Recommendations 2017

Having regard to:

– Recommendation of 20 December 2012 on funding of credit institutions (ESRB/2012/2), particularly Subrecommendation A3 setting forth that national supervisory authorities and other authorities with a macroprudential mandate are recommended “to assess the impact of credit institutions’ funding plans on the flow of credit to the real economy”. Whereas:

Credit institutions’ funding plans could be used in formulating guidelines on macroprudential policies. Based on the data provided by credit institutions’ funding plans, forward-looking information can be extracted on the developments in lending or for the identification of vulnerabilities, at an early stage, or the build-up of potential risks to financial stability, which could allow the preparation and early activation/ deactivation of the macroprudential instruments, thereby increasing their efficiency and effectiveness; Annual monitoring of credit institutions’ funding plans may (i) paint a picture on the growth outlook for lending and the potential structural changes in credit institutions’ activity, (ii) play the role of a backtesting measure by comparing the credit institutions’ achieved and projected levels with a view to checking the reliability of these data, and (iii) identify any changes in credit institutions’ risk appetite. Pursuant to:

Art. 3, para. (1), let. (f) and para. (2), let. (a), as well as Art. 4, para. (1), let. (a) of Law No. 12/2017 on the macroprudential oversight of the national financial system, The National Committee for Macroprudential Oversight has issued this recommendation:

The National Bank of Romania is recommended to assess on a regular basis the impact of credit institutions’ funding plans on the flow of credit to the real economy.

Having regard to:

Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, namely Art. 133 concerning the systemic risk buffer and Art. 162 para. (6) on the coming into force of the provisions regarding capital buffers, The systemic risk buffer concerns the structural dimension of systemic risk, namely the distribution of risk across the financial system. The ultimate goal of this buffer is to strengthen the resilience of the financial system and its subsets to shocks generated by changes in legislation or accounting standards, spillover effects from the real economy or other domestic/external channels, excessive concentration or oversize of the financial system relative to GDP, amid increased complexity and financial innovation. Whereas:

The introduction of a systemic risk buffer is further a macroprudential policy option, based on the following considerations: (i) the need to address the issue of non-performing loans, which has become a concern on the agenda of the decision-making bodies in the European Union and worldwide, (ii) the tensions surrounding domestic macroeconomic equilibria, (iii) the shaping of a legislative framework with potentially adverse effects on the management of risks in the banking sector, and (iv) lingering uncertainties about the regional and international context; The rationale behind implementing the systemic risk buffer is circumscribed to the following two perspectives: (i) ensuring an adequate management of credit risk from a macroprudential perspective, amid the possible return of non-performing loan ratio onto an upward path, in the context of unfavourable circumstances related to credit institutions’ potential future efforts to clean up their balance sheets and (ii) preserving financial stability, assuming that the tensions surrounding domestic macroeconomic equilibria and regional and global uncertainties will persist; The following vulnerabilities across the national financial system have been identified: the possibility of a renewed increase in non-performing loan ratios, following the rise in interest rates and the slowdown in the balance sheet clean-up process; the tensions surrounding macroeconomic equilibria. Pursuant to:

Art. 3, para. (1) and para. (2), as well as Art. 4, para. (1) of Law No. 12/2017 on the macroprudential oversight of the national financial system, The National Committee for Macroprudential Oversight has adopted this recommendation:

In the context of the structural vulnerabilities identified, currently noticed or possibly emerging in the future, which may lead to a larger stock of non-performing loans, concurrently with a narrower room for manoeuvre of monetary, fiscal and macroprudential policies and credit institutions’ potentially lower capacity to clean up their balance sheets, the National Bank of Romania is recommended to implement a systemic risk buffer applicable to all exposures, starting 30 June 2018, with the aim of supporting the adequate management of credit risk and enhancing banking sector resilience to unanticipated shocks, amid unfavourable structural circumstances.

Moreover, it is recommended that the buffer level be calibrated at 0 percent, 1 percent or 2 percent, depending on the average values over the past 12 months (September 2016 – August 2017) of the indicators on the non-performing loan ratio and the coverage ratio, as follows:

Non-performing loan ratio Coverage ratio Buffer level (% of Tier 1 capital) < 5% > 55% 0% > 5% > 55% 1% < 5% < 55% 1% > 5% < 55% 2% The National Committee for Macroprudential Oversight recommends the National Bank of Romania to reassess the indicators and thresholds in the calibration of the systemic risk buffer with a half-yearly frequency, so as to monitor in real time the progress in resolving non-performing loans.

Having regard to:

Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, namely Art. 130 and Art. 136 concerning the countercyclical capital buffer, Art. 160 regarding the gradual or accelerated steps of adjustment of the countercyclical capital buffer, and Article 162 para. (2) on the applicability of capital buffers, The objective of the countercyclical capital buffer (CCB) is to improve the banking sector’s resilience to potential losses generated by excessive credit growth. The CCB is built up in periods of excessive credit growth as an add-on to the capital conservation buffer and may be released during credit crunches in order to absorb losses. The countercyclical buffer rate is expressed as a percentage of total risk exposure amount of credit institutions with credit exposures in Romania, shall range between 0 percent and 2.5 percent and shall be calibrated in steps of 0.25 percentage points or multiples of 0.25 percentage points. Where justified, a CCB rate higher than 2.5 percent of total risk exposure amount may be set. Whereas:

Regarding the countercyclical capital buffer, it should be noted that:

the analysis on the excessive growth of credit and private indebtedness showed that total indebtedness (non-financial corporations and households) further stayed below the alert threshold that signals excessive credit growth; however, the differential between the value of the alternative indicator and the signalling threshold narrowed markedly since the previous analysis, reaching -0.53 percentage points in June 2017 and -0.13 percentage points in September 2017 respectively versus -0.76 percentage points in March 2017; at sectoral level, there are further signals indicating the build-up of vulnerabilities related to household lending; residential property prices continued to increase at a fast pace, their annual growth rate coming in at 8.43 percent in nominal terms in June 2017 (7.52 percent in real terms over the same period), standing above the 6 percent alert threshold recommended by the European Commission, yet further below the 10 percent signalling threshold. Pursuant to: Art. 3, para. (1) and para. (2), as well as Art. 4, para. (1) of Law No. 12/2017 on the macroprudential oversight of the national financial system, The National Committee for Macroprudential Oversight has adopted this recommendation:

Having regard to the fact that total indebtedness currently remains below the alert threshold and setting a countercyclical buffer rate above 0 (zero) percent is, thus, not necessary, the National Bank of Romania is recommended to maintain the countercyclical buffer rate at 0 percent and to monitor developments in household indebtedness.

Having regard to:

Identifying the increase in household indebtedness as a vulnerability to financial stability,

Whereas:

The rise in household indebtedness may have notable negative effects on both the financial system (the empirical evidence shows that an indebtedness level of over 55 percent is associated with non-performing probabilities of 3 percent over a one-year horizon and of 14 percent over a five-year horizon) and future economic growth, where households that took housing loans face difficulties in paying their monthly loan instalments and decide to lower consumption in order to keep the purchased house. At present, indebtedness rose substantially, with one third of the debtors who took a loan in the past year reporting a level of indebtedness of more than 55 percent.

In accordance with:

Art. 1, para. (2), Art. 2, para. (1), and Art. 3 of Law No. 12/2017 on the macroprudential oversight of the national financial system, Pursuant to:

Art. 4, para. (1), let. a) and b) of Law No. 12/2017 on the macroprudential oversight of the national financial system, The National Committee for Macroprudential Oversight has issued this recommendation:

The Government, by the agency of the Ministry of Public Finance (MPF), and the National Bank of Romania (NBR) are recommended to set up a working group that should make in-depth analyses on household indebtedness, using the data to be made available to this working group by the MPF via the National Agency for Fiscal Administration, while complying with the confidentiality rules. The new data to be examined should at least refer to the reports on individuals’ monthly wage earnings, their income from other sources than wages (Form 112), and income from the transfer of real estate from the personal patrimony (Form 208).

Having regard to:

Identifying structural vulnerabilities concerning the financial soundness of non-financial corporations in Romania, which entail notable negative consequences on the stability of the Romanian financial system, i.e. persistence of negative financial results of many firms, poor quality of capital and the large number of firms either with owners’ equity below the regulatory threshold or inactive, with an impact on (i) companies’ balance sheets becoming frail, (ii) limiting access to financing, (iii) increasing the difficulties in the repayment of debts to trade partners, general government and banks, (iv) altering competition, the manner of resource allocation, the contribution to value added economy-wide, government budget receipts, and (v) distorting financial discipline,

Whereas:

The analysis of the state of the companies doing business in Romania revealed that, although at aggregate level the economic results and the financial soundness of non-financial corporations have continued to improve in recent years, structural vulnerabilities persist, entailing notable negative consequences on the stability of the Romanian financial system, namely: (i) persistence of negative financial results in many firms, (ii) poor quality of capital, and (iii) the large number of firms either with owners’ equity below the regulatory threshold or inactive. Thus, in 2015, a number of 276.4 thousand firms (44 percent of the companies active in Romania) recorded owners’ equity lower than 50 percent of share capital, i.e. below the threshold set by Law No. 31/1990 on commercial companies. Out of these companies, most of them have negative equity, i.e. 268.5 thousand firms. At the same time, from among the companies recording negative owners’ equity as at end-2015, a significant percentage witnessed such a state in three of the last five years (72 percent), and the persistence thereof is also illustrated by the fact that nearly one-half of the companies recording negative equity in 2015 were in this state in each of the last five years (47 percent).

It is deemed that such a business behaviour leads to (i) companies’ balance sheets becoming frail, (ii) limiting access to financing, in particular from professional creditors, which contributes to maintaining one of the weakest financial intermediation levels in the EU, (iii) difficulties in the repayment of debts to trade partners, general government and banks, (iv) significant direct implications on competition, resource allocation, contribution to value added economy-wide, government budget receipts, and (v) distorting financial discipline. The vulnerabilities these firms pose to the economy are all the more important as the share of companies recording negative owners’ equity grew markedly over the past years (from about 10 percent of total companies in 1994 to more than 42 percent in 2016). The channels whereby risks pass through are: (1) non-performing loans in the credit institutions’ balance sheets; and (2) payment discipline relative to trade partners and insolvency proceedings.

The need to take measures to improve firms’ financial soundness arises from the perspective of the important and growing role that companies with negative owners’ equity play in the economy, specifically: (i) they hire 15.6 percent of corporate sector employees, (ii) they create 7.8 percent of corporate turnover, (iii) they owe 39 percent of total corporate debt (in December 2016), and (iv) they account for 3 percent of companies’ total expenses on profit/income tax and 11 percent of companies’ total expenses on social protection and insurance in December 2016.

In accordance with:

Art. 1, para. (2), Art. 2, para. (1) and Art. 3 of Law No. 12/2017 on macroprudential oversight of the national financial system, Pursuant to:

Art. 4, para. (1), let. a) and b) of Law No. 12/2017 on macroprudential oversight of the national financial system, The National Committee for Macroprudential Oversight has issued this recommendation:

The Government, by the agency of the Ministry of Public Finance, and the National Bank of Romania are recommended to set up a working group that should make in-depth analyses of the firms’ financial soundness, using the data to be made available to this working group by the Ministry of Public Finance via the National Agency for Fiscal Administration, while complying with the confidentiality rules. The new data to be examined should at least refer to the reports on the deliveries/supplies and acquisitions of goods made within the national territory (Form 394) and the reports on intra-Community deliveries/supplies and acquisitions (Form 390), for every firm for which there are full historical data sets. Following the analyses made by the said working group, solutions will be identified so that businesses’ budget constraints become tight in both public and private sectors.

Having regard to:

Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, namely Art. 131 concerning the buffer for global systemically important institutions (G-SII buffer) and the buffer for other systemically important institutions (O-SII buffer), as well as Art. 162 para. (2) and (5) on the applicability of capital buffers, The capital buffer for other systemically important institutions is a capital reserve that shall be set to mitigate systemic risk posed by the size of credit institutions. By recommendation of the macroprudential authority, the competent authority may require each O-SII, on a consolidated, sub-consolidated or individual basis, as applicable, to maintain a buffer of up to 2 percent of the total risk exposure amount. The requirements on the O-SII buffer are applicable starting 1 January 2016. Whereas:

The opportuneness of implementing the O-SII buffer shall rely on the role played by this buffer in enhancing the capability of systemic institutions to withstand potential exogenous shocks and in reducing their negative impact on the banking system as a whole in the event those risks materialise.

Pursuant to:

Art. 3, para. (1) and para. (2), let. b), as well as of Art. 4, para. (1), let. a) of Law No. 12/2017 on macroprudential oversight of the national financial system, The National Committee for Macroprudential Oversight has issued this recommendation:

The National Bank of Romania is recommended to require, starting 1 January 2018, a capital buffer for other systemically important institutions (O-SII buffer), on an individual or consolidated basis, as applicable, equal to 1 percent of the total risk exposure amount for all the credit institutions identified as having a systemic nature in accordance with the methodology harmonised with the provisions of the EBA Guidelines on the criteria to determine the conditions of application of Art. 131(3) of Directive 2013/36/EU (CRD) in relation to the assessment of O-SIIs, based on the data reported as at 31 March 2017. The banks identified as systemically important are the following:

Banca Comercială Română S.A. (consolidated level); BRD – Groupe Societe Generale S.A. (consolidated level); UniCredit Bank S.A. (consolidated level); Raiffeisen Bank S.A. (consolidated level); Alpha Bank România S.A. (consolidated level); Bancpost S.A. (consolidated level); Banca Transilvania S.A. (consolidated level); CEC Bank S.A. (consolidated level) and Garanti Bank S.A. (consolidated level). Updated list of systemically important banks and the other systemically important institutions buffer (O-SII buffer) applicable in 2018

Updated List of Systemically Important Banks and the other Systemically Important Institutions Buffer (O-SII buffer) Applicable in 2018

Having regard to:

Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, namely Art. 130 and Art. 136 concerning the countercyclical capital buffer, Art. 160 regarding the gradual or accelerated steps of adjustment of the countercyclical capital buffer, and Article 162 para. (2) on the applicability of capital buffers, The aim of the countercyclical capital buffer (CCB) is to improve the banking sector’s resilience to potential losses generated by excess credit growth. The CCB is built up in periods of excess credit growth as an add-on to the capital conservation buffer and may be released during credit crunches in order to absorb losses. The countercyclical buffer rate is expressed as a percentage of total risk exposure amount of credit institutions with credit exposures in Romania, shall range between 0 percent and 2.5 percent and shall be calibrated in steps of 0.25 percentage points or multiples of 0.25 percentage points. Where justified, a CCB rate higher than 2.5 percent of total risk exposure amount may be set. Whereas:

Regarding the countercyclical capital buffer, it should be noted that:

the analysis on the excessive growth of credit and private indebtedness showed that total indebtedness (non-financial corporations and households) further stays below the alert threshold that signals an excessive credit growth; however, the differential between the value of the alternative indicator and the signalling threshold narrowed markedly since the previous analysis, reaching -0.42 percentage points in March 2017 versus -0.51 percentage points in December 2016; at sectoral level, there are further signals indicating the build-up of vulnerabilities related to household lending, the alert threshold being exceeded for the sixth quarter in a row; residential property prices continued to increase1, their growth rate reaching 5.12 percent2 in March 2017 versus March 2016 (4.93 percent in real terms over the same period), standing below the 6 percent alert threshold recommended by the European Commission. However, this information should be interpreted with caution, taking account of the changes made by the NIS in the calculation methodology of residential property prices. Pursuant to:

Art. 3, para. (1) and para. (2), as well as of Art. 4, para. (1) of Law No. 12/2017 on the macroprudential oversight of the national financial system, The National Committee for Macroprudential Oversight has adopted this recommendation:

Having regard to the fact that total indebtedness currently remains below the alert threshold and setting a countercyclical capital buffer rate above 0 percent is, thus, not necessary, the National Bank of Romania is recommended to maintain the countercyclical capital buffer rate at 0 percent and monitor developments in household indebtedness.

The National Institute of Statistics changed the calculation methodology of residential property prices, which accounts for the fact that the annual growth rate for March 2017 lacks comparability. Data available in Prices Statistical Bulletin No. 3/2017 released by the NIS; Eurostat data point to a growth rate of house prices of 7.3 percent in December 2016 versus the same year-ago period.

Having regard to:

Recommendation ESRB/2016/14 on closing real estate data gaps which lays down a minimum set of residential and commercial real estate market-specific indicators that national authorities should include in their regular exercises of monitoring the systemic risks to the financial system.

Whereas:

The real estate sector has an important role in the economy, with empirical analyses showing a close interplay between excessive developments in property prices and the breakout of financial crises, while real estate market developments may amplify the financial crises, as the significant corrections in property prices have a major impact on household and non-financial corporation assets, with noteworthy effects on the real economy (drop in consumption and investment) and on the financial sector (rise in credit risk), The 2008 financial crisis has highlighted the need for a comprehensive monitoring framework of the vulnerabilities and risks originating in the real estate market. Pursuant to:

the provisions of Art. 3, para. (1), let. f) and para. (2), let. a), as well as of Art. 4, para. (1), let. a) of Law No. 12/2017 on the macroprudential oversight of the national financial system, The National Committee for Macroprudential Oversight has adopted this recommendation:

Considering that the real estate sector has an important role in the economy, with empirical analyses showing a close interplay between excessive developments in property prices and the breakout of financial crises, while real estate market developments may amplify the financial crises, the National Bank of Romania and the Financial Supervisory Authority are recommended to take the necessary steps with a view to implementing Recommendation ESRB/2016/14 on closing real estate data gaps, as follows:

The NCMO takes note of the NBR’s concern to broaden the scope of information originating in the residential real estate sector; The National Bank of Romania and the Financial Supervisory Authority shall circulate a questionnaire (Annex) to the main investors on the commercial real estate market and financial institutions (credit institutions, insurance companies, pension funds, investment funds, etc.) in order to cover data gaps for the physical market (developments in prices, yields, rents, vacancy rates), as well as for the volume of investment in and financing of real estate.

Having regard to:

the provisions of Art. 139 of Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, concerning the decisions of designated authorities on countercyclical buffer rates for third countries, Recommendation ESRB/2015/1 on recognising and setting countercyclical buffer rates for exposures to third countries, particularly recommendation B1 on the identification of material third countries on an annual basis, Whereas:

Data available at end-2016 have not indicated any material third country for the banking sector in Romania in terms of recognising and setting countercyclical buffer rates.

Pursuant to:

the provisions Art. 3, para. (1) and (2), let. b), as well as of Art. 4, para. (1) of Law No. 12/2017 on the macroprudential oversight of the national financial system, The National Committee for Macroprudential Oversight has adopted this recommendation:

Considering that the exposures to third countries of the banking sector in Romania are further low, the assessments carried out have not found any material third country in terms of recognising and setting countercyclical buffer rates for the banking sector in Romania.

The National Bank of Romania is recommended to assess on a regular basis material third countries for the banking sector in Romania in terms of recognising and setting countercyclical buffer rates and to propose the necessary measures should these exposures become material.

The provisions of Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, specifically: Article 130 and Article 136 on the countercyclical capital buffer, Article 160 on the gradual phasing-in and the accelerated build-up respectively of the countercyclical capital buffer, as well as Article 162(2) on capital buffers, The countercyclical capital buffer is aimed at enhancing banking sector resilience to potential losses induced by excessive credit growth. The buffer is set up in periods of excessive credit growth, as an addition to the capital conservation buffer, and may be released during the contraction phase in order to absorb losses. The countercyclical capital buffer rate, expressed as a percentage of the total value of the risk exposure, determined by credit institutions with credit exposures in Romania, shall range between 0 percent and 2.5 percent, calibrated in steps of 0.25 percentage points or multiples of 0.25 percentage points. Where justified, a countercyclical capital buffer rate in excess of 2.5 percent of total risk exposure amount may be set. Whereas:

As regards the countercyclical capital buffer:

the analysis on excessive growth in credit and leverage of the non-government sector pointed to an additional increase in total indebtedness of the private sector (non-financial corporations and households) that remained, however, below the indicative threshold that signals excessive credit growth; at sectoral level, there were further signals indicating a build-up of vulnerabilities related to household lending, with the indicative threshold being exceeded for the fifth consecutive quarter; residential property prices have continued to go up, with the deviation from the long-term trend remaining above the indicative threshold. In addition, the growth rate of prices has exceeded the Commission’s alarm threshold. Pursuant to:

the provisions of Art. 3, para. (1) and (2), let. b), as well as of Art. 4, para. (1), let. a) of Law No. 12/2017 on the macroprudential oversight of the national financial system, The National Committee for Macroprudential Oversight has adopted this recommendation:

Considering that, at present, total indebtedness has increased further, yet remains below the indicative threshold, it is estimated that there is no need to set a countercyclical capital buffer rate of over 0 (zero) percent.

The National Bank of Romania is recommended to maintain the countercyclical capital buffer rate at 0 percent and monitor developments in household indebtedness, including from the perspective of analysing the timeliness of applying macroprudential tools to ensure that borrowers’ level of indebtedness is sustainable.