Not really, I say. This idea has been put forward few times by Romania officials but I never gave it any attention as I did not find any harm in it. But the latest such assertion comes from Mr. Mihai Tanasescu the Romanian representative at IMF. Here is the quote in Romanian.
The interview deals with more issues especially the current global crisis but that is not what I am interested in as Mr. Tanasescu’s message cannot deviate from the official one of IMF, EU etc.
But the message about the Romanian banking sector is unsettling. What is the basis for his conclusion? What does it meant that the Romanian financial sector is very well supervised? There has to be a standard against which the Romanian financial sector is judged. Could it be that here it is implied that we are better at supervising/regulating banks than the EU and US?
There are two points that need to be made here.
First, I read from this declaration that the other banking sectors are in trouble because they were not as professionally supervised/regulated as the Romanian one. Let’s go with this logic and assume is true. This means then that the financial crisis we have witnessed in 2008 and the woes of banks in EU today are due to poor supervision. A better supervisor would have seen that banks have invested in assets that would turn out to be loss making and then banks would have to increase their capital to survive. Is this really what a regulator does?
Now, let’s get back to Romania. The banking sector is supervised and regulated at the highest standards. Then, surely there was no need to force the banks to keep their capital here as there should not be a problem with bad investments. Or, due to good top notch supervision by the regulator the Romanian banking sector has only invested in good assets and has been showing profits every year during the current crisis. Or, the Romanian banking sector has only invested in assets where funding would not be a problem. But any sane person living in Romania knows this is not true.
Romanian banks showed huge losses and provisions, they were forced by the regulator to keep their capital in Romania and most of their assets are in euro which needs to be bought from abroad.
This does not seem too different to the rest of Europe. In fact I would say that the lack of euro makes the situation worse for banks in Romania.
The second point I want to make refers to the relevance of supervision. What can the regulator do in the case when banks are downgraded globally which means that local subsidiaries are downgraded also? What can the regulator do when as a result of the downgrade most of those banks will be cut off from the funding market? Or at least they will be funded at very short term and at a premium. Finally, what can a regulator do when banks invest most of their idle resources in Romanian government bills which are still junk status? Are these good investments from the regulators point of view?
Regulating a banking sector is a very tricky and tough business. There are few things that the central bank can do to protect the rest of the economy from the reckless decisions by banks. Some of these include, making sure that procedures on “Chinese walls”, insider trading, conflict of interests and front running are very well observed by banks. Or it can make sure that losses are not hidden in dubious trades or that provisions are properly calculated. In other words there is a lot of detailed work for the regulator.
However, the most a regulator can do and hope for is to make sure a competitive environment is in place. And let the market weed out the bad apples. Also, we should leave the qualitative remarks about the Romanian banking sector to the economic history. Or at least let’s wait until the crisis has passed and we have had a chance to count our wounds.
As support for my views about such declarations here is what Mr Tanasescu was saying on August 9th this year: “there is no crisis coming and all will be over in few days”. Interesting isn’t it?
Here is an interesting post on The Big Picture related to my views on what the messaged from officials might due to the market. TO give you an incentive read it, the article sites Taleb, Mandelbrot and others like them.
P.S. I know the tone of the post is at time ironic and I apologize for this. I blame it on Saturday and the topic.