Banks looking to set up their reserves as soon as possible

Ana Săbiescu

Romanian banks are getting increasingly cautious, and they feel it is best to secure the liquidity needed for creating the minimum mandatory reserve, required by the National Bank of Romania, as soon as each new period for setting up the mandatory reserve begins (ed. note: on the 24th of each month).

The minimum mandatory reserve rate for foreign currency liabilities is currently set at 40%, and the one for liabilities denominated in lei is 18%.

Dealers from the treasury departments of various banks said that these last few months, they"ve noticed an increase of inter-bank interest rates at the beginning of a new reserve period, up to around 12 - 13%, when compared to the low levels of around 5 - 6%, in the last days of the period.

This is the reverse of last year"s situation: in the last days of the period for setting up the reserve, banks would rush to the inter-bank market, sometimes causing the interest rate to rise above 13%.

The minimum mandatory reserves (RMO) consist of the foreign currency and lei resources deposited by the banks with the Central Bank.

The main functions of the leu denominated reserves in lei are to keep the stability of the money supply and of the interest rates on the inter-bank market, whereas the creation of forex reserves is intended to keep foreign currency lending in check.

In case the bank fails to cover the minimum mandatory reserve, the Central Bank will charge a penalizing interest rate on the reserve deficit, and if the situation occurs again, the lender institution may be fined or have its operations restricted by the Central Bank. The penalty interest rate of the Central Bank is 21% for lei and 18% for foreign currency.

In turn, if the minimum mandatory reserve is adequate, the Central Bank pays an interest rate of 5.5% on mandatory reserves in lei, 2.71% for Euros and 1.05% for US dollars.

The Central Bank also decided recently, that banks would no longer be required to set up minimum required reserves for foreign currency liabilities with a maturity of more than two years.

BNR has reached this decision in order to support long term lending and to ease the banks" operations. Thus, the reduction of minimum mandatory reserves means the banks will have an additional hundred million Euros available for lending, and what is most likely to happen is that the structure of their borrowings will change, meaning long term funding will increase.

The decision will come into effect starting May 24th - June 23rd 2009.