This content is from: Local Insights

Regulatory capital

Arguably, Romanian banks survived quite well though the financial crisis and presented a strong solvency degree in a rather distressed macroeconomic climate. For instance, pursuant to the data published by the National Bank of Romania (NBR), in 2008 the banks active on the Romanian market were in compliance with the capital adequacy requirement of 8% and at the end of the same year, had an average capital adequacy ratio of 12.3%.

Regardless, in order to ensure that Romanian banks face the financial turmoil as efficiently as possible, the NBR took a restrictive stance in 2009 and has been monitoring, on a monthly basis, banks' capital adequacy and solvency. Strengthening the supervision of the Romanian banking system was also part of the agreement that the Romanian government concluded with the International Monetary Fund, where it undertook to "continue to improve the banking supervisory and regulatory framework" and raise the minimum level of the capital adequacy ratio from 8% to 10%.

In a joint statement, issued on March 26 2009 in Vienna, parent credit institutions of the main banks operating in Romania, Erste Bank, Raiffeisen International, Eurobank EFG, National Bank of Greece, Unicredit, Société Générale, Alpha Bank, Volksbank and Piraeus Bank undertook to provide the necessary support to their Romanian subsidiaries, while committing to maintain their exposures to Romania and recapitalise their subsidiaries, if need be, in order to ensure a solvability degree of 10%.

The NBR has recently published on its website a proposal for the amendment of NBR Regulation 18/2006 regarding the own funds of credit institutions and investment firms. The Regulation was open for public consultation until March 15 2010 and should be officially adopted soon.

The purpose of the proposed amendments is to further restrict the conditions under which foreign banks may withdraw the funding granted to their Romanian subsidiaries and hence achieve greater stability of the own funds of Romanian credit institutions.

Given that subordinated loans are one of the main ways parent credit institutions provide financial support to their local subsidiaries, the Regulation provides that subordinated loans granted by parent credit institutions may be reimbursed only with NBR's prior consent.

Additionally, the five years within which a credit institution is prohibited from requesting the NBR to approve the repayment of issued credit instruments or the reimbursement under the loan agreements forming part of the own funds will start on the date such elements were included in the own funds, and not the issuance date or the date of the loan agreement, as at the moment.

After five years, the NBR will approve such reimbursements provided that, in its opinion, the own funds of the credit institutions will be maintained at an adequate level for at least two years.

Claudia Arnautu

Subordinated loan agreements that do not have a maturity date and which form part of the own funds of a credit institution, may be reimbursed subject to the requirement that the reimbursement be notified to the NBR five years prior to the contemplated reimbursement date. Exceptionally, subject to NBR's approval, such loans may be pre-paid.

Amounts granted under subordinated loan agreements are, typically, considered as tier two capital. In this context, the NBR clarifies that in order to be included in the tier two capital, the receivables against the credit institution would have to be subordinated not only to all the other unsubordinated creditors, but also to the subordinated creditors with a superior rank with respect to payment (for example as a result of a subordination agreement). Furthermore, if the repayment of a subordinated loan is made in several tranches, each tranche is considered an individual subordinated loan for determining the supplementary tier two capital.

Generally speaking, these amendments reinforce and implement the NBR's commitment to secure a sound and adequately capitalised Romanian banking system and their implementation will be welcomed, given that they have also been endorsed by the major foreign credit institutions with a local presence in Romania.

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