Banking and Finance

08.02.2013 ZF English

Romanian Banking System

The Romanian banking system entered the recession well capitalized and with good profitability and liquidity levels, which allowed it to absorb the various economic shocks and remain relatively stable. The IMF/EU support package put in place during 2009 eased the macroeconomic pressures and concerns about the liquidity and solvency of local banks, the vast majority of which are subsidiaries of larger European banking groups.

The capital adequacy ratio for the entire banking system was over 14% at the end of 2009, well above the 8 percent EU minimum requirement. Romania’s still high reserve requirements (15 percent on lei deposits and 25 percent on foreign currency deposits) also provided a substantial liquidity buffer. This buffer was partially released in 2009 by the National Bank of Romania (from 40% to 25% for foreign currency deposits and from 18% to 15% for local currency). These available funds were used to cover liquidity shortages in the banking system but also to finance bonds issued by the Romanian state.

System profitability came significantly under pressure in 2009 as loan defaults rose sharply and credit growth slowed considerably as a result of a significant contraction in economic activity and increased aversion to risk by banks, following several years of rapid growth of loans in both local and foreign currency.

In the short to medium term, the stability of the Romanian banking system depends on banks’ ability to monitor and strengthen the quality of loan portfolios, as well as on their shareholders’ commitment to maintaining adequate funding and capital levels.

The banking system is supervised by the central bank, the National Bank of Romania.

National Bank of Romania

The NBR was restructured in 1991, and since then, considerable effort has been devoted to developing an appropriate institutional infrastructure for a modern central bank. The NBR’s activity is governed by Law 312/2004 on the Statute of the National Bank of Romania. As an independent public institution, the NBR is run by a Board of Directors consisting of nine members appointed by Parliament. Its primary objective is to ensure and maintain price stability.

The NBR works on a permanent basis with the International Monetary Fund, the European Central Bank and specialized consultants from the World Bank, as well as with other organizations, in developing banking policies and procedures. From 1 January 2007, when Romania joined the European Union, the NBR became part of the European System of Central Banks (ESCB), and the NBR's Governor, became a member of the General Council of the European Central Bank (ECB).

Regulations on Credit Institutions

The Romanian law applies the main provisions of European Directives on credit institutions.

Credit institutions that are Romanian legal entities, may be set up and operate as: (i) banks, (ii) credit co-operatives, (iii) housing savings banks, (iv) mortgage loan banks and (v) electronic money institutions.

Domestic Credit Institutions

Credit institutions that are Romanian legal entities may be established only as joint stock companies with at least two shareholders, (individuals or legal entities, either resident or non-resident) and may operate only with the authorization and under the supervision of the NBR.

To be authorized, Romanian banks must have a minimum initial capital of RON 37 million, i.e. approximately EUR 9 million. Banks which grant mortgage loans and housing savings banks must, upon authorization, have a minimum initial capital of RON 25 million, i.e. approximately EUR 6. million whereas electronic money institutions must have a minimum initial capital of RON 12 million, i.e. approximately EUR 3 million.

The shareholders’ contribution to the share capital must be fully paid, in cash, at the subscription date.

All banks must open current accounts with the NBR and are required to maintain minimum reserves.

Romanian banks are mainly involved in the following activities: (i) Acceptance of deposits and other repayable funds, (ii) Lending, including, inter alia: consumer credits, mortgage credits, factoring with or without recourse, financing of commercial transactions, including forfeiting, (iii) Financial leasing, (iv) Monetary transfer services, (v) Issue and administration of payment means such as credit cards, travelers' cheques and other similar means of payment, including the issue of electronic money, (v) Issue of guarantees and undertaking of commitments, (vi) Trading of financial instruments on their own behalf and on behalf of clients, (vi) Keeping in custody and managing financial instruments, etc.

Romanian banks are expressly prohibited from carrying out activities, such as: (i) Pledging the bank’s own shares to secure its liabilities, (ii) Granting loans secured with the bank’s own shares, etc., (iii) Acceptance of deposits and other repayable funds when the bank is insolvent.

Supervision of the liquidity risk is ensured both by banks and the NBR. As such, all banks must submit financial statements to the NBR and other requested data under the terms and in the form established under the legal provisions in force.

In order to limit the liquidity risk, for each financial year banks must establish: (i) A strategy for liquidity management, which must be reconsidered whenever the business environment makes it necessary and (ii) A strategy for liquidity risk in the event of a potential crisis, and appropriate solutions for resolving the crisis. In order to meet these objectives, banks must have procedures in place for monitoring and limitation of liquidity risk. 

Foreign Credit Institutions

Following Romania’s EU accession, any credit institution licensed and supervised in an EU or an EEA member state is entitled to operate in Romania, through a branch or by directly rendering services, without any NBR license being required, provided that certain notification formalities are met and that the branch thus established operates within the framework set out in the banking license issued by the regulatory body in the credit institution’s home-country.

Non-EU credit institutions may operate in Romania through branches, subject to NBR authorization and within the framework set out in the banking license granted by the regulatory body in the home-country. Generally, foreign banks operating in Romania have the same rights and obligations as domestic banks.

Licensing

Upon applying for a license, foreign and domestic banks are subject to the same licensing NBR requirements. The main requirements involve:

• Maintenance of a minimum share capital (endowment capital for branches) of EUR 5 million in RON equivalent
• Reputation and financial reliability of significant shareholders
• Evidence of a strong and professional management team
• Presentation of a comprehensive three-year business plan.

Generally, the NBR authorization process includes 3 stages:

• NBR approval for the setting up of the bank
• Incorporation of the bank (registration with the Trade Registry) and,
• NBR authorization for starting operations.

Individuals or legal entities or a group of individuals and/or legal entities which intend to become significant shareholders of an already existing credit institution, i.e., have a contribution to the share capital or voting rights in the bank equal to or more than 10%, must obtain NBR approval.

To ensure the stability of the banking system, the NBR has introduced certain requirements to be met by the shareholders of a bank (individuals or legal entities), as follows: (i) Sound reputation, analyzed in terms of integrity and professional competency, including experience as a controlling shareholder or a director/manager of a financial institution (ii) Stable financial situation (the NBR has the authority to analyze the source of the funds used by individuals or legal entities to gain the position of a significant shareholder), (iii) Supply of the necessary information related to the group they belong to; (iv) Adequate supervision ensured by the relevant authorities in the country of origin of the individual or the legal entity.

Accounting Regulations

Starting 1 January 2012, credit institutions carrying out activities in Romania, including Romanian branches of foreign credit institutions and foreign branches of Romanian credit institutions, are required to apply International Financial Reporting Standards (IFRS) as a basis for accounting and reporting of financial statements.

Privatization of State-Owned Banks

Most banks have now been privatized, and CEC Bank (in the top 10 banks by assets) is the only commercial bank still in state hands (100%). Although the government is committed in principle to the eventual privatization of CEC, this has been postponed indefinitely. The state also owns EXIMBANK, which supports Romania's foreign trade through specialized financial-banking and insurance instruments, both on the bank's behalf and account as well as on behalf of and for the benefit of the Romanian State.

Non-Banking Financial Institutions

Non-banking financial institutions are regulated by Law 93/2009. To qualify as a non-banking financial institution and to be authorized to conduct credit operations, a company is required to include in its main objects of activity only the activities permitted under Law 93/2009, e.g. granting of credits, financial leasing or pawnbroking activities.

Non-banking financial institutions may also provide auxiliary and advisory services in relation to their main object of activity and may carry out operations on behalf of other non-banking financial institutions and credit institutions.

Law 93/2009 states that non-banking financial institutions must be registered with the NBR and included in a General Registry as well as, if applicable, in a Special Registry (depending on certain criteria relating to turnover, credit volume, debt-to-equity ratio, total assets and own capital - as established under NBR regulations). As a general rule, non-banking financial institutions are allowed to carry out the activities included in their object of activity only after they have been recorded in the General Registry maintained by the NBR.

Payment Institutions

Payment institutions are licensed and regulated by the NBR. The legal framework is provided by Government Emergency Ordinance no.113/2009 on payment services and NBR Regulation no. 21/2009 on payment institutions which implement the provisions of Directive 2007/64/EC on payment services within the internal market.

Regulation 21/2009 establishes the requirements for the provision of payment services in Romania and sets out the rules for the supervision of payment institutions by the regulatory authorities. It also lists the rights and obligations of users and providers of payment services.

For Foreign Currency Regime see this report

Romanian Insurance Market

The Romanian insurance market has seen significant M&A activity in recent years, with all large players in the region now having a local presence, including Germany’s Allianz, France’s Groupama and Axa and Austria’s Uniqa and Vienna Insurance Group.

The market is regulated by the Financial Supervision Authority (“ASF”). The ASF was established in 2013 and took over the prerogatives of the former Insurance Supervision Commission, the National Securities Commission and the Private Pensions Supervision Commission. Currently, the former Insurance Supervision Commission is a branch of the ASF.

Insurance activities may be performed only by insurance companies set up and operating according to the general provisions of the Company Law (Law 31/1990), Law 136/1995 on insurance and reinsurance and Law 32/2000 on insurance companies. As such, the setting up of an insurance company is subject to the following main rules:

• Insurance companies set up as Romanian legal entities must be organized as joint stock companies registered with the appropriate Trade Registry Office, whose shareholders can be resident or non-resident individuals or legal entities
• Currently, the minimum share capital must be RON 8 million (approximately EUR 1.8 million) for general insurance activities except for compulsory insurance activities and RON 12 million (approximately EUR 3 million) for general insurance activities including compulsory insurance activities and for life insurance activities. These limits may be modified by the Insurance Supervisory Commission.
• As a consequence of Romania’s EU accession, insurance companies established in an EU or an EEA member state may operate in Romania under a license issued by the supervisory authorities in their home-countries, by setting-up a branch or by providing services directly, in accordance with the right of establishment and freedom to provide services.
• Non-EU insurance companies may perform insurance activities in Romania by setting-up branches, subject to authorization by the ASF and subject to supplementary requirements.

Insurance activities are divided into two categories: life and non-life, each with subsequent classes. Generally, an insurance company may not perform both categories of insurance activities. However, life insurance activities can be cumulated with certain classes of non-life insurance.

The registration of an insurance company with the appropriate Trade Registry Office is subject to prior authorization by the ASF. Once registered with the Trade Registry Office, insurance companies must obtain their operating license from the ASF.

The former Insurance Supervisory Commission has issued regulations on matters such as:

• Internal control and risk management of insurance companies
• Fees for insurance companies and insurance brokers
• Evaluation criteria for approval of significant shareholders and for authorizing the setting up of insurance companies. Insurance companies must have adequate financial resources and insurance must be their sole object of activity. They must have a corporate name which is not misleading to customers, as well as meeting minimal conditions related to share capital and reserves. They must present comprehensive reinsurance and feasibility programs, while foreign insurance companies must present evidence of similar activities performed for at least 5 years in the country of origin. Companies must also meet requirements on significant shareholders and management.
• Categories of insurance coverage that can be offered
• Minimum solvency margin for insurance companies performing general insurance activities
• Portfolio transfer.

Insolvency of insurers is regulated under Law no. 503/2004 on the recovery and bankruptcy procedure of insurance companies.

Insurance companies must carry out their accounting operations in accordance with Order 3129/2005 for the approval of accounting regulations (in line with European Directives) issued by the former Insurance Supervisory Commission, with effect from 1 January 2006.

The former Insurance Supervision Commission introduced the EU Solvency I Directive in 2004, while implementation of Solvency II Directive is expected to follow the European timetable.

Private Pension System

In 2007 the Romanian pension system underwent major restructuring based on the World Bank’s multi-pillar model. Law 204/2006 on voluntary pensions and Law 411/2004 on mandatory pensions form the regulatory framework of the private pension system. Additional norms and regulations are issued by the former Private Pension System Supervisory Commission. The new system became mandatory for all employees aged under 35 and voluntary for employees aged 35-45. 

Participation in a mandatory pension fund is only open to employees paying social security contributions (CAS). Contribution collection is centralized by the National Pensions Authority which collects and directs the contributions towards the pension funds. Since 2008, part of the social security contribution due by individuals (currently 10.5%)  has been redirected from the state budget to the chosen private fund. The redirected contribution was 2% in 2008 and it will gradually increase to 6% by 2015, while the social security contribution to the state system will diminish accordingly. In 2013, the contribution redirected to the chosen private pension fund amounts to 4%.

Mandatory pension funds are managed by pension management companies (administrators) which can manage no more than one fund.

Participation in a voluntary pension fund is open to everybody earning income - from employees to the self-employed (those with independent activities in liberal professions). For employees, collection of contributions is made by the employer, who must send the money to the voluntary pension funds. In all the other cases (self-employed, etc.), the participant can pay his or her own contributions directly to the private pension fund.

Voluntary pension funds are managed by pension management companies (administrators), life insurance companies or asset management companies. However, there is only one type of product - 3rd pillar voluntary pension fund - regardless of the nature of the pension management entity. Each pension/ life insurance/ asset management company can manage as many funds as they wish.

A pension fund (either mandatory or voluntary) is unitized and functions similarly to an investment fund but its investments are strictly regulated (the law imposes percentage ceilings for different classes of assets). Before starting their activity on this market, operators must obtain several licenses from the ASF.

Currently, there are only 8 mandatory pension funds (following several mergers in the last few years) and 10 voluntary pension funds.

Capital Markets

The development of Romanian capital markets is closely linked to privatization. The Bucharest Stock Exchange (“BSE”), initially established in 1864, was re-established in April 1995, but transactions started only in November 1995. Trading volumes were not significant until 2003-2004. In addition, RASDAQ became operational in October 1996.

Regulatory mechanisms and bodies

The Financial Supervision Authority (“ASF”) is the regulatory and supervisory body of the capital market. The ASF was established in 2013 and took over the prerogatives of the former National Securities Commission (the “NSC”), the Insurance Supervision Commission and the Private Pensions Supervision Commission. Currently, the former NSC is a branch of the ASF called Financial Instruments and Investment Sector. The ASF has certain extended prerogatives to the effect that it authorizes investment firms, management companies, undertakings for collective investments in transferable securities and also provides the general listing requirements for issuers and regulates the securities exchange, including trading and settlement mechanisms.

In 2004, as a result of the Government's efforts to harmonize Romanian capital market legislation with EU directives, the legal framework governing capital markets was significantly amended by the enactment of Law no. 297/2004 on the capital markets (“Law 297/2004”).

Besides the provisions concerning market operations and investors' protection, Law 297/2004 also contains provisions on:

• Intermediaries
• Collective investment undertakings
• Management companies
• Regulated markets
• Clearing, settlement, deposit and registry systems for financial instruments.

For a more detailed view on Romania's capital markets click here

Source: KPMG - Investment in Romania report (May 2013)