Cristian Popa Deputy Governor Athens, February 11, 2011

1. Growth, Recession and the Banking System: A Before-and-After Perspective on Romania Cristian Popa Deputy Governor Athens, February 11, 2011 NATIONAL BANK OF ROMANIA

2. Summary (I) • Romania registered rapid average growth from 2004-8, fueled by strong capital inflows, including lending expansion (led by fx) mainly financed by parent bank credit lines • This took place at the expense of overheating: both inflation and CAD were worsening • Strong short-term nominal appreciation also created a challenge for macroeconomic demand management, through the stimulative effects of interest rate hikes, mirrored in balance sheet and wealth effects (esp. for unhedged borrowers) • The NBR took a broad variety of measures to slow down unsustainably rapid fx (and overall) credit growth: increases in MRR (higher for fx liabilities), LTV, debt service to income limits for households (across spectrum of financial institutions), exposure limits for banks to unhedged borrowers, tougher stress-test coefficients for fx exposures (esp. ‘exotic’ denominations), demands for higher capital base, moral suasion • The flexible inflation targeting regime was interpreted to warrant preventing additional nominal appreciation of the domestic currency, since the disorderly reversal of such appreciation (not warranted by improving fundamentals) would not only lead to inflationary consequences, but also pose challenges to financial stability: sustainably achieving inflation targets over a medium-term perspective while adjusting (or not worsening) macroeconomic disequilibria was the stated goal of monetary policy; however, this lacked support from a procyclical stance of fiscal and incomes policies

3. Summary (II) • After Oct. 2008, Romania entered into a prolonged recession, on the background not of a fully-fledged sudden stop, but of a sizable reduction in capital flows, with significantly more difficult and expensive access to financing against growing risk aversion of investors everywhere; subsequent correction in both external & (with a lag) fiscal deficits • Banks turned from ST competition for market shares to procyclical deleveraging – competing for scarce domestic savings bid up deposit yields and, with widening margins (from NPL growth & provisioning requirements), lending rates also rose considerably • However, efforts to consolidate & increase bank capital started ahead of the crisis, with comfortable levels even against rising NPLs (solvency rate currently at 14.7% in Dec. 2010 against 12.8% in Sept. 2008) • Conclusions: • Need to manage fx credit growth issue pro-actively & comprehensively, by involving parent banks and cooperation between regulators/supervisors from both home & host countries: debtor-focused measures adopted solely in host country have limited effectiveness, become porous over 1-2 years and may have distortive side effects (cross-border credit transfer, etc.) • Liquidity becomes not only an important issue for financial system, but also a quasi-instrument of monetary policy • Longer-term, ‘holistic’ view of economic developments, integrating price stability and financial stability are key challenges for central banks

8. Current Account Deficit Financing via FDI

14. Inflation Forecast