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IMF urges Romania to address emerging financial sector vulnerabilities


Despite the significant strengthening of Romania's financial sector over the last few years, vulnerabilities are emerging and need to be addressed in order to improve financial stability, the International Monetary Fund (IMF) said on Tuesday, quoted by seenews.com.

"Banks' holdings of domestic sovereign paper have grown large, exposing them to valuation losses in case of an increase in interest rates or sovereign risk spreads," the IMF said in a report prepared under the financial sector stability assessment programme. 

The report is based on the information available at the time it was completed on May 16, 2018.

NPL ratios on banks' mortgage portfolios may also be affected negatively in case of an increase in interest rates, the IMF noted.

The IMF staff mission's risk analysis found out that banks' capital will be impacted significantly in the event of a sharp increase in interest rates, combined with a shock to economic growth, comparable to the 2008 crisis.

"Stress test results indicate that, over a three-year horizon, banks face losses of close to 900 basis points (bps) in capital, resulting from trading losses on their sovereign securities portfolios, and credit losses on their loan portfolios," the IMF said.

A number of the 12 banks which went through stress tests fail to meet the minimum threshold for the common equity Tier 1 capital ratio, the IMF pointed out.

In order to mitigate risks of housing sector imbalances and to support the effectiveness of the existing loan-to-value limits, Romania should continue gradual scaling back of the Prima Casa programme, designed to support first-time homebuyers through a 50% guarantee by the government.

A currency-differentiated Liquidity Coverage Ratio and the monitoring of a currency-differentiated Net Stable Funding Ratio is also recommended in order to limit FX liquidity risks.

The mission also recommended introducing capital buffers to increase resilience and guard against risks from large sovereign exposures.

This report is based on the work of the Financial Sector Assessment Program (FSAP) mission that visited Romania in November 2017 and January 2018. The FSAP findings were discussed with the authorities during the Article IV consultation mission in March 2018, the IMF said.