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BNR's Isarescu : Central bank's independence is under attack
Governor of the National Bank of Romania (BNR) Mugur Isarescu said during hearings in the Senate’s joint economic and budget committees on Tuesday that BNR insists that, in the case of Government Emergency Ordinance 114, the ROBOR Romanian Inter-bank Offer Rate be cut loose from asset taxation because keeping it there would be tantamount to attacking the independence of the central bank.
"Cutting ROBOR loose from this ordinance is a two-edge sword, so to say. The untying of ROBOR from asset taxation is something else, and for that we insist, because it is an attack at the independence of the central bank. The European Central Bank has already notified us and that that does not comply with or it violates the Treaty of the European Union, and there is nothing we can do about that. We have explicitly asked the finance minister to come up with a solution. The government is entitled to tax even banks, nobody challenges that. But everywhere in Europe the monetary policy rate was not been tied to taxation, and in the end ROBOR is part of the monetary policy," Isarescu said.
He said that if ROBOR is to be decoupled from lending, banks may charge other types of costs.
He explained that by applying Ordinance 114 interest on deposits would decrease, and the taxation of bank assets is done indiscriminately.
"Banking assets representing the mandatory reserves that banks keep with the National Bank are also being charged; they are called mandatory because a minimum of liquidity has to be secured, because banks make payments in the economy. So that is a duty, not an advantage. Tax is being levied indiscriminately on government securities that banks buy, that is their loans to the Romanian government (...) Among the proposals of the National Bank for improvement is not only cutting ROBOR loose, but also removing at least these three assets from the balance sheet of banks in the taxation process. As it stands, Ordinance 114 is discouraging lending and it will further discourage bank deposits and consequently investment," said Isarescu.
Governor of the National Bank of Romania (BNR) Mugur Isarescu said on Tuesday that he is skeptical about finding a solution that could result in lower interest rates within the Joint Committee between the BNR and the Public Finance Ministry (MFP).
"These calculations are made, but based on my instinct, if you allow me, based on this instinct and this experience, I don't think it will get better. You want something else and, therefore, let's say what you want. You want to have lower interest rates in Romania, right? And we want it, too, and for that we have to do three things: to come down with inflation, bring it to level one, yes, but we cannot bring it down by pushing a button, we shall reduce deficits. You can reduce the deficit from 2.5 percent to 1 percent, because you are with the budged ahead, yes? And, we'll reduce the external deficit. Well, this external one, you really cannot do it ... there are exports, imports, there are tens of thousands of economic agents that work. Can we do it? We have a difficult job. I said yesterday. We are economists and we need to say what can and cannot be done. We know that we are sometimes unpleasant. We come with bad news. But, that's that. It is not possible to bring interests and ROBOR down if we do not bring at least these three indicators down," Isarescu told the hearings in the economic and budget-finance committees of the Senate.
There is nothing wrong with the ROBOR, the Romanian Interbank Offer Rate, and there is no mishandling it or it slipping from the real level of the market, Isarescu said on Tuesday.
He was asked if the half-hour morning quoted formula is the best formula for calculating the interest rates, and whether or not when trade is subsequently done below the quote there is an interest of banks excessively profiting of their customers.
"Being interbank only, banks are fighting for a hundredth of a percentage point, which I can swear to and verifications can confirm. So they can vary around the displayed quotes, but they are fighting for hundredths of a percentage point (...) The idea that they act together in a cartel, as I told you, would be when they agree on 3.50pct interest, but no more, I have heard someone claiming interest is going to be 10pct. At 3.5pct, if someone goes to borrow at 4pct, Mr. Cinteza calls him or her immediately and tells that he or she endangers the stability of the system and ushers in panic to the market. So, 3.5pct is the highest it can go. So the banks cannot collude," said Isarescu.
According to him, the confusion about ROBOR results from the fact that weekly figures are compared with 3, 6 and 12-month figures, and the differences are very high.
"We do not upset the ROBOR. There is nothing wrong with the ROBOR, and I can guarantee there is no mishandling it. There is no deviation of ROBOR from the real level of the market. The market works very well. Evidence that the market works very well relates to the stability of the exchange rates and the interest rate moves. The rest is really distortion, but media distortions, and then the question is why the interest rates are tied to the 3M rate. As far as I remember, the decision was made in 2010, when that rate was considered to be the most stable. It does not show the variations that interest shows in a week's time, or a day's time, which over the last three-four weeks, has gone from 1.50 to 3.50pct," Isarescu explained.
"ROBOR is an interbank money market index. The interbank money market is made up of banks only, so it is made up of banks that have accounts opened with the National Bank of Romania; these banks are not many, they are about 40. Let's say 40 for the sake of simplification. The liquidity supply of the Romanian economy, including the Treasury, is performed on this interbank market and through those banks, with the total of the accounts at the level of the economy exceeding, say, one trillion. (...) There are no accounts opened by individuals with the National Bank, and even we, the staff, we get our money through banks. For your understanding, what is called the supply of liquidity or cash to the Romanian economy is done on this interbank market," said Isarescu.
"The money market is only between banks, which is why it is called the interbank money market. Since it is only between banks, this ROBOR or the interest at which the banks make transactions is the outcome of an agreement between the banks. Agreement means the same as you going to a store and buying a product understanding what the price of the product is; you accept it, pay it and shake hands with the vendor," said Isarescu. He added that there are two types of agreements and that only cartel agreement is prohibited.
He also explained why BNR decided to bring its entire administration board for testimonies. "I have come with my colleagues from the administration board because I noticed that the public is slightly confused. It is believed that the National Bank is run by one person, but we have a collective leadership: the governor, the first deputy governor, two deputy governors and five members of the administration board, and responsibility for the decisions made lies with the entire board. That is why we are all here, not to impress, but to comply with the law that governs us," Isarescu said.
In his turn, BNR First Deputy Governor Florin Georgescu mentioned that there are more discussions about the manner in which ROBOR is calculated.
"Currently, the National Macroprudential Stability Committee, where the Government is represented through the MFP, the ASF [the Financial Supervisory Authority] and the BNR with three people each, analyses through technical experts how a ROBOR calculated on a transaction, not quotes basis, would look like and not only corresponding to one day or the other, but for a whole period, let's say three months. It is a variant or one can choose others in relation to the significance of the indicator, not opportunistically, where the indicator is lower, but which reflects more transparently, objectively and more efficiently the situation in the market and which indicator with a certain average, based, I repeat, on actual transactions, should be the basis for calculating individuals' installments for the next period," Florin Georgescu stated.