BNR’s Press release: Financial Stability Report, December 2023

In its meeting of 8 December 2023, the National Bank of Romania (BNR) Board examined and approved the Financial Stability Report, December 2023.   The main systemic risks to financial stability have remained the same since the previous Report, yet global economic and geopolitical uncertainties have amplified: the risk posed by external developments owing to the global uncertainty amid the energy crisis, the war in Ukraine and the Middle East conflict, which is assessed as severe and expected to become more relevant over the period ahead; tensions surrounding macroeconomic equilibria, inter alia as a result of regional and international geopolitical developments, as well as in terms of the future fiscal and income policy stance, a risk assessed as severe, but relatively steady; the delay in implementing structural reforms committed to by the authorities and, hence, in absorbing EU funds, especially via the National Recovery and Resilience Plan (NRRP), a risk assessed as high and unchanged for the period ahead; and the default risk for loans to the private sector, assessed as moderate, albeit on the rise.   The Romanian banking sector has been experiencing good times in terms of key financial and prudential indicators. The solvency ratio (22.3 percent) is adequate and above the EU average, liquidity indicators have improved as against 2022, while the main asset quality indicators (NPL ratio and the NPL coverage ratio) place the banking sector in the EBA-defined low-risk bucket.   At macroprudential level, following the NCMO recommendation, the countercyclical buffer rate was raised from 0.5 percent to 1 percent, strengthening the banking sector’s capacity to withstand adverse developments. Banks’ profitability indicators are further high in a European comparison, but on the domestic front, return on assets and return on equity have stood below the similar indicators recorded by the real sector in the past decade. For instance, in 2013-2022, average return on assets ran at 0.9 percent in the banking sector and at 6.4 percent in the non-financial corporations sector.   Banks with majority domestic capital continued to strengthen their first position in the Romanian banking sector, as they came to hold one third of bank assets. In recent years, lending to the real economy went primarily to companies with domestic capital (approximately 70 percent of total loans to companies), enhancing the banking sector’s role in supporting the economy, in general, and the domestic capital, in particular. The consolidation of the Romanian banking sector is expected to continue via the mergers and acquisitions announced in 2023.   Lending to non-financial corporations continued to rise, albeit at a slower pace (up 8.2 percent year on year in September 2023). This occurred amid the slowdown in the growth rate of foreign currency lending, given the decrease in the interest rate differential between leu- and EUR-denominated loans. Turning to households, the loan stock stayed virtually unchanged, yet worth noting are the positive dynamics of new consumer loans granted to households by the non-bank financial institutions (up 27 percent in September 2023, as the sum of 12-month flows). Applying a 2 percent tax on banks’ turnover will have an annual impact equivalent to 1.5 percent of total own funds of credit institutions, Romanian legal entities, and could affect financial intermediation.   The bank loan repayment capacity remained rather unchanged, with the non-performing loan ratio standing at 2.61 percent in September 2023. On the other hand, given the challenges mentioned in the map of risks to financial stability, the outlook for the period ahead implies close monitoring of developments in bank asset quality, in line with similar actions taken EU-wide.   The Romanian economy faces a series of structural vulnerabilities, which, unless properly addressed, can contribute to the heightening of systemic risks to financial stability, while also affecting the capacity to channel investment flows to critical economic areas.   These vulnerabilities are: (i) weak payment discipline in the economy and vulnerabilities in companies’ balance sheets, (ii) low financial intermediation, (iii) the demographic problem, and (iv) climate change. The non-financial corporations sector still falls significantly short of adequate capitalisation, with a large percentage of firms (29.5 percent in 2022) reporting negative equity and almost a third holding equity below the regulatory threshold.   Given the close connection between these vulnerabilities and the level of financial education, the “Antreprenoriat de TOP” (TOP Entrepreneurship) project was launched, aimed at developing financial knowledge, improving financial behaviour, encouraging a broader use of financial products and services, and improving the digitalisation of financial and business activities.   The Special feature of the Report dwells on zombie firms and the effectiveness of the insolvency procedure. Zombie companies have a low economic performance and a modest contribution to economic activity, but entail major disruptions in terms of resource allocation in the economy, the collection of revenues to the general government budget, corporate governance and payment discipline.   The presence of a relatively large number of zombie firms makes the entire non-financial corporations sector have a further low resilience to shocks and limits its development. The mechanisms in place to address issues related to the market exit of zombie companies lack the necessary effectiveness to mitigate this vulnerability substantially. In this vein, useful measures could consist in revising the legislative framework for commercial companies so as to enhance the sector’s capitalisation, as well as improving the restructuring and market exit mechanisms for unviable firms.