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Mr. Marco Arena, Tingyun Chen, Mr. Seung M Choi, Ms. Nan Geng, Cheikh A. Gueye, Mr. Tonny Lybek, Mr. Evan Papageorgiou, and Yuanyan Sophia Zhang
Macroprudential policy in Europe aligns with the objective of limiting systemic risk, namely the risk of widespread disruption to the provision of financial services that is caused by an impairment of all or parts of the financial system and that can cause serious negative consequences for the real economy.
Erlend Nier, Radu Popa, Maral Shamloo, and Liviu Voinea
We provide empirical evidence to support the calibration of a limit on household indebtedness levels, in the form of a cap on the debt-service-to-income (DSTI) ratio, in order to reduce the probability of borrower defaults in Romania. The analysis establishes two findings that are new to the literature. First, we show that the relationship between DSTI and probability of default is non-linear, with probability of default responding to increases in DSTI only after a certain threshold. Second, we establish that consumer loan defaults occur at lower levels of DSTI compared to mortgages. Our results support the recent regulation adopted by the National Bank of Romania, limiting the household DSTI at origination to 40 percent for new mortgages and consumer loans. Our counterfactual analysis indicates that had the limit been in place for all the loans in our sample, the probability of default (PD) would have been lower by 23 percent.
International Monetary Fund. Monetary and Capital Markets Department
This Technical Note analyzes the implementation of macroprudential policy framework and tools in Romania. The National Bank of Romania (NBR) has a long experience in implementing macroprudential policy measures. The NBR monitors several indicators to assess the build-up of systemic risk, many of which are derived from the nation-wide credit register and related data sources. The institutional framework for macroprudential policymaking has recently been revised and contains a clear mandate and well-defined objectives, but NBR’s role seems constrained. It is recommended that the macroprudential policy toolkit should be strengthened further to address risks identified in the Financial Sector Assessment Program’s risk analysis. The systemic risk buffer should be calibrated carefully to address risks stemming from the strong sovereign-bank nexus.
International Monetary Fund. Monetary and Capital Markets Department
This Technical Note analyzes the macro-financial interlinkages, sectoral dependencies, and potential balance sheet vulnerabilities for all resident sectors in Romania. The financial sector size and interconnectedness have been increasing significantly. The overall amount of intra-financial sector exposures grew from five percent of GDP in 2008 to approximately seven percent of GDP in 2016. The banking system is at the center of intra-financial sector balance sheet connections, as an overall net borrower that channels funds to other domestic sectors. The funding of bank liabilities by domestic financial institutions has been rising and stood at close to 10 percent of banks’ nonequity liabilities in 2016. Moreover, banks are also exposed on the credit side to nonbank financial institutions, in particular to other financial institutions.
International Monetary Fund. Monetary and Capital Markets Department
This Technical Note discusses the results of systemic risk analysis and stress testing of Romania’s financial sector. Although the Romanian banking sector has a strong initial capital position, banks are affected significantly by the realization of the shocks captured by the scenarios. The stress test results indicate that an extreme but plausible adverse scenario would have a significant negative impact on the capital ratios of the banking system. Although the banking sector as a whole maintains capital ratios above the minimum regulatory requirements, several (smaller) banks prove vulnerable. The extreme adverse scenario reflects downside external risks as well as a domestic demand shock impacting private consumption and investment.
International Monetary Fund. Monetary and Capital Markets Department
This Technical Note discusses calibration of a debt-service-to-income (DSTI) limit in Romania. The recent pick-up in household credit in Romania has given rise to a need for revisiting the design of existing macroprudential tools addressing household vulnerabilities. The National Bank of Romania is considering a redesign of its existing macroprudential tool related to household indebtedness, including expanding its scope to cover all household loans. The analysis of loan-level data from the Central Credit Register suggests that the probability of default of a borrower is highly sensitive to any changes in DSTI at DSTI ratios at about 50 percent, particularly for mortgage loans. It is recommended to set the limit such that loans do not exceed this sensitivity threshold.
International Monetary Fund. Monetary and Capital Markets Department
This paper assesses the stability of the Romania’s financial system. Romania’s financial sector has strengthened significantly over the last few years. Effective supervisory measures have helped reduce the high level of nonperforming loans from 21.9 percent at its peak in 2013 to 6.4 percent as of December 2017. Foreign-owned banks’ dependence on parent funding has significantly declined, while deposits from the domestic private sector have increased, reducing liquidity risks. Banks’ capital buffers strengthened, on the back of a slowdown of credit and low interest rates, with an average capital to risk-weighted assets now above 18 percent. However, some vulnerabilities are emerging, and policy action is needed to address these risks and strengthen financial stability.