THE BANKING SYSTEM OF ROMANIA

Anda Fratica Raluca Ichim Tempea Roxana

AN OVERVIEW OF THE BANKING SECTOR OF ROMANIA NOWADAYS The banking sector of Romania – made up of 40 banks at the

end of December 2012 – finances mainly the Romanian economy, providing about 92% of the total financing granted by the Romanian financial system. The banking system has proven to be resilient during the crisis, continuing to grant funding to the economy of Romania.

The economic growth outlook generated by the absorption of European funds, the level of financial and bank intermediation of almost 40% and respectively 57%, make Romania be an attractive destination for investors who invest in banking sectors.

The banking sector’s assets stood at €83 billion, their weight against the Gross Domestic Product (GDP) amounting to 62%.

SHORT HISTORY OF THE ROMANIAN BANKING SYSTEM

The first modern commercial bank was established in the Romanian Principalities in 1865 under the name of The Bank of Romania. The bank was organized as a limited joint-stock company.

The Bank of Romania was initially set up as an issuing and commercial bank by the English and French investors who governed the Banque Imperial Ottomane.

Four years later the Romanian Government revoked the Bank of Romania’s monopoly of issue. This institution operated further as a private commercial bank until its liquidation in 1948 by the communist regime.

The establishment of the modern-type banking system designed to replace money lenders and trade houses that had developed healthily before the mid of the 19th century, was a low process until the setting up of the National Bank of Romania, on 1880.

The National Bank of Romania was designed not only to pay the role of state financing and note issuing, but also to perform purely commercial banking functions. With the provisions of the law governing its establishment, the new banking institution was a joint-stock company.

On the eve of World War 1, the Romanian banking industry was highly concentrated, being dominated by 9 leading commercial banks, called “the big Romanian banks”. In the 1913 these banks held 70% of the total commercial banks’ resources, while 188 small and middle-size banks held the remainder of the total resources.

Soon, after the communist took the power, all the Romanian and foreign-controlled banks were liquidated, except for the National Bank of Romania, the National Company of Industrial Credit and the Saving Bank.

THE BANKING SYSTEM IN ROMANIA AFTER 1989 The issuing of the Law on banking activities and the Law

concerning the Statute of the National Bank of Romania represented the beginning of the organization of the banking system in accordance with the market economy principles.

The new banking system started its activity on December 1st,1990. Its structure has been organized in two tier levels: The National Bank of Romania as the Central Bank and the commercial banks.

THE NATIONAL BANK OF ROMANIA AND ITS ROLE IN THE BANKING SYSTEM

The National Bank of Romania (NBR) is an independent, public institution, that has the exclusive right to issue currency, being the sole institution vested with the power to issue legal tender in the form of notes and coins to be used as means of payment on the territory of Romania.

The NBR supports the general economic policy of the Government without prejudice to its primary objective which is providing and maintaining price stability.

NBR’s main responsibilities are:

devising and pursuing monetary policy and exchange rate policy;

licensing, regulating and prudential supervising of credit institutions, promoting and monitoring the appropriate operating of payment systems in order to ensure financial stability;

issuing banknotes and coins as legal tender on Romania’s territory;

establishing the foreign exchange norms and its supervision;

managing Romania’s foreign reserves.

NATIONAL BANK OF ROMANIA’S POWER

The National Bank of Romania has the following main statutory powers:

to issue and apply the monetary and exchange rate policy to authorize, regulate and supervise the credit institutions

from the prudential point of view, as well as to promote and monitor the good functioning of the payment system;

to issue currency as legal payment means on the Romanian territory

to establish the foreign currency regulations and supervise the observance of the same

to administrate the international reserves of Romania

Operations with credit institutions(settlement, deposit, discount and payment services; lending operations; monitoring, authorizing and supervising the payments system; supervising credit institutions; performing paid services, upon the express request of credit institutions, regarding collection and transmission of payment incidents and credit risk; establishing the regime of the minimum compulsory reserves which credit institutions need to maintain with NBR).

Operations with the State treasury(opening and operating State treasury’s current account; acting as state agent for establishing the credit institutions which are eligible to accept and maintain deposits of the State treasury; acting as State agent for performing discounts on the general current account of State treasury).

Operations performed by the National Bank of Romania

Operations with treasury bills on the primary marketBased on various protocols concluded with the Ministry of Finance, NBR may act as a State agent with regard, inter alia, to: placements with third parties of treasury bills and other

Romanian state negotiable instruments; and registration, deposit and transfer of treasury bills as well

as payments of related principal, interest and bank commissions.

Gold and foreign assets operations (establishing and maintaining the State’s international reserves; entering transactions with gold bars and other precious metals, as well as with currencies and treasury notes; entering transactions with foreign currency ).

THE SUPERVISION AND CONTROL OF THE NATIONAL BANK OF ROMANIA

When granting loans, banks must be careful that applicants are credible in repaying them at maturity. Therefore, banks have to ask the applicants to guarantee the loans under the conditions established by their norms.

Banks must comply with the following prudential requirements as stated in the regulations of the National Bank of Romania:

the minimum level of solvency; minimum exposure to a single debtor; minimum exposure aggregate; minimum level of liquidity determined according to the

deadlines of the amounts receivable and the bank’s commitments;

the classification of granted loans and of uncased interest rates to them and the setting up of specific risk provisions;

currency position; resource management and investments of the bank.

The National Bank of Romania supervises the operations performed by banks, Romanian legal entities and the branches of foreign banks, on the basis of the prudential reports drown up according the law and implemented regulations of the National Bank of Romania, as well as through on-site and of-site inspections.

COMMERCIAL BANKS

  The second tier of the Romanian banking system is made-up of credit institutions, distinctively regulated depending on their status of Romanian or foreign legal entities.

1. Concept of “Credit Institution” and “Bank”. Credit institution types Depending on the nature of the credit institution share

capital, the following types of credit institutions operate in Romania:

public credit institutions, which are state-owned, such as the Savings House, reorganized as a joint-stock banking company;

private credit institutions, being those with private capital (domestic and/or foreign).

2. Incorporation and operation of Romanian credit institutions

According to Romanian law, commercial banks may only be established as joint-stock companies. For the incorporation purpose the approval of the National Bank of Romania is necessary. Pursuant to the bank’s incorporation, the National Bank of Romania grants the operational authorization.

Romanian commercial banks may establish branches and other secondary headquarters (agencies and other similar secondary seats) on the Romanian territory, in accordance with the National Bank of Romania regulations.

3. Organization of foreign credit institutions’ activity

Foreign banks may perform banking activities in Romania either by incorporating a subsidiary in Romania, which will be a Romanian bank and shall thus conduct its banking activity based on the NBR authorization, or by establishing branches in Romania, which are subject to NBR authorization procedure in case the parent bank is a non-EU credit institution. Additionally, foreign banks may establish representative offices in Romania.

4. Banking secrecy

Banks must observe the confidential nature of banking transactions and services rendered, including the identity of account holders. According to law each person entitled to have management or leading responsibilities, as well as all individuals participating in the bank’s activities are bound by professional secrecy. All these persons may not use or disclose, neither during their activity, nor after termination of their activity, facts or information, which, if becoming public, might affect the interests and the prestige of the bank or of any client of the bank.

5. Prudential requirements

Credit institutions are required to observe prudential requirements, on an individual or consolidated level, as the case may be, in accordance with NBR regulations, including but not limited to: solvency; liquidity; maximum exposure towards a single debtor and maximum

aggregate exposure; exposure towards persons that are in special relations with

the bank; currency risk; quality of assets, establishment and use of risk provisions; organization and internal control.

6. Prohibited transactions

According to banking legislation, credit institutions are forbidden to enter into, among other things, the following operations: dealing with movable or immovable goods, except for those

expressly accepted to be performed by credit institutions under certain conditions provided by the banking legislation ;

creating pledges over the bank’s own shares to secure the bank’s debts;

 granting loans or rendering other types of services to clients conditioned by the sale or purchase of the bank’s shares or by the client’s acceptance of other services unrelated to the loan or the product/service required;

granting loans secured with shares issued by the bank or another entity from the group;

accepting deposits, or other reimbursable funds, titles or other values from the public when the bank becomes insolvent; and

granting loans conditioned on the client’s acceptance of other services that are not related to such a crediting operation.

Privatization of State-owned banks

Privatization methods Banks may be subject to privatization under any of the following methods: increase of registered capital by private capital

contribution in cash, pursuant to public offer or private placement;

sale of shares managed by the Authority for State Assets Recovery (“AVAS”), only against cash with payment in full;

combination of the two methods described above.

The privatization of banks is based on valuation reports and feasibility studies concluded by specialized entities, in accordance with the international standards.

Privatization process limits

Romanian or foreign individuals or legal entities acting directly or indirectly, individually, or jointly with third parties, may not acquire more than 20% of total share capital of banks earmarked for privatization, except for reputable international financial banking institutions.

The law also forbids the following operations: anticipated share sale and purchase agreements, as well as

any other agreements concluded prior to privatization; loans granted by Romanian-based banks for payment of

shares acquired from AVAS or for payment of the subscribed shares in case of a share capital increase of banks earmarked for privatization;

shares in banks earmarked for privatization may not be purchased with loans granted by Romanian entities;

loans obtained abroad may be used to purchase such shares, but said shares cannot be pledged as security for the loan repayment.

BANKS IN ROMANIA

Other institutions that co-operate with the Romanian banking system The Bank Asset Recovery Agency was established in 1999 and is specialized in taking over non-performing loans and off-balance sheet items from majority state-owned banks, aiming at recouping them from the debtors.The Bank Deposit Guarantee Fund was set up in 1996, by Government Ordinance no. 39/1996, as a legal entity of public law. The Fund’s purpose is: guarantees the reimbursement of deposits with credit

institutions by natural persons, legal persons or entities without legal personality, according to the terms and limits established by the law on the Fund’s operating;

conducts activities as special administrator, interim administrator or liquidator of credit institutions, if appointed to act in such a capacity.

Credit Bureau aims to support the participants to the banking system by providing them real, updated, aggregated and consistent information regarding individuals who have outstanding loans with banks or financial companies, who have purchased an asset via leasing or have been insured against default risk with an insurer.

  TransFonD – the Company for Fund Transfer and

Settlement,  The operator of the Electronic Payment System of Romania is a private firm established by the banking community of Romania, having as shareholders the National Bank of Romania (33,33%) and 25 commercial banks (66,67%).The main line of business of TransFonD is to provide clearing and settlement services of cashless payments in national currency for credit institutions, the National Bank of Romania, the State Treasury and other financial institutions.

The Romanian Banking Institute (RBI) has as main target vocational training, by specializing the staff working in banks, according to the requirements established by credit institutions and the National Bank of Romania, in cooperation with the Romanian Banking Association and the programs endorsed by its Board.

The Payments Incidents Bureau is an intermediation center managing information specific to incidents with payments instruments (cheques, promissory notes, bills of exchange), both from the bank’s point of view (overdraft) and from the social point of view (lost/stolen/damaged).

The Credit Information Bureau was set up in 2000, in the National Bank of Romania, as an intermediation center that manages credit risk information and card fraud information. The system collects, stores and centralizes information on the exposure of every credit institution in the Romanian banking system to the debtors that were granted loans and/or have commitments totaling more than the reporting threshold, and on payments overdue, as well as information on card frauds committed by cardholders.

The users of the information in the Credit Information Bureau database are the reporting entities – credit institutions and mortgage loan companies – and the National Bank of Romania.

ROMCARD is joint stock company, set up in 1994 by the five most important Romanian banks, having as objective the processing of cards transactions, including cards transactions authorization, databases administration, national and international switching, cards transactions processing and settlement, security solutions for e-commerce services.

The Romanian currency The Romanian currency is known as the New Leu (RON);

prior to the currency reform of 2005, an earlier Leu (ROL) was in place.

Romania agreed in the late 1990s to be bound by IMF rules on current account convertibility, liberalizing the regime in place with regard to international transactions.

On 1 July 2005, the leu was revalued at the rate of 10,000 "old" lei (ROL) for one "new" leu (RON), thus psychologically bringing the purchasing power of the leu back in line with those of other major Western currencies. The term chosen for the action was "denominare", similar to the English "denomination", to signify not a conversion, but rather a total reinvention.

Foreign banks play a significant role in the Romanian banking sector, and in August 2009, as one of a number of measures to mitigate the impact of the global financial crisis on the Romanian economy the sector's nine largest foreign players agreed to raise the capital adequacy levels of their Romanian operators to 10%, and not to reduce their overall exposure to the country.

The first day brought difficulties adjusting to the new paper currencies and closed ATMs (that needed reprogramming) and forcing a new calculation habit that slowed down shops. The old ROL currency banknotes remained in circulation until December 31, 2006 (coins remained in circulation only until December 31, 2005), but all accounts have been converted starting July 1, 2005.

As of 2006, the revaluation is a potential source of confusion, especially to visitors, since both old and new currency values are commonly quoted.

Conclusions

In order for the Romanian Banking System to be functional and to contribute to the development of the economy as a whole, we have to take into consideration the following aspects:

Supervising the financial stability in order to: enhance the capacity of efficient allocation of the resources, the absorption of possible shocks on the real economy;

The growth of the banking system’s administrative capacity which will assure the main objective of this one of assuring the stability of the prices;

Qualitative study of the surveillance process through: the adaptation of the NBR’s regulations to the risk profile specific to each credit institution, giving a greater importance of the role that the management of the institutions has it in managing the bank’s risks;

Conclusions Managing the contagion risk which manifested due to the

evolution of international markets as a consequence of the supreme debt crisis;

Improving the quality of the banking assets; The balance of the on coins structure of the crediting; The perspectives of the banking industry and of the national

financial system depend mostly on the remaking the trust, on the success of a sustainable release of the economy and not at last on the international evolutions.

 

THANK YOU!