From 2010 to 2020 – this time the bank is the good guy

Right now, Romania is performing better than most European peers in managing the pandemic, hence it avoided the lockdown for the first quarter of 2021. The National Institute for Statistics announced that the economy contracted in 2020 by only -3.9%, a much better result than World Bank or IMF predictions. In 2019, Romania was classified as a high-income country and the local exchange entered emerging market status. However, the renowned European Recovery Fund is still on paper, Romania has been traditionally weak in absorbing EU funds and the global market trust in Romania is significantly impaired. The dynamic of the local economy is there, but will it materialize?

Who will finance economic recovery after the pandemic?

Romania pays 10 times more to borrow money from international sovereign debt markets than EU average, which limits its ability to boost public investment to support the economic recovery. So private equity and bank lending will be the key drivers of the GDP growth potential. However, foreign private equity is unpredictable and focused on key sectorial large tickets. So what will fund the SMEs, the backbone of the locally owned economy? It has to be banking debt.

Can the banks play the role of the growth accelerator in Romania?

Banks are called to save the locally owned economy, but banking intermediation is low in Romania. Assuming that role will require consensus between the sector, the state and the regulator.

The state will need to encourage banks to lend and restructure their non-performing portfolios. Punitive tax policies on recognized loan impairments is preventing the banks from building healthy balance sheets and replenish their capital buffers. Eastern European illiberal practices of overtaxing banks scare investors away and prevent banks from cleaning up their portfolios and capitalizing earnings for strong capital adequacy. The economy needs a bank to lend, not to auction collaterals.

The state will need to support the borrowers with financial education. The overregulation of the sector often blocks lending to borrowers with a lack of a clear governance model. Banks will need help to transform faster a larger portion of the economy/population from unbankable to bankable. No single bank has infrastructure to perform the task.

The state will need to provide incentives for lending in strategic sectors. A public economic recovery plan will help banks identify the business opportunity in line with the growth prospects. The role of Exim Bank and the upcoming Romanian Development Bank should be fundamental in providing direction to the banking sector.

The regulator will need to help banks navigate this period. The ECB identified a key risk of banks being overoptimistic in provisions and projected NPL, while it warned that the end of moratoria and state guarantee schemes will ignite a wave of bankruptcies. Banks were asked to identify key areas to work better and faster including forbearance, early warning indicators for worsening asset quality, revised risk models etc. On top of that, the SSM announced areas of supervisory focus and regulatory deadlines. ECB is counting on support schemes to boost market liquidity in lack of a moratorium and understands that transparency is key when communicating to the banks.

The regulator needs to drive a stable and transparent supervisory agenda. The EU regulatory framework can be transposed with justified adjustments to the Romanian reality after consultation with the sector, and the supervisory work can be implemented with a degree of proportionality. In EU, one size fits all when it comes to CRR/CRD, however SREP is the very definition of risk based proportionality. A systemic top 3 bank in Romania is a very small bank in Germany.

The banks will need to become more agile, to revise risk measuring approach, to develop new IFRS9 models with sectorial client segmentation and to apply forbearance intelligently to allow for early warning of troubled loans. They will need to go into risk-based pricing and analyze their capital allocation model to achieve more with less, to balance between restructuring and lending to keep their market alive, while not violating their risk appetite and protecting their capital adequacy. They will need to prepare in terms of systems and human resources to deal with restructurings and workouts.

In the last financial crisis, the mistake was coming the from the bank. In this crisis, the solution is coming from the bank. The attitude of the stakeholders needs to be different, to partner with the sector to achieve the maximum impact for the economy. And this needs to be fast, SMEs do not survive long with liquidity crunches.