Banks in Romania have accumulated important vulnerabilities in recent years, due to their growing exposure on the public sector and the real estate market.

A crisis similar to that at the end of 2008 would lead to a drastic drop in the sector’s solvability and some banks would even drop under the minimum regulated threshold, according to stress tests carried out by the International Monetary Fund (IMF), cited by local Profit.ro. This may push some local banks into bankruptcy.

The IMF thus recommends limiting the vulnerabilities, also referring to the First House state-backed mortgage lending program.

The local banking system has strengthened in recent years and the overall non-performing loans ration dropped from almost 22% in 2016 to 6.4% at the end of last year. Banks are also less dependent on financing lines from their parent-groups. However, they are very exposed to Romania’s sovereign debt and to the real estate market, according to IMF.

The fund’s stress tests show that 12 local banks, which account for 80% of the total assets on the market, would see their solvability drop under the legal threshold in a scenario that includes an interest rate hike and an increase in Romania’s sovereign risk. This adverse scenario also takes into account a 10% drop in the gross domestic product between 2017 and 2020, an increase in the unemployment rate and a doubling of the interest rates for the state’s bonds from 3.5% per year to 7-8% per year. The banks would also be hit by a depreciation of the local currency in this scenario.

The IMF recommends that banks reduce their exposure to the sovereign bonds, which has reached 22% of their assets, up from 5% in 2008.

The IMF also points out the local banks’ high exposure on the real estate sector, with 36% of their loans to the private sector being mortgage loans while another third are loans to companies which are guaranteed with real estate assets.

Romania’s National Bank (BNR) is already working on a regulation to limit lending by imposing lower indebtedness ratios for individuals.

editor@romania-insider.com