Cercetări Empirice Privind Stabilitatea Financiară În Condițiile Economiilor

International Conference KNOWLEDGE-BASED ORGANIZATION Vol. XXII No 2 2016

EMPIRICAL RESEARCH ON FINANCIAL STABILITY IN CONTEMPORARY ECONOMIES. ROMANIA CASE STUDY

Leontin STANCIU, Ioan Gabriel POPA

“Nicolae Bălcescu” Land Forces Academy Sibiu, Romania [email protected], [email protected]

Abstract: Given the profound changes of the financial systems as a result of the technological innovation, the economic liberalization and globalization in the recent decades, and the economic crisis, achieving financial stability is a necessity for the modern economies. In the national economies, ensuring financial stability is a priority for the central banks and the other regulating and supervising authorities. These issues, and others, are the main objectives of our research, and, by referring to the Romanian experience in terms of financial stability, through the conducted research, we intend to contribute to the systematization and the development of knowledge in this area.

Keywords: financial system, financial stability, macroprudential policy, central bank, price stability.

1. Introduction In a complex and globalized Over time, any national economy is financial environment, assessing and subject to “upheavals'' and blockages, most promoting financial stability requires an of them unpredictable, affecting its effective and consistent cooperation, both operation mechanism in general and the nationally and internationally, between price development and the financial different supervising authorities stability in particular. Also, the current (ministries, government agencies, central global financial crisis, which began in banks, supervisors and regulators). To this 2007 and whose unintended consequences end, a number of central banks, including have not yet been fully eliminated, brought the National Bank of Romania (NBR) to the forefront of the macroeconomic periodically publish reports on financial research and decision making the concept stability. of financial stability and the role of the These issues, among others, are the central bank in providing it. main objectives of our research, and Lately, providing financial stability, through the obtained results, we want to alongside price stability, is a main concern modestly contribute to a better of the central banks which are the core of systematization and development of the the national financial systems. Having the knowledge in this field. responsibility of ensuring price stability through the decisions they make, they 2. Theoretical Approaches on the contribute to achieving and maintaining Concept of Financial Stability financial stability. Furthermore, a stable For the real economy, the financial financial environment is a fundamental system plays a vital role and its best prerequisite for price stability. functioning facilitates the accumulation of capital, ensures a better distribution of

286 risks, guarantees the funding of various risks, to ensure the settlement of debts, investment opportunities, thereby even in financial stress situations, or in contributing to the economic growth and, periods of substantial structural changes. ultimately, to increasing the population’s The Bank of England considers that standard of living. the fundamental objective of the financial In the period preceding the global stability is to ensure the resilience of the financial crisis, the international financial financial system, which is a fundamental system has grown fast but unsustainably, condition for a sound offer of financial thus aggravating or generating a series of services for the real economy. macroeconomic and financial imbalances. The Bank of Holland, according to In the context of the global another official publication, considers that financial crisis, the literature has shown a “a sound financial system is able to allocate keen interest in financial stability issues, resources efficiently and to absorb shocks, although it has not reached a common view thus avoiding their having a destructive point concerning its contents. effect on the real economy or on other Unlike price stability, a certain financial systems'' [3]. definition of the concept of financial The financial system contains the stability has not yet been established at the following components, as it results from international level. Moreover, there is no Figure 1: consensus regarding the role of the central • the financial markets (namely banks in providing financial stability, even the money market and the capital market), if their concern in supporting it is no which provide the necessary framework for longer a novelty.[1] directing the cash flow surplus from Andrew Crockett argues that creditors to debtors; financial stability is “a situation where the • the financial intermediaries economic performance is not potentially (such as: banks and insurance companies), affected by the asset price fluctuations or which indirectly make the connection the inability of institutions to fulfill their between creditors and debtors; obligations''.[2] • the financial infrastructure, Bundesbank believes that the which facilitates transfers, payments, financial stability highlights a steady state transactions, clearances and settlements of of the financial system, which allows it to securities. allocate resources efficiently, to diversify

Figure 1- Financial system components

287 In its turn, the European Central risk through its own corrective Bank more comprehensively defines mechanisms. Basically, we consider that a financial stability as a condition in which financial system is stable when it the financial system is able to absorb simultaneously fulfills two fundamental financial shocks, mitigating the disruptions prerequisites, namely: of the financial intermediation process, 1. it contributes to increasing the which can hinder directing the savings to economic performance; investment opportunities [4]. 2. it ensures the elimination of the In its first Financial Stability imbalances caused by endogenous factors Report, the National Bank of Romania or by unanticipated adverse events. broadly defines financial stability as “that characteristic of the financial system to 3. Involvement of the Central Bank in withstand the systemic shocks on a Ensuring Financial Stability sustainable foundation, without major Most experts argue that the central disruptions, in order to efficiently earmark bank has an important role in ensuring resources in the economy and to effectively financial stability. Although in this field identify and manage risks” [5]. the tasks of the central bank are quite Also, the NBR governor argues that controversial in the literature, there are financial stability is “the situation where certain features that contribute to achieving the financial system is able to attract and financial stability, such as: place money funds effectively and to • banking sector regulation and withstand shocks without causing supervision; prejudice to the real economy” [6]. • management and oversight of Financial stability, according to the paying systems; Schinaşi G., is the state of the financial • deposit guarantee; system where it is able to simultaneously • lender of last resort. fulfill three essential functions, namely: Certain phenomena are added to • dynamic, efficient and devoid of these traditional functions of the central shocks intermediation of the financial bank that enhance the links between the resources (transfer of funds from those banking sector and other two important who have them to those who use them); sectors of the financial system (i.e. the • evaluation, foresight and rigorous financial market and the insurances) such management of the risks involved in this as: the globalization, the deregulation, the process; innovation and so on. In this context, there • absorption of shocks that the real are experts who argue that the central bank and financial economy undergoes and/or needs to deal with ensuring financial generates [7]. stability first and thereafter with Taking into consideration the developing and implementing the above-mentioned definitions, and the monetary policy. [9] complexity of the topic, we believe that the The increased interest of modern financial stability is that state in which the central banks in ensuring financial stability economic mechanisms of price formation, derives from the fact that an effective financial risk evaluation, division and monetary policy is based on predictable management, work well enough to help transmission mechanisms, which increase the economic performance'' [8]. ultimately requires a stable financial Based on these definitions, we environment. On the other hand, the believe that the financial stability ultimate objective of the monetary policy - highlights the ability of the financial price stability - is a necessary, but not system to efficiently earmark resources and sufficient, condition for ensuring financial to assess, divide and manage the financial stability.

288 Currently, there are authors who As far as we are concerned, we claim that the only fundamental objective endorse the idea that there is of the central bank should be price complementarity between price stability stability, and that there is no compatibility and financial stability, and the relationship between this objective and the financial between them can be pictured as shown stability [10]. below.

Relieving Money Policy from Conflicting Objectives

Financial stability Price stability

Macroeconomic Balance

Figure 2 - Relation between financial stability and price stability (Isărescu, 2006,p.1)

We also consider that the main Both the market and the central arguments concerning the vital role of the bank and certain state institutions central bank in ensuring financial stability contribute to the financial stability. can be summarized as follows: Ensuring financial stability also requires an • the central bank is the only international approach in coordinating issuer of the “primary” currency, which is policies in this field. the legal and ultimate means of payment; The global economic recession • the responsibility for the resulting from the financial crisis led the operation of the national payment system central banks to adopt specific measures to (which is the main vector of transmitting stimulate the aggregate demand. Thus, the and increasing the systemic risk) lies reference rates decreased gradually, at the exclusively with the central bank; same time with the implementation of • the quality of the banking certain atypical monetary policy measures. system operation directly influences the These measures have generated a new adjustment of the cash flows in the macroeconomic environment, with economy by the central bank, according to nominal interest rates close to zero or even the objectives of its monetary policy.[11] negative, where the vulnerabilities and the sources of systemic risk within the 3. The Macroprudential Policy and the financial system were amplified. Financial Stability. The Romanian In the current macroeconomic Experience. environment, the financial stability plays a The economic reality proves that a central part, due to the macroprudential stable and sound financial system tools the authorities have available in order contributes substantially to the economic to limit the risks and to strengthen the growth of a country. Therefore, the resilience of the financial sector. financial stability is “a global public good, In 2010, in order to ensure the characterized by non-rivalry and non- stability of the European financial system excludability'' [12] the European Systemic Risk Board (ESRB) was established. This body is responsible

289 for the macroprudential oversight of the • to issue recommendations and financial system in the European Union; it warnings in order to prevent or reduce the contributes through its recommendations systemic risks; and warnings to the prevention or the • to monitor the implementation of mitigation of the systemic risks and to the the recommendations issued by ESRB or efficient functioning of the internal market. NCMS and of the measures adopted by the Thus, the Recommendation ESRB/2011/3 national authorities, following the requires the member states to “stipulate in recommendations and the warnings issued their national regulations the authority by the afore-mentioned bodies. which is entrusted with the application of Until the Law on macroprudential the macroprudential policy, usually oversight of the national financial system represented either by a single institution or is passed, and hence until NCMS is by a committee consisting of authorities operationalized, the recommendations and whose actions have a considerable impact the advisory opinions shall be adopted by on the financial stability” [13]. By the National Committee for Financial Recommendation ESRB/2013/1, this Stability, established under a cooperation European body fulfills the macroprudential agreement between the National Bank of framework by setting the intermediary Romania, the Financial Supervisory objectives and the macroprudential policy Authority and the Ministry of Finance. instruments. Within this body, NBR is responsible for In Romania, the financial stability setting the strategy in terms of is ensured through the combined efforts of macroprudential policy, within its area of several national institutions and through competence. Up to now, NBR: the coordination of the macroeconomic • has adopted a series of policies. For the implementation of the macroprudential measures for crediting the ESRB recommendations, the Bill on the population and the nonfinancial macroprudential oversight of the national companies; financial system was developed. This bill • has improved its ability to aims to establish the National Committee monitor and manage the potentially for Macroprudential Supervision (NCMS) systemic risks and vulnerabilities within as an inter-institutional cooperation the financial system in Romania; structure, which is not a legal entity. It will • has the following intermediary include representatives of the authorities objectives of the macroprudential policy: playing an important role in maintaining - to reduce and to prevent excessive financial stability in Romania (i.e., NBR, increase in lending and borrowing; Financial Supervisory Authority and the - to reduce and to prevent the Government). The fundamental objective excessive imbalance between maturities of NCMS is to contribute to providing and the lack of liquidity in the market; financial stability, including strengthening - to limit the concentration of direct the financial system to withstand shocks, and indirect exposures; having among its primary duties the - to limit the moral hazard; following: - to strengthen the resilience of the • to identify, monitor and assess financial infrastructures. [14] the systemic risks; • to identify the financial Conclusions institutions and the structures of the In the context of the economic financial system which are relevant from a globalization, of increasing degree of the systemic point of view; financial market integration, of the global • to develop the strategy on the financial crisis, the financial stability is an macroprudential policy; important and complex issue both for the

290 specialists from the institutions having In the recent decades, the financial responsibilities in this field, and for the markets have experienced multiple researchers from the academia. The vulnerabilities, which, by rapidly interest in this issue has been exacerbated spreading, have increased their fragility. by the consequences of the global financial For this reason, currently, ensuring crisis, which revealed a number of financial stability should be a fundamental weaknesses in the national and also goal of public policies, because the international financial systems. These stability of the national financial system dysfunctions of the financial systems, due stimulates the economic development and to their instability, had a negative effect on the improvement of the population’s living the process of allocating resources and, standard. ultimately, on the economic performance.

References [1] Lătea,G.-O., Stabilitatea prețurilor și stabilitatea financiară în activitatea băncilor centrale, in the Economic Library Collection, Economic Issues series, vol.425, Centre for Economic Information and Documentation, p.15. [2] Crockett, A., The Theory and Practice of Financial Stability, GEI Newsletter, 6, 1997, p1-2. [3] Wellink, N., Central Banks as Guardians of Financial Stability, The Seminar: Current Issues in Central Banking, Oranjestad, 2002, p.2. [4] Lătea,G.-O.,op.cit.,p.16. [5] BNR, Financial Stability Report, 2006, p.7. [6] Isărescu, M., Stabilitatea prețurilor şi stabilitatea financiară, Dissertation on being awarded the title of Doctor Honoris Causa of the University of Piteşti, 8th December 2006,p.8. [7] Schinasi, G., Defining Financial Stability, IMF Working Papers, 4, 2004, p.82. [8] Cerna,S.(coord.), Stabilitatea financiară, Timişoara, West University Press, 2008, p.9. [9] Volcker, P., The Federal Reserve Position on Restructuring of Financial Regulation Responsibilities, Federal Reserve Bulletin,70,1984,p.548. [10] Jacobson, T., Molin, J., Vredin, A., How Can Central Banks Promote Financial Stability?, Economic Review,2,2001. [11] Cerna, S.(coord.),op.cit.,p.28. [12] BNR, Financial Stability Report, 2015, p.133. [13] BNR,op.cit.,p.137. [14] BNR,op.cit.,p.140-141.

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