The National Bank of Romania launches its fourth Financial Stability Report. The document evaluates the soundness of the financial system, the drivers of its overall performance and of the main components, as well as the inter-linkages with the real economy and the external environment.
The report underlines the difficult conditions in which the system has functioned during 2008 and the first quarter of 2009. This period is marked by an on-going worsening of the international financial environment, the labelling of the emerging Europe with the higher risk tag and the deterioration of the foreign investors perception due to structural and macroeconomic imbalances persistence.
All the financial system components have been affected by the external environment shocks. The most evident consequences have been observed in the capital market, but the critical role for the overall financial stability has been borne by the banking sector, due to its dominant position in the system. The main vulnerabilities for this sector are the volatility of the external financing and the increased credit risk, mirrored in the strong dynamic of the non-performing loans.
Since the crisis debut, the external financing of the Romanian credit institutions and companies has been characterised by an upward cost trend and a debt tenures decrease. Subsequently, the financing uncertainties have increased, reflecting, on the one hand, the liquidity constraints in the countries of origin of the Romanian banking sector capital, and on the other hand, the material exposure of foreign investors on the balance sheets of Romanian banks and companies (liability side).
This context has called for preventive measures, which have subsequently materialized in the negotiation of an external financing package with the International Monetary Fund, the European Union and other international financial institutions.
The external financing package, together with the agreements concluded in Vienna and Brussels have contributed to the easing of the perspective of a deep and rapid adjustment of external financing, especially for the short term financing. This circumvented adverse effects on the economic activity and the banking sector.
The credit risk increased, especially in the last couple of months, due to domestic economic conditions deterioration, as well as to the external demand tightening for the Romanian companies. This sector faces mounting financing pressures, related to the costs of financing, and servicing outstanding debt, aggravating the financial deadlock/arrears. The household sector encounters significant non-financial and financial assets adjustments. Especially the lower income debtors (which account for the largest share in the total number of loans) have difficulties in debt reimbursements, as they are affected by the decrease in income and the exposure to foreign exchange risk.
A number of stress test scenarios have been run. The outcomes highlight a good shock absorption capacity if some banks would bring in additional capital (the process is in place, with some banks having already increased the capital).
The Romanian financial sector has proven able to absorb shocks of a relative moderate intensity and persistence. The financial stability indicators point out to a low systemic risk in the context of a limited external exposure.
The other components of the financial system have been deeply affected by the crisis, particularly the capital market, but their reduced size has contributed to the upholding of the systemic risk at modest levels.