This content is from: Local Insights

Bankruptcy of credit institutions

Claudia Arnautu

On April 28 2010 Government Emergency Ordinance no. 37/2010 entered into force implementing a series of amendments to Government Ordinance no. 10/2004 on credit institutions' bankruptcy.

The aim of the amendments is to strengthen confidence in the banking system and fulfil at the same time one of the government's obligations assumed under the Stand-by Arrangement concluded between Romania and the International Monetary Fund. The National Bank of Romania (NBR) and the Romanian Banking Association actively participated in the drafting process of this enactment.

One of the significant changes, is the express involvement of the NBR in the insolvency procedure of credit institutions. Following the new rules, in order to initiate insolvency proceedings against a Romanian credit institution, creditors have to obtain the consent of the NBR. Similarly, if a credit institution wishes to enter into insolvency proceedings, it has to file a request with the NBR. In both cases, the NBR is bound to decide upon such a request within ten days from the date the request is received. The decision of the NBR may be challenged in court.

Currently, a credit institution is considered insolvent if: (i) it is illiquid, (ii) its solvability degree is lower than 2%, or (ii) its license is withdrawn as a result of its incapacity to overcome financial difficulties.

If the NBR considers that the credit institution in question is not insolvent and rejects the insolvency request, depending on the circumstances it may, however, decide to place the respective credit institution under special administration in accordance with the banking law (Government Emergency Ordinance no. 99/2006 on credit institutions and capital adequacy).

The NBR's involvement in the insolvency proceedings is not limited to the prior approval mentioned above. Pursuant to the amendments, the NBR at its own initiative may express its point of view or may provide the bankruptcy court or the liquidator with information it considers relevant in the course of the bankruptcy procedure. Additionally, the NBR shall also evaluate the solvability degree and financial soundness of the potential buyers of the insolvent credit institution's assets.

Another important aspect concerns the order of payment of bankruptcy proceeds. In accordance with the amendments, guaranteed deposits have priority over any other creditors of the bankrupt credit institution, save for the costs and expenses incurred as a result of the bankruptcy proceedings. As a result, the depositors are granted a higher degree of certainty in relation to the recovery of their monies.

The Romanian banking system has been the subject of several reinforcement measures that have been rather onerous on local credit institutions. While within the last five years there have been no cases of bankrupt credit institutions, according to the NBR, this year one of the local banks was on the verge of being placed under special surveillance due to the fact that its solvability had decreased below the minimum threshold of 8%. However, the NBR officials stated that the situation improved as a result of the increase of the own funds of said credit institution, by way of a subordinated loan granted by one of its shareholders.

All the revised regulatory measures imposed by the NBR in terms of solvability degree, liquidity and exposure of credit institutions together with these latest amendments on insolvency of credit institutions are aimed at strengthening the credibility of the Romanian banking system and at avoiding as much as possible the negative impact of the worldwide economic and financial crisis.

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