Annex 1 – The Overall Macroprudential Strategy Framework of the NCMO

I. Introduction

The overall macroprudential policy framework of the National Committee for Macroprudential Oversight (NCMO), hereinafter referred to as “the Strategy”, is developed according to the macroprudential responsibilities of the National Committee for Macroprudential Oversight as macroprudential authority. The strategy establishes the macroprudential elements and the appropriate instruments for their implementation.

The strategy is harmonised with the provisions of Recommendation of the European Systemic Risk Board of 4 April 2013 on intermediate objectives and instruments of macroprudential policy (ESRB/2013/1). The above-mentioned recommendation refers to the intermediate objectives and instruments of macroprudential policy under the direct control or under the recommendation powers of macroprudential authorities and to the assessment made in order to decide if they are sufficient to effectively and efficiently pursue the ultimate objective of macroprudential policy – safeguarding of financial stability.

The selection of the macroprudential policy strategy elements on intermediate objectives and macroprudential instruments is based on the assessments performed by the National Bank of Romania (NBR), the Financial Supervisory Authority (FSA) and the Government, for the financial system components within the field of competence of these authorities.

The macroprudential policy strategy aims at defining the intermediate objectives, the instruments, the adoption and communication of the decisions as well as the cooperation with other authorities for the implementation of macroprudential policy.

The definitions used in this strategy are as follows:

Financial stability – the condition in which the financial system – intermediaries, markets and market infrastructures – is capable of withstanding shocks without major disruptions in financial intermediation and in the effective allocation of funds to productive investment. The main characteristics of safeguarding financial stability concern the identification and the effective management of risks and the strengthening of the financial system resilience to systemic shocks on a sustainable basis and without major disruptions in the economy (ECB definition).
Financial system – as defined in Article 2(b) of Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 on European Union macroprudential oversight of the financial system and establishing a European Systemic Risk Board.
Macroprudential authority – athe national macroprudential authorities with the objectives, arrangements, powers, accountability requirements and other characteristics set out in Recommendation ESRB/2011/3. On 20 March 2017, Law No. 12/2017 on the macroprudential oversight of the national financial system (published in Monitorul Oficial al României, Part INo. 192 of 17.03.2017) entered into force, establishing the National Committee for Macroprudential Oversight (NCMO) as an interinstitutional cooperation structure without legal personality, comprising representatives of the National Bank of Romania, the Financial Supervisory Authority and the Government. Without prejudice to the powers conferred by law upon the member authorities, the mission of the Committee is to ensure coordination in the field of macroprudential oversight of the national financial system by setting the macroprudential policy and the appropriate instruments for its implementation.
Macroprudential policy – macroprudential policy is used to identify, monitor and assess systemic risks in order to safeguard the stability of the financial system as a whole, to strengthen the resilience of the financial system and to prevent/contain the build-up of systemic risks, thereby ensuring a sustainable contribution of the financial sector to economic growth.
Macroprudential policy instruments – instruments applied to achieve the intermediate objectives of the macroprudential policy by establishing requirements either for the financial system as a whole or for individual financial institutions.
Effectiveness of the instrument – the degree to which the instrument can address market failures and achieve the ultimate and intermediate objectives.
Efficiency of the instrument – the potential of the instrument to achieve the ultimate and intermediate objectives at minimum cost.
Systemic risk – systemic risk as defined in Article 2(c) of RRegulation (EU) No 1092/2010 of the European Parliament and of the Council of 24 November 2010 on European Union macroprudential oversight of the financial system and establishing a European Systemic Risk Board..
Structural dimension of systemic risk – the distribution of risks across the financial sector.
Cyclical dimension of systemic risk – the changes of systemic risk over time, originating from the tendency of financial institutions to assume excessive risks in the upswing and become excessively risk averse in the downswing.

Other definitions used in the Strategy have the meaning assigned to them in the national law.

II. Objectives of macroprudential policy

The ultimate objective of macroprudential policy is to contribute to safeguarding the stability of the financial system as a whole, also by strengthening the resilience of the financial system and by containing the build-up of systemic risks, thereby ensuring a sustainable contribution of the financial sector to economic growth.

In order to achieve the ultimate objective, the NCMO aims at fulfilling the following intermediate objectives of macroprudential policy:

Mitigate and prevent excessive credit growth and leverage;
Mitigate and prevent excessive maturity mismatch and market illiquidity;
Limit direct and indirect exposure concentrations;
Limit the systemic impact of misaligned incentives with a view to reducing moral hazard;
Strengthen the resilience of financial infrastructures;
Sustainable growth of financial intermediation;
Increase financial inclusion;
Protect the insurance system from the consequences of insolvency of some insurers;
Reduce the negative impact of the operational risks generated by the use of information and communication technology.

Both the National Bank of Romania (NBR) and the Financial Supervisory Authority (FSA) contribute to the implementation of macroprudential instruments in order to achieve the intermediate objectives recommended by the ESRB through Recommendation of the European Systemic Risk Board of 4 April 2013 on intermediate objectives and instruments of macroprudential policy (ESRB/2013/1), i.e. the objectives A – E. In addition, the sectoral supervisory authorities committed to implement additional instruments in order to pursue national intermediate objectives, as follows: 1) the NBR has responsibilities for achieving the national objectives of a) sustainable growth of financial intermediation and b) increasing financial inclusion; 2) the FSA has responsibilities for fulfilling the national objectives of a) protecting the insurance system from the consequences of insolvency of some insurers and b) reducing the negative impact of the operational risks generated by the use of information and communication technology.

The NCMO will identify, monitor and assess systemic risk and will identify the institutions and structures of the financial system that are systemically relevant. Moreover, the NCMO will set, pursue and reassess on a regular basis the intermediate objectives of the macroprudential policy and its instruments in order to reduce the risks to the stability of the national financial system.

În plus, CNSM este responsabil de coordonarea gestiunii crizelor financiare, sens în care emite recomandări în vederea stabilirii măsurilor necesare pentru reducerea riscului de contaminare, în cazul în care unul sau mai mulţi participanţi la sistemul financiar se confruntă cu dificultăţi care au impact sistemic, şi monitorizează implementarea acestora.

In order to achieve these objectives, the NCMO Strategy is based on the following principles:

Continuity – a principle derived from the need of policy coherence;
Predictability – a principle concerning the preparation and implementation of policies;
Legality – fulfilment in good faith of the assumed obligations;
Proportionality – a principle concerning the suitability of necessary actions.

III. Macroprudential instruments

The instruments needed for the effective and efficient achievement of the above-mentioned intermediate objectives, which are within the field of competence of the National Committee for Macroprudential Oversight, in line with the provisions of ESRB Recommendation 2013/1 (Recommendation B), are the following:

To achieve objective A:
1. Countercyclical capital buffer (CCB)
2. Sectoral capital requirements (including intra-financial system)
3. Macroprudential leverage ratio;
4. Loan-to-value requirements (LTV)
5. Loan-to-income/debt (service)-to-income requirements (LTI)
To achieve objective B:
1. Macroprudential requirements for the liquidity ratio (e.g. liquidity coverage ratio – LCR) ;
2. Macroprudential restrictions on funding sources (e.g. net stable funding ratio – NSFR)
3. Macroprudential unweighted limit to less stable funding (e.g. loan-to-deposit ratio)
4. Margin and haircut requirements
To achieve objective C:
1. Large exposure restrictions
2. CCP clearing requirement
To achieve objective D:
1. SIFI capital surcharges
To achieve objective E:
1. Margin and haircut requirements on CCP clearing
2. Increased disclosure
3. Structural systemic risk buffer
To achieve objective F:
1. Increase the level of training of the bank staff directly involved in lending
2. Greater dissemination of statistical data
3. Bring into domestic bank loan portfolio the higher quality sold loans and the loans granted directly by non-resident banks to non-financial corporations in Romania
To achieve objective G:
1. Provide payment services at prices adequate to both market conditions in Romania and the needs of consumers who do not benefit from financial services
2. Greater dissemination of information
To achieve objective H:
1. Preparation of recovery plans by the insurance companies facing financial difficulties, also the measures to restore the level of own funds or change the risk profile.
2. The resolution mechanism (addressing the insurance companies with a significant share in the national insurance system).
3. Insurance guarantee fund
To achieve objective I:
1. Action plan on the way to remedy the vulnerabilities identified during the IT audit.

The competent authorities (the NBR, the FSA, the Government) will identify the situations in which the macroprudential policy instruments need to be used and will make proposals with a view to establishing the appropriate instrument, its level, timing and institutions to which the instrument applies, which will be subject to the analysis and decision of the National Committee for Macroprudential Oversight. The NCMO’s decisions on the activation and deactivation of macroprudential instruments will be implemented at the level of financial institutions by the competent authorities.

The list of macroprudential instruments set by the sectoral supervisory authorities in order to achieve the intermediate objectives of the National Committee for Macroprudential Oversight (NCMO) is presented in Annex 1a

The competent authorities (the NBR, the FSA, the Government) will periodically assess the appropriateness and effectiveness of the instruments in achieving the macroprudential policy objectives for the components of the financial system within the field of competence of these authorities, informing the NCMO of the results of their analyses. Based on the assessments performed by the competent authorities, the NCMO adopts decisions on strengthening the macroprudential policy strategy, including on instruments which are not established in Union legislation, the transmission mechanism of these instruments, as well as on the identification of indicators that may inform decisions on their application, deactivation and calibration. Where intermediate objectives or additional instruments are required, the list will be expanded accordingly. The selection of additional macroprudential instruments will be based on their efficiency and effectiveness in addressing structural and cyclical risks in the financial system.

Given that macroprudential policy measures can only diminish the probability of a future financial crisis but not completely eliminate it, it is important to also define crisis management mechanisms. The NBR is involved in the design and implementation of the national resolution and recovery regimes for credit institutions. According to the provisions of Article 3 para. (5) of Law No. 12/2017 on the macroprudential oversight of the national financial system, the NCMO is responsible for the coordination of financial crisis management, henceforward it issues recommendations for establishing the necessary measures to mitigate the risk of contamination, when one or more participants in the financial system face difficulties that have a systemic impact, and monitors their implementation. In accordance with the provisions of Article 5 para. (4) of Law No. 12/2017 on the macroprudential oversight of the national financial system, the Technical Commission on financial crisis management will support the activity of the General Board by drawing up analyses concerning one or more participants in the financial system which are failing or are likely to fail, thereby having a systemic impact, and by putting forward the measures necessary to mitigate the risk of contagion of other financial institutions or markets, or the financial system as a whole.

IV. Adoption of the macroprudential policy decisions

In accordance with the provisions of Article 2 para. (2) of Law No. 12/2017 on the macroprudential oversight of the national financial system, in achieving its fundamental objective the National Committee for Macroprudential Oversight is operationally independent. The NCMO will adopt macroprudential policy decisions independently, without seeking or taking instructions from public authorities or from any other institution or authority. The implementation of decisions will take into account the economic and monetary policies and the microprudential regulations applied to the financial system. The NCMO adopts macroprudential policy decisions (i) on its own initiative, (ii) at the proposal of the competent authorities (the NBR, the FSA, the Government) in the field of macroprudential oversight of the national financial system, or (iii) taking into consideration the ESRB recommendations and warnings on systemic risk.

Macroprudential policy decision-making is a four-step process¹ :

Identification and assessment of systemic risks
Systemic risk monitoring is achieved through a set of indicators that will be expanded once macroprudential instruments become operational, in the process of implementation of intermediate objectives; the latter will also facilitate decision-making by the NCMO regarding the activation / deactivation and calibration of instruments.

The list of indicators will be expanded in parallel with the development and implementation of macroprudential instruments. The decision on the publication of the thresholds for individual indicators that macroprudential policy decisions will refer to (activation / deactivation and calibration of instruments) will be adopted by the NCMO General Board.
Selection and calibration of macroprudential instruments
Decisions on the selection and calibration of macroprudential instruments will be made by the NCMO based on the following criteria:
1. effectiveness and efficiency in achieving the objectives of macroprudential policy (mitigation or elimination of risks);
2. proportionality of the instrument (the implementation effort should be proportional with the contribution to the systemic risk);
3. simplicity of implementation (definition, requirements, implementation);
4. efficiency of the instrument in terms of costs and benefits;
5. avoidance of regulatory arbitrage in defining and selecting the instrument (in cooperation with other macroprudential authorities)
6. avoidance of negative cross-border spillovers;
7. compatibility of the instrument with other macroprudential and microprudential instruments at national and EU level.
Implementation of macroprudential instruments
The underlying principles are listed below:
1. Independence of the macroprudential policy – Macroprudential policy decisions should be independent, without internal pressures (exerted by monetary policy and microprudential policy) and without external pressures (from financial institutions and fiscal policy), so that decision-making should focus exclusively on achieving the ultimate objective of the macroprudential policy.
2. Transparency – Timely publication of macroprudential policy decisions gives the financial sector and the general public a better understanding of macroprudential policy, unless publication could have a disruptive effect on financial stability.
3. Responsibility – the NCMO will pursue its ultimate objective by activating or deactivating macroprudential instruments, taking into account indicators and other tools in a transparent manner.
4. Avoidance of inaction bias – The explicit formulation of the objectives, as well as of the aim/aims of each instrument ensures the timely activation and calibration of macroprudential instruments, in response to the developments in the financial system, thus avoiding the inaction or action bias.
5. Guided discretion – Given that macroprudential instruments can generate multiple effects on the financial system, the macroprudential policy decisions on the activation/deactivation and calibration of macroprudential instruments should not be based entirely on strict rules, allowing the macroprudential authorities a high degree of flexibility and the possibility of entering qualitative factors in the decision-making process.
6. Flexibility – The macroprudential policy should have at its disposal a sufficient range of instruments available to be implemented in order to mitigate or prevent the emergence of systemic risks.
7. Legal framework – An adequate legal framework is required in order to ensure timely implementation and control over the macroprudential instruments.
8. Coordination – The efficiency of the macroprudential policy depends on coordination with monetary policy and microprudential supervision, as well as with the other supervisory authorities, national and European institutions (the ECB, the ESRB, the SSM, the EBA and the EC).
Evaluation of macroprudential instruments
The following principles will be taken into account in the assessment of the macro-prudential instruments:
1. periodic revaluation of macroprudential objectives and instruments;
  The NCMO will regularly reassess the appropriateness of the intermediate objectives, in view of the experience gained in operating the macroprudential policy framework, structural developments in the financial system and the emergence of new types of systemic risks. The NCMO will also periodically review the effectiveness and efficiency of the macroprudential instruments in achieving the ultimate and intermediate objectives of macroprudential policy. In the event of identifying new risks to financial stability that cannot be satisfactorily managed by using the existing set of macroprudential instruments, the replacement or introduction of adequate instruments or, when appropriate, the activation/deactivation or recalibration of existing instruments will be decided accordingly.
2. reciprocation for macroprudential instruments established by the authorities in other Member States.
  The NCMO will take into account the provisions of the relevant legal framework of the European Union and will decide on the appropriateness of amending the macroprudential policy, following the information on macroprudential policy decisions in other Member States. This will ensure a level playing field at EU level and the removal of regulatory arbitrage opportunities.

V. Communication of macroprudential policy decisions

The NCMO will ensure the timely publication of the macroprudential policy measures adopted, on its own website, except for those that, through publication, might pose risks to financial stability.

The publication of macroprudential policy strategy elements and the macroprudential instruments on the NCMO’s website is decided by the NCMO General Board.

The NCMO may issue press releases regarding the macroprudential policy decisions and the reasons for taking them, if this does not pose a threat to financial stability, as well as other materials containing information for the public.

The macroprudential policy decisions are included in the NCMO’s Annual Report presented to the Romanian Parliament. In addition, the annual reports published by the competent authorities (the NBR, the FSA) contain an assessment of systemic risks and of vulnerabilities of the financial system. At the same time, the results of the macroprudential analyses can be presented to credit institutions and the specialised/general public during conferences and seminars organised by the NCMO.

The NCMO may issue public statements regarding the systemic risk in order to warn, recommend, inform or raise awareness among the general public, financial market participants and other stakeholders, except when this poses a threat to financial stability.

In the communication of its macroprudential policy decisions, the NCMO will comply with the following principles:

Transparency – except for cases where threats to financial stability or confidentiality issues may arise;
Clarity – clarity in the communication of macroprudential policy decisions is essential for the effectiveness and efficiency of the measures;
Proportionality – the effort in implementing the measure versus the importance of the decision.

VI. Cooperation with other institutions

The NCMO ensures the cooperation and the exchange of information with the European Commission, the European Banking Authority, and the European Systemic Risk Board, as well as with competent/designated authorities in other Member States and third countries, taking the necessary measures for preserving the confidentiality of exchanged information.

The NCMO informs the European Systemic Risk Board of the actions taken for preventing and mitigating systemic risks at national level, by observing, where appropriate, the deadlines set in ESRB recommendations or in any other relevant acts issued at EU level. Without prejudice to relevant provisions of Union legislation, the NCMO informs the ESRB prior to the application of macroprudential instruments at national level if significant cross-border effects on other Member States or the single market are to be expected.

In order to carry out its financial stability tasks, the NCMO is authorised to collect raw statistical data and information, while ensuring the protection of data referring to individual subjects – either legal entities or individuals – obtained directly or indirectly, from administrative or other sources.

The macroprudential policy strategy will be periodically assessed by the NCMO. Based on this assessment, amendments to the macroprudential policy strategy can be made, if necessary.

The communication and coordination of the macroprudential policy with the ECB, the ESRB, other EU institutions and national macroprudential designated authorities of Member States are performed in accordance with the relevant legal framework of the European Union.

In accordance with the ESRB.