This is a subject I tackled few times before but it keeps coming back: the health status of the Romanian Banking Sector . The latest discussion about this topic was spurred by comments from the local head of supervision department at NBR.
He is quoted in Bloomberg saying: “All the banks, especially the Greek ones, must be prepared to face contagion, even though they are well capitalized right now. It’s a matter of credibility,” Cinteza said in an interview. “If one of the parent banks has problems, the Romanian units can be affected, that’s why we advise them to have strong cash reserves.”
I expressed a similar opinion before here: Is the Romanian banking sector better supervised/regulated than most? and Are Romanian foreign debt and deficit much higher? But there is something odd in his recommendation.
On the one hand he talks about the need for extra capital if the parent banks have problems and on the other he says that local banks are well capitalized right now. Which one is it? What is happening with current capitalization if parent banks have problems? Theoretically and if we are to believe the recent rhetoric from few people at NBR the banks in Romania are Romanian banks and nothing that happens outside shall harm them. If they are well capitalized now they should remain well capitalized in the future. But now something has changed in the NBR’s view.
But not in my view. Capital will circulate freely and if there is a need to finance an operation at home a parent bank will withdraw its support for subsidiaries elsewhere. Being well capitalized today is irrelevant for a subsidiary unless Romania imposes capital control.
The problem could be even more complicated and with big costs for the Romanian tax payer. Here are the
two dangers I see as we go forward:
1) Parent banks will withdraw capital in case they dearly need it
2) Local banks are not well capitalized today
What policy makers can do today is to prepare for both scenarios together or separately. I hope behind close doors and their calm demeanor our policy makers already have the solution for this cases ready. Also, I hope it does not mean that we follow the Irish way and pay for it with our own money. We are too poor to support such an action.