The euro area sovereign debt crisis and its implications for the economies of SEE. A Romanian financial stability perspective Florian Neagu Financial Stability Department National Bank of Romania Athens, 18 May 2012 BANCA NAŢIONALĂ ROMÂNIEI

Importance of the EA for the economy and the banking sector Romanian links with the euro area are material, but the contagion effects from sovereign debt crisis has remained subdued so far… Importance of the EA for the economy and the banking sector Risk perception (bp), January - mid May 2012 Note: Min, Max, and May-15 values Source: ECB, European Commission, BNR calculations Bloomberg, BNR calculations

…the soundness of the Romanian macroeconomic stance and of the prospects, in line with the region, contributing to such developments Main macroeconomic indicators in selected countries * projections Source: Source: European Commission, spring forecast 2012 (May 2012)

A slowdown of the EA economic growth would be relatively well managed by the Romanian companies involved in the foreign trade… Main financial soundness indicators for corporate sector, June 2011 Source: BNR calculations

Average holdings of non-resident government securities by the RO banks …and an orderly deleveraging process in the EA would orderly impact the SEE region. For Romania, the indirect channel (common lender) marginally changed in 2011, while direct channel is weak Sensitivity of the banking sectors to regional shocks, through common lender channel Average holdings of non-resident government securities by the RO banks Source: BIS, BNR calculations, Fratzscher (2002) Source: monetary survey

The Romanian banking sector weathered relatively well the financial crisis… Capital adequacy ratio (percent) Banking profitability (percent) Source: BNR Source: BNR

Liquidity stress test results, December 2011 (RON mil) …and is adequately equipped to withstand liquidity shocks from capital flights Liquidity stress test results, December 2011 (RON mil) Stress test scenarios S1 S2 Domestic deposits -10% -20% ST parent funding -25% -50% ST corporate external funding Banks FX swaps 1M

Main banking indicators (December 2011) The Romanian banks with Greek shareholders are in a good position to cope with adverse developments Main banking indicators (December 2011) Source: BNR

Credit conditions orderly developed from both domestic banks and foreign lenders financing Romanian economy Lending from domestic and foreign financial institutions (MFIs and NBFIs*) * BNR estimations for NBFIs, for the period 2006-2008 Source: BNR

Changes in credit standards (net percentage %) Lending standards of the domestic banks tightened, in line with euro area developments… Changes in credit standards (net percentage %) Companies Households Note: Net percentage - positive values indicate a tightening of lending standards Source: BNR, Bank lending survey, May 2012 ECB, The Euro Area Bank Lending Survey, May 2012

…the availability of funding in FX currencies having a contribution in such direction Loan-to-deposit ratio, by currency Wholesale funding from abroad, EUR bl. Source: BNR calculations Source: BNR

FX lending is mainly a stock challenge… Loans from domestic banks and NBFIs, by currency and type (RON bln) Non-financial companies Households Source: Private Credit Bureau, BNR calculations Source: BNR calculations

NPL non-financial companies …and the credit risk from FX lending over-paced the credit risk in domestic currency NPL non-financial companies NPL households Source: BNR calculations Source: Private Credit Bureau, BNR calculations

NPL non-financial companies The banks asset quality remains an important challenge for the financial stability NPL non-financial companies NPL households Source: Private Credit Bureau, BNR calculations Source: BNR calculations

Conclusions A disorderly unfold of the EA sovereign debt crisis would impact Romania through: (i) a deterioration of the availability of funding (through both price and quantitative channels), and (ii) a weakening economic growth prospects. The Romanian banking sector and the companies involved in foreign trade are adequately equipped to withstand external adverse developments. Credit conditions orderly developed in Romania, the central bank taking early measures: (i) calling for additional capital from banks shareholders, (ii) supporting Vienna Initiative type arrangements, and (iii) fostering cooperation with home supervisory authorities. Carrying on prudent policy implementation, in line with EU and IMF arrangements, will continue to provide confidence to the markets and to keep the prudential buffers to adequate levels.