A bad bank would have meant a new AVAB, the institution that in the late 90s cleaned up the balance sheets of state-held Bancorex and Banca Agricola banks using taxpayers’ money. Subsequently both turned out to be resounding failures of state management in the banking sector and of supervision of the central bank.
But this time the authorities did not think it would be an efficient approach and were hesitant to use public funds to buy such assets and help clean up banks’ portfolios.
The Romanian central bank (BNR) believed that the creation of a “bad bank” would have sent worse signals into the market than the real problem of non-performing loans.
Cleaning up banks’ portfolios would have arguably amounted to help for the banking system at a time when the high rate of non-performing loans was caused not only by the steep recession, but also by risk management problems.
The “bad bank” concept is not new to Romania, having been previously used by the authorities in the late 90s, also on the recommendation of international financial institutions. AVAB (the Bank Assets Resolution Authority) was set up in 1998 to sell non-performing bank assets from the banks where the state was a majority shareholder with at least 50%. It was the case of Banca Agricola and Bancorex, both of them resounding failures of state management in the banking sector and of supervision by the central bank.
At present, AVAS, the institution that absorbed AVAB, is in the process of being dismantled.
The still rising non-performing loans remain a cause for concern for the IMF, which believes new efforts are needed in order to enable banks to write loans off when they consider it the right time from a business point of view, with no delays.
The difficulties that banks face when they want to write problematic loans off – partially or fully removing problematic loans from balance sheets – contributed to a fast increase in the share of non-performing loans in the banking system, alongside the abrupt recession, IMF experts believe.
“NPLs (Non-performing loans i.e.) can only be written off after all channels for recovering the loans have been exhausted by the banks, which could take many years in Romania.,” the IMF says in a report evaluating the results of the stand-by arrangement sealed with Romania in 2009.
At the end of 2011 the share of non-performing loans in the banking system was above 14%, from 7.9% in 2009.
(English version by Daniela Stoican)