph 124: AML/CFT preventive measures apply to the full range of financial institutions envisaged under the FATF standard. Gaps are noted in key areas: beneficial ownerships, Politically Exposed Persons-PEPs and correspondent banking relationships. Shortcomings include lack of explicit provisions requiring financial institutions to pay special attention to business relationships and transactions with persons from countries that do not or insufficiently apply the FATF Recommendations. NBR supervises banking; CSA supervises insurance; CNVM supervises the capital market. Supervisory regime should be strengthened in insurance and money and value transfer service providers (MVT); lack of licensing procedures noted for money remittance services.
- Paragraph 125: At the time of assessment, all FATF-designated financial businesses and professions (DNFBPs) were included in the AML/CFT framework. The report notes several other businesses are subject to the AML/CFT regime and their activities and scope are too broad and should be clarified. DNFBPs are subject to the same AML/CFT requirements as financial institutions; deficiencies in preventive measures also apply to DNFBPs. A specific recommendation: consider implementing adequate legal or regulatory measures to prevent criminals from holding or being beneficial owners of casinos.

*Source: _cr1047 - 115.     The CNVM should address settlement reliability. The Sibex settlement system*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1047.pdf_