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The Bear Stearns of Romania

The Bear Stearns of Romania Memories from a not so distant past crisis

Despite a lot of public rhetoric and noisy politics, the Romanian episode of the recent Great Financial Crisis has not been adequately chronicled to date.

True, in Romania, a country with a low – but increasing – financialization rate by Western standards, there has not been any Lehman Brothers-style bankruptcy in the local banking industry. However, despite repeated public statements made, since the beginning of the Crisis, by Mugur Isărescu and other officials at the National Bank of Romania (BNR), that the Romanian financial system is crisis-proofed, there has actually been a Bear Stearns-type of failure not long after the global panic spread into the country as well. 

Business as usual 

Volksbank Romania was born in 2000, as a Romanian-registered subsidiary of the Austrian banking concern bearing the same name. The early 2000s were a period of stabilization and consolidation of the Romanian banking system, with several new entrants on the market and the privatization of the country’s leading banks. An all-purpose commercial and savings bank, like most banks in Europe, Volksbank occupied a lower position among the almost 40 banking firms that made up the Romanian market until the second half of the 2000s, when it began to franchise branches all over the country and grow rapidly as a bank specialized in foreign-exchange denominated commercial and real estate credit.

The fact that this new and rapidly expanding bank managed to concentrate so much currency risk is revealing for the deficiencies in banking supervision in Romania in the years leading up to the Crisis.

In September 2008, Volksbank Romania was the country’s 3rd biggest bank by assets, behind only Banca Comercială Română (BCR) and Banca Română de Dezvoltare - Société Générale (BRD - Société Générale), up from 11th place just two years before and 21st in 2004 – a staggering performance for a bank which did not take over any privatized banking assets when it opened. Thus, when the complex Financial Crisis – complex because, in the case of Romania, it encompassed interlinked real estate, debt and currency components – engulfed the country, Volksbank Romania was essentially on its way to bankruptcy, like the famous American investment bank Bear Stearns. However, just like its American counterpart, acquired under Fed pressure by JP Morgan Chase on March 16, 2008, it was bought in the middle of the bankruptcy process at a discount by a majority Romanian-owned bank, Banca Transilvania.

The move, which was sealed at the end of 2015, was no doubt engineered by the National Bank of Romania (BNR), which actually negotiated with the mother-banks of Romania’s almost completely foreign owned banking system a so-called voluntary Vienna Agreement, in 2009, the same year the Romanian Government asked for an IMF loan to stabilize the country’s private as well as public external deficit. According to the Agreement, which was revised several times and involved nine foreign banks primarily based in Austria, no foreign bank – which, back then, were soon to come under stress because of the Eurozone sovereign bonds crisis – would cut funding or exposure to its Romanian subsidiaries. Since a public bankruptcy of Volksbank Romania would have meant exactly that for the Romanian banking system – and on top of that a blow to Mugur Isărescu’s reputation, which he staked in an optimistic report to Parliament in late 2008 regarding the country’s financial stability –, BNR made Banca Transilvania an offer the third largest Austrian lender present in Romania – after the owner of BCR, Erste Bank, and of Raiffeisen Bank (formerly known as Banca Agricolă) – probably could not and did not refuse. 

Regional strategy 

The Vienna Accord between the private banks and the non-Eurozone central banks in South-East Europe, through which a highly visible public bailout of Volksbank Romania was averted and later covered up as a directed merger with another Romanian bank, was in fact part of a larger so-called Troika (IMF, World Bank and European Commission) blueprint strategy for the Central and Eastern Europe (CEE) region.

Compared to the Western European or American banks, the reserve ratios with which the Romanian banks operated were huge, and therefore leverage in the system was low.

First, the European Central Bank (ECB) made sure the mother-banks in the Eurozone would not run into liquidity problems or, worse, go bankrupt because of Southern Eurozone bond issues. In exchange for this official assurance, the Eurozone banks kept business going as usual in the CEE region, or its most crisis-ridden countries (although, in the case of Hungary, the ECB took exception and intervened directly with a currency swap for the Hungarian central bank). Second, the European Commission enforced the controversial fiscal discipline rules, which now allowed for a cyclically-adjusted structural instead of an arithmetic budget deficit of 3%, for the CEE countries which are members of the European Union, Romania included, while the IMF bridge-financed the external – private as well as public – deficits of these countries. Finally, the World Bank’s mission was to provide some sort of fiscal stimulus in the region, by maintaining financial flows to critical infrastructure projects and small businesses, but it did more than that. In the case of the forced merger between Volksbank Romania and Banca Transilvania orchestrated by the BNR, the World Bank – through its private investment unit, the International Finance Corporation (IFC) – was also a player behind the scenes, with the IFC acquiring in 2009 a minority stake in Banca Transilvania. 

Exceptions to the rule 

Mugur Isărescu, the BNR Governor, has always referred to the case of Volksbank Romania as a sort of isolated anomaly to his rule that the Romanian financial system was essentially sound and that, even with a financial crisis and a recession, no bank will fail. Coming from a man who oversaw several famous financial bankruptcies, restructurings and forced-mergers in the late 1990s, which still linger in Romania’s recent public memory, probably second only to the bloody fall of the Communist regime, this public assurance was daring, to say the least. Volksbank Romania was indeed rather small and far from representing any sort of systemic risk to the country’s financial system, but the fact that this new and rapidly expanding bank managed to concentrate so much currency risk is revealing for the deficiencies in banking supervision in Romania in the years leading up to the Crisis. With easy money flowing in, high growth rates and interest rates lowered year after year, the general opinion among bankers – including some BNR board members – in the aftermath of Romania’s capital account liberalization, which began in 2001 and was completed in 2007, was that the banking sector could only grow bigger. This downplayed the signs of overheating and out-of-control public deficits geared primarily towards consumption which dated to before the Financial Crisis kicked in, simply because, they reasoned, the country’s consumers were for a long time starved of credit and financialization was still well below the European Union’s average.

The Romanian central bank did not use borrowed public money to directly support and bail out failing private banks through asset purchases.

Isărescu’s brimming confidence in the soundness of the Romanian banking system when the Crisis did strike Romania was not entirely posturing to calm depositors and international markets. It was based on two facts. First, compared to the Western European or American banks, the reserve ratios with which the Romanian banks operated were huge, and therefore leverage in the system was low. In fact, the only kind of liquidity easing the Romanian banking system received in the early stages of the Crisis, when the ROBOR interbank rate peaked at 80% and the primary money market practically froze, was through lower reserve requirements, which were halved, since the policy interest rate was kept high to prevent a speculative attack on the leu, the Romanian national currency. Secondly, the share of loans denominated in foreign currency, usually euros or Swiss francs, of the kind Volksbank Romania was a top seller and which presented the additional problem of currency risk when the Crisis struck, was much lower in Romania than in the countries in its vicinity, of which some, like Poland or Czech Republic, actually fared the Crisis better, simply because Romanians got on the high risk-reversal train of foreign currency denominated credit later. 


Those who criticize the BNR for having doubled Romania’s national debt in order to save the banks, foreign-owned banks on top of that, are wrong. Whatever failures of supervision and foresight the BNR is responsible for in the boom years prior to the Crisis, the Romanian central bank did not use borrowed public money to directly support and bail out failing private banks through asset purchases, like many Western European and the US central banks did. The borrowed money was used to fund the widening government deficit and to keep the RON from abruptly depreciating when the capital inflows stopped. But, as the case of the now defunct Volksbank Romania shows, it came very close to doing exactly that.



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