How the NBR became a subprime institution

The "subprime" notion entered the domestic financial vocabulary after the effects of the financial crisis could no longer be ignored by our authorities. According to the definition from Investopedia, subprime represents a classification of the debtors which are considered highly uncertain when it come to their ability to repay their loans.

In the international press news initially appeared about the subprime loans in the United States and about the financial derivatives built using them as underlying assets.

The Romanian authorities, especially the National Bank of Romania, sought to reassure us, at the time: the crisis would not affect Romania, because exotic financial products did not exist in our banking system. In 2009, governor Mugur Isărescu was saying that "a significant part of the current economic crisis has a virtual nature" due to a "significant media component".

Thus, the monetary authority of the state took the first step towards a subprime institution, by disregarding the signals coming from the international markets.

The ratio of non-performing loans was 7.9% in 2009, but it increased all the way to 20.3% in June 2013, and the rate of the credit risk rose from 15.3% to 30.5% over the course of the same period. How was it possible? Simple, because the NBR adopted some inexplicable measures, such as the increase of the allowed degree of indebtedness of the population, just as the real estate bubble was reaching its peak.

The NBR probably hoped that the engines of lending would continue to work, at least until things returned to normal in the West. But normalcy is still taking its time after six years, and the burden of loans, out of proportion to the ability to repay them, has become increasingly heavy, for companies as well as the population.

In all these years, under the wise oversight of the NBR, the banking system did nothing else but try to mend its loan portfolio, through endless restructuring. Of course the effects were almost non-existent, considering that the fundamental element, the cash inflows in the form of interest and principal, was increasingly hard to find.

These signals were also ignored by the NBR. Only now, as the financial press writes, "the National Bank of Romania is checking whether the bankers performed the restructuring only to cheat the rules concerning provisions". In English there is an expression which describes the situation that the NBR is in: "closing the barn door after the horse has been stolen".

But "cheating" the rules for provisions, and, implicitly, the "embellishing" of the banks' results have several facets. One of them is the result of the switch to the IFRS reporting system, from the RAS national system, and this is demonstrated by the latest results of the banking system.

The substantial profit reported for the first half of the current year was also due to the substantial contribution of the release of the liabilities from delayed taxes. What happened? When the switch was made to the IFRS accounting system for reporting bank results, in the beginning of 2012, the financial institutions reported a significant increase in their profits, as the provisions under the RAS were far greater than the ones calculated according to the IFRS norms.

Theoretically, taxes were supposed to be paid on this kind of "profits" as well, but those were postponed, according to the fiscal norms and to the regulations of the NBR. Now these taxes have been "released" as well and they have become profits as well.

Why? A possible explanation would be the convergence towards the RAS provisions of the provisions calculated the IFRS norms, amid the heavy deterioration of the loan portfolios, a deterioration which can no longer be "concealed", not even by the "relaxed" accounting norms. In other words, even the virtual profit has vanished.

As an example, let's take the case of BCR, the biggest bank in the system in terms of assets. The net profit reported for the first six months of the year was 122.5 million Euros, amid a gross loss of 6.3 million Euros, according to data reported on the website of the parent bank. Out of that net profit of 122.5 million Euros, 116.7 million are awarded to the parent bank.

On the local website of the bank, the financial results for the year 2011 can be found, according to the RAS and the IFRS norms. According to the RAS, at the end of 2011, credit risk provisions amounted to 7.2 billion lei, and according to the IFRS report, they amounted to 4.12 billion lei. The difference would be a "profit" of about 700 million Euros and taxes equal to the one that was recently "released".

In the context of international arbitrage between the two reporting systems for the bank results, it bears reminding that on an international level, there are significant pressures to drop the IFRS, precisely because of how it delays the recognition of bank losses.

What is happening now? The foreign banks from the local market are "outsourcing" real money using virtual profits. According to information from the financial press, "parent banks have withdrawn five billion Euros from Romania in a year and a half", according to the officials of the NBR, and the process will exacerbate in the coming period.

And then, what can an economy that is deeply imbalanced and dependent on cheap credit do? Where can the financial resources needed for replacing the foreign funds which are being withdrawn be found?

The solution would be, of course, to resort to the domestic savings of the companies and of the population, but they are being heavily punished by the NBR through an unprecedented program of financial repression (author's note: negative real interest rates discourage saving and the formation of real capital in the economy).

Through these measures, the National Bank of Romania is doing nothing more but following the trend set by the major central banks on a global level, in other words take pride in its subprime nature, just like the major central banks are.

Back when he was a "comrade", governor Isărescu wrote an article in "Scânteia" (ed. note: the newspaper of the Romanian Communist Party) called "Developing countries - robbed of tens of billions of dollars due to the iniquities in the economic international relations" (author's notes: the scanned article was published on the website of analyst Lucian Isar).

"The secretary general of the party has clearly presented the practice of the major imperialist countries, of financial capital, of transnational monopolies, which are conducting a deliberate policy of exploitation and neocolonial oppression of developing countries", researcher Isărescu of the World Economics Institute wrote.

More than 20 years and miraculous metamorphosis later, Mugur Isărescu pontificates on the importance of reforms and endorses loans from the IMF. The governor of the NBR forgets that "the iniquities in the international economic relations" have deepened immensely, over the last few decades, as the extraordinary privilege of the monetary printing presses has allowed the major powers to buy real resources in exchange for paper money.

Now this practice has reached extreme levels, and its extremely negative effects will be felt by many future generations, including in Romania, because our resources are being sold for nothing, literally and figuratively speaking.

Bu the subprime nature of the NBR comes, especially from the constant refusal to acknowledge its own mistakes, over the last few years, mistakes which are making it to defend even the abusive clauses of the loan contracts in the banking system. And with a central bank that is subprime on so many levels - monetary policy, bank oversight and the management of the country's gold reserves- Romania can not exit its current crisis.