More questions than answers?

A run on Romania’s biggest bank was stopped in its tracks. The episode highlights nervousness in the system as banks are being readied for sale. Some on the inside say the situation’s not so bad as it looks and that the supervisors are getting tougher. But foreigners are still asking a host of questions, as Erik D’Amato reports.

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Earlier this year, Romania's largest bank, Banca Comerciala Romana (BCR), suffered a humiliating two-day run at the hands of its depositors following the collapse of the country's largest investment fund, the Fondul National de Investitii (FNI).







Candido: woes contained if not exactly cured

Many executives and officials blamed the stampede on the irrational fear of retail depositors that BCR was liable for losses at the fund or that the bank was otherwise in trouble. But one seasoned local banker believes the panics were the result of disinformation.
"They used phone banks manned by gypsies," the banker recalls, declining to attach a name to "they" but acknowledging with a wry smile his admiration for the conspirators. "They called around, saying 'so-and-so bank isn't safe.' And the next morning, people were lined up."
When this banker learned the calls were being made about his institution - the "they" in his case included troublesome borrowers, he says - he didn't waste a minute.

The bank Flew in large reserves of hard currency and extended the opening hours of threatened branches. It also fought Fire with Fire, sending workers into branches to mingle with frightened depositors and showily make deposits. In the event, the bank, like BCR - which lost no more than 30,000 of its 1.5 million depositors - easily survived the episode. Like many others, the banker believes the banks may now be more secure than previously because those crying wolf were proved wrong.
Confidence high?
The banker's tale, while perhaps overwrought, highlights the devilish ambiguities of the local banking sector and of the troubled country itself.

Some executives and analysts believe that the very visible problems of the industry obscure fundamentals that are better than many of the most advanced transitional countries, such as Hungary. Others warn that, beneath this better layer, there is yet more blackness awaiting illumination.
Most, however, agree that the worst has passed. "The system has been through hard times but confidence has been preserved," says Salvatore Candido, director for Romania at the European Bank for Reconstruction and Development, which has provided loans to and made equity investments in a number of Romanian banks, including BCR.
Like many other investors and lenders, Candido believes most of the remaining barriers to normalcy have been passed. He adds that the privatization of BCR and the country's second largest bank, Banca Agricola, is just the latest sign that the root cause of the sector's woes - ruinously unprofitable lending to unrestructured but well-connected enterprises - is contained, if not cured. "Most of the loss-making companies were clients of banks that no longer exist," he says.
One reason some of these banks no longer exist is the newly energetic supervision department of the National Bank of Romania (NBR). Some believe it's even too tough.
Nicolae Cinteza, director of the NBR's supervision department, clearly delights in his role as taskmaster to Romania's banks. "If they try to lend imprudently then we won't allow them to lend at all," says Cinteza, sitting among stacks of compliance reports in his houseplant-choked office in the bank's faded beaux-arts headquarters.
Using the relative quiet of a vacation day to catch up on some paperwork, he recounts how he intruded on the holiday of a bank president whose institution had Filed a liquidity report which did not add up. "I called him up and said: 'We have a little problem here with your report.' The banker replied that he was several hours from Bucharest, Fishing. I just said: 'No problem, I will be here.' And he came to see me that afternoon and we sorted out the problem."
Other banks Flouting lending, deposit-taking or liquidity standards have not had it so easy. Most recently, the National Bank moved to have the eccentrically named International Bank of Religions declared bankrupt, despite last-minute promises by the troubled bank's management that it was about to receive a capital injection from a foreign investor, a promise Cinteza says he knew was over- optimistic from the start.
While Cinteza and his team make it plain they will move against banks which fail to meet NBR guidelines - and do not challenge the notion that the NBR failed in the past to take such action - they just as strongly emphasize prevention. If nothing else, Cinteza says, prevention can help contain the burden on the Deposit Guarantee Fund, which is Financed by the banks themselves.
At the centre of the supervisors' effort are new reserve ratios and an early- warning system modelled on the widely used Camel (capital adequacy, asset quality, management, earnings, and liquidity). Both will come into force in the autumn, along with a requirement that banks adopt international accounting standards (IAS).
While the new ratios will change the position of some banks, Cinteza says he does not expect the regime to lead to the closure of "more than one or two" marginal banks over the next year. As it is, he says, the most crucial data coming into the department - especially those on immediate liquidity and past-due and doubtful claims - have improved markedly over the past year for most of the three dozen banks supervised by the NBR. He says that past-due and doubtful claims dropped from 253.6% of equity capital at the end of 1998 to 23.8% in May of 2000.
"I can see that the quality of people supervising us has improved," says Zdenek Turek, president of Citibank Romania, who came to Bucharest from the troubled Czech market two years ago. "They are very smart. Capacity is not an issue right now. There is much more focus and much more control."
At the same time, some bankers complain about the formalism of the matrix-heavy early warning regime and of being called to the mat by Cinteza and his staff. Others still have not forgiven the NBR for its past negligence nor the government for not giving it authority over non-bank Financial institutions, especially the investment funds and the country's sprawling credit co-operative industry.
The credit co-operatives - or "popular banks" - have been a special cause of concern, as they lure depositors with sky-high interest rates and have been allowed to use the word "bank" in their names. A local IMF official calls the co-ops "functionally illiquid", a designation that a resident Big Five auditor translates as "a disaster waiting to happen". But while some published reports put the amount of deposits at risk in the popular banks at upwards of $200 million, NBR officials and executives at several commercial banks say the true Figure could be as low as a tenth of that. They also downplay the notion that failures in the non-bank Financial industry could contaminate or lead to further runs on the banks. Meanwhile, legislation has been passed reining in the popular banks, forcing them either to drop "bank" from their names or apply for a banking licence - something few, if any, would be able to afford.
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