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Deloitte Banking Alert

March 2021

ECB to conduct comprehensive assessment as Romania targets delayed zone membership

Romania’s Prime Minister recently stated that he hopes the country will be able to adopt the euro in 2027-2028 and enter the this year. As of March 2018, the scheduled date for euro adoption in Romania was 2024. In order to achieve the change of the , Romania is required to undergo at least two years of stability within the limits of the convergence criteria.

Being bound by its EU accession agreement, Romania has to replace its current national currency (leu) with the euro, as soon as Romania will fulfil all of the four nominal euro convergence criteria as states in the Treaty of Functioning of the in article 140.

The Romanian leu is not part of the European Exchange Rate Mechanism (ERM II), although the Romanian authorities are working to prepare the changeover to the euro. In order to achieve the change of the currency, Romania is required to undergo at least two years of stability within the limits of the convergence criteria.

Next regular convergence report to be expected in 2022

ECB Comprehensive assessments are conducted either regularly or on an ad hoc basis:  Regular: At periodic intervals, the ECB carries out an initial health check for all banks that have recently been classified or are likely soon to be classified as significant (meaning that they will now be supervised directly by the ECB).  Ad hoc: The ECB also conducts assessments (i) in response to exceptional circumstances and (ii) where an EU country outside the euro area requests close cooperation between its national supervisor and the ECB (i.e. where it wants to join the Single Supervisory Mechanism).

Considering that Romania expressed the intention to join euro-zone in 2027-2028, the ERM mechanism has to be implemented no later than in 2023-2024. The latest convergence report issued by the ECB for Romania was in June 2020. Taking all this in account, the next ECB convergence report is expected in 2022 or at latest in 2023.

The examination process targets to assess whether the countries fulfill the four convergence criteria, respectively: (i) price stability, (ii) government budgetary position, (iii) exchange rate criterion and the (iv) long-term interest rates criterion. Furthermore, there is also a separate requirement focusing on the establishment of appropriate laws that would ensure the independence of the .

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Latest Convergence Report results

Main points of the last Convergence Report issued in June, regarding the assessment of Romania:  In March 2020 the 12-month average rate of HICP inflation in Romania was 3.7%, i.e. well above the reference value of 1.8% for the criterion on price stability;  While Romania's debt complied with the Maastricht debt criterion, its government deficit breached the 3% reference value in 2019; an excessive deficit procedure was thus launched in April 2020, under which the country was required to rectify its excessive deficit by 2022 at the latest;  In the two-year reference period from 1 April 2018 to 31 March 2020, the Romanian leu did not participate in ERM II, but traded under a flexible exchange rate regime involving a managed floating of the currency’s exchange rate;  Over the reference period from April 2019 to March 2020, long-term interest rates in Romania stood at 4.4% on average and were thus above the 2.9% reference value for the interest rate convergence criterion;  Romanian law does not comply with all the requirements for central bank independence.

Hence, the said that Romania needs stability-oriented economic policies and wide-ranging structural reforms in order to meet the convergence criteria for entry.

Moreover, in light of the COVID-19 pandemic, there still remains a high level of uncertainty as to how the macroeconomic environment will evolve and how these countries will manage this unpredictable situation and also try to comply with the requirements.

Subsequent to the potential admission to ERM II, Banks within the Romanian banking system will be subject to ECB supervision and will undergo an annual SREP assessment to evaluate the resilience of the overall system and ensure each credit institution has in place the strategies, processes, capital and liquidity.

How can Deloitte help? Our team’s extensive experience can help you to get ready for the ECB supervisory agenda. Thus, our team can organize workshops per request, to share our personal experience in supporting Banks from the Bulgarian and Croatian banking sector for the purpose of the ECB Comprehensive assessment and SREP readiness assessment.

For further questions regarding the aspects mentioned in this alert, please don’t hesitate to contact us.

Dimitrios Goranitis FSI Risk & Regulatory Advisory Partner, Deloitte Tel: +40 751 250 884 Email: [email protected]

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