The solutions given by The National Bank of Romania to the international

financial crisis and their effect

Author: Horia Mircea Boto
Babe-Bolyai University, Faculty of Economics Sciences and Business Administration
Cluj-Napoca, Romania
horia_botos@yahoo.com
Abstract
Due to the financial crisis that is taking place on an international level, The National Bank of Romania had
to take a series of protective measures in order to protect the people and the banking and business
environment. The primary purpose of my paper will be the study of the effects of these decisions on the
Romanian banking system. I will analyse decisions as the increase of the minimum banking reserves , the
tightening of the criteria for granting loans, a. a.
The problems analyzed are liquidity risk, credit risk, the best time to invest briefly analyzing the
performance and risks shown by Romanian banks. I also want to propose some other solutions for
mitigation of the crisis, even suggest ideas for getting Romania out of this crisis, all from a first year Master
students point of view.
Analysis of the Romanian banking system, in my opinion, will describe the activities, decisions and
measures taken by the national bank in order to protect the business and banking environment, and the
opportunities outlined by the international crisis.
Keywords: Romania, NBR (BNR), Financial Crisis, loans, Governor Mugur Isarescu a. a

1. The beginning of the International Crisis

The international financial crisis that is taking place at the present moment, had its begging in the
summer of 2007, when the first signs of trouble appeared in the American stock market. The problems
consisted of financial packages from a number of loans, both good and bad loans. The Crisis had its
peak in 2008, when one of USs top 5 banks, Lehman Brothers, announced its bankruptcy on the 15 th
September, and was bought by Barclays Capital United Kingdom on the 22nd.
2007 was also an important year in Romanian history: we joined the European Union and the European
free transit area. The National Bank of Romania (BNR) received with open arms the affiliation to the
EU, and continued its policy of loaning the population and the business sector. But by 2008, NBR
observed that loans started too bad, by the end reaching 5, 95% of total loans given in Romania.
The Central bank, at this moment observed two major points that would the affected by the Crisis: the
banks and the business environment. The business environment would be hit by the crisis because the
foreign investors, on which our economy depended heavily, were starting to get all of their money out
of Romania and because all the economy was faced with a lack of demand from abroad, and as it was
later revealed it caused a great lack of trust in the economy. When speaking about the banks, the major
problem that arrived was the possibility that the banks may enter a liquidity problem, this furthering the
mistrust.

2. Loans
As a response to this problem the National Bank considered best to limit the loan grantings and to rise
the banks minimal reserves. This was the most eminent treat, not because of what happened abroad,
but by the fact that in our country there is an imported crisis that was caused by the fact that investors
of the western-countries which were affected by the crisis retreated their money from the investments
made in Romanian. This fact caused additional mistrust in the financial system, affecting very much
Bucharest Stock Exchange and the banking sector.
Lending in our country was quite a profitable business until the crisis, because of the ease with which
banks could give money to its customers and because of the popularity of the credits for personal

needs that were awarded only with your ID card. Once that the crisis began, the banks started to
observe that many of its loans were becoming bad, thus their 2.19% rise in 2007-2008.
Until the forth semester of 2008, the government credit raised by 33.7%. I believe that they would have
past the 35% limit if the NBR hadn't intervened by limiting lending with the pretext of the
international financial crisis.
The nongovernmental credits, divided in currency and Ron. The Ron lending manifested a -2, 14%
diminished by December 2008. The currency lending, on the other hand, manifested a rise of +4, 37%
by December 2008. Many of the loans given out in out country were directed to the population, and not
to the business sector, and it was dominated by currency loans. So population lending reached the point
of 50.08% by the end of 2008, a rise of 1.73% since the previous year. Ron lending suffered a -5.68%
in 2008, getting to 41, 27%; currency lending, on the other hand, recording a growth and getting to the
58, 73% level.
The whole number of questionable and bad loans lent in gross value to the public reached a level of 1.4
percent at the end of 2008, and for the time being they still remain at a reduced level. The gross value
was recorded at 0.77 in 2007, thus registering a 0.63% rising in 2008.
As I said before, doubtful and loss categorised loans got to 5.95% of total loans in December 2008,
thus registering a +0.57 rise since the previous month and an annually rise of + 2.19 %. In my opinion,
this increase of bad loans was caused by: rapid creditation growth during the previous period, the
increasing volatility of the exchange rate, recent macroeconomic events, and modest evolution of credit
in 2008 based on the restriction of resources.
The populations manifested a large interest in loans granted in currency that indirectly exposed the
banking sector to the foreign exchange risk, by the end of 2008 around 57.8% of total loans were lend
in foreign currencies.
Measures designed by NBR to strengthen vigilance in supervision, have acted in terms of improving
the classification of loans in order to decrease the risk of exchange rate and worsening credit quality
portfolio, with considerable additional provisioning requirements for loans awarded to borrowers in
another currency than that of their income (NBR Regulation no. 4 / 2008 of March 2008). Criteria for
classification in these conditions include debt service, financial performance of the debtor and the
existence of judicial proceedings.
When assessing the Romanian banking system, we have to consider its profitability also, this being
represented by banking ROA and ROE indices. They manifest an oscillating trend during 2008,
reaching coats of 1.66 for ROA and 18.11 for ROE, visibly higher then those of 2007 of 1.01 for ROA
and 9.43 ROE. Thus showing a more then 60% increase for ROA and an almost doubling of ROE.
Also, liquidity is very important in this process, the index is above the minimum requirement (1), but
there are banks that manifested a significant decline. Liquidity index increased between 2007 and 2008
with +0.43%, being 2.13% in December 2007 and reaching 2.56% in December 2008. The
credits/deposits increased from 109% in 2007 to 122% by the end of 2008. This index shows a strong
growth of lending compared with deposits attracted from the public. Liquidity also has vulnerability,
being dependent on funding from foreign financial institutions, especially banks to mother. Lack of
liquidity was a common problem to banks in our Romania, this group excepting for the short periods of
time the Top 5 banking institutions in our country.
At the moment there is a strong decrease in the credits, which is caused by the preventive crediting
measures of the Central Bank, but also by the growth rate of bad loans. Thus, in this moment in our
country one cannot talk about a lack of cash in banks, but by a lack of trust or, better said, the
people/companies of confidence can be included in the rules in force.
One other interesting fact, is that almost half of the companies listed on BVB had record returns of
equity (ROE) of over 10% higher profits receipts between 30 September 2007 and 30 September 2008 ,
despite the ongoing international financial crisis .

3. The NBR activity on the monetary policy

Monetary policy interest rate was reduced to 10% on February 5 th 2009, lending standards have also
been relaxed a little, so we can expect a loaning revival, but at lower rates than those of previous years.
On May 7th, the interest of monetary policy was reduced again at 9.5 percent, the interest rate on
lending facility was also lowered to 13.5 percent for its 14 percent level of February 5 th, and the interest
rate on the deposit facility was also diminished to 5.5 from its 6.0 previous score.
Meanwhile, the central bank decided to maintain minimum reserves at the same level, contrary to
expectations of market analysts. They expect national bank to postpone the reduction rate of monetary
policy and decrease the level of minimum reserves (RMO) for liabilities in RON.
Over 70% of the members of the Association of Financial-Banking Analysts of Romania (AAFBR) had
foreseen a decrease of 1-3% for the Ron minimum reserves, up to the level of 16%. Also, experts
predict an RMO for maintaining liabilities in foreign currency unchanged at 40% until Romania had
signed a financing agreement with the International Monetary Fund.
Reducing the minimum reserve of banks resulted in a faster growth of liquidity and thus lowering
interest rates in a short period. These phenomena should be translated by a revival of the credit in RON,
less risky than those in foreign currency.
In the context of high volatility of the exchange rate, encouraging lending in foreign currency would
increase the number of those who couldnt pay their instalments. All because the RON is on a
downward trend to the euro, the Management Board of National Central Bank decided to maintain
monetary policy interest rate at 10.25%. And lowering it then the exchange rate stabilised.
Reducing the rate of monetary policy will likely be postponed, first because of the significant pressure
of the depreciation rate and on the other hand, due to reduced effectiveness in conditions in which
interest on the money market is well above the level the reference interest and evolve according to their
perception of risksaid Rozalia Pal, chief economist of UniCredit Tiriac Bank, quoted by Ziarul
Financiar, on February 4th 2009.
Keeping monetary policy interest rate at the current rate will displease the bankers, however, given that
NBR has not changed it since August 2008. The few analysts who hoped that the Central Bank would
alter interest rate monetary policy base their presumptions on a 0.25-0.50 fall of the rates value.
The central bank reduced last time the interest in the monetary policy meeting of the Administration in
June 2007 when it had dropped from 7.25% to 7%. Since then, there were seven increases; the biggest
step was 1%, the value reaching 10.25% in the year 2008. Then finally lowering it at a 9.5 level in May
2009, after two successive decreases occurred.
Reference rate in the country is now at 9.71 points per year, recording a decline after reducing of the
interests in monetary policy. It recorded a constant 10.25% from September 2008 until February 2009,
and since that time showing a descending trend reaching the current levels.
Gold Reserve has been maintained at 103.7 tonnes. In terms of international prices, it had a value of
2484 million euro. Romania's international reserves (currency plus gold) on 28 February 2009 were
28,401 million euro, compared with 28,388 million at 31 January 2009. Payments due in March 2009
in the external public debt, direct or guaranteed by the Ministry of Public Finance, amounted to 112
million euro.

4. The changes of macro-economical field: GDP, inflation, foreign currency

rate, confidence in the financial system and fiscality
Romania registered a massive increase of foreign capital inputs, with the becoming of the country
bordering the European Union in 2004. Current account deficit rose to 13.5% of GDP in the year 2007,
then decreasing to 12.3% of GDP in 2008, all starting at 8.4% of GDP value of 2008. On the other
hand, the external debt of the private sector recorded a massive increase, approximately four times, at
the level of 12% in 2004 at 46% of GDP in 2008.
Financial depth of the Romanian economy in 2004 was small, only 25.6 percent. Massive inputs of
capital have increased the depth, but it is still at low level standards developed economies (34.6% of
GDP in 2008). Given the relatively low financial depth, the input of capital occurred rapidly and was
significant.
Exchange rate appreciation has manifested both the real and in the roll. In nominal terms, from around
4.1 lei / euro in January 2004, Ron's appreciated at 3.1 lei / euro in July 2007 (appreciation of
approximately 24%). Along with relatively large fiscal dominance and the net debtor position of the
NBR, massive inputs of capital have raised a serious problem in the implementation of inflation
targeting; monetary policy strategy adopted starting in August 2005.
Currency appreciation, favouring disinflation, reached levels that tended to affect the external
competitiveness of the country. At the same time, and there were episodes of high volatility of the forex
market.
As in other countries in the CEEC, the present multinational banks in the territory of Romania have
received resources from the parent banks from the EMU. In 2004 almost 72% of liabilities came from
the EMU. Between 2004 and 2008 the external liabilities of banks in Romania have increased by
almost 7-fold, from 3.8 billion in 2004 to 24.5 billion euros.
Together, the increase in resources of banks and currency appreciation Ron's exuberant behaviour
stimulated activity on lending in foreign currency. Credit increased a few years with rates between 6080% per annum in real terms. The share of credit in foreign currency for the households held an
appreciation of 9.4%, 2.2 points from GDP in 2004 and reaching the level of 11.6 points of GDP in
2008. For the corporate sector, these shares were 2.6 percent in 2004 and reaching the 8.5 percent of
GDP that is claiming an increase of more than 3 times. Overall, financial intermediation (nongovernment credit in GDP) increased by 22.7 points, thus reaching 39.3 percent in 2008 from 16.6
percent in 2004.
Banks have become so dependent on external financing and imbalances in foreign assets of companies
and their foreign currency liabilities have increased. In 2004, the corporate sector, the ratio of foreign
currency deposits and loans in foreign currencies was approximately -5 billion, while in 2009 this
difference to be reaching -35.4 billion. In the domestic users, the differences were + 5 billion in 2004
and the reaching - 30 billion in early 2009. These imbalances are one of the biggest problems the nation
economy is the main channels through which external funding of any attempt to turn in the exchange
rate depreciation.
All those listed above have been indirectly linked between 2005 and 2008, as anticipated moments of
the phenomena of inflation and appreciation of Ron. They raise an issue for banks, mainly due to
monetary regimes imposed by authorities. The growth rate required for anticipated inflation, thus
inducing the intake of foreign capital in the country, which led to the appreciation rate. Constraints are
strong enough to adopt binding NBR policy flotation controlled circulation of currency.
This has attracted many critics toward the policy of intervention on the forex market of the NBR,
which has bought significant amounts of euro assessment to prevent the massive depreciation of the
RON.
By modifying the interest rates and increasing reserve requirements by the Central Bank, the first being
necessary due to appreciation of Ron's and inflationary pressure and reserves were having as mitigation
for capital inputs in the country. In 2002 reserves to foreign liabilities attained a level of 20 percent,
being increased at the end of 2006 to 40 points, holding it until now. But all measures taken by a

National Bank managed to restrict access to foreign capital, finding the forms to avoid these obstacles.
In 2006, despite growth RMO, in foreign currency liabilities of commercial banks rose by 4.8 billion,
to increase thereafter to 7.8 billion euro in 2007 and another 5.8 billion euro 2008. About three quarters
of increasing liabilities of foreign banks in Romania in the period 2005-2008 has increased by RMO to
40 percent.
In response to massive inputs of capital, the central bank bought significant amounts of currency. The
main reason for these purchases was that the appreciation of the relatively short periods of time was so
fast that the risk of a reversing to pump-up inflation created stress in the financial sector. Many believe
that these purchases were made only to alleviate appreciation. But they were made and given the reason
to be careful with their action. As we will see, the end-cycle synchronous large input of capital can lead
to relatively steep depreciation, which can be avoided if reserves are sufficient.
Entry of large sums of capital in the country caused a cyclical fiscal policy, which causes an increased
vulnerability of the current account between 2004 and 2008. GDP has also an element of cyclonical
high inputs of capital expenditure and growth with an amplification effect on them. The prospect that
large inputs of capital associated with financial crisis, fiscal policies of Romania was imprudent
between 2004 - 2008. In Romania were two causes for this indiscretion.
The first decision was that they considered that good times had come once and for all, which
obviously meant that expansion costs could be permanent. The second is that in 2008, costs have
increased even more due to the nature of the election. Relaxation of the fiscal policy expenses has a
negative effect on the economy, having as effect an involuntary decrease.

5. Effects of the IMF financing on the Romanian Economy

The global financial crisis, felt in 2008, generated and then generalised a feeling of mistrust and
increased risk aversion of investors significantly. Current account deficit, external financing needs and
relatively high ratio between high and deposits in foreign currency have made the Romanian economy
uncertain and risky for foreign investors. Calculations showed that for 2009 Romania could have had a
funding shortfall estimated at 16 billion, depending on the sentiment of foreign investors and their
desire to renew lines of funding of banks and private companies. This negative sentiment was reflected
in the depreciation rate for the period October 2008-February 2009. In these circumstances, the
authorities decided to promote policies that ensure minimal reduction of external financing in Romania.
Since December 2008, NBR has been searching for an economic program focused on reducing public
deficits and private affairs, to minimize the effects of the crisis. Achieving these goals needed the
design of a model of measures to bring the economy on a sustainable in the long slope that would
minimize losses, including in terms of unemployment.
Risk financing holes would have resulted in the highest level anticipated for 2009; depreciation
pressures Ron would result in a crisis of the exchange rate, with negative effects on inflation and
especially financial assets in U.S. dollars. Other adjustments, such as bringing public spending, the
unsustainable level reached during the cycle of high input of capital, should be worn low mark of
credibility to the population. In this context, the IMF provided two essential given the situation of the
Romanian economy: the coverage deficit funding and credibility.
An import of credibility of the IMF has made private funding to reduce less. The measures included in
the agreements have provided the financing of the Romanian economy. This funding was reflected
positive investment in relatively higher compared to the situation would not have concluded
agreements and in stabilizing and reducing the depreciation rate against the euro and other currencies,
the Vienna agreement, and that banks have taken commitment to renew lines of funding and to
maintain the rate of capital adequacy levels to insurers.
Decreased pressures Ron depreciation and thus a reduction of inflationary pressures arising through the
exchange rate channel, together with efforts at fiscal consolidation, have enabled the national bank to
move to relax the prudent monetary policy, which will alleviate the decrease GDP, while inflationary
pressures increase.

Looking forward, the main challenge of 2009 is to implement the adjustments provided for in the IMF.
Failing to implement the measures set out by the IMF will result in a loss of credibility that will affect
our country in more than one sector. And in this case pathways variables may be GDP, exchange rate,
current account deficit; inflation will have more negative slopes.

6. What to learn from the crisis

In Romania, the international crisis is manifesting an increase in its imported character. As I said above,
the crisis has 5 dimensions: the GDP, the inflation, the exchange rates, the confidence in the financial
system and taxation. These dimensions brought up to attention the 9 things that any country has to
learn about the crisis, according to what Governor Mugur Isarescu said in his speech at the Romanian
Academy.
In return I will list these lessons, and I express my views on them:
1. Low level of inflation is not a sufficient condition for ensuring financial stability on long term inflation was always a factor of instability, which is well exemplified by the crisis of the '30. The crisis
if a careful review of the inflation after nearly 20 years of low and relatively stability, the funny thing is
the coexistence of inflation and abundant liquidity in this period. As is well known, the crisis has its
origins in the American subprime crisis, with then expanded on an international level. In my opinion
fiscal and monetary policy must work together, both recording a too high relaxation in terms of
regulations and systems of supervision.
2. Regulation and supervision remain behind markets evolution. The word that characterized the
international economic world in recent years has been innovative. This feature has caused the markets
to be increasingly difficult to regulated, not even discussing about the difficulties raised in supervision.
When talking about markets we understand the production of goods and services, and also understand
financial markets. The inability to control the markets was one of the main topics of discussion on the
meeting agenda G20 member countries.
3. EU lack of institutions. Following the de Larosiere report, conclusion of that financial supervision
must be restructured, considering that the two major areas to be considered are: macroprudencial and
micropridencial monitoring and supervision. Institutions that will require the establishment are:
Council of systemic risk (CSR), the European System of Financial Supervision, the European Banking
Authority, European Securities Commission and the European Insurance Security Committee. It should
also be mentioned that the three institutions will be receiving authority from the CSR and will report
back to it. It is hoped that these institutions will respond properly and that they will be able to perform
macroprudencial supervision.
4. Wage incentives in private companies are not adequately linked with risk management. The increase
will give employees an incentive, giving them more a competitive edge and dynamics. Both are
welcome, because the labour market is heavily exploited the ability of employees risk management.
This is also recommended by the Basle 2 agreement.
5. People forget the crisis occurrence in periods of prosperity and neglect the conception of crisis
management plans. The emergence of financial crisis is a phenomenon that is not very often. This in
my opinion was recently forgotten by the United States, although they had been hit by such crises in
the years '30 and then the oil crisis in the'80s, but they chose to ignore the signals.
6. IMF has an increased role after it was criticized as not provision of the Asian crisis. Although in past
years on the international level of the IMF considered being in decline, but the crisis has demonstrated
the importance of this organization. In the future the IMF is recommended a closer collaboration with
the Financial Stability Board (FSB). The Forum has a seniority of 50 years and includes 185 countries,
experience, reputation and its analytical capabilities are well developed and will once again
demonstrate the applicability.
7. Expansionist measures are accompanied by the beginning of the exiting strategy, but the side effects
are felt especially on inflation and economic growth. This means that besides the Output prices of the
crises must be accompanied by a growing dimension of trust in the economical and financial

environments.
8. It is important to avoid macroeconomic imbalances slopes and to a sustainable growth supported by
a substantial degree of structural reforms. In Romania, banks are too dependent on the capitals
injection from abroad. They had to resist a big hit at the beginning of the crisis, mainly from the
perspective of cash assets that have not only affected the economy, but also a primary consideration:
trust. NBR warned many times about the procyclical fiscal policy of the Romanian environment, which
has led to a further increase and some how unexplained of the command. In our country it was said
several times that the only alternatives of attenuating the effects of the crisis would have been the
efficient use of state budget or the significant increase of these.
9. Adoption of the euro can not substitute for policy adjustments, this being shown by the emerging
economies developments. In our country continues to show that the National currency suffered an
undue appreciation, market needing and demanding corrective action that took place. High rate of
indebtedness and increased volatility of markets led to the idea that the only option to escape is the
adoption of the euro, both to adjust monetary and taxation policies. But adopting of the unions currency
at this time would cause some major economical problems and long term imbalances for our country,
facing which would be were difficult at this moment.
The 9 lessons, as are called, can be divided in two: 7 lessons generally valid for all countries of the
European Union, and the last 2 which focus on developments of emerging countries, as our country.

7. Conclusions
In my opinion, the financial crisis which is manifested in the international has been effectively
controlled by the central bank. All measures were taken to protect the economic-financial and banking
environments, but they have not always had the desired effect entirely. An example is the increase of
the minimum banking reserves requirements, although it wanted to protect the banking system led to a
decrease of the trust population. This was caused by: the exchange rates and the crisis importing.
Exchange rate fluctuations were unpredictable. Importing the crisis, referred to the fact that our country
did not manifest typical crisis symptoms, but has suffered from the crisis of the origin countries of the
foreign investors has contributed considerably to the appreciation of our national currency.
Until now all the solutions chosen to be put on the table by the central bank, namely limiting lending
and monetary policy, have succeeded although they were contested by the economic environment.
Limiting lending was a strong measure, which was caused by the increasing number of bad loans and
fear of lack of liquidity caused by massive extraction of funds of foreign investors. Adding that most
bad loans were granted in currencies and volatility of the exchange course did only increase the number
of bad-loan payers during the international financial difficulties. The interest rate of the monetary
policy has been increased in an attempt to withdraw cash from the market, in a try to stabilize the
exchange rate fluctuations.
As highlighted by the Larosiere report, both Romania and the European Union were not ready to face
the crisis. But our country had the advantage that because the Central Bank has forecasted such a crisis
scenario, trying to protect the population since 2004 to this day.
During this year NBR concluded that the negative psychological effect of the crisis is ending, and now
is trying to relaunch the economic. Ways of relaunch chosen are those opposite of protective ones,
namely the decrease of interest rate monetary policy and the increase of lending. The first with the role
of giving cash in the market for investments, the second aimed at helping the enterprises to pay their
debts and develop.
One thing I noticed is that the central bank maintained a method of protection, that of attempting to
stabilize the exchange rates. A justification, in my point of view, is that Romania wants to access the
exchange rate mechanisms in 2012. And if all goes well staring 2014, Romanian will start using the
euro.
Because of judgments and decisions in opportune moments of the central bank, Romania had a great
chance to have a variety of opportunities after the crisis. These opportunities are both economic and

social. The crisis was an introduction, preparing our country to face these opportunities and opening the
populations horizons.
With the exiting from the crisis, it is seen that the national bank took visionary actions. Had I been
NBR Governor, I would have chosen the same steps in order to protect and relaunch of the economy,
putting a much more significant increase in the control of exiting foreign capitals from the country.
Limiting the drain of cash from our country, thus the importing of the crisis wouldnt have been on
same scale.

References:
[1] NBR 01 June 2009 press release International reserves May 2009
[2] The Global Financial Crisis, Bail-outs and Bail-ins , Mugur Isarescu , Central and South-East
European Financial Forum, Bucharest, 19-22 may 2009
[3] Lending in Romania, Recent Developemrnts and Perspectives, Florin Georgescu , First Deputy
Governor of the NBR, Bucharest 20 may 2009
[4] Financing and adjustment in the Romanian economy Academician Mugur Isrescu, NBR
governor, Honorius Causa awarding of the Alexandru Ioan Cuza University Iasi , 14 May 2009
[5] The High-Level Group Of Financial Supervision in the European Union, Brussels, 25 February
2009
[6] BuletinOperativ MAE-DPEM CrizaFin&Econ 23-26 Mai 09 ExInt
[7] http://www.banisiafaceri.ro/exclusiv/cele+9+lectii+trase+de+mugur+isarescu+din+criza+fi
nanciara