It seems that the Romanian banking crisis is already largely behind us. Recent runs on banks demonstrate how sensitive Romanian banking sector is to rumours. The most serious run occurred in late May 2000, when depositors in some regions started to withdraw funds from Banca Comerciala Romana (BCR), the largest bank in Romania, Thomson BankWatch shows in an analysis released on July 14.
Triggered by malicious rumours about the bank's liquidity, clients started to withdraw deposits. All the major Romanian banks, as well as the NBR, offered to support, although in the end this was not necessary as BCR had adequate balance sheet liquidity. The run on deposits quickly dried up and all withdrawal requests were met. According to the bank, most of the withdrawn deposits returned to BCR before the end of June. Whilst serious, this run did not spread to other major banks, indicating that some normality is returning to the system.
As the main banks regain liquidity, there have been liquidity problems in the non-banking financial sector. In May, Romania's biggest mutual fund Fondul National de Investitii (FNI) (the National Investment Fund) collapsed as it failed to meet withdrawal requests, triggered by rumours, but underpinned by indications of fraud in the Fund's management. The National Securities Commission (CNVM) has been accused of failing to supervise the fund adequately. The funds in FNI were guaranteed by Romania's State owned Savings bank, Casa de Economii si Consemnatiuni (CEC), although there is a dispute about whether this guarantee is valid as it was not correctly executed. As a result, CEC's President has resigned. CEC is now led by the retired former President of BCR. If the guarantee from CEC turns out to be valid, CEC will be asked to pay back the money lost in FNI. As FNI had over 300,000 investors and reported assets of ROL 3.41 trillion ($159m), this could cause problems both for CEC and the Government.
The problems at FNI have highlighted the inadequate supervision of the non-bank financial sector. The most significant problem part of this sector is the credit cooperatives, of which there are thousands across the country. They are currently not supervised by the NBR or any regulatory body. Although many call themselves 'banks', they are not allowed to participate in interbank trading and they are not covered by the Deposit Guarantee Fund. Some estimates suggest that credit cooperatives hold deposits of around ROL 4 trillion ($186m). The Government is now in the process of placing these institutions under the NBR supervision. Credit cooperatives were recently given about two months to choose whether they would continue operations as a non-banking institution, apply for a banking licence, or be liquidated. Those deciding to remain as credit cooperatives must remove the word 'bank' from their name. The law draft stipulates that credit cooperatives must form a national association, which will be regulated by the NBR. Given the very low solvency of most cooperatives, it is expected that many will be unable to transform into a bank. The minimum capital requirement for a banking licence is ROL 200bn ($9.3m). Romania's largest credit cooperative, Banca Populara Romana (BPR), faced liquidity problems following the FNI collapse. At the moment, although it is in the process of applying for a banking licence, its future survival is not clear. BPR's liquidity problems spread to the commercial banking sector. It withdraw a substantial deposit from Banca Unirea, in which it is the majority shareholder (80%), to respond to its increased withdrawal of deposits.
Troubled banks
The NBR is working hard to eliminate all the remaining unhealthy banks. At end June, the NBR eventually cancelled Banca Columna's licence, as it failed to meet its requirements. The NBR is asking the court to begin bankruptcy procedures for the bank. Columna's activity has been limited by the NBR since 1997. It was not allowed to take deposits from individuals and corporates, as it had repeatedly breached banking rules. Meanwhile, the deposit guarantee fund has started to pay compensation to Bankcoop depositors. Bankcoop was declared bankrupt earlier this year. Whilst the banking system is in the final phase of cleansing, one troubled bank is proving hard to kill. Recently, after four years, Dacia Felix Bank won a lawsuit brought by the National Bank of Romania (BNR) and the Savings Bank (CEC), which sought the bankruptcy of the bank. The Court's decision allows the bank to carry on operations, but the bank's ability to continue on a going concern basis is undermined by the fact that it is heavily indebted to the NBR and CEC. The NBR hopes to finally resolve this case in the near future. The most recent problem bank is Banca Internationala a Religiilor (BIR). In late May 2000, the NBR initiated bankruptcy procedures against it. BIR is the third private bank to fail in less than a year. Troubles at BIR, a bank created in 1994 by Romanian and foreign individual and corporate shareholders and various churches in Romania, began earlier this year, when it was placed under special surveillance by the NBR following cash flow problems. A foreign investor showed interest in the bank, but failed to provide a promised capital injection. Depositors at BIR should be able to recover their money from the Deposit Guarantee Fund. Eventually, all operating banks will end up paying for these mistakes, as funds in the Deposit Guarantee Fund are contributed by all Romanian banks and the Fund does not have resources to pay out to depositors of all failed banks.
Privatisation in the banking system
On the privatisation front, Banca Agricola's (BA) privatisation is likely to be further delayed. Romania has extended the deadline for binding bids to early August. So far, Agricultural Bank of Greece, a consortium led by Romanian-American Enterprise Fund and Rabo International Financial Advisors (an unit of Dutch Rabobank) have shown interest in BA. A key issue in the sale negotiations is how the eventual new owner will restore the bank's solvency. According to some estimates, BA needs recapitalisation of about $150-$200m to meet solvency standards. We are concerned that the November elections could further delay BA's privatisation as international investors will be concerned over the outcome of the elections. A possible delay could further postpone BCR's privatisation, which is due to be privatised after BA. According to the latest estimates, BCR's privatisation will take place during 1H2001.
Last year Banca Romana pentru Dezvoltare (BRD) and Banc Post were privatised. Of these banks, Banc Post is now moving to the second phase of the privatisation. GE Capital will divest most of its stake in Banc Post and the Greek EFG Eurobank is becoming a new investor. EFG Eurobank is a universal bank in Greece, focused on retail banking. This is likely to be a better solution for Banc Post as it will benefit more from EFG's knowledge within general banking rather than the specialised areas GE Capital is based on. Greeks are increasing their presence in the Romanian banking sector. In May, Greece's Piraeus Bank bought the Romanian Pater Bank from the Hungarian GE Capital controlled Budapest Bank. Recently, Banca Bucuresti, the Romanian subsidiary of Greece's Alpha Bank Group, has changed its name into Alpha Bank Romania. In addition to Greek banks, it is the Turkish banks, which have a dominant position of the foreign banks in Romania. Turkish banks continue to expand their activities in Romania. Banca Turco Romana (BTR) has an 18 branch countrywide network. Demirbank Romania SA, the Romanian subsidiary of Turkish Demirbank has six branches but is planning to expand its network to add more units across Romania in 2000. Other banks with Turkish links operating in Romania include RoBank and United Garanti Bank International. In early 2000, Turkey's Finansbank acquired 50.07% of Banca de Credit Industrial si Commercial SA.
Banking sector supervision
During the first half of 2000, the NBR has introduced several measures in an attempt to strengthen banking sector supervision. A bank rating system based on CAMEL is in use. With data provided by banks on a monthly basis, the NBR analyses the banks' capital adequacy, quality of assets, management, profitability and their liquidity. The inspections at the banks' headquarters are now done once a year whereas previously this was done only once every two years. The NBR plans to require all Romanian banks to produce their accounts according to International Accounting Standards from the beginning of next year. Taxation will also be based on IAS accounts.
Starting from the beginning of October, a new loan classification system will come into force. It is based solely on client delinquency records. Furthermore, provisions will be tax deductible. Previously, in addition to debt service, clients' financial performance analysis was also taken into consideration in a matrix style classification. As Romanian corporates typically do not want to show good profits due to taxation, this usually led to too severe a classification of companies. According to the new classification, only loans overdue by less than seven days will be classified as standard. The lower thresholds are also harsh with watch being 7-15 days past due, substandard 15-30 days, doubtful 30-60 days and loss over 60 days past due. However, many banks should see an improvement in the overall level of classified loans as a result.
In addition to new loan classification rules, there will be changes in provisioning practise. Only guarantees or cash collateral will be taken into consideration. This means that real estate collateral will no longer be deductible when making provisions. This is a very positive development, given the difficulties in real estate valuation and realisation in Romania. We believe that to date, real estate collateral has created a false sense of security for many banks in Romania who have underprovisioned portfolios as a result. Although some loans will be classified, this tightening of provisioning will result in increases in provisions for many banks and thereby lead to a significant decrease in profits in 2000. In addition to increase in provisions, banks' profitability is already burdened by heavy NBR reserve requirements. The minimum reserve requirements have risen rapidly over a short period of time to a current 30% of eligible deposits. The NBR pays only a marginal interest rate on these funds, easing liquidity pressures for the Government but decreasing banks' profitability. Therefore, commercial banks have asked the NBR to reduce minimum reserves requirements to 25% from 30%, but to date have been ignored. The banks' profitability is also burdened by the payments to the Deposit Guarantee Fund. Troubles at several banks over the past year have led to large outflows from the fund, which covers currently up to ROL 63m for each household depositor in case the bank is declared insolvent. Mediafax
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