Potential new risks to financial stability arise from the high exposure of banks to the Romanian sovereign and to the real estate sector, banks’ funding in foreign exchange (FX), and the fast growth of non-bank financial lenders, International Monetary Fund (IMF) mission in Bucharest warns in its Concluding Statement, as a press release informs.
US-based financial institution shows a Debt-Service-to-Income (DSTI) limit on mortgage lending would mitigate risks from the exposure of banks to the real estate sector. The proposed DSTI limit can boost borrowers’ resilience and should be imposed on all mortgages, including those made under the Prima Casa program. The government’s strategy to gradually scale back the program is welcome.
At the same time, a carefully calibrated capital surcharges could increase resilience against potential losses from sovereign exposures.
“The Romanian banking system is vulnerable to valuation losses in the event of sharp increases in interest rates. Capital surcharges – preferably the Systemic Risk Buffer – should be calibrated carefully to increase the resilience of the system while avoiding unintended market impacts,” IMF recommends.
The processes supporting banks’ supervisory review should be further developed, and the framework for Emergency Liquidity Assistance be finalized and implemented. IMF points out the central bank should establish liquidity facilities for the Bank Deposit Guarantee Fund. Finally, a stronger supervision of non-bank financial lenders would reduce regulatory arbitrage, mitigate credit risks and ward off reputational risk to the financial system.
“Legislative initiatives that harm the financial system should be avoided. Several recent initiatives would, if enacted, reduce the amount of credit provided to the real economy and slow the resolution of NPLs, thereby adversely affecting financial stability,” IMF officials stated.
These include the proposals for capping interest rates for household lending and the prices at which individuals re-purchase debts acquired by third parties.
An IMF staff team visited Bucharest during March 6-16 to conduct the 2018 Article IV consultation discussions.
Read also about IMF warning regarding Romanian economy.