NBR Governor spots the big oligopoly in the room, finally

As a skeptic and contrarian I am used to being ridiculed most of the time even though the reality more often than not rests closer to my views. Thus you can imagine my pleasant surprise when I read this title in the news today (in Romanian):

“Mugur Isarescu: Poor banking sector competition allows banks to transfer costs from internal inefficiency and poor risk management to clients”

Mugur Isarescu: Concurenta slaba permite bancilor sa transfere clientilor costurile provenite din organizarea ineficienta si evaluarea gresita a riscului

In a nutshell MR. Isarescu just confirms my view that banks in Romania function in an oligopoly structure. All this means that instead of accepting the market price they are imposing the price of credit.

Now the question remains: should the NBR stop at just aknowledging this situation or should it do something about it?

From my point of view  the NBR should have at heart the interest of the consumer. But how would a regulator impose competition? There is only one non-intrusive way: allow for insolvent banks to fail. In the same time make sure that ALL banks play by the same rule and ALL abide to the same rules.

It might be hard to recognize but there is some responsibility with the NBR regarding the current banking sector structure and lack of competition in Romania. Banks can sustain an oligopoly as long as:

-the NBR plays favorites whne intervenes in the FX markets

-the NBR uses bylateral deals that funds few banks in the market while other use the money markets to fund themselves

-the Ministry of Finance needs the local banks to finance its debt, thus NBR lowers the cost of funding or the MF and imporves the bank’s margin via repos or bylateral funding deals

-the NBR is proping up insolvent banks

All of these “favors” allow the banking sector to remain an oligopoly and even more: not to play by the rules. Today the NBR has done a first step by pointing to the non-competitivness of the banking sector. To get to a competitive one more is required from NBR and other public institutions. After all if we want to have a healthy economy in the future we need a healthy banking sector which will be delivered only after this sector will really restructure.

The rest of the economy has been restructuring for 2 yrs, let’s allow the banking sector to restructure also.

This is what I said  about this subject before:

Oligopoly, the game for banks in Romania?

13 thoughts on “NBR Governor spots the big oligopoly in the room, finally

  1. I can’t believe he noticed the elephant in the room, or maybe it was time to acknowledge his existence. Nonetheless this will keep people talking for a while.

    I always thought it was common sense that banks in Romania behave like an oligopoly. One should have just looked at revenues earned by the big banks from commission fees charged to both population and companies. It was very unlikely that the biggest Romanian banks would have the same commission fees, in similar if not identical conditions

    1. This true. However, I always wonder what is the angle. Because there always has to be an angle. And without support, implicit or explicit, from the NBR the banking sector would not get away with this much. So, I welcome his message today but there is more, much more to be done.
      Come on, there are banks out there without a treasurer.🙂

      1. You scratch my back, I’ll scratch yours. It’s pretty simple, the NBR offers liquidity when needed, turns a blind eye on other occasions, but the large banks support key policies of the National Bank and most important support NBR’s intervention on different occasions (especially on the Fx market). But hey…I’m just speculating here, I don’t have any real insight on what goes on behind those thick walls.

  2. I looked at the NBR’s Monetary indicators – October 2011. It says that non-government loans totaled 221,031.8 mill. RON + 63,289.1 mill. RON government credit. At the same time the deposits of non-government resident customers totaled 179,645.1 mill. RON. The way I see it is that, as long as these numbers are not in balance, we cannot talk about real competition between banks, regardless of the rules/restrictions or other actions imposed/taken by the monetary institution that do not try to correct these imbalances.

  3. Measures that might help:
    1. Let anyone create a bank and choose their own interest rates. If they will make a profit in the long run, it will be because they will please their customers and not because they increase their prices without proportionally increasing the quality of their services.
    2. Treat banks exactly like businesses. Same taxes, same regulation, same everything. The bank’s model will have to adapt to this new reality.
    3. Don’t let the government or the NBR borrow money from banks. They should spend only the money they get from their taxpayers and nothing more.
    4. Don’t keep any fractional reserves at NBR. Let the banks do everything they want with their money. If people will lose their money, they will have to be more careful the next time. And the bank will go bankrupt in the process. New more careful banks will take their place.
    5. There are many other types of financial institutions. People should easily be able to create them. Examples: micro banks(that offer micro loans)

    I don’t understand why people shouldn’t be able to loan money like a bank with interest. They should be able to do it legally with terms, contracts and stuff like that.

    The oligopoly structure can exist because of the nature of the environment. There should exist institutions that behave similar with banks but they operate to a micro scale or they serve different types of customers that banks cannot serve properly.

    I searched a while ago on Google to see how can I create my own bank in Romania. I couldn’t find any useful information. That’s a shame!🙂

    1. Short answer to your question : loan shark or camatar. But it looks like banks have already killed this competition as “camataria” has been outlawed.

      Easy entry and easy exit is the best medicine against oligopoly.

      Sent from my iPhone

      1. “But it looks like banks have already killed this competition as “camataria” has been outlawed.
        Easy entry and easy exit is the best medicine against oligopoly.”

        Yes, they outlawed it instead of making it legal. Banks are doing pretty much the same thing with the big exception that banks usually lend other people’s money.

        Oligopoly happened because the NBR and the state created the environment for it to happen.

  4. Maybe NOW it’s the time for Mr. Mugur(el) to reconsider his position on Decree no. 50 (rgrd. mortgage and customers)🙂

    Reconsider meaning to disable everything from it (even for the new credits) – this in order for the banks to stay in our country with their money.

    Please let Mr. Mugurel know (and forward my email address) that I can think of other such other great ideas in order to protect our “poor” banks from bad influence /image of our irresponsible and non-educated credit wishers. He-he :-))

  5. P.S. (Oldies but goldies)
    Just how the really market (& banks) need our help:

    “Bird and Fortune – Financial Adviser”🙂

  6. The banks using less the NBR for financing probably don’t have enough collateral to work with NBR. They don’t own enough securities accepted for their usual financing needs, this meaning actually a poor liquidity management, the guys have a mismatch, which is probably strong enough as long as they feel like they are very affected by this. I wouldn’t take the improper liquidity management and assets management, the treasurer’s job , out of question, as this seams to me a little bit more problematic for the banking sector than the collateral NBR accepts or not for financing needs.

    So you can only make NBR culpable of not accepting higher risk as a collateral from the banks. And I would agree if somebody would propose to relax the collateral rules a little bit, taking into account the romanian state debt management. But this is another story.

    Oligopoly exists because most of the customers work with these few big banks, allowing them to take their deposits even when the interest rates are worse than their competition. I don’t see what the authorities could make to determine people to prefer … Nextbank, instead of … BRD. Of course is always easier to find the system as being culpable, but this is not always the case🙂.

    Plus, I’m seeing banking systems with thousands of banks, not 43, and still the oligopoly is much higher than in Romania. People seam to prefer to work with just a few banks from the system, from personal comfort, and the only way you could solve this is by communist regulation.

    In a free market, both businesses and people are free to choose. If you’re not happy with the banks commission, keep as much cash as possible to make payments with it. Do something else with your money, and don’t keep them in a bank. Or find another bank.

    I’ll give you an example. I need to make and receive payments in dollars, which this summer accentuated, so I punished the ING for their completely stupid commissions by finding another bank, which charge me less for this service. Probably if everybody would do the same ING would loose business, and in the end they would need to adjust the prices down, or step out of the market. They don’t do this, because most of the people are stupid and continue to pay their fees, so there’s no reason for them to change. What is NBR supposed to do, send them a pricing list by email?

    Than, another funny thing for me is that I simply can’t see how could NBR create more banks, as this should actually be done by the private sector. What they could try to do is a rethinking of the IFNs and CARs status. But beside this … there’s not much to be done from the central authority, except totally communist measures, like splitting a bank if 3 “voluntarily”.

    Usually, the strongest entry barrier in business, any sort of business, is your competition. So, we get to the same point. Either NBR should act like in total communism to kill the competition for the new entrants, either we, the people, should find out that there exists more banks in the market, and not just 10 of them.

    The usury was not outlawed, you can still be a Camatar if you want to, is just the excessive interest rate which was outlawed, and I don’t even know if the law described very well what exactly does it mean by excessive interest rate. Probably 100% a month, or 50% a month, something alike.

    What do you mean by insolvent bank?

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