This article is part of a series of analyses on the challenges facing banking this decade, by Dr Andrei Radulescu, Head of Macroeconomic Research. 

Romania’s banking sector has closely mirrored the structural changes in the Eurozone banking sector, our main economic partner, especially after Romania joined the European Union. A range of factors contributed to this convergence between the structure of the domestic sector and that of the Eurozone, including the growing integration over time of the national economy into Europe’s economic circuit and the high share of banks with European capital in Romania’s banking landscape.

Following the onset of the Great Recession, the domestic banking sector faced an alarming surge in the non-performing loan ratio, which remained at a very high level (over 20%) until nearly the middle of the last decade.

At the same time, banks’ exposure to the government sector rose significantly after the economic and financial crisis (the most severe since the end of World War II), a trend consistent with developments in the Eurozone.

This dynamic was strongly influenced by the development of the government securities market, including in the context of reforms implemented under the guidance of the International Monetary Fund. As a result, banks’ exposure to the government sector as a share of total assets increased from 5% in 2008 to 22.8% in April 2020, and to 24% at the end of the first quarter of this year.

The share of banks’ exposure to the government sector rose sharply in the first half of the post-crisis economic cycle, when the domestic economy felt the waves and consequences of the Great Recession most acutely — the indicator climbed from 5% in 2008 to 21.1% in 2014 and subsequently fluctuated (through April 2020) in the 21.1% - 22.8% range.

Likewise, the increase in banks’ exposure to the government sector during the pandemic was not significant, from 22.8% in April 2020 to just 24% in March 2021. 

Exposure of Romania’s banking system to the public and private sectors (%, share of total assets)

Source: National Bank of Romania, Financial Stability Reports

On the other hand, the share of banks’ exposure to non-government credit (in total assets) decreased during the post-crisis economic cycle, a trend similar to that seen in the Eurozone, our main economic partner. We believe this dynamic was driven mainly by factors external to banks, including:

1. the sluggish pace of productive investment by companies during the post-crisis cycle (at least compared with the previous cycle), given the consequences of the Great Recession, especially in capital-intensive sectors (construction, real estate, etc.);
2. the high level of trade credit (a long-standing feature of the domestic economy);
3. multinationals borrowing from banks outside the country or directly from their parent groups;
4. challenges in the Romanian-owned corporate sector, including the large number of companies with negative equity, which are not bankable;
5. the growing role of financing via European funds, as European Union programmes were implemented;
6. an elevated household savings rate during the post-crisis cycle (at least compared with the previous cycle);
7. the underdevelopment of the equity market and the corporate bond market in Romania in the post-crisis cycle — although in recent years there have been favourable developments in building out these segments of the financial market, which will in turn contribute to higher exposure of domestic banks to corporate lending.
   
   

Structure of the liabilities of Romania’s non-financial companies (%)

Source: National Bank of Romania

At the same time, the regulations adopted in the wake of the Great Recession (including the Basel III framework) led to a significant increase in prudential standards, which in turn helped clean up the banking sector and drove a marked decline in the non-performing loan ratio, to below 4% during 2021, as shown in the chart below.

NPL ratio in Romania (%)

 Source: National Bank of Romania

In recent quarters the banking sector has faced an unprecedented liquidity surplus, which contributed to greater exposure to the government sector after the pandemic hit — a period when the real economy underwent an adjustment induced by the restrictions introduced to counter the health crisis. 

Gap between non-government deposits and non-government credit in Romania (RON billion)

Source: National Bank of Romania

In conclusion, this analysis shows that the dynamics of Romania’s banking market are aligned with developments at European and global level in terms of exposure to sovereign debt, with differences driven mainly by national specifics.

This series also includes:

• The paradigm shift in monetary policy
• Excess liquidity accumulating in the banking sector
• Structure of banking system assets – developments in the Eurozone, Romania’s main economic partner
• Outlook for the banking sector