Poor Banking Intermediation

This is the last of the four episodes of the exclusive interview granted by Governor Mugur Isărescu to BURSA.

The first episode focused on the matter of confidence in the national currency.

The second explained the inflation rate causes and projection.

The third was dedicated to coordination between the monetary policy and the budget policy.

Every episode, the governor added valuable news to what was already known about the respective topic.

In this episode, Mr. Mugur Isărescu deals with some of the aspects of the relationship between the central bank and commercial banks.

• Seven years ago - 10%; today - 40%

BURSA: Do you have any methods to counter speculative attacks?

M. Isărescu: We do and the first instrument we use to discourage speculative attacks is the flexibility of the exchange rate. Generally, a flexible exchange rate discourages short-term speculative capital. International experience proves it. Of course, having a flexible exchange rate does come with a few shortcomings, including some emotional ones. For instance, the general public cannot remain too calm when an abrupt exchange rate fluctuation takes place, especially if they are exposed to the currency risk, even if that fluctuation is a welcome correction from an economic and financial perspective, which experts are able to explain.

BURSA: Are there chances that the current account deficit return to a sustainable level this year?

M. Isărescu: We will gradually return to a sustainable level of the current account deficit. A swift return would equal a correction that is neither desirable nor expectable. The recovery will take place gradually, over several years. In fact, the foreign deficit has started to improve already, I believe, and the exchange rate development is relevant in this respect. However, the impact on imports and exports will be gradual, of course.

BURSA: Do you believe that the current account deficit will be influenced by the poor evolution of the macroeconomic indexes in the EU countries with whom we trade the most?

M. Isărescu: It is quite obvious that our exports are related to the fluctuation of the indexes in the EU countries with whom we perform most of our trade. But we need to be realistic: our market share is not high enough for the impact of the economic growth slowdown in those countries to affect our exports significantly.

BURSA: Is it possible that the revenues of the Romanians working abroad may be sufficiently affected that they reduce the amount of money they send home?

M. Isărescu: It is possible. But that will have an influence on imports, too, because a significant part of the consumer goods imports made to Romania are paid for with the money sent from abroad. Thus, such imports will decrease, which is not a bad thing. There is definitely a correlation between the size of the deficit and the volume of the inbound cash flows.

BURSA: The president of an important bank in Romania criticized you because your communication with the commercial banks is not too good. How has your communication with the banks been this year?

M. Isărescu: It is not true that we do not communicate well with the banks. There is a monthly management meeting between the Romanian Banking Association and the National Bank of Romania, represented at least by a vice governor or the first vice governor. As for me, the meetings take place as often as requested. We are ready to improve communication with the banks and I believe that, in the context of a tenser international climate, there is need for that.

BURSA: When will the National Bank change the level of the minimum mandatory reserves?

M. Isărescu: When the monetary conditions allow it and when the inflation rate resumes a clear and sustainable downward trend. We are also considering the alignment of the lending conditions in Romania to those in the European Union.

BURSA: Last year you took measures to stimulate lending, such as relaxed lending norms...

M. Isărescu: We took relaxation measures in the first half of the year for two reasons. The first is that direct lending restrictions usually have effects only for a limited period. It became obvious that, from a point on, such restrictions could be avoided by commercial banks, had become ineffective and could create distortions in the financial and economic system (lending externalization). The second reason was that the inflation outlook was positive in the spring.

BURSA: The practice of lending externalization has become to gain momentum. What is your opinion on this matter, considering that banks transfer major loans to the parent bank (both corporate and retail loans)? In such case, are the profits also booked by the parent bank? Does that not lead to a decrease in the banking system"s profitability?

M. Isărescu: Lending externalization can lead to a decrease in the profitability of the Romanian banking system and, for this reason, we renounced direct lending restrictions. However, we cannot lower the minimum mandatory reserves as long as the inflation rate is increasing.

BURSA: Romanian banks give loans and finance them from the parent bank. Considering that the crisis is expanding across Europe, is there a risk of facing a liquidity deficit?

M. Isărescu: There is a potential for that risk. In Romania"s case, the chances of seeing that risk materialize are not too high for the time being. But it"s best to keep that in mind.

BURSA: Do you think there are too many banks in Romania?

M. Isărescu: It"s hard for me to say whether there are too many or too few banks on the market. If we look at the banking systems in the European countries, we"ll notice that in the north there are few banks with a high concentration rate, and more banks in the south. Romania is somewhere in the middle.

Two aspects are important. The first is that the structure of the banking system is high enough to ensure a high degree of competition, which leads to better service for the customers and more efficient lending activities.

The second is that the small banks, which have not yet found a niche to develop in, should consolidate either by a capital increase or by mergers and acquisitions. I believe that both scenarios are already taking place in the Romanian banking system.

BURSA: What is the percentage of the Romanians who use banking services?

M. Isărescu: It is fairly high, but in the cities. The overall average points to a banking intermediation rate of 40% in 2007. That places us, next to Poland, in the lower part of the intermediation standing at European level. But let us not forget that we started from 10% some 7 years ago.