The international financial crisis that is taking place at the present moment, had it’s 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 US’s top 5 banks, Lehman Brothers, announced its bankruptcy on the 15th 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.
As a response to this problem the National Bank considered best to limit the loan granting’s 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 ‘.