This paper examines the effects of the financial crisis on lending within the Romanian banking system. Lending in Romania contracted significantly since the fall of last year for two reasons. On one hand, the central bank’s new crediting norms, that intended to limit borrowing risks, entered into force in October 2008 and forced banks to take extra-measures. On the other hand, the first signs of the economic crisis started to show in Romania at the same time and affected the lenders’ liquidity. The development of Romanian bank lending at the end of 2008 reflected the impact of both credit demand and especially credit supply.financial crisis, bank lending, credit demand, credit supply, household loans, corporate loans

Ph.D Lect. Anca Jarmila Guta

Ph.D Lect. Imola Driga

English

Research Papers in Economics

 
  22 
Revista Tinerilor Economi ti (The Young Economists Journal) 
ROMANIAN BANKLENDING DURING THE FINANCIALCRISIS
Ph.D Lect. Imola Drig  
Ph.D Lect. Anca Jarmila Gu   
University of Petro ani 
Faculty of Science 
Petro ani, Romania 
  Abstract: This paper examines the effects of the financial crisis on 
lending within the Romanian banking system. Lending in Romania 
contracted significantly since the fall of last year for two reasons. On one 
hand, the central bank’s new crediting norms, that intended to limit 
borrowing risks, entered into force in October 2008 and forced banks to 
take extra-measures. On the other hand, the first signs of the economic 
crisis started to show in Romania at the same time and affected the 
lenders’ liquidity. The development of Romanian bank lending at the end of 
2008 reflected the impact of both credit demand and especially credit 
supply. 
JEL classification: G01, G15, G21 
Key words: financial crisis, bank lending, credit demand, credit supply, household 
loans, corporate loans 
  Financial crisis erupted in 2007 in United States from the high number of 
defaulting borrowers with sub prime mortgages, leading mortgage lenders to 
bankruptcies. Problems with loan quality in the sub prime mortgage sector forced the 
failure of some lenders in the primary market, but had much wider repercussions, 
figuring prominently in solvency problems in institutions outside the United States and 
contributing to increased market volatility and the virtual drying up of liquidity in the 
interbank and short-term money market. Major central banks have responded to the 
crisis with emergency injections of liquidity, and the Fed has also lowered the federal 
funds rate in order to deal with the crisis and prevent stronger effects of the market 
turmoil on the wider economy. Meanwhile, as a consequence of the crisis, leveraged 
buyout activity has slowed and many announced deals are either being reprised or 
cancelled. 
  The financial crisis of 2008, which started in the summer of 2007, has now 
assumed global manifestations. A crucial aspect worth studying is how the financial 
crisis affects the real economy through the supply of credit to customers. Credit crisis 
directly affected by the financial crisis, is expanding in Europe, leading to a blockage in 
bank lending due to sudden decrease in the level of economic confidence and activity 
slowing. It is estimated that the current crisis will last about 2 years, because companies 
will adapt, although the global economy will enter a period of less dynamic growth. 
  The initial channel of the crisis was the real estate market, which hit companies 
in European countries (Great Britain, Ireland, Italy and France). In addition, the real 
estate crisis followed by the financial crisis led to a significant worsening of the credit 
risks in these countries. In Italy, the credit risks for companies are deteriorating in the  
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Finances - Accounting 
context of weak growth, rising costs and blocking loans. In France, there was a 
significant increase of non-payment incidents for companies (up to 75% at the end of 
September 2008 compared to the end of September 2007). This deterioration due to 
slowing business was caused mainly by difficulties faced in accessing corporate credit. 
In Britain, the financial and real estate crisis have strong impact on consumption and 
companies expenditure leading to a 14% increase in company bankruptcies in the first 
half of 2008. In Ireland, real estate crisis has spread to the entire economy, causing a 
recession and non-payment incidents for companies have increased by 75% in the first 
half of this year. 
  In a market-based economy, the financial sector channels the supply of funds 
from savers to the demands of borrowers, which supports the wealth-creating abilities 
of the entrepreneurial sector. At the same time, the performance of the financial sector 
also depends crucially on the health of the economy. Typically, growth of loans at 
commercial banks declines sharply before a recession. Clearly, bank actions to limit the 
credit supply can exacerbate an economic downturn. For example, banks typically 
tighten credit standards and/or loan terms as the economy weakens and nonperforming 
loans increase. But an adverse shock from outside the financial sector can be just as 
important such as a sharp increase in oil prices or a plunge in house prices. Such shocks 
also slow the demand for credit because of weaker future growth of incomes and 
profits. In large and open economies, forces that trigger changes in the supply and 
demand for credit are often synchronized and difficult to distinguish. 
  A reduction in lending does not, by itself, show that there was a decline in the 
supply of credit. It is possible that the recession and general economic uncertainty 
reduced the demand for credit by corporate borrowers. To separate supply and demand 
effects, bank lending can be related to a bank’s willingness or ability to lend during the 
crisis. 
  In Romania, the international financial crisis and changes in credit standards 
have resulted in a decrease in applications for mortgages. Lending in Romania 
contracted significantly since the fall of last year for two reasons. On one hand, the 
central bank’s new crediting norms intended to limit borrowing risks, entered into force 
in October 2008 and forced banks to take extra-measures. On the other hand, the first 
buds of the economic crisis started to show in Romania at the same time and affected 
the lenders’ liquidity, hampering lending. As an effect of the economic crisis, loans to 
people and companies in Romania clutched by 1.5 billion euros in January 2009 to 
48.26 billion euros despite a 4.2 percent advance in December 2008. 
  Loans in local currency decreased in January by 1.1% in real terms, for the 
fourth month in a row, while loans in foreign currency, expressed in euros, dropped by 
0.1%, compared with 1% last December, according to the data of the National Bank of 
Romania. 
  In real terms, private lending in lei started to fall after the breakout of the 
financial crisis in Central and Eastern Europe, namely in the last quarter of 2008, by 
2.4% in December, by 0.7% in November and by 0.4% in October. Foreign currency 
lending fell in November by 0.9% on the month, expressed in euros, but hiked 2.3% in 
domestic currency. In October 2008, foreign currency loans rose 0.4% in euros and 
decreased by 1.5% in lei. In the last part of 2008, lending was almost blocked due to the 
financial turmoil, as well as due to the implementation of new, more restrictive 
household lending rules by the central bank. In nominal terms, January was the first 
month after October when loans rose, expressed in lei and in foreign currency as well.  
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Revista Tinerilor Economi ti (The Young Economists Journal) 
Private lending in foreign currency, expressed in lei, rose 7.2% on the month in 
January, compared with a 4.4% growth in December, while loans in lei rose 0.1%, after 
a 2.1% drop in December. 
  At the end of 2008, development of lending standards and terms regarding both 
companies and households has confirmed the trend that was previously recorded, with a 
significant tightening, more pronounced in household lending. 
  Lending standards concerning small and medium companies were hardened 
faster than banks expected, while the situation regarding large companies was reverse. 
Factors that contributed to this situation were: expectations for the entire economy, risk 
associated with the industry the company operates, risks associated to required 
collateral and changing the weight of bad loans in bank portfolio. Risks associated to 
companies increased. In this regard, the main sectors regarded were construction and 
real estate transactions. 
Households lending standards were severely tightened in the whole banking 
sector for both consumer and housing loans. Lending terms have become considerably 
more restrictive, most significant developments were that concerning the decreasing of 
debt service ratio in monthly income and the increase of risk premium paid by 
customers. 
  Thus, during March to May 2008 the growth rate of loans granted to the private 
sector slightly reduced and posted a faster decline between June and August 2008, so 
that in the September-November 2008 the growth rate of lending to private sector 
diminished rapidly, reaching the lowest level of the last three years (-9.3% to 34.9%). 
The trend of decline that characterized the dynamics of credits both in lei and foreign 
currency, posting a three and a half year low. However, loans in foreign currency 
continued to be more dynamic than those in domestic currency (particularly in case of 
households) so that the average share of foreign currency loans in total lending to the 
private sector recorded a peak of the last three years (55.9%). 
Table no. 1. Loans granted by credit institutions to households in the Romanian 
banking system in 2008 (million lei) 
Period Lei  EUR  Other 
currencies  Total 
Jan. 33944.2  33086.1  7115.7 74146.0 
Feb. 34778.4  33990.9  7903.7 76673.0 
Mar. 35712.0  35200.0  8730.0 79642.0 
Apr. 36608.8  36035.0  9091.2 81735.0 
May 37358.1  36903.0  8990.3 83251.4 
Jun. 38045.0  38944.8  9928.4 86918.2 
Jul. 39297.9  38733.6  9791.2 87822.7 
Aug. 40249.4  40204.0  10105.2 90558.6 
Sep. 41016.6  43540.8  11490.0 96047.4 
Oct. 41377.9  42451.5  11935.7 95765.1 
Nov. 41299.7  43881.4  11644.2 96825.3 
Dec. 40944.3  45814.6  12451.3 99210.2 
Source: NBR, Monthly Bulletin No. 12/2008 
 
  These developments reflected the impact of both credit demand and especially 
credit supply. The latter came under more intense pressure from several factors, such  
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Finances - Accounting 
as: 
-  the implementation of the new provisioning coefficients in relation to foreign 
currency loans (NBR Regulation No. 4/2008 amending and supplementing NBR 
Regulation No. 5/2002 on the classification of loans and placements as well as the 
setting up, regularization and use of specific provisions for credit risk and the 
methodological norms for the enforcement thereof);  
-  tightening of external financing conditions for banks; 
-  reduction of the liquidity surplus in the banking system; 
-  increasing prudence of credit institutions based on increased adverse selection risk; 
-  customers’ lower degree and/or scope of eligibility (partly due to the enforcement 
of NBR Regulation No. 11/2008 amending and supplementing NBR Regulation 
No. 3/2007 on limiting credit risk associated with loans to households, effective as 
of October 2008); 
-  more restrictive lending terms and conditions; 
-  increased interest of banks for government securities and external assets (although 
their share in the monetary balance sheet remained subdued). 
Table no. 2. Indexes for estimating the relative variance of household loans in the 
Romanian banking system in 2008 (%) 
  Lei EUR  Other 
currencies  Total 
Feb./Jan.  102.46 102.73 111.07 103.41 
Mar./Feb.  102.68 103.56 110.45 103.87 
Apr./Mar.  102.51 102.37 104.14 102.63 
May/Apr. 102.05  102.41  98.89  101.86 
Jun./May  101.84 105.53 110.43 104.40 
Jul./Jun.  103.29 99.46  98.62 101.04 
Aug./Jul.  102.42 103.80 103.21 103.12 
Sep./Aug.  101.91 108.30 113.70 106.06 
Oct./Sep.  100.88 97.50 103.88 99.71 
Nov./Oct.  99.81 103.37 97.56 101.11 
Dec./Nov. 99.14  104.41  106.93  102.46 
 
  At the same time, credit demand has been negatively influenced by: 
-  the strong increase of interest rates for lending; 
-  deterioration of market operators’ expectations regarding economic and financial 
conditions; 
-  low-income households potentially reaching the indebtedness ceiling; 
-  the weaker domestic currency and increased uncertainties surrounding its evolution; 
-  maintaining a high level of foreign financing for non-banks. 
Table no. 3. Loans granted by credit institutions to non-financial corporations in 
the Romanian banking system in 2008 (million lei) 
Period Lei  EUR  Other 
currencies  Total 
Jan. 33892.0  38540.2  3976.2 76408.4 
Feb. 35041.1  38866.3  3918.1 77825.5 
Mar. 36767.7  40352.8  3972.4 81092.9 
Apr. 38423.8  40647.0  4170.4 83241.2 
May 39439.6  41476.4  3857.5 84773.5  
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Revista Tinerilor Economi ti (The Young Economists Journal) 
Period Lei  EUR  Other 
currencies  Total 
Jun. 40051.3  42848.9  4000.8 86901.0 
Jul. 40657.0  41864.3  3961.6 86482.9 
Aug. 41198.0  42962.8  4461.6 88622.4 
Sep. 42285.0  46305.7  4990.4 93581.1 
Oct. 42492.5  44963.4  5573.2 93029.1 
Nov. 42424.2  46295.6  5469.4 94189.2 
Dec. 40945.8  48942.3  4717.4 94605.5 
Source: NBR, Monthly Bulletin No. 12/2008 
 
 
Table no. 4. Indexes for estimating the relative variance of corporate loans 
in the Romanian banking system in 2008 ( %) 
  Lei EUR  Other 
currencies  Total 
Feb./Jan. 103.39  100.85  98.54  101.85 
Mar./Feb.  104.93 103.82 101.39 104.20 
Apr./Mar.  104.50 100.73 104.98 102.65 
May/Apr. 102.64  102.04  92.50  101.84 
Jun./May  101.55 103.31 103.71 102.51 
Jul./Jun. 101.51  97.70  99.02  99.52 
Aug./Jul.  101.33 102.62 112.62 102.47 
Sep./Aug.  102.64 107.78 111.85 105.60 
Oct./Sep.  100.49 97.10 111.68 99.41 
Nov./Oct.  99.84 102.96 98.14 101.25 
Dec./Nov.  96.52 105.72 86.25 100.44 
 
  During this period, the supply of loans was stymied by the contraction of 
banks’ excess liquidity and the tightening of external financing conditions for credit 
institutions. The growth rate of household and corporate loans continued to decelerate 
across all categories, along with the sizeable contraction in the volume of new business 
to households and non-financial corporations. The dynamics of the household loans 
granted in Swiss francs posted the sharpest deceleration, with credit institutions 
relinquishing almost entirely their lending activity in this currency in November 2008. 
At corporate level, the worst hit category was that of loans with a maturity of over 5 
years (accounting for 28.5 percent of total corporate credit), whose foreign currency 
component recorded, for the first time, three successive monthly retrenchments in terms 
of volume.  
  27 
Finances - Accounting 
0
20000
40000
60000
80000
100000
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
2008
household loans corporate loans
 
Figure no. 1. Household and corporate loans granted by Romanian credit 
institutions in 2008 
 
  In conclusion, we can say that the development of loans granted to households 
and non-financial companies by the Romanian credit institutions was a immediate 
consequence of a prudent policies provided by the National Bank of Romania which 
has materialized in: 
-  slowing down the expansion of credit to the private sector; 
-  supporting lending in domestic currency to the detriment of foreign currency credit; 
-  limited overall risk exposure; 
-  low share of overdue and doubtful loans in total loan portfolio (1.1% as of 
September 2008). 
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ROMANIAN BANK LENDING DURING THE FINANCIALCRISIS

ROMANIAN BANK LENDING DURING THE FINANCIALCRISIS

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