4. banking in romania

8/13/2019 4. Banking in Romania

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4.1. Shor t history of the Romanian banking system

The forerunner of the National Bank was the first banking company set up

in 1866 in Bucharest under the name of the Bank of Romania, a companywhose deed of concession was signed by Prince Alexandru Ioan Cuza.

On April 17, 1880, Parliament voted and passed the foundation law of thefirst banking institution, which was to play a major part in the economic

development of the country.

The new institution called also The Bank of Banks fully matches as

functions and organization the similar institutions in the Western countries.

Since its establishment and up to World War I, the National Bank played amajor part in financing the banking system by means of discount credits.

By duly supporting monetary expansion, the National Bank of Romaniamade the chief contribution to the creation and development of the most

important banking and financial institutions and the banking commerceinthe country and to backing them in the tough competition with the foreignspecialized institutions 22.

Characteristic of the interbella activity of the National bank was its financial

support for the countrys economic rehabilitation, for the swift accumulationof capital, for the strengthening of domestic industry, for the unprecedentedexpansion of the financial market, the growth of Romanian exports and

participation in wide-scope international transactions. Significant for thespectacular boom of the Romanian banking system by then was the rise in

22The National Bank of Romania 1880-1995, Ed. Enciclopedica, Bucharest 1995

Banking in Romania


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the number of the joint stock banking companies from 215 in 1918 to 1122

in 1928.

The financial and banking system was well organized in those years,

offering the favorable pre-requisites for obtaining on the eve of 1938competitive economic indexes in general as well as in many specific fields,

as compared with to the standards reached in the other European countries.

The ascending course of the National Bank of Romania was abruptly and

naturally interrupted in 1945, when its functions as a unique issuinginstitutions and as a Bank of Banks were altered and when it artificially took

over some of the functions of the Commercial Banks; moreover, it sufferedalso the central-planned immixtures in the monetary and financial policies.

Consequently, the banking system was a mono-banking system up to 1990,in spite of existence of four specialized banks, dominated by administrativecontrol, which ignored the real development of economic mechanism.

The National Bank regained its natural activity in 1990 when it resumed itsstatus of Central bank and its traditional functions, commercial activities

being transferred in the process to the Commercial Banks.

In 1991, when the Parliament passed the law on Banking Activities (Law

No. 33/1991) and the Law on the Statute of the National Bank of Romania(Law No. 34/1991) they actually created the legal framework for the

independence and reinstatement of the Central Bank in its functions.

4.2.The new banking system

The actual Romanian banking system enjoys a two-tier structure, involving

the National Bank of Romania and the banks. This new banking system wasintroduced in December 1990, marking the first step of the banking reform

process, when the NBR assumed the traditional central banks functions and

its previous commercial operations were transferred to the newly establishedthe Romanian Commercial Bank. In early 1991, the Parliament approved

the laws governing the banking environment in Romania: the Law onbanking activity (no. 33/1991) enabling the development of a network ofcommercial banks and the Law concerning the Statute of the National Bank

of Romania (No. 34/1991).

The legal framework of the banking system was reshaped and improved inthe first half of 1998, when three banking laws were enacted: the Banking


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Law (No. 58/1998), the Statute of the National Bank of Romania (No.

101/1998) and the Law on Bankruptcy Proceedings for Banks (No.83/1998). By the enactment of the new legislation, together with the Law on

privatization of state-owned banks (no. 83/1997), the weaknesses of the

former legislative framework were corrected in order to ensure a sound andstable banking system, to strengthen the independence of the NBR and its

enforcement powers and to improve the exit mechanism for ailing banks.

The National Bank of Romania is aiming at full harmonization of the legal

framework for banking activity with European Union regulations, in orderto facilitate the European integration of Romania.

The structure of the financial system in Romania

Type of inst i tut ions As sets Assets (%)Number of

inst i tut ions

Commercial Banks 233.254 90,5 41

Securities Companies 258,73 0.1 125

Investment funds 427,07 0.17 22

Financial investments companies 11.447,63 4.44 5

Insurance companies 9308,83 3.61 73

Associations for mutual funds 3056,14 1.18 4.439

TOTAL 257.752,41 100 4.705

Source: www.cerope.ro

During the last decade, the main characteristics of the banking system have

been concentration and segmentation. Despite the increasing number ofbanks over the recent years, there are four banks dominating the market,

which account for approximately 60 percent of the banking sectors assets,more then 60 percent of the deposits and more then 60 percent of the paid-incapital at the end of June, 2000.23

23Romanian Financial Directory 2000, Finmedia Directories Series


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Concentration indicators

Year Gro up s of bank s As sets Depos its Lo ans

31-Dec-99 C5 61,44 61,25 57,6

C10 77,20 77,27 78,32

C15 83,69 82,69 85,16

31-Dec-00 C5 65,64 67,5 59,11

C10 82,25 84,13 78,05

C15 89,59 90,63 87,54

31 iunie 2001 C5 66,63 68,51 58,04

C10 83,01 85,31 78,56

C15 90,47 91,86 88,08

Source: www.cerope.ro

As far as market segmentation is concerned, it still remains important asstate-owned banks are involved mainly in financing state-owned companies,

private banks with domestic capital focus on lending to private enterprisesand foreign banks branches are dealing with the major foreign investors inRomania. All these factors explain the lower degree of competition in the

banking system and show why banks are not oriented to serve the customer.Card-based schemes are quite new in Romania since 1992. Domestic

currency-denominated card have been issued since 1997 by a small numberof commercial banks, under the VISA or Europay logo. Only a fewcommercial banks improved their current activity by introducing some

modern instruments, such as Internet banking.24

The NBR tries to stimulate, within the legal framework, the establishment ofbranches and subsidiaries of foreign banks, as they play an important role in

developing the range of banking services and improving their quality.

There are different kinds of banks when considering capital that can apply

for banking licenses issued by the NBR:I. Romanian banks, of which:a). fully or majority state-owned capital, out of which:

24Claudiu Doltu, The Evolution of the banking system in Romania, The Romanian Center

of Economic Policies, www.cerope.ro


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- fully state-owned capital (e.g. Savings Bank);

- majority state-owned capital (e.g. Romanian Commercial Bank);b). fully or majority private capital, out of which:

- fully or majority domestic capital

- fully or majority foreign capitalII. Foreign banks branches, such as ING Bank, United Garanti Bank

International, Banque Branco-Roumaine.25At the end of September 2002, there were 38 banks, Romanian legalentities, including 8 branches of major foreign banks. This number rose

significantly from 7 banks in 1990.

The National Bank of RomaniaIn accordance with the Law No. 101/1998, the National Bank of Romania is

a public institution, with legal personality, entitled to establish branches,subsidiaries and agencies. The main responsibilities of the NBR are thefollowings:

- to ensure the stability of the domestic currency with a view tomaintaining price stability;

- to issue currency as legal tender in Romania;

- to design and implement the monetary, foreign exchange and creditpolicy;

- to participate on behalf of the State in external negotiations on financial,

monetary and payment matters.The National Bank of Romania is mainly engaged in the following

activities:- licensing commercial banks, both foreign and domestic, and monitoring

their activities on a monthly basis;

- keeping the Romanias international reserves;- elaborating the balance of payments;

- setting the level of reserve requirements of commercial banks, which inturn influences the liquidity of the financial system;

- establishing the foreign exchange policy of the State, setting exchange

rates, licensing and supervising legal entities authorized to conductforeign exchange transactions.

The National Bank of Romania is headed by a Board of Directors and itscurrent management is entrusted by the Governor. The Board of Directors

consists in the governor, the First Deputy Governor as Vice-Chairman, twoDeputy Governors and five members. The members of the Board of

25Ligia Georgescu-Golosoiu, Business of Bnaking, Editura ASE, 2002


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Directors are appointed and replaced by Parliament on the recommendation

of the Prime Minister.

On a permanent basis, the National Bank of Romania co-operates with the

international Monetary Fund and specialized consultants provided by theWorld Bank, as well as with other organizations in developing policies and

procedures governing the Banks operations.

Banking Law in Romania

Commercial banks are legal entities, established as commercial companies.In order to incorporate a bank, a national Bank of Romania license should

be obtained. Commercial banks shall be incorporated as joint stock

companies only, with at least five shareholders, and shall operate under thesupervision of the National Bank of Romania. According to the Norms No.

16/September 2002 issued by the NBR, the minimum share capital of banks,currently ROL 250 billion, shall be raised to ROL 320 billion by May 31,2003 and to ROL 375 billion by May 31, 2004. The share capital of a bank

has to be fully paid in cash at the time of the subscription. The minimumlevel of paid-up capital may be modified by the Central Bank whenever

necessary. All commercial banks shall open current accounts with theNational Bank of Romania and are required to maintain minimum reserves.At present, the reserve ratio is uniform for ROL and foreign currency

liabilities, namely 22%.

Foreign banks, legal persons may establish subsidiaries, branches, and

representative offices in Romania.

The establishment, operation and winding-up of the Romanian subsid iaries

of foreign banks, legal persons are performed according to the Romanianlegislation, once they are licensed by the NBR. The subsidiaries of foreign

banks, established in Romania are Romanian legal persons subject to thenational Bank of Romania licensing and are subject to the Romaniancommercial and banking legislation.

As a rule, a branch is an entity without legal personality that is governed by

the legal status of the parent company. In Romania, the foreign banksbranches are subject to the NBR licensing the same as the subsidiaries, andare bound to comply with Romanian commercial and banking law.

Special provisions regulate authorization and operation of foreign bankingcompanies. The representative offices are established by the parent

companys decision and are not subject to the NBR licensing. Within 15


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days since the establishment, the representative office must notify the NBR

about all information with regard to its compliance with the Romanian legalrequirements.

The Banking Law (No. 58/1998) applies to banks, Romanian legal entitiesand to foreign banks branches operating in Romania. The law provides that

banking activity may be carried out by other entities under specific law, byobserving the provisions of the banking law. For instance, the Savings Bankis governed by its own law and, in the first half of 2000, the Government

issued an Emergency ordinance in order to regulate the functioning of creditco-operatives, establishing a regulatory and supervisory authority.

The banking law defines the permitted and prohibited activities, licensing

procedures (including revocation of the license) and rules for mergers anddivestitures. It deals with problems of organization and management,defining the powers, responsibilities and the required qualifications of the

banks managers and auditors. Minimum capital requirements) includingcapital endowment for foreign banks branches operating in Romania),

prudential rules and indicators (capital adequacy, large exposures, required

reserves, loan classification and provisioning) as well as accountingmethodology are also defined. The regulatory powers of the central bank are

strengthened. The NBR may take measures for special supervision and

special administration over banks. The central banks control overshareholders is reinforced and all changes in the situation of a bank must be

approved by the NBR under the terms of specific regulations.

Among the permitted activities, the law provides that transactions on the

capital market may be performed by banks only via own securitiescompanies, except the cases when the capital market legislation allows such

activity to be performed by banks. The law states that banks may performfinancial leasing operations via leasing companies established specificallyfor this purpose. The banking law introduces mandatory external audit for

the banks to be carried out on an yearly basis.

Banks in Romania are currently barred from owing more than 20% of theshare capital in an insurance company, but the commercial banks alreadyholding a stake in insurance-reinsurance companies might be allowed to

increase their ownership to over 20% according to a modification to theBank Law advocated by Romanias National Bank. The modification would

encourage banks to increase their involvement in the insurance market,either by augmenting their current shareholdings or by creating new


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insurance companies. According to this proposal, bank ownership in

insurance companies will not exceed 60% of the banks equity. The largestbank participations are currently ASIBAN, BCR Asigurari, Omniasig andARDAF. Increasingly more banks have over the past years promoted the

concept of bank assurance, which entails rounding the usual bank serviceswith insurance and leasing products. The insurance companies are expected

to gain a lot if the proposal is carried, as their needs for capital are stringent.The Romanian Commercial Bank and the Transilvania Bank are the onlyRomanian banks to have so far created their own insurance arms- BCR

Asigurari and SAR Transilvania, respectively. Romanian Commercial Bankis the heaviest involved bank in the insurance market, also thanks to its

stakes in Omniasig and ASIBAN stand-alone insurance companies. BancPost is also holding 19% of the shares in Garanta, while Raiffeisen Bank

owns shares in Agras.

The special status of credit-cooperatives

Law No. 109/1996 established the legislative framework for the functioningof credit cooperatives that are entitled to perform banking activities. Thecrucial error made was to include the term bank in the denomination of

these credit institutions, as they were not under the supervision of NBR.This misunderstanding was speculated by over than 1000 cooperatives that

set up and started to attract deposits from population with higher interests

than commercial banks and using an outrageous promotion campaign. Thepersons with low income were the main target, being vulnerable because of

the lack of information and economic culture, and that was attracted by thehigh interest and thus they were attracted by the high interests offered.

As expected, this situation didnt last too long. In June 2000, the liquiditycrisis started with the major popular bank: the Romanian Popular Bank.

This had a negative impact over the entire system of cooperativeorganizations and weakened the financial sector, which had already beeninfluenced by the story of National Fund of Investment (FNI) story and

bankruptcy of the International Bank of Religions 26.

At the end of June 2000, the government issued Emergency Ordinance No.97, amended by EO no. 272/2000 and completed by the Norms no. 7/2000and 2/2002 of NBR to regulate the way of functioning and reorganization of

the credit cooperatives and to suspend the setting up of new popular banksaccording to the old legislation.

26Piata Financiara magazine, No.11/2002


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The new regulation makes a clear distinction between the non-banking

intermediaries and the commercial banks. The Ordinance stipulates thechanging of the cooperative organizations into networks (made by a central

house and credit cooperatives affiliated to this) or their reorganization ascommercial banks. In addition, the National Bank of Romania willsupervise their activities, pursuing the regulations of the central bank

regarding the prudential, accountability requirements and the monetary,credit, foreign exchange, payment policies.

The minimum capital accepted at the level of a network was established at150 billion lei, arising objections on the part of these institutions. They

argued that the members of cooperatives are natural persons with lowincomes, diminishing the chances of the cooperatives to comply with this

criterion. NBR motivated its decision by the necessity to comply with theprovisions of the Community Directives, which stipulate a minimum levelof 5 million Euro for the initial capital of a credit institution.

The deposits of populations will be under the scope of the Guarantee Fundof Deposits, but only after the authorization of the network by the central

bank; compensation will be made only in case of bankruptcy of the centralhouse. In case one of the cooperatives will be unable to fulfil the payment

obligations, the central house will provide the payment from the reserves

made at the level of the network.The authorization of the networks of cooperatives by the NBR implied threestages. The first one consisted in the process of notification forreorganization. The deadline for application was 13 February 2001. Out of

10 networks that submitted the application, the central bank gave positiveanswer to only five: Aurora Romana, Concordia Romana, Creditul

Romanesc, Creditcoop, Creditul Popular. At that time, these five networkscontained 987 cooperatives. The reasons for the rejection of the others(Milenium BPR, Pontica Bucuresti, Star Petrosani, Familia and Minerva)

were related to the existence of a negative difference between the assets andliabilities and the failure to pay off some obligations that became due.

In the second stage, the NBR had to approve the common reorganization ofthe five networks. The central bank approved only four of them, including

784 cooperatives; the network Creditul popular was not accepted. At thesame time, 13 cooperatives included in those four networks were rejected.


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The last stage, which is rolling on, consists in obtaining the authorization of

functioning for the central house and the affiliated credit cooperatives.

According to economic theory, credit cooperatives could stimulate the

economic growth for the less financial developed areas, by allowing manycredits with low value for small enterprises.

The high costs of selecting and supervising this type of customers make thebanks less interested in allowing such credits. On the other hand, the setting-up of the cooperatives, where the members are at the same time customers,

offer the advantage of mutual supervision which entails lower costs.

All these elements back up the idea of setting up credit cooperatives, but inpractice, for one reason or another, the outcome didnt meet the

expectations. In addition, in the case of Romania there was identified aspecific element, denominated as agency cost, in economic terms. Thus, theassociations of the cooperatives at the level of organization give rise to the

number of members, generally persons with low income, who ask for creditswith an average value of 3-5 million lei. This led to a fragmentation ofdecision power (because each member has one vote irrespective of his

contribution to the social capital), the influence of the members in thecooperative policy being almost nonexistent. As a matter of fact, most of

them were not even interested in their rights in the General Assembly, and

the management had the entire power to decide over the destination of thefinancial resources. In this way, the members of the board allowed high

priority to their personal interests, as there was no any supervision of thecentral bank. The most common example is The Romanian Popular Bank.

The new legislative framework will allow a sound development for creditcooperatives, the principal reason being the supervision by the central bank.

Thus, the credit cooperatives will have to fulfil the prudential requirements,related to the solvency and liquidity ratios, maximum aggregated exposureand the maximum exposure for one debtor. But, according to international

practice, the purpose of supervision of cooperatives should be different fromthat of commercial banks. The management of the cooperatives is focus

more on using money in its personal interest rather than assuming creditrisks.

As commercial banks have already penetrated the market of the microcredit,the chances of the credit cooperatives to gain substantial market shares intheir traditional field of operation, are quite low.


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Further more, the long elapse of time for authorization and gaining the

confidence of the population for credit cooperatives will favor thecommercial banks that will consolidate their position in allowingmicrocredits.

It is doubtful that the new cooperative networks, no matter of their liquidityand solvency, would gain a substantial market share since the target field is

more and more restraint.

The past experience is unfavorable for them, in the same way, as the

bankruptcy of the FNI for the future development of investment funds.

Stud -case: At the beginning of the century, the popular banks have

bought even the mountains1

Even though in practice the first pop ular bank was set up by Ion Ionescu from Brad, around

1860, the founder of the popular banks is considered professor Spiru Haret. The initiative of

the movement which came up with this idea belong to the rural teachers group. But the real

merit is allowed to the professor Sipru Haret, not only because he put in practice this idea, but

also because he gave the impetus to a new trend favorable to setting up of the popular banks.He considered these ones the most appropriate institutions to allow cheap credits to rural

population. Law of rural popular banks and the Central House was issued on 28 March 1903.

It included clear provisions regarding the setting up, the incorporation and the functioning o

popular banks.

The Central House, in direct relationships with the central bank, was set up to control, guide

and finance these institutions, discounting the portfolio or receiving credits when necessaryfrom the central bank.There was a flourishing period so named the heroic period of the

Romanian cooperation after the law was issued.It represented not only an increase in the

number of these institutions (from 26 in 1898 to 2 965 in 1918), but also a growth of the

funds available.Thus, in 1912, the popular banks had 30,64% of the social capital in the financial system, and

their creditworthiness was represented by the fact that 32,5% families in the Old Country

were members of these credit institutions. Probably, this was an effect of the stated purpose

of these institutions, namely to raise the life standard of the rural population.The activity of

the popular banks was stimulated also by the credits offered by the Central House(owned by the state) and also by the National Bank.

During 1908-1917, the credits allowed by the popular banks accounted approximately 88%

from their total assets, and their activity had so much rentability as their net profit was almostequal to the allowed credits. Some of them, having to many funs, built schools. The most

powerful of them initiated great businesses: in 1902, the Novaci Bank bought 11 mountainsand estates.

Even though the popular banks in that period represented an intermediary system between the

types Schulze-Delitzsch and Reiffeisen, 90% had an unitary statute and pursued the same

objective: credits for the needs of the rural population. Nowadays, the popular banks want to

change their statute to become commercial banks


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Privatization of the banking sector

Romanian commercial banks began their operations with relativelyspecialized portfolios, reflecting their pre-1989 concentration in particular

economic sectors. However, this initial specialization has diminished as thebanks competed with each other and new banks entered the market. Anumber of new banks with private Romanian or mixed capital have been

licensed to begin operations. The privatization process of the major state-owned commercial banks started in 1998. Law on bank privatization (Law

No. 83/1997) established the legal framework for the transfer of state-ownedbanks to the private sector and the improvement of their financial situation.

The privatization of the banking companies may be achieved in one of thefollowing ways:

increasing the share capital, through contribution of private capital incash, on the basis of public offer or private investment;

selling the stock administrated by the Authority for State-Owned Equity

Management and Privatisation, only in cash, with full payment, towards;- Romanian individuals;

- foreign individuals;

- Romanian legal persons with private majority capital;- financial investment companies;

- foreign legal persons with private majority capital;- a combination of the two methods described above.

The National Privatization Authority is the administrator of state equity inthe banks capital. A privatization commission is set up in the case of

commercial companies in which the state is shareholder. The privatizationcommission shall supervise the privatization operations and ensure theobservance of transparency, consistency and objectivity of the principles.

The privatization of such companies shall be based on the valuation reportsand feasibility studies drawn up by a specialized company in accordance

with international standards.

In compliance with Law No. 83/1997, the process of banks privatization in

which the state is a shareholder carries on. In 1999, the privatization ofstate-owned banks represented one of the key objectives of the structural

adjustment program supported by the World Bank and the InternationalMonetary Fund. In this respect, the privatization process of Romanian


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Development Bank and Banc Post was completed in the first semester of

1999. The majority interest (i.e. 51 percent) in case of RomanianDevelopment Bank was sold to the French bank Societe Generale, whileGeneral Electric Capital Corporation and Banco Portugues de Investmento

acquired the controlling interest (i.e. 45% ) in Banc Post. In this way,private capital in the two banks accounts for 90 percent and 83 percent

respectively.

Privatisation of the Agricultural Bank ended with the sale, on April 12,

2001, of the state equity holding to the consortium made up of RaiffeisenZentralbank Osterreich A.G. (93.13 percent) and the Romanian-American

Enterprise Fund (5.7 percent). Referring to the stage of privatization processof Romanian Commercial Bank, the privatization strategy was approved in

2001 by the empowered institutions (National Authority for State-OwnedAssets Management and Privatisation, Ministry of Development andPrognosis, Ministry of Public Finance and the National Bank of Romania)

and will be completed in the following years.

Privatized Banks starting 1999

Main shareholders

Nam e Year

Total

assets (%) Name

Capital share

(%)

Banc Post 4.03 EFG Eurobank Ergasia 19,25

Banco Portugues do Investimento 17

General Electric co. 8.75

BRD 16.16 Societe Generale 51

BERD 4.99

Banca Agricola 2001 3.98 Raiffeisen Zentralbank 93,36

Fondul Romano American 5,72

The privatization is beneficial for all parties involved, ensuring bankingknow-how and expertise transfer, introduction of new or improved banking

products, improved efficiency for banks assets, harmonization of banksquality services with internationally recognized standards, banking networkdevelopment included, a more efficient integration of the Romanian banking

system into the international one, thereby facilitating access to worldfinancial markets.


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Restructuring process in the Romanian banking system

The Romanian banking sector also faced problems specific to the transitioneconomy. This state of affaires called for stepping up bank reform through

fast-track privatization of some banks (The Romanian Bank forDevelopment in 1999 and Banc Post in 2001) as well as through theimplementation of a rapid bank purging program by the central bank in

1999-2002. Therefore, tough measures were taken, including the merger ofthe largest state-owned bank, Bancorex, through absorption with another

large bank, Romanian Commercial Bank and the initiation of bankruptcyproceedings for four other smaller privately-owned bank (Credit Bank,

Albina Bank, Bankcoop and International Bank of Religions ). The licenseof Columna Bank was withdrawn in 2000 due to serious violations of thelaws and regulations. Restructuring and privatization of the banking sector

represented, in the above-mentioned period, one of the basic objectives ofthe structural reform program supported by the International Monetary Fundand World Bank.

The restructuring of Bancorex was finalized following the merger through

absorption with Romanian Commercial Bank and became operational on 21

October 1999. The legal provisions have permitted to RomanianCommercial Bank to take only the sound assets of Bancorex. The balance

sheet and off-balance sheet non-performing assets were transferred to theBank Assets Recovery Agency (an agency set up to deal with bad debts ofstate-owned banks that were restructured or liquidated). In addition, BCR

has assumed other liabilities of Bancorex, and the Government has issuedtreasury bills on behalf of BCR to offset such liabilities.

Throughout 2001, the NBR together with Romanian and Turkish authoritiesstrove to solve the problems that Romanian-Turkish Bank was facing. In the

absence of any favorable developments, after all attempts to get the bankback on track or sell it had failed, the NBR Board revoked the license of the

Romanian-Turkish Bank pursuant to the Decision of the NBR Board issuedon April 30, 2002, and filed a petition for the start of bankruptcy

proceedings.

Commercial Bank Unirea was subject to a special supervision by the NBR

throughout 2001 due to the liquidity strains it had been experiencing in prioryears. In addition, as bank failed to comply with the minimum share capital


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requirements and own fund by the en of May 2002, its license was revoked

according to the Decision of NBR Board of Directors issued on 3 July 2001.This prudential requirement was met by the subsequent rise in share capitalmade by the new foreign investors and therefore the Supreme Court of

Justice admitted the complaint of Unirea Bank against the NBR and ruled infavor of the former resuming the banking business: the NBR maintained

some restrictions due to uncertainties surrounding the shareholders.

Inspections conducted by the NBR at Romanian Discount Bank revealed

blatant violations of the banking legislation and mismanagement of fundsand deposits, which entailed imposition of sanctions and special measures.

Given the irregularities found by the NBRs inspectors and the banksimpossibility to set up required reserves, the NBR instituted special

supervision for 60 days (starting July 2, 2001) that was extended for 120days, the maximum legal period. Subsequently, in order to limit the possiblenegative impact on the banking system, the NBR Board also instituted the

special settlement regime (December 10, 2001). On January 3, 2002, theNBR instituted special administration and withdrew the license of thebanks president. The findings in the special administrators report provided

the legal basis for the NBR Boards decision on February 28, 2002 torevoke the license of the bank and to file a petition for the start of

bankruptcy proceedings. As of April 16, 2002, the Court admitted the

NBRs petition and ruled in favor of the start of bankruptcy proceedings. Toprevent occurrence of similar situations, the NBR improved banking

regulations by setting qualitative criteria in licensing the managers, Boardmembers and shareholders of banks and by setting know your clientstandards.

The Credit Information Bureau

The Credit Information Bureau (CIB) is a center specialised in gathering,storing and centralising information on the exposure of each Romanian bank

to debtors that were granted loans that cumulatively exceed the reportinglimit. The present reporting limit has been established by Order No. 27/2000

issued by the NBR Governor and amounts to ROL 200 million.

The CIB database is organised in two files:

The Central Credit File (CCF) containing credit risk informationreported by banks and updated on a monthly basis.


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The Overdue Debt File (ODF) containing information on borrowings

overdue in at most seven years, and updated monthly with credit riskinformation from the CCF.

Banks and the National Bank of Romania are the users of the CIB database.The exchange of information is made through the Interbank Communication

Network.

Banks' reports include the following information:

identification data of debtors to which the exposure of the bank isequal or exceeds the reporting limit; and

information on all the loans granted to the debtor: type of loan,maturity, type of collateral, debt service, granting date, due date, the

amount granted, the amount due on reporting date, the amountoutstanding.

Information is disseminated by the CIB to banks in two manners:

monthly reports including credit risk information on all the debtors

reported by the bank in the respective month with all informationavailable in the CIB database on loans the debtor was granted by allthe banks (overall risk report); and

following "online" inquiries of banks requesting two types ofinformation: global risk report and overdue borrowings report (for 7

years).

Information on reported debtors shall be disseminated unconditionally,

while information on clients - potential debtors is available provided theconsent of the respective client 27.

The Payment Incident Bureau

The Payment Incident Bureau is operating with the National Bank ofRomania since February 1997. The Payment Incident Bureau (PIB) is an

intermediation centre managing information specific to payment incidentsresulting mainly from overdrafts or theft of payment instruments. Banks, asreporting entities, notify the PIB on any payment incident involving an

accountholder of cheques, bills of exchange, promissory notes, in case ofboth inter- and intra-bank payments.

27www.bnr.ro


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Information is forwarded to the PIB by computer system, using the

Interbank Communication Network that links the National Bank of Romaniahead office to the head offices of all banks.

The PIB database is organised in two main files: the National File onPayment Incidents and the National Risky Persons File. All payment

incidents, irrespective of the cause that generated them, are registered in theNational File on Payment Incidents. The National File on Risky Personscontains all major payment incidents generated by causes such as:

payment instruments drawn on overdraft;

cheques issued without authorisation of the drawee;

cheques issued with false date or missing a mandatory specification;

traveller's cheques or circular cheque issued as bearer cheques;

cheques issued by a drawer banned from performing bankingoperations;

bills of exchange discounted without total/partial surrendered claimwhen transferred.

The natural or legal persons that produced major payment incidents

involving cheques are recorded in the National File on Risky Persons andare placed under a ban on performing banking operations. A ban on

performing banking operations is a ban enforced by a bank on an

accountholder to issue cheques for one year.28

The Bank Deposit Guarantee Fund

In order to preserve the stability of the banking system and to protecthousehold deposits, adeposit guarantee scheme was established in 1996 .

The Fund guarantees deposits held both by residents and non-residents indomestic or foreign currency.

Financial resources of the Fund are built up mainly from the contributionsof banks, Romanian legal entities or foreign bank branches that are licensed

or going to be licensed to raise funds from natural persons in compliancewith the provisions of Law No. 58/1998 - The Banking Act. The Fundinvests the amounts raised mainly in government securities.

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In case of a bank's insolvency, the Fund guarantees the payment in ROL of

deposits, irrespective of the currency or the number and size of deposits,within the guarantee ceiling that is updated half- yearly with the consumer

price index. The guarantee ceiling includes interest on the respective

deposits accrued until the date deposits became unavailable. For the latterhalf of 2002 the guaranteed ceiling is ROL 109,795,000 per depositor.

At the request of the Fund's Board, the National Bank of Romania maychange the licence of a bank by waiving its right to take deposits from

natural entities should a bank fail to comply with the obligations providedby the ordinance.

Pursuant to the provisions of Government Emergency Ordinance No.

138/2001, the Fund is appointed as a rule to act as official receiver ofinsolvent banks. At present, the Fund is concerned with fulfillment of thetask pertaining to liquidation of the following insolvent banks: Banca

Romna de Scont and Banca Turco- Romna 29.

Summary

Hystory of the Romanian banking system

- 1865: first modern commercial bank The Bank of Romania;- 1866-1880: 3 credit institutions;- April 17, 1880: the National Bank of Romania as a commercial and

issuing bank.

The evolution of the Romanian banki ng system after the setting up of

the NBR- economic progress and the modern type banking system

- increasing number of banks from 3 in 1880 to 215 in 1914- high concentration: 9 big banks-70% of the resources- 1931-1932: collapse of some large banks

- May 8, 1934: Law of organization and regulation of the bankingcommerce

- liquidation and mergers diminishing the number of banks from 839

in 1933 to 523 in 1937 and 246 in 1944.

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The evolution of the banking system dur ing the communism regime

- the 1934 banking law was abrogated by the Decree Law no. 197/1948- almost all the Romanian and foreign-controlled banks were liquidated,

the remaining banks under Commercial Code and their specific laws- mono-banking system corresponding to a centralized economy- the NBR agent of the state acting as a central bank and a commercial

bank- 3 specialized banks for credits: Bank of Agriculture and Food Industry,

Romanian Bank for Foreign Trade, Investment Bank- the single institution to receive credits for population: the Savings Bank

The banki ng system in Romania after 1989- the new banking system started on December 1, 1990- two levels: NBR as a central bank and the commercial banks- the Law on banking activities (33/1991) and the Law concerning the

Statute of the NBR (34/1991) according to the market economyprinciples- the former commercial banks changed and new commercial banks

were established- the new laws were introduced in 1998: 58/1998 and 101/1998- until December 31, 2000: 33 banks Romanian legal entities and 8

branches of the foreign banks- new regulations of the banking system: Law 375/2002 and Law

101/1998 was modified

Banks operating in Romania, by type of capital

1. Fully or majority state-owned capital- majority state-owned capital

EX: BCR-70% Romanian State Ownership Fund

-30% (5) private Romanian Financial Investment Companies(FIC)

-fully state-owned capital

Ex: Savings Bank 100% state owned bank with the Ministry of Finance assole shareholder

2. Fully or majority private capital out of which:

-fully or majority domestic capitalEX: Transilvania Bank -77,61% Romanian

-23,39% foreign-fully or majority foreign capital

Ex: Piraeus Bank Romania- 99,9930% Piraeus Bank Group Greece

- 0,0069% Romanian individuals3.Foreign banks branches

Ex: ING Bank N.V. Bucharest Branch 100% ING Group NV, Amsterdam,Netherlands


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Check out questions

1. The evolution of the Romanian banking system before 1989 was

characterized by some features. State three of these.

2. Mention three features of the banking reform in Romania after 1990.

3. Set forth three main features of the current Romanian banking system.

4. Classify the types of banks according to the nature of the capital.

5. Set forth the meaning of the concentration and segmentation features for

the Romanian banking system.

6. Explain the functions of the Deposit Guarantee Fund.

7. State the role of the Payment Incident Bureau.

8. Set forth the meaning of the prudential supervision.

9. Explain briefly the current status of credit-cooperatives in Romania.

Choose the right answer(s).

10. According to the Romanian banking legislation, a foreign bank:

a. operates under the license from the NBRb. if it is a branch, there is no need to obtain the license from the NBRc. is fully submitted to the legislation of its own country

d. can obtain a derogation from NBRe. can operate as a representation without license from the NBR.

11. The main responsibilities of the NBR are the following:a. to ensure the stability of the domestic currency with a view to

maintaining price stabilityb. to issue currency as legal tender in Romania

c. to design and implement the monetary, foreign exchange and creditpolicy

d. to participate on behalf of the State in ext ernal negotiations on

financial, monetary and payment matters.


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12. The credit information bureau is:a. a center specialized in gathering, storing and centralizing

information on bad debtors

b. a bankc. coordinated by the National bank of Romania

d. the same thing with the Payment Incident Bureau.

References

1. Ligia Georgescu-Golosoiu, Business of Banking, ASE 2001

2. The National Bank of Romania 1880-1995, coordinator MugurIsarescu, Ed. Enciclopedica, 1995.

3. Piata Financiara magazine, 2000-2002.

4. Romanian Financial Directory, Finmedia Directories Series, 2000.

5. Romanian Banking Forum collection, Piata Financiara conferences,

Finmedia SRL, 1999

6. Vasile Savoiu, Banca Centrala si sistemele de plati de interes national,Ed. Enciclopedica, 1998

7. The National Bank of Romania, www.bnr.ro

4. banking in romania

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