“We have not seen a decline, but a lowering of additional funding to Romanian subsidiaries. We have not seen net capital outflows. However, it is possible for them to occur in the future. It remains to be seen,” says Cristian Popa, vice-governor of the National Bank of Romania (BNR). He adds the central bank is in permanent contact with the supervisory bodies in the countries of origin of parent banks. “We don’t see serious problems.”
However, BNR officials admit euro zone banks are in the process of reducing exposure and will reassess the allocation of resources to subsidiaries. The BNR also takes into consideration scenarios under which many lines of credit would not be extended, but relies on the fact that most foreign bank subsidiaries have accumulated portfolios of significant government bonds, which allow them to go to the central bank for refinancing.
According to the report on inflation published on Monday, the BNR is considering several hypotheses and sources of risk generated by the external context and which could affect the banking system, lending, and price stability.
One of the main dangers is of Romania being lumped in with other countries by investors if market nervousness increases, with investors no longer taking into consideration Romania’s fiscal consolidation efforts and the positive IMF reviews.
The result would be a supplementary depreciation of the leu and an increase in the cost of foreign currency loans because of the country’s higher risk premium. On the forex market, the BNR noted an increase in the volume of speculative transactions in the second half of September.
In the last few years, the BNR has been preparing adverse scenarios on the banking market and has gradually adopted measures to allow it to respond in situations where the stability of the financial system is threatened.
What can it do at present? It can ask bank shareholders to perform a capital increase or to grant subordinated loans convertible into shares at the initiative of the BNR, it can ban or limit the distribution of profits, it can appoint a special administration at an ailing bank and it can enhance their powers and the restructuring measures they can resort to.
It can also ask for the resources of the Deposit Guarantee Fund to be used to finance restructuring measures. This would entail the transfer of guaranteed deposits from an ailing bank to a solid one.
The central bank will soon also have the legal support to ask for the establishment of a bridge bank that would take over the assets and liabilities of a troubled bank.
(English version by Daniela Stoican)