Banking in 2012: towards a more regulated market

Two of the most significant events in the banking sector in 2012 were the introduction of the International Financial Reporting Standards (IFRS) starting with 1 January 2012 and the legislative framework of the bridge-bank concept

These measures converge to the common purpose of the national and European authorities to have a unified view over the globalised banking sector as well as to re-enforce their role in financial stability. These changes were due to the commitment of the Romanian Authorities to a new preventive finance arrangement with the European Union, IMF and World Bank. Also, in 2012, the enforcement of the cooperation and harmonization framework in a new collaboration step under the Viena European Initiative for Banking Coordination 2.0 was set as a primary goal for national regulators. This initiative sets up a better cooperation between the regulators in the origin European countries and those in host-countries for the purpose of preventing erratic financial dealing.


The IFRS transition was guided by the National Bank of Romania (NBR) in such a way as to prevent any irregularities in computing prudential indicators. The International Standards assume that the allowances for loans are to be recorded as a consequence of a default event, while the former national regulations imposed that allowances were recorded based on expected losses. This used to lead to the ex ante recognition of losses in the financial statements, i.e: a decrease in annual profits. The concern was that, with the transition to IFRS, banks would increase their profits and thus improve their own funds position in the calculation of capital adequacy ratios. This was prevented by the NBR through the Order 26 issued in December 2011, which sets the framework for reporting of prudential filters, starting with January 2012. Based on the analysis performed on financial reporting as at 31 December 2011 and 31 March 2012, NBR decided to maintain prudential filters after 1 January 2013 as well.


Additional measures taken by NBR were targeted to the monitoring of correct capitalization of risks in the Romanian banking sector. Capitalization was, in 2012 like in previous periods, assured by the shareholders. Other capitalization movements referred to the take-over of Emporiki Bank Romania by the French group Credit Agricole and the recent takeover by Piraeus Bank of the good assets of ATE Bank (including the Romanian branch). These restructurings did not affect the capitalization ratios and did not assume state intervention. The net increases in the social capital of banks reached EUR 550 million in the first semester of 2012. The solvency ratio reached a level of 14.7 in June 2012 (EU minimum level required: 8%).


The banks’ biggest problem was in 2012 the same as in the previous 2 years: the quality of the loan portfolio. The level of non-performing loans (NPLs) continued to grow in 2012 rising from a level of 14.3% in December 2011 to 16.8% in June 2012. The growth is due, in part, to the introduction of IFRS, whereby banks are obliged to recognize losses from loans previously recognized off-balance sheets. Also, in 2012, banks re-valued the performance of customers whose loans they had re-structured in previous years.


The transition to IFRS has been followed-up by the National Bank through the requirement of prudential filters, whereby banks are required to compute solvency ratios based on recognition criteria that are stricter than the ones required by IFRS. The latest stress-testing results show, that on a two years horizon, the Romanian banking entities have the capacity to overcome strong macro-economic shocks. These tests show that in the adverse scenario case where Romania re-enters the recession and the national currency incur heavy devaluation against foreign currencies, the solvency ratio would drop to 12.3%, maintaining an acceptable level.




In 2012, banks continued to record a majority of mortgage loans in their balance sheet. The mortgage loans granted to individuals in 2012 grew by RON 13 billion between January 2011 and June 2012. This was mainly due to the “First House” program. During this period, the program contributed with 53% to the total mortgage loans, in approximately 30,500 guarantees. These loans are, though, responsible for a significant increase in the NPL ratios, as the non-performing mortgage loans granted to individuals raised by 60% in the period to June 2012. Out of these loans, the most risky ones are the so-called “American Mortgages”: loans for personal needs, with real estate collaterals, as opposed to Housing Loans - loans used for the construction/acquisition of a real estate property. A similar situation occurs for mortgage loans granted to companies. The non performing loans have increased by 66.1% by June 2012. These movements in non-performing loans cannot be entirely imposed to the bank’s decision to invest, but more to the market trends between June 2011 and June 2012. The National Statistics Institute reported a drop of 15% in prices of real estate properties for the above mentioned period. Thus, the loan-to-value indicator (“LTV”) deteriorated in this period, by increasing from 71% to 78% for retail loans and from 70% to 75% for corporate loans.


This drop in real estate prices also worsened the banks’ exposure towards real estate companies. The NPL ratio for these loans rose from 18% in December 2010 to 28.4% in July 2012. Banks continue to support this sector by re-scheduling and restructuring the loans granted to developers. This year, 12% of total restructured loans were represented by loans granted to the real estate sector. Banks continue also to grant new finance to this sector, as they believe that the market was not fully matured at the inception of the economic crisis, and it could re-start from where it has left, back in 2009-2010. Their beliefs is consolidated by the numbers in the construction and real-estate industry where there has been a raise in volume of work as well as an increase in number of employees and investment projects. Other analysts state, however, that this sector is still to fall, as construction authorizations have decreased in the previous 18 months.


The other major event in 2012 was the set-up of the legislative framework of the bridge bank. This is an instrument used by NBR to intervene promptly when one of the banks faces problems that might spread to the entire banking system. If such an event occurs, the NBR will immediately suspend the mandates of the problem-bank management and transfer all assets and liabilities to a newly formed entity – the bridge bank. This entity will have a two-tier administration board, the members of the Board being elected by NBR. The unique shareholder of this new entity will be the Banks Deposits Guarantee Fund who will also finance this new bank from its own private resources. Public funding could also be provided in the form of loans granted by the Ministry of Finance to the Fund. The new entity will function for a period of two years when the NBR should be able to find a new investor willing to take-over the assets and liabilities. This period could be prolonged if no such investor is found by the end of the two-year period. The troubled bank from which the assets and liabilities are taken over will be liquidated, as NBR will annul its authorization.