The ghost of destruction, the final "weapon" of the National Bank of Romania

When all the arguments that would justify your lack of action in an area of primordial social interest, in relation to which you are claiming absolute competence, all that is left for you is to switch to forcing the creation of "solutions" through threats.

That is the case of the NBR as well, an institution which holds the monopoly of money issuing and of the banking regulation in Romania, when it comes to the law of giving in payment (datio in solutionem) of loan collaterals to extinguish debts.

There will be a disaster in the banking system if the law gets passed, lending will stop and people with bank deposits will receive their interest and principal in "bricks and double-paned windows".

And the law has been passed by the parliament, with the last step being, at least theoretically, its signing by president Iohannis.

The organizations that represent the banking system, the ARB (the Romanian Banking Association) and the Council of Banking Professional Associations in Romania (CPBR), have used every means available to halt the draft law, but their opposition seems to be very far less vehement than that of the NBR.

The bankers' representatives said that there would be irreversible negative consequences for the banking system and for lending, according to the online financial publications.

I remember the time when the real estate bubble seemed unstoppable. Back then no one seemed concerned, no one was issuing any warnings about the irreversible negative consequences, and the NBR was expressing its "concern" from the sidelines, as if it didn't have the necessary prudential leverage.

Will lending be restricted and the downpayment required for mortgage loans increase to 50%? Very good! Why? Because a 50% downpayment for a single room apartment will probably represent an amount around 5,000 or 7,000 Euros, not at all 20,000 Euros, amid the adjustment of home prices to match the citizens' purchasing power.

The head of the Oversight Division of the NBR, Nicolae Cinteză, every time includes in his speech a warning for depositors: their money is being used to grant loans, and the law of giving in payment threatens their savings.

Have the NBR officials not read the document by the Bank of England concerning the creation of money in the modern economy, which states that banks should not wait for the creation of deposits before granting loans, but rather, that lending is the process that creates the bank deposits, and private banks thus create new money? The two parts of the document from the Bank of England are part of the electronic archive of the BURSA newspaper, as attachments to the articles "The understanding of the nature of money is above the understanding of financial products", also published in the print editions of April 28th, 2014 and May 6th, 2014.

Isn't this where the Romanians' financial education should start from, who as a result, would also learn the true "worth" of the state guarantee of bank deposits?

At the EU-COFILE Seminar held last week, organized by the NBR, Alpha Bank Romania and the Romanian Banking Association, an NBR advisor, Cristian Bichi, presented "The Role of Banking Resolution in ensuring financial stability".

Banking resolution, a process regulated on a European level, which will come in effect in the beginning of 2016, represents "the reorganization of a distressed bank which seeks to preserve financial stability, the continuity of banking services and the revitalization of the bank".

The reorganization process is funded through the bank deposit guarantee schemes or through distinct resolution funds, according to the presentation.

One of the main goals of the resolution is "avoiding the pointless destruction of value and the attempt to minimize costs".

But what is the nature of the "value" the destruction of which must be avoided? Isn't it that of the banking "assets" backed by overvalued collateral, far above the citizens' purchasing power? Wasn't the uncontrolled lending growth the main factor in the booming of prices on the residential real estate market?

Under these circumstances, isn't the destruction of the illusory "value" created through lending even necessary, so that the move is made to the rearrangement of the fundamentals of economics, which would allow development through capital accumulation, increased productivity and real wage growth?

The European Banking Recovery and Resolution Directive (BRRD) was transposed late into the Romanian legislation, through the law passed by the Chamber of Deputies in November 11, 2015, which stipulates that there are two national resolution authorities: the NBR for lenders and the ASF for investment firms.

As further stated by the NBR advisor, an organizational framework must be established at the level of the state's monetary authority, so that a "Chinese wall" exists between the supervision and the resolution departments.

But can the "Chinese wall" function when things get to the resolution stage? We should not forget that the Oversight Division of the NBR annually reviews every commercial bank, aside from the fact that it knows almost in real time, the situation in the banking system.

If a bank gets to the point where it needs "resolution", doesn't that mean that the oversight hasn't done its job, and that the upper management levels of the NBR, which is above that "wall" between the two departments, is in the situation of a possible conflict of interest?

And then, while small banks get liquidated if they get close to bankruptcy, while the big ones get "saved", won't the resolution mechanism lead to the artificial consolidation of the banking system, in which financial institutions that are too big to fail will be created and which will hold the state "hostage" forever?

Furthermore, even if a bank gets "saved" from bankruptcy, including through the creditors' and depositors bail-in, how will this work in the future? Will a law be given in the future to force depositors declare and prove their trust in the bank?

Paul Krugman, 2008 Nobel prize winner for economics, recently wrote in New York Times that "the real estate bubble in the mid-2000s was the most obvious thing I have ever seen, and the refusal of so many people to accept it represents a dramatic illustration of motivated reasoning in action".

Unfortunately, the real estate bubble, both in the US, and particularly so in Romania, had extremely negative effects on the economy, especially when it comes to the structural nature of the banking system.

"The financial superstructure built on top of the real estate bubble was completely different, and I did not have the slightest clue about this phenomenon and I did not see the coming of the financial crisis", the City University of New York professor writes.

From his ivory tower, professor Krugman can afford to make a "mea culpa". A central bank can not do that, because the fate of an entire nation can be fundamentally changed, as a result of these mistakes. And he cannot accuse the Parliament of political opportunism politic, even if the accusation is valid, when, in its "independence", it has pursued the same path, including in all of these years of crisis.

Pandora's Box is now open and we will have to deal with all its evils, before Hope comes out.