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Impact of COVID-19 Crisis on Banking Sector in Romania

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Abstract

Postponing debt payment in the context of a lockdown of the economy in Romania during COVID-19 pandemic was a logical and beneficial step for all stakeholders. The analysis performed concludes that the solutions proposed both by GEO no. 37/2020 and the Law approving it are not likely to significantly affect the liquidity position of commercial banks in Romania, as they are able to absorb the shock. Also, the macroeconomic shock of COVID-19 may lead to a significant increase in the volume of non-performing loans, with subsequent negative effects on the banking sector's ability to lend to the real economy. In the context of the COVID-19 pandemic, the reduced-form stress testing exercise indicates a potential increase in the non-performing loans (NPL) rate in Romania, up to a level of approximately 12% in the adverse scenario, over a 2-year horizon. The simulations performed indicate that the banking sector can make a substantial contribution to limiting the economic contraction of 2020 and 2021 and thus to reducing business cycle volatility.

Keywords

  • Debt Moratorium
  • COVID-19 pandemic
  • NPLs
  • Structural VAR
  • ARDL models

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  • DOI: 10.1007/978-3-030-86641-9_7
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Fig. 1

Source National Bank of Romania

Fig. 2

Source National Bank of Romania

Fig. 3

Source European Commission and own estimation

Fig. 4

Source European Commission and own estimation

Fig. 5

Source own estimation

Fig. 6

Source own estimation

Fig. 7
Fig. 8

Source own estimation

Fig. 9
Fig. 10

Source own calculation

Fig. 11
Fig. 12

Source own estimation

Fig. 13

Source own estimation

Fig. 14

Notes

  1. 1.

    https://www.arb.ro/wp-content/uploads/Comunicat-de-presa-ARB-24.04.2020.pdf.

  2. 2.

    European Banking Authority, Guidelines on legislative and non-legislative moratorium on loan repayments applied in the light of the COVID-19 crisis, 2 April 2020, the application of moratoriums on a large scale and without producing other contractual changes, except for the maturity lag.

  3. 3.

    According to the information provided by EBA (Guidelines on the application of the definition of default under Article 178 of Regulation (EU) No 575/2013), in the event of a restructuring in the event of financial distress of the debtor (distressed restructuring), the value change threshold Net present of financial obligations may not be higher than 1%. These specifications come into force on January 1, 2021.

  4. 4.

    https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200312~45417d8643.en.html.

  5. 5.

    https://bnro.ro/Masurile-BNR-in-contextul-situa%c8%9biei-generate-de-epidemia-COVID-19-21312.aspx.

  6. 6.

    For the interest rate on foreign currency loans, the interest rate on euro loans was used as a proxy. For the interest rate on consumer loans, the interest rate on consumer loans and other purposes was used as a proxy.

  7. 7.

    The NPL rates enter the model under a logistic transformation to avoid any potential issues with restrictions in the [0, 1] interval or the violation of the error normality hypothesis—the approach is common in related literature, for example, see Vazquez et al. (2012) or Wezel et al. (2014).

References

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Correspondence to Dumitru Ionut .

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Ionut, D. et al. (2021). Impact of COVID-19 Crisis on Banking Sector in Romania. In: Dima, A.M., Anghel, I., Dobrea, R.C. (eds) Economic Recovery After COVID-19. Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-86641-9_7

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