Financial Stability Report 2015

Transcription

1 Press Conference Financial Stability Report 215 Liviu Voinea Deputy Governor Bucharest, 6 October 215 1

2 Map of systemic risks Chapter 1. International and domestic economic and financial environment Chapter 2. Real sector Chapter 3. Financial system Outline Chapter 4. Financial system infrastructure Chapter 5. Financial stability, regulatory framework and macroprudential policies Special feature: Romania s public debt sustainability seen from the perspective of financial stability Key 1 messages of the 215 Financial Stability Report 2

3 Map of systemic risks Chapter 1. International and domestic economic and financial environment Chapter 2. Real sector Chapter 3. Financial system Outline Chapter 4. Financial system infrastructure Chapter 5. Financial stability, regulatory framework and macroprudential policies Special feature: Romania s public debt sustainability seen from the perspective of financial stability Key 1 messages of the 215 Financial Stability Report 3

4 Map of risks to financial stability No severe systemic risk Risk generated by external uncertainty surrounding global economic growth, the state of the international financial system, a possible reversal of the downward trend in interest rates worldwide and shifts in investor sentiment Domestically, the risk of returning to pro cyclical economic policies Risk of further modest dynamics of loans to non financial corporations, despite the sustainable growth potential Contagion risk from the banking sector in Greece Credit risk associated with the stock of loans, amid the widening share of domestic currency loans Risk triggered by the geopolitical situation in the Middle East, with possible consequences on the European single market severe systemic risk high systemic risk moderate systemic risk low systemic risk 4

5 Map of systemic risks Chapter 1. International and domestic economic and financial environment Chapter 2. Real sector Chapter 3. Financial system Outline Chapter 4. Financial system infrastructure Chapter 5. Financial stability, regulatory framework and macroprudential policies Special feature: Romania s public debt sustainability seen from the perspective of financial stability Key 1 messages of the 215 Financial Stability Report 5

6 Non financial private sector indebtedness (I) Loan to deposit ratio witnessed a considerable adjustment, falling below one, which is deemed an adequate level from a macroprudential perspective Loan to deposit ratio, non government sector Further adjustment of the loan to deposit ratio could turn counterproductive, since it would affect lending Credit institutions liquidity improved, correcting an imbalance that had built up in the years prior to the global financial crisis 1 5 Mar.9 Jun.9 Sep.9 Dec.9 Mar.1 Jun.1 Sep.1 Dec.1 Mar.11 Jun.11 Sep.11 Dec.11 Mar.12 Jun.12 Sep.12 Dec.12 Mar.13 Jun.13 Sep.13 Dec.13 Mar.14 Jun.14 Sep.14 Dec.14 Mar.15 Jun.15 Source: NBR total lei foreign currency foreign liabilities/total liabilities (rhs) 2 1 6

7 Non financial private sector indebtedness (II) MFIs total assets to GDP ratio Relative sizes of banking and non bank financial sectors in CEE countries 17% 16% 15% 14% 13% 12% 11% 1% Hungary Slovakia Czech Rep. Slovenia Poland R 2 =.576 Romania 9% Lithuania 8% 15% 25% 35% 45% 55% OFIs total assets to GDP ratio Source: ECB, national financial accounts Croatia Estonia Corporate and household indebtedness of GDP Non financial corporations Households Bulgaria Czech Republic Hungary Poland Romania Source: ECB, Eurostat, Reuters, NBR calculations 7

8 Non financial private sector indebtedness (III) There is a sustainable borrowing potential economy wide: about 1, extremely well performing companies (selected in terms of profitability and investment criteria) that play a major role in economy report low indebtedness and could service a significant loan volume Potential borrowing volume of the best performing firms, December 214 The role in economy of non financial corporations with sustainable borrowing potential 3,5 lei bn , 2, , 1, , Agriculture Industry lending potential (rhs) Services and utilities Construction and real estate no. of companies Trade 5 Gross value added Turnover Total assets Number of employees Source: MPF, NBR calculations Source: MPF, NBR calculations 8

9 External balance (I) The current account deficit, a significant vulnerability when the financial crisis broke out in 28, currently stands at sustainable levels (.4% of GDP in 214). Romania has no BoP related problems Romania s export dynamics are strongly influenced by the economic picture in euro area countries Current account total and components of GDP goods primary income secondary income services current account Euro area economic growth and Romania s export dynamics 27 Q1 27 Q3 28 Q1 28 Q3 29 Q1 29 Q3 21 Q1 21 Q3 211 Q1 211 Q3 212 Q1 212 Q3 213 Q1 213 Q3 214 Q1 214 Q3 215 Q1 real annual growth rate of euro area GDP nominal annual growth rate of Romanian goods exports (rhs) Source: Eurostat, NBR calculations Source: Eurostat, NBR calculations 9

10 External balance (II) Romania s exports grew by 6.6% vs. an EU average of 4.4%, even though unit labour cost increased price competitiveness factors became less important for export performance and exports added value rose In 214, 41.5% of exports were medium and high tech goods staying flat against 213, but rising by 37.8% from 211 Balance on trade in goods by added value Foreign trade in motorcars of GDP low tech medium high tech other Source: NIS, NBR calculations medium low tech high tech Note: The classification of industries according to their technological intensity and of services according to knowledge intensity was made based on Eurostat aggregation EUR bn. thou net exports no. of exported motorcars (rhs) no. of imported motorcars (rhs) Source: NIS, NBR calculations

11 External balance (III) Financial soundness of foreign trade companies continues to be above the economy wide average, but these companies make recourse mostly to loans from non resident financial institutions and to intercompany lending Indicators for foreign trade companies versus non financial corporations (December 214) Return on equity NPL ratio* Leverage ratio (rhs) net exporters net importers total companies economy wide Source: MPF, NBR, NIS General liquidity (rhs) EBIT/interest expenses (rhs) * June Q2 Funding of foreign trade companies (financing from resident NBFIs not included) EUR bn. 214 Q4 215 Q2 213 Q2 214 Q4 215 Q2 213 Q2 Financial loans Intercompany loans Foreign loans Source: NBR, NIS net exporters net importers 214 Q4 215 Q2 213 Q2 Financial loans Loans from domestic banks 214 Q4 Total 215 Q2 Total indebtedness* * June

12 Map of systemic risks Chapter 1. International and domestic economic and financial environment Chapter 2. Real sector Chapter 3. Financial system Outline Chapter 4. Financial system infrastructure Chapter 5. Financial stability, regulatory framework and macroprudential policies Special feature: Romania s public debt sustainability seen from the perspective of financial stability Key 1 messages of the 215 Financial Stability Report 12

13 Non financial corporations (I) Most profitable sectors: trade, services and agriculture The firms operating in sectors producing goods and services with high value added and innovative technology improved their performance Leverage ratio () Non financial corporations financial performance by business sector (214) Source: MPF, NBR Construction (8.3) Real estate (2.5) Utilities (6.7) Mining and quarrying (5.7) Agriculture (3.2) Manufacturing (24.) ROE () Trade (17.1) Services (32.5) Financial soundness indicators for non financial companies, by technological intensity EBIT/Interest expenses Source: MPF, NBR Leverage ratio Debt/equity low tech high tech knowledge intensive services other services ROE (rhs)

14 Non financial corporations (II) Foreign currency loans, albeit still prevailing, are on the wane Non performing loan volume shrank markedly, due both to credit institutions balance sheet clean up efforts and the slower deterioration of the loan portfolio quality Banks need to continue implementing a prudent lending policy, with tougher conditions imposed on unhedged borrowers, in order to raise bank asset quality lei bn. Jun.9 Oct.9 Feb.1 Jun.1 Oct.1 Feb.11 Jun.11 Oct.11 Feb.12 Jun.12 Oct.12 Feb.13 Jun.13 Oct.13 Feb.14 Jun.14 Oct.14 Feb.15 Jun.15 Source: NBR Non performing loans (NPL) by currency total loans, foreign currency total loans, lei NPL ratio, lei NPL ratio, foreign currency

15 Non financial corporations (III) The major vulnerability of firms remains the lack of financial discipline Corporate losses stayed high, in spite of the notable improvement in the macroeconomic environment The loss incurred by non financial corporations sector in 214 stood at lei 42 billion (about EUR 9.4 billion), with the private sector having the largest contribution thereto (lei 39 billion, or EUR 8.7 billion). Losses incurred by state owned enterprises amounted to lei 3 billion, or EUR.7 billion Aggregate loss of firms with net negative results by ownership (nominal values) lei bn companies with majority private capital companies with majority state capital Source: NTRO, MPF, CCR, NBR calculations 15

16 Non financial corporations (IV) The firms having posted losses for a long time or whose financial discipline is weak distort the competition in real economy, impact inflation and cause a drop in the value added across the economy and in GDP respectively Incurring losses repeatedly leads to capital erosion and, hence, to higher indebtedness. Some 75% of loss making firms reported negative net worth in 214. Across the economy, there are thousand firms with deficit equity (48% of the total number of firms), while almost one third of companies posted negative equity over the last three years It should be noted the high frequency of loans granted by private shareholders to their own loss making firms. At end 214, the balance on these loans came in at lei 87.3 billion (accounting for 24 of total debt reported by those companies), of which lei 63.9 billion worth of loans directly from shareholders and lei 23.4 billion worth of loans from affiliates of the same group of companies 16

17 Non financial corporations (V) Insolvent firms also account for the largest share of non performing loans In the year prior to entering insolvency proceedings, those firms reported negative profitability and a far lower asset utilisation efficiency than the other companies 3 lei bn. Non performing loans generated by insolvent/bankrupt firms 3 Financial soundness indicators for the newly insolvent companies in the year prior to entering insolvency proceedings 2 days June non performing loans, other companies non performing loans, insolvent/bankrupt companies share of loans to insolvent companies in total loans (rhs) claim recovery period newly insolvent companies claim recovery period total economy ROA newly insolvent companies (rhs) ROA total economy (rhs) 15 Source: NTRO, MPF, CCR, NBR calculations Source: NTRO, NBR calculations 17

18 Households (I) Over the recent years, lending targeted particularly above average income earners Low income households still face high indebtedness, being vulnerable to interest rate shocks Once the loans to below minimum wage earners outstanding in 28 reached maturity, the share of such borrowers narrowed Distribution of household indebtedness to banks by monthly net wage (individual data) Distribution of the number of borrowers, natural entities, by monthly net wage (individual data) Q Q2 28 median Q Q2 <=9 (9;1,7] >1,7 Total (rhs) Source: NBR, CB, MPF Debtor's monthly net wage (lei) Q2 Source: NBR, CB, MPF the share of debtors by income category (%) 215 Q <=9 (9;1,7] >1,7 Debtor's monthly net wage (lei) 215 Q2 18

19 Households (II) CHF denominated loans hold a low share of GDP (1.3%) and a small weight in total non government credit (4.1%) data as at June 215 Compared to end 214, the number of CHF denominated loans took a plunge (of 24% December 214 through July 215), this trend gaining momentum in the last months 5 4 Distribution of borrowers with CHF denominated loans by monthly net wage (June 215) , 6, Distribution of borrowers with CHF denominated loans by loan size (June 215) lei mill., total loans stock 27.8% 3 DSTI (median, rhs) 15 5, 2 1 4, , 2, 25.7% ( 9] (9 1,7] (1,7 2,5] (2,5 3,5] (3,5 5,] Monthly net wage (lei) (5, 7,] >7, 1, 21.3% 25.2% <= CHF 4, (CHF 4, CHF 18,) (CHF 18, CHF 47,] >= CHF 47, Source: NBR, CB, MPF Source: NBR, CB 19

20 Households (III) The declining interest rate on lei denominated mortgage loans has stimulated the extension of new loans in local currency More than 9% of mortgage loans were granted at a variable interest rate First Home programme made an important contribution to the recovery of household lending when it was launched and, starting in 213, to the step up in loans in local currency The correlation between the volume of new mortgage loans and the interest rate on leu denominated mortgage loans lei bn Jan. Jul.15 volume of new mortgage loans in lei Source: NBR average interest rate on new mortgage loans in lei

21 Households (IV) Households net creditor position vis à vis the financial system improved following a rise in bank deposits in nominal terms (up 8% in June 215 vs June 214) and a decrease in the stock of loans to households Household savings with banks edged higher amid the cut in deposit rates lei bn. Q1 28 Q4 28 Source: NBR Households position vis à vis banks (asset sales included) and NBFIs Q3 29 Q2 21 Q1 211 Q4 211 Q3 212 Q2 213 Q1 214 position in lei position in foreign currency net total position annual real growth rate of deposits (rhs) Q Loan to deposit ratio for households Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q3 211 Q1 212 Q3 212 Q1 213 Q3 213 Q1 214 Q3 214 total lei FX Source: NBR Q1 215 Q

22 Households (V) Households net wealth stuck to the uptrend that had started in 212: up 24% in 214 from 211 and 3.5% in 214 against 213, mainly due to net financial assets doubling between 211 and 214 The ratio of real estate assets to net financial assets: 1.75 in 214 against 1.85 in 213 and 5.5 in 29 1,2 1, lei bn. Households net wealth 1,2 1, Households assets accounted for 156% of GDP, while their liabilities made up 17.8% of GDP in 214 In 214 vs 213, behind the expansion in net wealth stood both the 2.5% pick up in financial and real estate assets and the 2.8% reduction in liabilities Source: NBR, NIS, FSA real estate assets net financial assets net wealth/gross disposable income (rhs) net wealth/net money income (rhs) real estate assets/net financial assets (rhs) 22

23 Households (VI) Credit risk stemming from bank loans to households contracted The non performing loan ratio fell by almost 3 age points December 213 through June 215 (to 7.5% from 1.2%) Loans granted by 28 account for approximately 7% of total non performing loans Banks NPL ratio by loan type Sep.8 Dec.8 Mar.9 Jun.9 Sep.9 Dec.9 Mar.1 Jun.1 Sep.1 Dec.1 Mar.11 Jun.11 Sep.11 Dec.11 Mar.12 Jun.12 Sep.12 Dec.12 Mar.13 Jun.13 Sep.13 Dec.13 Mar.14 Jun.14 Sep.14 Dec.14 Mar.15 Jun.15 Source: NBR, CB total NPL ratio real estate loans mortgage backed consumer loans non mortgage backed consumer loans credit card and overdraft NPL ratio by the quarter of credit agreement over a three year moving window Q1 23 Q4 23 Q3 24 Q2 25 Q1 26 Q4 26 Q3 27 Q2 28 Q1 29 Q4 29 Q3 21 Q2 211 Q1 212 Q4 212 Q3 213 Q2 214 Q1 215 cumulative distribution of NPLs (rhs) Source: NBR, CB NPL ratio

24 Map of systemic risks Chapter 1. International and domestic economic and financial environment Chapter 2. Real sector Chapter 3. Financial system Outline Chapter 4. Financial system infrastructure Chapter 5. Financial stability, regulatory framework and macroprudential policies Special feature: Romania s public debt sustainability seen from the perspective of financial stability Key 1 messages of the 215 Financial Stability Report 24

25 Banking sector (I) Asset structure of credit institutions operating in Romania Dec. 28 Dec. 29 Dec. 21 Dec. 211 Dec. 212 Dec. 213 Jun. 214 of total assets Dec. 214 Jun. 215 Domestic assets, of which: Claims on the NBR and credit institutions, of which: Claims on the NBR Claims on the domestic non bank sector, of which: Claims on the government sector Claims on companies* Claims on households Other assets Foreign assets Note: Due to rounding, some totals may not correspond with the sum of the separate figures. * Non financial corporations and non monetary financial institutions Source: NBR Aggregate monetary balance sheet data of credit institutions 25

26 Banking sector (II) Liability structure of credit institutions operating in Romania Dec. 28 Dec. 29 Dec. 21 Dec. 211 Dec. 212 Dec. 213 of total liabilities Jun. 214 Dec. 214 Jun. 215 Domestic liabilities, of which: Interbank deposits Government sector deposits Corporate deposits* Household deposits Capital and reserves Other liabilities Foreign liabilities Note: Due to rounding, some totals may not correspond with the sum of the separate figures. * Deposits from non financial corporations and non monetary financial institutions Source: NBR Aggregate monetary balance sheet data of credit institutions 26

27 Banking sector (III) Foreign financing kept declining, the drop being offset by an increase in financing from domestic sources. External contagion risk abated Foreign financing is largely ensured by deposit taking and loans from financial institutions and especially from parent banks Foreign exposures and the effect on corporate and household lending EUR bn. Dec.13 Dec.14 Jun.15 Dec.13 Dec.14 Jun.15 Dec.13 Dec.14 Jun.15 5 EUR bn. 1 Foreign financing from parent banks Source: NBR Loans to nonfinancial corporations (rhs) lei bn. Loans to households (rhs) Dec.28 Dec.29 Dec.21 Dec.211 Dec.212 Dec.213 Mar.214 Jun.214 Sep.214 Dec.214 Mar.215 Jun.215 Dec.28 Dec.29 Dec.21 Dec.211 Dec.212 Dec.213 Mar.214 Jun.214 Sep.214 Dec.214 Mar.215 Jun.215 Dec.28 Dec.29 Dec.21 Dec.211 Dec.212 Dec.213 Mar.214 Jun.214 Sep.214 Dec.214 Mar.215 Jun.215 Dec.28 Dec.29 Dec.21 Dec.211 Dec.212 Dec.213 Mar.214 Jun.214 Sep.214 Dec.214 Mar.215 Jun.215 Dec.28 Dec.29 Dec.21 Dec.211 Dec.212 Dec.213 Mar.214 Jun.214 Sep.214 Dec.214 Mar.215 Jun.215 Source: ECB Foreign liabilities of the banking sector Hungary Romania Bulgaria Poland Czech Rep. foreign liabilities (rhs) foreign liabilities in total liabilities other banks Austrian owned banks Greek owned banks French owned banks 27

28 Banking sector (IV) Implementation of the CRD IV/CRR regulatory framework starting 1 January 214 helped strengthen the capital position of EU banking sectors Capitalisation of the Romanian banking sector is similar to that of countries in the region, comparing favourably with most countries of origin having subsidiaries in Romania Capital adequacy indicators Dec.8 Mar.9 Jun.9 Sep.9 Dec.9 Mar.1 Jun.1 Sep.1 Dec.1 Mar.11 Jun.11 Sep.11 Dec.11 Mar.12 Jun.12 Sep.12 Dec.12 Mar.13 Jun.13 Sep.13 Dec.13 Mar.14 Jun.14 Sep.14 Dec.14 Mar.15 Jun.15 solvency ratio Tier 1 capital ratio for credit risk Tier 1 capital ratio total capital ratio (CRD IV/CRR) Tier 1 capital ratio (CRD IV/CRR) Common Equity Tier 1 capital ratio (CRD IV/CRR) Source: NBR 28

29 Banking sector (V) Leu denominated loans to the private sector gathered pace. The shift in banking sector s focus to lending in local currency benefits unhedged borrowers, either households or companies Corporate lending remains weak 5 Annual growth rate of loans to the private sector 12 lei bn. Growth rate of the components of loans to the private sector Dec.8 Mar.9 Jun.9 Sep.9 Dec.9 Mar.1 Jun.1 Sep.1 Dec.1 Mar.11 Jun.11 Sep.11 Dec.11 Mar.12 Jun.12 Sep.12 Dec.12 Mar.13 Jun.13 Sep.13 Dec.13 Mar.14 Jun.14 Sep.14 Dec.14 Mar.15 Jun.15 Source: NBR lei foreign currency total 1 Dec.8 Dec.9 Dec.1 Dec.11 Dec.12 Mar.13 Jun.13 Jul.13 Aug.13 Sep.13 Oct.13 Nov.13 Dec.13 Mar.14 Jun.14 Sep.14 Dec.14 Jan.15 Feb.15 Mar.15 Apr.15 May.15 Jun.15 Source: NBR household loans (volume) corporate loans (volume) household loans, real annual growth rate (rhs) corporate loans, real annual growth rate (rhs) 29

30 Banking sector (VI) Interest spreads on leu denominated loans and deposits stayed on a downtrend Spreads on new business are lower than those calculated based on outstanding loans and deposits, and will depress operating profit in the period ahead Interest spreads on outstanding loans and deposits Interest spreads on new loans and deposits age points Dec.8 Dec.9 Dec.1 Dec.11 Mar.12 Jun.12 Sep.12 Dec.12 Mar.13 Jun.13 Sep.13 Dec.13 Jan.14 Feb.14 Mar.14 Apr.14 May.14 Jun.14 Jul.14 Aug.14 Sep.14 Oct.14 Nov.14 Dec.14 Jan.15 Feb.15 Mar.15 Apr.15 May.15 Jun.15 Source: NBR interest rate margin in domestic currency (households) interest rate margin in domestic currency (companies) interest rate margin in euro (households) interest rate margin in euro (companies) age points Dec.8 Dec.9 Dec.1 Dec.11 Dec.12 Mar.13 Jun.13 Sep.13 Dec.13 Jan.14 Feb.14 Mar.14 Apr.14 May.14 Jun.14 Jul.14 Aug.14 Sep.14 Oct.14 Nov.14 Dec.14 Jan.15 Feb.15 Mar.15 Apr.15 May.15 Jun.15 Source: NBR interest rate margin in domestic currency (households) interest rate margin in domestic currency (companies) interest rate margin in euro (households) interest rate margin in euro (companies) 3

31 Banking sector (VII) Loan to deposit ratio across the banking sector fell markedly in 214 Starting in 215, the ratio has rebounded slightly amid the marginal reduction in the deposit base combined with a slightly positive evolution of lending in May and June The ratio posted similar dynamics across the region, as credit institutions continued to grow less reliant on foreign financing in favour of locally borrowed money Loan to deposit ratio for the non government sector (regional comparison) Dec.7 Dec.8 Dec.9 Dec.1 Mar.11 Jun.11 Sep.11 Dec.11 Mar.12 Jun.12 Sep.12 Dec.12 Mar.13 Jun.13 Sep.13 Dec.13 Mar.14 Jun.14 Sep.14 Dec.14 Mar.15 Jun.15 Romania Hungary Bulgaria Poland Czech Republic Source: ECB 31

32 Banking sector (VIII) Stress testing In the event of a parallel upward shift by 2 basis points of the yield curve and the realisation of the forward rates implied by it (shock persistence), banks would incur a relatively low loss The loss is manifest on the background of the duration mismatch of interest rate risk sensitive assets and liabilities The impact is stronger compared with June 214, as a result of the increase in the share of fixed interest bearing assets in credit institutions balance sheet as well as in that of variable interest bearing liabilities, given the continued decline in the volume of foreign financing Source: NBR Credit institutions ranked by the impact of a 2 bp shock on own funds potential impact on own funds loss > 2% given a 2 bp decrease loss > 2% given a 2 bp increase 32

33 Banking sector (IX) Banking sector profitability Net profit/loss and ROE A profitable banking sector is needed in order to uphold real sector lending In 215 H1, the aggregate financial result was positive, benefitting from the negative dynamics of net expenses for IFRS provisions Operating profitability saw negative dynamics, under the influence of weak lending in recent years, as well as the ongoing adjustment of interest rates given the low eligible demand and credit institutions continued efforts aimed rather at non performing loan resolution 5 lei bn Dec.8 Dec.9 Dec.1 Dec.11 Dec.12 Mar.13 Jun.13 Sep.13 Dec.13 Mar.14 Jun.14 Sep.14 Dec.14 Mar.15 Jun.15 net profit/loss ROE (rhs) Source: NBR

34 Non bank financial sector (I) NBFIs lending remained in negative territory The explanation for the NBFIs loan stock contraction lies not only with demand, but also with supply, as a result of keener interest in managing risk The end of 214 and 215 H1 showed higher profit of NBFIs, due largely to the cut in operating expenses NBFIs lending and economic growth (annual change) NBFIs profitability lei mill Jun.9 Sep.9 Dec.9 Mar.1 Jun.1 Sep.1 Dec.1 Mar.11 Jun.11 Sep.11 Dec.11 Mar.12 Jun.12 Sep.12 Dec.12 Mar.13 Jun.13 Sep.13 Dec.13 Mar.14 Jun.14 Sep.14 Dec.14 Mar.15 iun.15 Jun.1 Dec.1 Jun.11 Dec.11 Jun.12 Dec.12 Jun.13 Dec.13 Jun.14 Dec.14 Jun.15 Source: NBR real GDP (rhs) loans granted by NBFIs loans granted by credit institutions Source: NBR Special Register General Register* * excluding NBFIs in the Special Register 34

35 Non bank financial sector (II) Shadow banking Exposures of the Romanian financial system Financial auxiliaries Non financial corporations From the perspective of the size and interconnections with other institutional sectors, shadow banking does not pose significant risks to the stability of the financial system as a whole However, the contagion risk from shadow banking of advanced economies cannot be ruled out in case of a sudden shift in investor sentiment on external financial markets Households Central bank Non profit institutions serving households Captive financial institutions and money lenders Other financial intermediaries, except insurance corporations and pension funds Deposit taking corporations except the central bank Rest of the world exposures over lei 1 bn. exposures below lei 1 mn. exposures between lei 1 mn. and lei 1 bn. Source: NBR Non MMF investment funds Money market funds (MMFs) Pension funds Insurance corporations General government 35

36 Financial markets (I) The emergence of temporary stress episodes following the uncertainty surrounding Greece s financial woes, as well as amid concerns over the fragile global economic growth, had a limited impact on the financial markets RON/EUR exchange rate volatility was lower in this period than the volatilities seen on other forex markets in the region Average interbank money market rates Jan.11 Mar.11 May.11 Jul.11 Sep.11 Nov.11 Jan.12 Mar.12 May.12 Jul.12 Sep.12 Nov.12 Jan.13 Mar.13 May.13 Jul.13 Sep.13 Nov.13 Jan.14 Mar.14 May.14 Jul.14 Sep.14 Nov.14 Jan.15 Mar.15 May.15 Jul.15 Stochastic volatility of RON/EUR exchange rate Jan.11 May.11 Sep.11 Jan.12 May.12 Sep.12 Jan.13 May.13 Sep.13 Jan.14 May.14 Sep.14 Jan.15 May.15 12M ROBOR 3M ROBOR stochastic volatility error bands Source: NBR Source: NBR 36

37 Financial markets (II) The convergence of yields on Romanian government securities towards those on regional and European government stocks strengthened July 214 through March Spread between yields on 5Y government securities in Romania and other European countries Alongside the local money and foreign exchange markets, the developments in the Romanian government securities market upholds the assertion of stronger synchronous movements with those seen across the region, regardless of the type of challenges that arose in the period under review Jan.12 Mar.12 May.12 Jul.12 Sep.12 Nov.12 Jan.13 Mar.13 May.13 Jul.13 Sep.13 Nov.13 Jan.14 Mar.14 May.14 Jul.14 Sep.14 Nov.14 Jan.15 Mar.15 May.15 Jul.15 Source: NBR RO DE spread RO HU spread RO CZ spread RO PL spread 37

38 Map of systemic risks Chapter 1. International and domestic economic and financial environment Chapter 2. Real sector Chapter 3. Financial system Outline Chapter 4. Financial system infrastructure Chapter 5. Financial stability, regulatory framework and macroprudential policies Special feature: Romania s public debt sustainability seen from the perspective of financial stability Key 1 messages of the 215 Financial Stability Report 38

39 Stability of ReGIS payment and settlement system ReGIS functioned smoothly July 214 through June 215, amid an increase in both the number and the average value of settled transfer orders A simulation based analysis points to a distribution of liquidity across the banking system capable of ensuring the normal functioning of ReGIS 1, Value of transfer orders settled in ReGIS lei bn. Jan.12 Mar.12 May.12 Jul.12 Sep.12 Nov.12 Jan.13 Mar.13 May.13 Jul.13 Sep.13 Nov.13 Jan.14 Mar.14 May.14 Jul.14 Sep.14 Nov.14 Jan.15 Mar.15 May.15 NBR credit institutions State Treasury annual average Maximum value of waiting queues in ReGIS lei bn. Jan.12 Mar.12 May.12 Jul.12 Sep.12 Nov.12 Jan.13 Mar.13 May.13 Jul.13 Sep.13 Nov.13 Jan.14 Mar.14 May.14 Jul.14 Sep.14 Nov.14 Jan.15 Mar.15 May.15 Source: NBR Source: NBR 39

40 Securities settlement systems The securities in SaFIR amounted to lei billion, up 4 from the end of the previous year This was attributed to the increase in the value of bonds recorded in the system, in spite of a further downtrend in the value of Treasury certificates lei bn Value of securities recorded in SaFIR Bonds Treasury bonds Source: NBR Jun.215 4

41 Map of systemic risks Chapter 1. International and domestic economic and financial environment Chapter 2. Real sector Chapter 3. Financial system Outline Chapter 4. Financial system infrastructure Chapter 5. Financial stability, regulatory framework and macroprudential policies Special feature: Romania s public debt sustainability seen from the perspective of financial stability Key 1 messages of the 215 Financial Stability Report 41

42 The NBR is aligned with the ECB/ESRB macroprudential standards (I) The majority of EU Member States have decided that the designated authority for CRD IV should be the central bank (17), the supervisory authority (5) or the government (1) Classification of Member States based on the institutional arrangements regarding the implementation of Recommendation ESRB/211/3 and the designated authority for CRD IV/CRR instruments CRD IV Macroprudential authority Designated authority Committee Central bank Supervisory authority Government No. Committee FR, LU, PL, SL, RO* ES, NL, HR,IT, BG AT,DE DK 13 Central bank BE, CZ, CY, EE, GR, HU, IE, LT, MT, PT, SK, UK LV 13 Supervisory authority FI, SE 2 No * according to the draft law on the macroprudential oversight of the national financial system 42

43 The NBR is aligned with the ECB/ESRB macroprudential standards (II) Romania is currently in the process of setting up the macroprudential authority, in line with the ESRB Recommendation, as there is a draft law on the macroprudential oversight of the national financial system Macroprudential mandate of national authorities Recommendations A B C D E Overall Romania LC LC LC LC LC LC Austria FC LC LC FC LC LC Belgium LC PC LC LC FC LC Bulgaria LC LC LC PC PC LC Croatia FC FC FC FC FC FC Cyprus LC PC LC LC FC LC Czech Republic LC FC FC FC FC FC Denmark LC LC LC LC FC LC Estonia LC PC LC LC FC LC Finland MN MN MN LC FC PC France LC LC LC FC LC LC Germany LC FC FC FC LC FC Greece FC FC LC PC FC LC Hungary FC FC FC LC FC FC Ireland LC LC LC PC LC LC Italy PC PC PC PC PC PC Latvia LC LC LC LC FC LC Lithuania LC LC LC LC FC LC Luxembourg LC PC LC LC PC LC Malta FC FC FC PC FC LC Netherlands PC PC LC LC LC LC Norway LC PC LC MN PC PC Poland MN PC PC MN PC PC Portugal FC FC FC LC FC LC Slovakia LC LC LC FC FC FC Slovenia FC FC FC FC FC FC Spain PC MN PC PC FC PC Sweden LC LC LC FC FC LC United Kingdom FC LC FC FC FC FC Source: ESRB 43

44 The NBR is aligned with the ECB/ESRB macroprudential standards (III) The Follow up Report on the ESRB Recommendation on lending in foreign currencies shows that Romania fares well in this respect, with an overall assessment of fully compliant Lending in foreign currencies Recommendations A B C D E.1 E.2 F G Overall Romania LC FC FC FC FC FC FC FC Austria FC FC FC FC FC FC FC FC Belgium LC LC SE SE LC FC IE LC Bulgaria PC PC SE PC LC FC SE PC Croatia FC LC FC FC FC FC SE FC Cyprus SE LC FC SE LC FC SE LC Czech Republic SE SE FC SE SE FC SE FC Denmark SE SE SE FC FC FC IE LC Estonia FC SE FC LC FC SE SE FC Finland SE SE SE SE SE SE SE LC France IE SE FC SE SE FC SE LC Germany LC SE FC FC SE FC SE FC Greece FC SE SE SE SE SE FC FC Hungary FC FC FC FC PC FC SE LC Ireland SE LC FC SE SE LC SE LC Italy LC SE SE SE SE SE FC LC Latvia SE LC FC LC LC FC SE LC Lithuania LC LC FC FC PC LC SE LC Luxembourg FC FC FC FC FC FC SE FC Malta FC FC FC FC FC FC FC FC Netherlands SE SE SE SE SE SE SE LC Poland FC FC FC FC FC FC SE FC Portugal FC FC SE SE SE FC SE FC Slovakia FC SE SE SE SE SE SE FC Slovenia LC LC SE SE SE LC SE LC Spain LC SE SE FC FC FC SE FC Sweden SE LC SE FC SE SE SE LC United Kingdom SE SE SE LC SE LC LC LC Source: ESRB 44

45 Capital buffers with a view to preserving financial stability Capital buffers: a) capital conservation buffer b) countercyclical capital buffer c) capital buffer relating to other systemically important institutions d) systemic risk buffer Regulating capital buffers through a European Directive and a directly applicable Regulation was warranted by the need to ensure a level playing field across EU Member States, as an essential pre requisite for the functioning of the internal market, and aims to: a) eliminate regulatory arbitrage b) ensure a high degree of harmonisation, and c) enhance transparency and predictability in the macroprudential field 45

46 The new EU wide harmonised definition of non performing exposures (I) The definition is available in the Implementing Technical Standards on supervisory reporting on forbearance and non performing exposures prepared by the European Banking Authority The key differences vis à vis the national methodology are: (i) impaired assets are included, (ii) provisions related to impaired assets, either current or less than 9 days past due, are lower than the provisions set up for loans overdue for more than 9 days, (iii) the equity capital used is in line with prudential reporting, and (iv) reporting is done at a consolidated level for banking groups Consolidated Banking Data indicators (harmonised definitions) Gross non performing debt instruments/total gross debt instruments Net non performing debt instruments/total own funds Accumulated impairment/total gross nonperforming debt instruments NBR indicators (national definitions) % NPL ratio (share in total loans) 13.9% 61.7% NPLs net of provisions / Capital and reserves 26.2% 59.6% IFRS provisions for NPLs / NPLs 69.9% Source: NBR 46

47 The new EU wide harmonised definition of non performing exposures (II) According to this new definition, the Romanian banking system has a medium risk as compared with the other Member States, given that the higher non performing exposure ratio is mitigated by the higher degree of coverage with IFRS provisions. Country Gross non performing debt instruments/total debt instruments Net non performing debt instruments/total own funds Accumulated impairment/total gross non performing debt instruments Romania EU average Austria Belgium Cyprus Germany Denmark Estonia Slovenia Spain France Greece Croatia Hungary Ireland Italy Lithuania Luxembourg Latvia Malta Netherlands Poland Portugal Sweden Finland Slovakia Source: EBA 47

48 Map of systemic risks Chapter 1. International and domestic economic and financial environment Chapter 2. Real sector Chapter 3. Financial system Outline Chapter 4. Financial system infrastructure Chapter 5. Financial stability, regulatory framework and macroprudential policies Special feature: Romania s public debt sustainability seen from the perspective of financial stability Key 1 messages of the 215 Financial Stability Report 48

49 How much does Romania s public debt amount to? (I) Maastricht methodology* Extended ESA 21 methodology** National methodology*** Maastricht methodology Gross debt (as a share of GDP) Net debt (as a share of GDP) * Maastricht debt is defined in Council Regulation (EC) No 479/29, as subsequently amended, as the total general government consolidated gross debt at nominal value outstanding at the end of the year. ** Unlike the Maastricht methodology, when calculating public debt other financial instruments are included as well, such as insurance, pensions and standardised guarantee schemes and other accounts payable, according to the extended framework of the European System of Accounts 21 (ESA 21). *** Unlike the aforementioned definitions, the national methodology includes all central and local government guarantees, in line with Government Emergency Ordinance No 64/27, as well as the loans from the available funds of the State Treasury. Source: MPF, NBR 49

50 How much does Romania s public debt amount to? (II) Public debt comparisons between 28 and 214 The evolution of public debt and external public debt EUR bn IT PT IE CY BE ES FR UK HR ATSI HU DE NL MT FI SK PL DK SE CZ LT LV RO BG LU EE general government gross external debt general government gross domestic debt public debt (% in GDP) (rhs) net public debt* (% in GDP) (rhs) Source: Eurostat public debt, 28 public debt, 214 * Net external debt is the gross external debt minus the foreign currency buffer of the MPF. Foreign claims have not been taken into account. Source: NBR, MPF 5

51 How much does Romania s public debt amount to? (III) Romania s external debt Foreign currency buffer of the MPF EUR bn. Dec.1 Dec.11 Dec.12 Dec.13 * Dec.14 * Jun.15 * EUR bn. NBR s external debt gross external public debt private external debt Mar.15 * Starting December 213, values have been calculated in line with the new international statistical standards, according to which SDR allocations from the IMF are included in the NBR s external debt. foreign currency buffer of the MPF 4 month gross financing requirements Source: MPF Source: MPF 51

52 Why has government debt gone up? (I) Annual change in public debt, by main component (share in GDP) annual change in the foreign currency buffer of the MPF interest expenditure primary deficit (national methodology) exchange rate effect other changes in public debt annual change in public debt Source: MPF, Eurostat, ECB 52

53 Why has government debt gone up? (II) General government budget deficit National methodology Budget deficit (% of GDP) Maastricht methodology Budget deficit (% of GDP) Primary deficit* (% of GDP) Structural deficit** (% of GDP) Interest payable (% of GDP) Interest payable/gross public debt * The primary deficit is the government deficit before including interest payable. ** A structural deficit occurs if the fiscal balance is in deficit when computed at potential output level. Source: MPF, Eurostat 53

54 Is Romania s public debt sustainable? (I) Public debt of GDP Q1 gross public debt net public debt Average residual maturity of total public debt years Q1 Public debt stock related cost relative to government debt Q1 Source: NBR, MPF, FSA 7, 6, 5, 4, 3, 2, 1, Herfindahl Hirschman index of the investor base in primary market government securities points Q1 54

55 Empirical model Is Romania s public debt sustainable? (II), _,,, _, _,, Structural model International comparison the estimated level of the signal threshold in the case of public debt (empirical model) Calibrating the optimal level of government debt using the general equilibrium condition (structural model) of GDP LV BG SI RO CZ HU Sustainable debt level (% of GDP) Source: NBR government debt level (214) signal threshold (regression model) Source: NBR 55

56 Is Romania s public debt sustainable? (III) The current level of public debt is sustainable, yet it has neared the critical threshold above which there would be major negative consequences on economic growth (with a probability of recession of over 5 ) and on the subsequent borrowing capacity in adequate conditions Maintaining the deficit within the limits set by the MTO would accommodate the rise in nominal public debt, without an increase in the public debt to GDP ratio Even assuming that the current public debt costs are kept in place and the economy grows at potential, a budget deficit of around 3 of GDP per annum would mean exceeding the public debt critical threshold within the next three years 56

57 Is Romania s public debt sustainable? (IV) Public debt estimated critical threshold Interest rate on public debt (%) Scenario 1 (decreasing public debt) Scenario 2 (stabilising public debt) Scenario 3 (rising public debt) Primary government budget balance (% of GDP) Growth rate of real GDP (%) public debt/gdp scenario 1 scenario 2 scenario 3 Notes: 1) Public debt interest payments as a ratio to average government debt in ) The primary government budget balance of.3 of GDP corresponds to a structural deficit of around 1 of GDP (MTO Medium Term Budgetary Objective) in ) 2.8 is the real growth rate in 214. Source: MPF, NBR calculations 57

58 Map of systemic risks Chapter 1. International and domestic economic and financial environment Chapter 2. Real sector Chapter 3. Financial system Outline Chapter 4. Financial system infrastructure Chapter 5. Financial stability, regulatory framework and macroprudential policies Special feature: Romania s public debt sustainability seen from the perspective of financial stability Key 1 messages of the 215 Financial Stability Report 58

59 The 1 key messages of the 215 Financial Stability Report Financial stability has remained robust. No severe systemic risk. Prudence is warranted in the domestic macroeconomic policy mix. Main risks stem from the external environment. The banking sector is resilient, yet deleveraging continues. Domestic currency lending to households has started to rise. Still weak lending to non financial corporations, but there is a potential for growth. Lack of financial discipline is the main vulnerability in the corporate sector. Public debt is sustainable at present. Maintaining the deficit at the MTO level ensures debt sustainability over the medium and long term. The NBR is aligned with the ECB/ESRB macroprudential standards. 59

60 Thank you! 6