This paper describes the evolution registered by the Romanian banking system over the last years in the context of accession to the European Union. The analysis presents the progress registered by our banking system, the main characteristics of Romanian banking activity after 2007 as well as a brief analysis of profitability indicatorsEuropean accession, banking system, profitability indicators

Dragan (Santamarian) Oana Raluca

English

Research Papers in Economics

  730
THE IMPACT OF EUROPEAN INTEGRATION ON THE ROMANIAN 
BANKING SYSTEM 
Dragan (Santamarian) Oana Raluca  
“Babes – Bolyai” University, Cluj Napoca 
Faculty of Economics and Business Administration 
 
This paper describes the evolution registered by the Romanian banking system over the last years 
in the context of accession to the European Union. The analysis presents the progress registered 
by our banking system, the main characteristics of Romanian banking activity after 2007 as well 
as a brief analysis of profitability indicators. 
 
Keywords: European accession, banking system, profitability indicators 
 
JEL Classification: G21 
 
Introduction 
The banking reform in Romania began in December of 1990 when the authorities have proposed 
the development of new banking legislation designed to obtain a modern banking system. In this 
way the old system was replaced with a system organized on two levels: the Romanian National 
Bank  and  commercial  banks.  Over  the  past  years  Romania’s  banking  system  experienced  a 
dynamic economic development and economic growth. 
One of the key elements in the process of nominal and real convergence imposed by the new 
economic environment was the National Bank of Romania. The accession to the European Union 
strengthened the performance of the reform, and NBR’s activity became more and more efficient. 
Romania's adhesion to the European Union in January 2007 was a long awaited and prepared 
moment. It was neither the start nor the end of the long journey of European integration that the 
country had taken. Once Romania became a member of the European Union the National Bank of 
Romania became a member of The European System of Central Banks (ESCB). 
Since 2007 the main preoccupations of NRB were: participation of our central bank in the ECB 
Euro system, improving banking supervision, implementation of Basel II principles, development 
and application of the convergence program, a monetary policy which aims at price stability. 
National  Bank  of  Romania,  as  a  supervisor, acted  in  response to  new threats  caused  by  the 
financial  crisis  in  the  following  way:  by  providing  liquidity,  by  close  monitoring  of  banks, 
implementing new measures to improve prudential regulatory framework and in collaboration 
with the Government signed some funding agreements with the International Monetary Fund and 
the European Union. 
 
Consequences upon the banking segment due to the European accession. 
Studies of the banking system performed within the field disclose positive results due to the 
accession. The financial and banking integration results are estimated from the following aspects:  
The union with a distinctive market of financial services  and banking products, which offers 
business potential under the most encouraging terms, putting forward optimizing promises of the 
economic performances from the macro stabilization standpoint, of the higher efficiency levels 
and increasing people’s wellbeing. 
Macro economic stabilization under the circumstances in which banks operating in two countries 
may  import  assets  in  countries  where  there  are  financing  opportunities,  thus  protecting  thus 
national economy against possible bank distress. 
Banking  consolidation  reflects  structural  modifications  which  might  produce  additional 
competitiveness  within  the  monetary  setting,  increasing  client’s  wellbeing,  operational   731 
effectiveness and profit in terms of reducing the expenses per product unit or bank service. Bank 
unions may improve the effectiveness of the entire activity of the banking segment. 
The main characteristics of Romanian banking activity after 2007 
The first year after the accession to the European Union was an excellent year for the banking 
market.  The  main  result  of  the  European  accession  was  the  increasing  competition  in  the 
domestic market. Other favorable outcomes were the dynamic banking activity and the increasing 
attractiveness  and  diversification  of  banking  products.  There  could  be  easily  observed  a 
competition between different banks in offering more sophisticated and complex services. There 
is a constant effort directed towards customer attraction and portfolio enlargement. Following 
this path   banks began to offer “express” credits, by trying to tell in less than half an hour if the 
client is eligible for a credit. 
There was an unmatched expansion of the banking network and specialized units dedicated to 
corporate  and  retail  were  opened.  New  agencies  became  operational  for  being  nearer  to  the 
potential  clients.  The  revitalization  of  banking  products  was  successful  due  to  the  bank’s 
capability  to  offer  promotional  products  which  were  easily  accessible, and rapidly  available. 
These are just a few signs that banks increase the market consistence. 
The  entry  of  the  foreign  banks  on  the  Romanian  national  banking  market  improved  the 
competition between banks, leading to high quality of services offered to clients by reducing 
costs, as well as requiring  domestic banks to compete  in their  products range by creating new 
products and services. Levine Ross believes that foreign banks may improve the quality and 
availability  of  financial  services  in  the  domestic  financial  banking  competition  and  may 
encourage the implementation of modern technologies. Foreign banks can serve to stimulate the 
development of the underlying banking supervisory and legal framework. They also can enhance 
a country's access to foreign capital. 
In 2007 the Romanian market became a target for the European credit institutions. Romania’s 
addition to an integrative group as EU had a favorable impact on the banking system. Many 
foreign financial groups consider that the national market is favorable for the opening of new 
units. Several foreign banks opened bank branches in Romania. This operation was encouraged 
by restrictive monetary policy imposed by NBR. As the foreign banks must comply with the 
requirements of the country of origin they have significant cost advantages.  
The  presence  of  foreign  banks  raised  the  competition  level  and  offered  many  new  banking   
products  and  direct  provision  of  services  in  Romania  leading  to  changes  in  the  structure  of 
domestic banking system. The most spectacular market entry belonged to Millennium Bank, 
member of the Portuguese Millennium group. Also 2007 brought major changes for banks in the 
first echelon, at the middle of the year the largest merger on local banking market was completed. 
HVB ￿iriac Commercial Bank merged with Unicredit Romania, whose newly established entity 
presently operates under the name of Unicredit ￿iriac Bank S.A. It should be noted that in the 
same year BCR came under the control of Erste Bank. In the same period   Belgium's Fortis 
received the operating authorization from NBR, The Iberian group La Caixa has opened a unit in 
the Romanian Capital. In addition, Finicredito Branch of the Portuguese group appears on the list 
of new branches. Beginning March 2008 the Romanian Branch of Blom Bank Egypt transferred 
its operations to the Romanian Branch of Blom Bank France S.A Paris. 
In year 2008 has triggered the greatest financial crisis of the past 80 years. Originally called 
"credit crisis" by the specialists, this financial crisis is almost unprecedented. Although initially it 
was said that the Romanian banking system and economy will not be affected by this crisis, the 
negative impact has been felt since fall of 2008. Now, most opinions are leaning towards the 
conclusion that Romania is affected, but not directly and not as much as other countries that have 
a higher exposure to sub prime mortgage loans. At the start of the crisis, the Romanian economy 
had been driven through a period of several years of growth in high rates. The banking sector 
which  has  a  dominant  position  in  ours  financial  system  had  a  good  resistance  to  pressure 
manifested by the financial crisis. However, the global economic crisis had many negative effects   732
like: negative consequences on quality credit portfolio, worsening perceptions of risk, changes of 
interest rate of monetary policy, and interest rates charged on loans and deposits. Also a sharp 
contraction of non-government credit took place. Interest rates were changed and non performing 
loans increased. Tendency to extend the activity in new territory became lower and the number of 
employees became smaller.  
In terms of banking structure the Romanian banking sector hasn’t recorded significant changes in 
2008 and the first quarter of 2009 (Table 1). DEPFA Bank Plc. Dublin opened a new branch in 
Bucharest and there were changes in the shareholding structure of ABN AMRO Bank, now 
called RBS Bank Romania S.A., after its takeover by the Royal Bank of Scotland. CitiBank 
România S.A. has changed its status becoming a branch of CitiBank Europe in Romania.  
In 2009 in Romania there were 43 credit institutions, 32 Romanian legal entities and 11 branches 
of EU banking groups. In the context of the service market relaxation generated by Romania’s 
accession to EU, BNR received notifications from 174 institutions from abroad willing to provide 
financial services directly in Romania. 
 
Table 1: Romanian banking sector structure 
 
  2005  2006  2007  2008  T12009 
No. Credit institutions  40 
 
39  42  43  43 
No.  banks  with  majority 
foreign capital 
Branches of foreign banks 
30 
 
6 
33 
 
7 
36 
 
10 
37 
 
10 
37 
 
11 
No.  banks  with  majority 
private capital 
38 
 
37  40  41  41 
Market  share  of  top  five 
banks 
58,8  60,3  56,3  54,4  54,3 
Herfindahl-Hirschmann 
 index 
1124  1171  1046  926  906 
Source: Source: BNR-RSF 2008 
 
The efficiency of the banking system is reflected in the degree of system’s concentration. The 
degree of concentration is measured using the Herfindahl-Hirschmann index or market shares in 
terms of assets held for the five largest banks in the system. The banking systems with a higher 
degree of concentration are usually less exposed to a banking crisis. The Romanian banking 
sector was characterized by a high concentration degree even from the first years of the banking 
reform. Since 2006, the Herfindahl-Hirschmann entered on a slightly downward curve, giving the 
image of a moderate degree of concentration. In 2008 and first quarter of 2009 the concentration 
degree  in  Romania continued its decreasing trend and in March 2009 market share of top five 
banks in total assets recorded a decrease to 54.3 %. Market share of loans fell to 53.7 %. On the 
liability side, the degree of concentration for the top five banks in the system held a total of 53.91 
% in deposits. In terms of share held by the five largest banks in aggregate assets Romania is 
close to the average of other EU Member States. 
 
Impact of EU accession on bank intermediation in Romania  
Banks are designed to mediate the relationship between those who registered a surplus and those 
who recorded a shortage of resources, transforming economies and monitoring credit lending 
processes. Along with Romania's EU entry an increase of financial intermediation was recorded, 
although growth of financial intermediation accelerated in 2007 it is still one of the smallest in 
the European Union. Financial intermediation quantified using credit indicator Non-government 
credit / GDP in 2008 reached a value of almost 40% of GDP. Romania recorded the lowest level   733 
of financial intermediation among the new EU state members states at greater distance from the 
EU-15  (123,1%)  or  UE-25(118,9%).  Financial  intermediation  quantified  using  the  bank 
assets/GDP reached a value of 62% in 2008. Romania still exhibits a lower degree of financial 
intermediation  compared  to  other  countries  in  EU,  indicating  significant  potential  for  future 
growth. 
In terms of lending activity of the Romanian banking system over the past several years we can 
see some features. Even if in 2007 loan products abounded on Romanian banking market, the end 
of  2008  was  marked  by  relative  suppression  of  activity  of  private  sector  lending,  retail  and 
corporate alike. Retail credit has been affected by restrictive conditions imposed by the central 
bank new lending rules and by the economic-financial international context. Restricting lending 
to businesses was due primarily to the increase of difficulty to access bank funding. End of 2008 
banking market had stiff competition in attracting deposits. Reached very high interest rates and 
led to increased credit costs. The first half of 2009 brought low-performing banking loans along 
with high financing costs, which generated economic pressure that recorded a sharp decline in the 
lending appetite. 
The loans granted to the population registered a fast decrease in 2008 (only 30.5%, compared 
with 71 % in the previous year) and in the first quarter of 2009 (19% compared to end-March 
2008). The same trend was noted in the case of credit non-financial corporations. 
The  non-governmental  credit’s  structure  registered  after  Romania  accession  to  the  European 
Union created some changes in terms of the currency in which the credit was granted. Analysis of 
credits given to population depending on the currency by 2006 showed a predominance of loans 
in lei. Since 2007 foreign currency loans dominated in a total of 53.05% share of total lending to 
the population. This tendency of loan currency is also seen in 2008. Foreign currency loans had a 
faster evolution than in local currency in most countries of Central and Eastern Europe. More 
attractive  terms  of  financing  and  currency  appreciation  which  tend  to  feature  in  transition 
countries may be possible explanations of growth in the foreign exchange component of non-
governmental credit. Therefore, the predominant inclination in the structure of credits granted to 
population was the ones in foreign currency. In the area of the retail segment, the consumption 
credits represented 77, 1%, while the credits for dwellings held an inferior percentage of 19, 9% 
at the level of 2007, the last ones being mainly contracted in foreign currencies. 
Within  the  retail  component  in  2008,  the  credit’s  structure  according  to  their  destination 
underwent major changes against the year of 2007. The consumption credits remained dominant, 
holding 74,3% from the total, with a slight preference for the national currency superior to the 
foreign currency one, while this component is much more represented in the dwelling credits 
holding up to the end of 2008 a percentage of 92,1% from the total of dwelling credits. 
Specialists  pay  attention  to  analysis  of  bank  performance,  especially  to  concentration  and 
profitability, because banking performance is best represented by profitability indicators. 
 
Tabel 2: Evolution of indicators of profitability in the Romanian banking system in 2004 - 2009 
Indicators  2004  2005  2006  2007  2008  2009 
Solvency 
Ratio 
20,6  21,6  18,1  13,78  12,34      14 
ROA  2,4  1,9  1,5  1,3  1,4  0.2 
ROE  18,5  15,2  11,7  11,4  15,9  2.7 
Source: BNR-RSF 2008 and FMI, Global Financial Stability Report 
 
A healthy bank system is built on profitable banks, this is the reason why understanding the profit 
sources  and  analysis  of  profitability  indicators  is  really  important.  Since  2004  profitability 
indicators of our banking system had a descending trend. In 2007, the profitability of Romanian   734
banks followed the downward trend due to: the increase in the cost of investments and due to the 
narrowing of interest margins.  
Solvency Ratio in the banking system in Romania registered a decrease in recent years. Solvency 
ratio or capital adequacy has been a constant preoccupation of bank management and prudential 
regulations because of its significance on the soundness and security of bank deposits. Solvency 
ratio remains at a higher level than the minimum threshold required by the prudential regulations 
applicable in Romania since 2007 and also on European and international level. 
Return on assets – ROA is an indicator that best reflects the bank's management capability to use 
resources available in order to optimize bank’s profit. This indicator finds a downward trend 
during the analyzed period for the Romanian banking system. In 2009 the ratio between net profit 
and total assets on annualized average dropped to 0.2% from 1.4% in December 2008.  
Similarly, Return on equity ROE the indicator which constitutes the most significant expression 
of profit and highlights the results of bank management in its entirety, reached  2.7% at the end of 
December 2009 from 15.9% in December 2008. 
Despite the decline recorded in the recent years for both indicators of profitability return rate on 
assets (ROA) and return rate on equity (ROE) evolution does not indicate deterioration of the 
banking sector profitability. The result of intensifying competition and the decrease of inflation 
lead to the decrease of the interest rates and implicitly of the income of the banks. In recent years 
banks accepted lower profit margins to consolidate market position. 
Compared with EU countries Romanian banking system has a lower financial return than the 
European average, situation resulting from the reduction in recent years of spread between the 
assets and liabilities. 
 
Conclusions 
European  Union  can  be  seen  as  a  well  developed  and  solid  economic  structure.  Romania's 
accession to the UE had a positive effect on the banking climate and also put pressure to achieve 
compatibility. The Romanian banking system suffered a major move on with the integration into 
EU, in terms of structure. The new banking entities appeared due to purchases and mergers, share 
of foreign capital participation has increased substantially and the presence of foreign banks 
raised  the  competition  level.  Despite  this  the  international  crisis  had  negative  effects  on  the 
Romanian banking system and Romania's desire to adopt the euro revealed weaknesses in the 
system. To exit the crisis and to recreate a competitive, robust and efficient system a few changes 
must be made where weaknesses should be removed. Banks must prove that they are a trusted 
brand, their product portfolio must be constantly renewed and operate effectively in terms of 
costs. These are some requirements that banks must meet in order to remain competitive in the 
EU market. Due to the lack of external financing strongly felt because of the financial crisis, the 
banks should pay more attention to the selling activity. 
 
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Editura Universit￿tii « Al. I. Cuza », 2007 
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THE IMPACT OF EUROPEAN INTEGRATION ON THE ROMANIAN BANKING SYSTEM

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THE IMPACT OF EUROPEAN INTEGRATION ON THE ROMANIAN BANKING SYSTEM

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