National Bank of Romania proposes bridge bank option

The board of the Central Bank of Romania (BNR) has drafted an ordinance to set up a bridge bank, which could take over the administration of a bank that is in distress due to a sluggish economy or liquidity crisis. The bridge bank would ensure the continuity of the lender’s operations and address the credit institution’s core problems before marketing and selling it.

The draft emergency ordinance stipulates that the Bank Deposit Guarantee Fund (BDGF) be appointed as a delegated administrator and shareholder of distressed credit institutions, by increasing the institution’s share capital and buying the new shares issued by the BDGF. The draft adds that the assets and liabilities of a distressed credit institution could be partially or totally transferred to one or more eligible institutions. The transfer of assets and liabilities to a bridge bank does not remove the financial threat to the bank’s stability.

When the bridge bank is created, the BDGF is the sole shareholder and carries out the tasks of the supervisory committee. The bridge bank can operate for up to two years from the moment it is established and ensures the prudent continuous provision of banking services related to assets and liabilities taken over in view of its subsequent sale to an eligible third party purchaser.

The ECB (European Central Bank), which was also consulted by the Romanian legislator, says that the existence of a bridge bank could be extended from two years, if the financial risk is still present and no purchaser is found for the credit institutions. It added that deposit-guarantee funds should be propped up to pay claims made by depositors.

Adrian Vasilescu, advisor to the bank’s governor, Mugur Isarescu, explained last week that the bridge bank was a flexible institution that could become functional at key moments, offering a distressed credit institution the chance to improve its situation or be sold to a third party. The amendments in the draft ordinance are part of Romania’s commitments under a stand-by arrangement with the IMF and World Bank.

Radu Gratian Ghetea, president of the Romanian Banking Association (ARB), commented that the setting-up of a bridge bank was a normal move, creating the necessary framework in the event that a bank needs support. Ghetea added that credit institutions in Romania have dealt in a reasonable manner with the distortions of the current economic and financial crisis, proving the structural stability of the Romanian banking system.“I believe that the Romanian banking system is well prepared for the scenario of persistent crisis effects and I am hoping the crisis vulnerabilities will be minimized,” said Ghetea.

The ARB president believes that mother banks will continue to allocate capital to Romanian subsidiaries, with post-crisis opportunities emerging in Romania in sight. Ghetea doesn’t exclude the possibility of a new Vienna agreement, through which nine banks committed to maintain their exposure in Romania.

The percentage of assets owned by foreign capital institutions of the total assets of the Romanian banking system was 85.4 percent at the end of June this year.
With more than 80 percent of the local banking system controlled by foreign lenders, Romania is particularly vulnerable to increasing banking sector uncertainties elsewhere in Europe. At end-September 2011, the country had 42 credit institutions, out of which nine were foreign bank branches, with total net assets of RON 344 billion. The NPL (non-performing) loans ratio was 14.2 percent, while the loan to deposit ratio reached nearly 119 percent.
Ovidiu Posirca