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WorldOctober 1 2014

Romania’s CBG eager to join European banking union

The governor of Romania's central bank explains why being part of the European banking union makes sense for the country, even if it is not yet ready to join up to the single currency regime.
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Romania’s CBG eager to join European banking union

The European banking union will transfer domestic banking supervision responsibilities of euro area member states to the European Central Bank (ECB). It will also install a single resolution mechanism (SRM) in a crisis scenario. This is a contentious topic among some EU members, but it is due to become fully operational in January 2016, when the SRM is expected to be implemented, though the ECB will assume its single supervisory mechanism responsibilities much earlier, taking control from November this year.

Romania, which is not yet a member of the eurozone, would not automatically be included in the banking union, but has voiced an interest in joining.

Quick to move

Romania has set a target date of January 1, 2019 to obtain membership in the eurozone, but still needs “several years of relentless efforts to ensure a lasting fulfilment of the Maastricht criteria”, according to Mugur Isărescu, governor of the National Bank of Romania (NBR).

“At this point in time, Romania is fulfilling all Maastricht criteria, namely the sustainability of the fiscal position, convergence of long-term interest rates and exchange rate stability – although we are not technically in the exchange rate mechanism,” he says.

Mr Isărescu sees advantages of joining the European banking union at its inception, rather than waiting until Romania adopts the euro. “The objective of preserving the integrity and ensuring the smooth functioning of the European financial market is not something that concerns only the euro area, but is relevant at EU level,” he says.

“It makes perfect sense that the reality of a significant, even systemic, cross-border presence in the banking systems of non-euro area countries is matched by effective cross-border supervisory and regulatory institutions.”

In Romania, as in many other young EU member states that are yet to adopt the euro, the domestic banking system is dominated by banks headquartered in the euro area. Some 80% of the Romanian banking system’s assets are related to euro area banks. It is a similar landscape in the likes of the Czech Republic and Hungary, where foreign-controlled banks account for more than 80% of total banking assets.

“Subsidiaries and branches of these banks are often important enough that they are deemed systemic at the host country level, even though their balance sheets are small relative to their parent entities,” says Mr Isărescu.

Better in than out

One trend that has had a significant impact on Romania's banking sector in recent years has been the reduction in external funding from the parent banks of foreign-owned lenders in the country. Compared with the beginning of the eurozone crisis, foreign funding has decreased by 35% in Romania, with about half of this reduction occurring in 2013 alone, according to Mr Isărescu.

He says that membership of the banking union should benefit participating countries through the removal of an incentive for banks to deleverage foreign assets. 

“The ongoing cross-border deleveraging, while reflecting balance sheet repairs in host countries, as well as constrained demand for new borrowing, must be monitored carefully,” says Mr Isărescu. “The rebalancing of bank funding away from parent subsidiary lines of credit and more towards domestic funding is necessary and appropriate, but must not be unduly accelerated in the short and medium term, especially when superimposed on an ongoing fiscal consolidation effort, as this puts excessive downward pressure on economic growth.”

Not opting for banking union membership could also hurt non-eurozone countries, such as Romania, in the event of a crisis and bank failures. Mr Isărescu says that it is likely that resolutions would only take into account the home country’s interests, a concern given the high proportion of foreign banks in Romania.

“[This] is definitely a sub-optimal outcome from the perspective of a host country,” says Mr Isărescu, adding that non-SRM member countries would furthermore remain vulnerable to contagion effects.

“[Should] such effects materialise, [the countries] can only rely on their own mechanisms, resources and instruments, which may not prove up to the task – a situation not unlike the one in some of the eurozone countries during the recent crisis, [and] the very event the banking union idea sprang from.” 

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