E AESTIMATIO, THE IEB INTERNATIONAL JOURNAL OF FINANCE , 2015. : 88-109 DOI:10.5605/IEB.10.4 L 10
C © 2015 AESTIMATIO , THE IEB INTERNATIONAL JOURNAL OF FINANCE I T R A
H C
R Implications of the financial crisis A E S E
R on the soundness of the banking system in the Republic of Moldova
Clichici, Dorina Gribincea, Corina
̈ RECEIVED : 6 MAY 2014 ̈ ACCEPTED : 7 JULY 2014
Abstract The extent of recent financial crisis implications on economies differs from country to country. The effects of the crisis events in developed countries differ from the ef - fects in developing countries. The banking systems are now more vulnerable to shocks and to contagion than ever before due to the globalization of banking ac - tivity. In recent years, the Moldovan banking system has demonstrated a high degree of resilience to the global financial crisis. The local banking system has a low degree of connectivity to the European and world banking systems due to a very limited presence of international banks in the market. This has meant that there has been no direct contagion during the last financial crises. The effects of the crises in Moldova were felt indirectly by the banks, through the channel of remittances and foreign trade , which have diminished substantially as a result of the economic decline in Europe, particularly in 2009. This article aims to verify whether a systemic crisis was recorded within the domestic banking sector during recent years and to establish the conditions which could be classified as a full-fledged crisis episode in the case of the Republic of Moldova. In addition, the implications of the recent financial crisis on the soundness of Moldova’s banking system are identified.
Keywords: Banking crisis, Policy interventions, Banking system, Financial soundness indicators.
JEL classification: E52, G01, G21.
Clichici, D. National Institute for Economic Research of Academy of Sciences of Moldova (NIER). 45, Ion Creanga street. Chisinau, Republic of Moldova. www.ince.md. +373 22 50 -11- 06. E-mail: [email protected] Gribincea, C. National Institute for Economic Research of Academy of Sciences of Moldova (NIER). 45, Ion Creanga street. Chisinau, Republic of Moldova. www.ince.md. +373 22 50 -11- 06. E-mail: [email protected]
88 AESTI MA TIO
AESTIMATIO, THE IEB INTERNATIONAL JOURNAL OF FINANCE , 2015. 10 : 88-109 © 2015 AESTIMATIO , THE IEB INTERNATIONAL JOURNAL OF FINANCE Implicaciones de la crisis financiera en la solidez del sistema bancario de la República de Moldavia
Clichici, Dorina Gribincea, Corina
Resumen La profundidad de las consecuencias de la reciente crisis financiera en las distintas eco - nomías difiere de un país a otro. Sus efectos no son los mismos en los países desarro - llados y en los países en desarrollo. La globalización de la actividad bancaria tiene como consecuencia que los sistemas bancarios sean, ahora más que nunca, más vulnerables a los shocks y al contagio. El sistema bancario moldavo ha demostrado durante los últimos años un alto grado de resiliencia a la crisis financiera mundial. Tiene un bajo grado de conectividad con el sistema bancario europeo y mundial debido a la muy baja presencia de bancos internacionales en el mercado, lo cual ha sido determinante en el hecho que no haya habido contagio directo en las últimas crisis financieras. Los efectos de las crisis en Moldavia afectaron a los bancos de forma indirecta, vía remesas y comercio exterior , que han disminuido sustancialmente como resultado de la ralentización de las economías europeas, en particular en 2009. El objetivo del artículo es verificar si ha tenido lugar una crisis sistémica el sector bancario moldavo en los últimos años, así como determinar, en el caso de la República de Moldavia, las condiciones que pueden ser calificadas de episodio de crisis en toda regla. También hay se identifican las impli - caciones de la reciente crisis financiera en la solidez del sistema bancario moldavo.
Palabras clave: Crisis bancaria, intervenciones de política, sistema bancario, indicadores de solidez financiera.
AESTI MA TIO 89
n 1. Introduction Banking systems are now more vulnerable to shocks and to contagion than ever before due to the globalization of banking activity. The banking crises prompted numerous research papers and case studies, some descriptive and some economet - ric, of specific banking crisis episodes, as well as several attempts to draw general - izations from individual experiences. Some examples of case studies include Garcia-Herrero (1997), Drees and Pazarbasioglu (1998), Jaramillo (2000), González-Hermosillo et al. (1997), Ramos (1998), and Schumacher (2000). Among papers drawing general lessons, see Davis (1995), Gavin and Hausman (1995), Goldstein and Turner (1996), Mishkin (1996), Rojas-Suárez and Weisbrod (1995), and Sheng (1995).
The extent of crisis implications on economies differs from country to country. The effects of the crisis events in developed countries differ from the effects in developing countries. The main implications of a systemic banking crisis in a country . C
, a
e are noted when its financial and banking industry experiences a significant number c n i b i
r of defaults, while financial entities face enormous problems fulfilling financial G
d
n contracts on time (Contessi and El-Ghazaly, 2011). As a consequence, a country a
. D
, i
c experiences a large increase in nonperforming loans, and a large decrease in the i h c i l
C capital in the banking system. Sometimes, these events follow a fall in asset prices . a v
o (for example, in the real estate market) and sometimes overlap with runs on banks, d l o M
but in order to be defined as “systemic”, such crises must involve a large number f o
c i
l of institutions or cover a large portion of the banking system. If the beginning of a b u p
e banking crisis is marked by bank runs and withdrawals, then changes in bank R
e h
t deposits could be used to date the crises (Kaminsky and Reinhart, 1999). Often,
n i
m the banking problems do not arise from the liability side, but from a protracted e t s y 9 s 0 deterioration in asset quality
, be it from a collapse in real estate prices or increased 1 g - n 8 i 8 k
: bankruptcies in the nonfinancial sector. In such cases, changes in asset prices or a n 0 a 1 b
. 5 e significant increase in either bankruptcies or nonperforming loans could be used 1 h t 0
f 2
, o E to mark the onset of the crisis. s C s N e A n N I d F n F u O o s L Banking crises , a distinct subset of financial crises, consist either of panics,
A e N h R t
U moments of temporary confusion about the unobservable incidence across the fi - n O J o
L s i A s
N nancial system of observable aggregate shocks, or severe waves of bank failures i r O I c T
l A a i
N which result in aggregate negative net worth of failed banks in excess of one c R E n T a N n I
i percent of GDP (Calomiris, 2009). Unlike financial crises, however, historical evi - f
B E e I h E t
dence suggests that banking crises cannot be seen as an inevitable result H f T
, o
s O I
n of human nature or the liquidity transforming structure of bank balance sheets, T o i A t a M I c
i and adverse macroeconomic circumstances alone are not sufficient to produce l T S p E m I A banking crises.
90 AESTI MA TIO
1
Implications of the financial crisis on the soundness of the banking system in the Republic of Moldova. Clichici, D. and Gribince9 a, C. AESTIMATIO T, HE IEB INTERNATIONAL JOURNAL OF FINA, N2C0E15. 10 : 88-109 , ; , - t s s s s y y y e e e g n i ) s x s a r m c n a n b b h h n s i s o i e e e
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s 0 a o h y 2 e o o n s T c 4 u r p i h N A t P f D 2 ( n 2. Banking system characteristics in the Republic of Moldova
The Republic of Moldova is a small country with a financial sector dominated by the banking system: it accounted for 93% of total financial assets and 96% of total loans provided by the financial sector at 2012 year-end (World Bank, 2013). The number of banking institutions during the years 2006-2013 remained broadly unchanged, with 14 commercial banks.
Concentration ratios of the Moldovan banking system range between 60-70% for the largest five banks in the system. Although foreign participation within the local banking industry is considerable (the share of foreign investments in banks’ capital recorded at the end of 2013 was 72.2%), the majority of foreign holdings in the Republic of Moldova belong to investors that are not internationally highly-rated financial institutions. A significant percentage of the banks’ owners are residents in offshore centers. Foreign strategic investors 1 own less than 20% of the banking sector’s . C
, a
e assets (see appendix A). c n i b i r G
d
n One of the largest Moldovan banks - Moldova Agroindbank - has been recognized many a
. D
, i
c times as one of the World’s Best Emerging Market Banks and World’s Best Foreign Exchange i h c i l
C Providers by Global Finance (2013, see Table 1). These awards further prove the . a v
o domestic banking system’s resilience to the recent crisis. d l o M
f o
c i l l Table 1. Soundness of the domestic banking system, by Global Finance b u p
e rankings and awards R
e h t
n i I. World’s Best Emerging Market Banks II. World’s Best Foreign Exchange Providers m e t s y 9 Year Level Bank name Year Level Bank name s 0
1 g - n 8 i 8
k Western Moldova Western Moldova
:
n 2012 2013 0 a Europe Agroindbank Europe Agroindbank 1 b
. 5 e 1 h t 0 Moldova Western Moldova f 2
,
o 2011 National 2012 E
s
C Agroindbank Europe Agroindbank s N e A n N I d
F Moldova Moldova n F
u 2010 Global 2011 Global O
o Agroindbank Agroindbank s L
A e N h R t
Moldova Moldova U n
O 2009 National 2010 Global J o
Agroindbank Agroindbank L s i A s N i r O I
c Moldova T
l
A 2009 National a i N Agroindbank c R E n T a N n I i f
B E e I
h SOURCE GLOBAL FINANCE (2013) COUNTRY ECONOMIC REPORTS & GDP DATA MOLDOVA
E : , , t
H f T
, o
s O I n T o i A t a M I c i l T 1 S p B.C. “Mobiasbancă – Groupe Société Générale” S.A., B.C. “EXIMBANK-Gruppo Veneto Banca” S.A., B.C. ProCredit Bank S.A., B.C.R. E m I A Chi inău S.A.
92 AESTI MA TIO
The local banking system has a low degree of connectivity to the European and world banking systems due to a very limited presence of international banks in the market 2. This has meant that there has been no direct contagion within the last financial crises (Table 2). l Table 2. Foreign strategic investors in the banking system
80
60
40
20
0 2006 2007 2008 2009 2010 20 11 2012 2013 -20
-40
-60 I m
Remittances Export p l i
-80 c a t i o
SOURCE AUTHORS ELABORATION n : ’ s
o f
t h e
f i
At present, Moldova’s banking sector is developing in terms of geographical accessi - n a n c i bility. During the 2006-2013 period, statistical data reflect a trend of expansion in ter - a l
c r i ritorial units and the number of people employed in the domestic banking sector. The s i s
o n
number of banking divisions increased from 2006 to 2013, reaching 1288 units at the t h e
end of 2013 compared to 966 units in 2006 (with 2009 as an exception). During the s o u n
2006-2012 period, the number of branches per 100,000 adults increased from 8 units d n e s s in 2006 to 12 in 2012. The indicators of banking services accessibility are close to o f
t h
those of the Commonwealth of Independent States (CIS) country indicators, however, e
b A a n E
there is a big gap compared to Central and Eastern European countries (Table 3). k S T i n I g M
s A y T s I t O e m , l Table 3. The indicators of accessibility of banking institutions/services, T
H i n E
I t 2011 year-end E h B e I N
R T e E R
Central and CIS Republic of p N u A b
Eastern Europe countries Moldova T l i I O c
N o
2 A f
Branches (1000 km ) 22 7 10 L M J O o U l d 2 R N ATM (1000 km ) 44 18 26 o A v a L . O C F
Open deposit accounts at commercial banks l i F c I h 1726 1935 1483 N i A
(per 1,000 adults) c N i ,
C D E .
,
a Open credit accounts at commercial banks 2 n 0 d
492 - 46 1
5
(per 1,000 adults) G .
r 1 i b 0 i : n
8 c
SOURCE AUTHOR S ELABORATION BASED ON IMF DATA FINANCIAL ACCESS SURVEY HTTP FAS IMF ORG 1 8 : ’ , ( :// . . /) e - a 1 ,
0 C
2 9 Of the 14 commercial banks operating in the local banking market, there are only 4 with 100% foreign capital. .
AESTI MA TIO 93
The number of deposit and credit accounts opened at commercial banks is quite low compared to Central and Eastern Europe countries, where open credit accounts at commercial banks (per 1,000 adults) reached 492 accounts in 2011, compared to 46 accounts in the Republic of Moldova. The number of ATMs increased by 20% in 2011 and the number of deposit accounts has increased by 13% since 2007 3.
n 3. Checking for a systemic crisis in the Republic of Moldova banking system
In order to verify whether a systemic crisis was recorded within the Republic of Moldova banking sector in recent years, we will establish the above-mentioned con - ditions for the case of the Republic of Moldova. We will then identify the implications of the recent financial crisis on the soundness of Moldova’s banking system.
According to Demirgüç-Kunt and Detragiache (2005) the ratio of nonperforming . C
, a
e assets–to-total assets in the banking system should exceed 10% in order to classify as c n i b i
r a full-fledged crisis episode. In the case of Moldova’s banking system this ratio did G
d
n not reach the 10% level between 2007 and 2013, even though the total amount of a
. D
, i
c assets continuously increased (see Figure 1). i h c i l C . a v
o n Figure 1. Nonperforming assets-to-total assets and total assets of Moldova’s d l o M
banking system f o
c i l 10 80 b u p
e 9
R 70
e h
t 8
n 60 i 7 m e t
s 50 y
9 6 s 0
1 g - n 8 i 5 40 8 k
: n 0 a 1
b 4
. 30 5 e 1 h t 0
3 f 2
, o 20 E
s C
s 2 N e A n N
I 10 d
F 1 n F u O o s L
0 0 A e N h
R 2006 2007 2008 2009 2010 20 11 2012 2013 t
U n O J o
L s i A Nonperforming asstes/ Total assets, % Total assets, mil. lei (secondary axis) s N i r O I c T
l A a i N SOURCE : NATIONAL BANK OF MOLDOVA DATABASE , 2007-2013 c R E n T a N n I i f
B E e I h E t
None of the other episodes of distress suggested by Demirgüç-Kunt and Detragiache H f T
, o
s O I
n (2005) were recorded within the Republic of Moldova banking system: there were T o i A t a M I c i l T S p E
m 3 I A IMF Financial Access Survey (http://fas.imf.org/) 1
94 AESTI MA TIO
no significant rescue operations by regulatory authorities; some problems were recorded within the banking sector but they did not lead to nationalization of banks; there were no recorded bank runs or emergency measures such as deposit freezes, prolonged bank holidays, or generalized deposit guarantees. Furthermore, policy interventions in the Moldovan banking sector were insignificant. None of the interventions specified by Laeven and Valencia (2012) were used in recent years by the National Bank of Moldova. The most important interventions in the Moldovan banking sector were those regarding the minimum capital adequacy ratio and the minimum reserve requirements. In June 2012, the minimum capital adequacy ratio was raised by the National Bank of Moldova to 16%; up until then it had been at 12%.
The National Bank of Moldova continued to work towards ensuring broad monetary conditions to create conditions for encouraging both loan supply and demand in order to stimulate sustainable economic growth. Due to excess liquidity
recorded in the banking system in recent years, the Central Bank has taken measures I m p l i more oriented towards offer contraction. Thus, there has been a gradual increase c a t i o of the minimum reserve requirements rate up to 14.0% at 2012 base (NBM, 2012), n s
o f
taking into consideration the passivity on the interbank money market, which aims t h e
f i to improve the quantitative and qualitative indicators and the transmission n a n
4 c i mechanism . a l
c r i s i s
o n
During this period, only positive values were recorded for banks’ net liquidity position t h e
and the Central Bank generally acted in a debtor position with regard to the banking s o u n system, continuing the sterilization operations. Despite the Central Bank’s d n e s s interventions, the positive trend of the credit granted to the private sector was o f
t h
influenced by a number of factors: 1) the favorable statistical effect of inflation e
b A a n E
which remained close to the target set by the Central Bank (for the first time in 20 k S T i n I g M
s years the annual rate of inflation was in single figures for 3 consecutive years, close A y T s I t O e m ,
to 5%); 2) improved sustainability of maintaining the inflation within the variation T
H i n E
I t range around the annual targets, creating favorable conditions for sustainable E h B e I N
R T e economic growth in the Republic of Moldova and bringing benefits for both E R p N u A b T l i investors and the general population. I O c
N o A f
L M J O o U l d R N Thus, the situation within Moldova’s banking system could not be classified as a full- o A v a L . O C fledged crisis. However the recent financial crisis has been felt indirectly by the real F l i F c I h N i A c N economy in general and by the banking industry in particular. i ,
C D E .
,
a 2 n 0 d 1
5 G .
r 1 i b 0 i : n
8 c 8 e - 4 a 1 ,
0
Rate evolution of minimum required reserves: January to June 2009 – 17.5%; June to July 2009 –16%; August 2009 –8%, 2010– C 9 8%; February 2011- increased from 8% to 11%; in July 2011- 14% to present date. .
AESTI MA TIO 95
The effects of the crises in Moldova were felt indirectly by the banks, through the channel of remittances and foreign trade , which have diminished substantially as a re - sult of the economic decline in Europe, particularly in 2009. The decline of private consumption in the Euro area as a result of the crisis has contributed to a sudden decrease in Moldovan exports to the EU and in the volume of remittances in 2009 and 2012 (see Figure 2).
n Figure 2. Growth rate of remittances and exports (%), Moldova, 2006-2013
80
60
40
20
0 2006 2007 2008 2009 2010 20 11 2012 2013 -20 . C
, a e
c -40 n i b i r G
d -60 n a
. Remittances Export D
, i -80 c i h c i l
C SOURCE : AUTHORS ’ ELABORATION , NATIONAL BANK OF MOLDOVA DATABASE , 2006-2013 . a v o d l o M
Although remittances have declined, Moldova’s dependence on them is one of the f o
c i
l highest in the world (24.5% of GDP in 2012): Moldova ranked fifth internationally b u p
e (World Bank, 2013) in 2012. This exacerbates the financial system’s vulnerability to R
e h
t potential volatility in these inflows. The main determinant of fragility is the depend -
n i
m ence on the economic conditions of the main destinations for Moldovan emigrants e t s y 9 s 0
(Russia and the EU). Along with worsening conditions in destination countries, the 1 g - n 8 i 8 k
: inflow of remittances has slowed down considerably. This puts the exchange rate n 0 a 1 b
. 5 e under pressure and reduces the availability of financial resources to the financial 1 h t 0
f 2
, o E sector. It also increases credit risk, as part of bank lending is based on the borrowers s C s N e A n N I
d earning/receiving remittances. F n F u O o s L
A e N h R t
U n O J o
L s i A s N i n r O 4. Implications of the crisis on the soundness of I c T
l A a i N c R the Moldovan banking system E n T a N n I i f
B E e I h E t
The main implications of the crisis on the soundness of the banking system can be H f T
, o
s O I
n identified by assessing the evolution of financial soundness indicators of the system T o i A t a M I c
i (capital adequacy and liquidity ratio, assets quality, profitability), and the evolution l T S p E m I A of some structural development indicators.
96 AESTI MA TIO
4.1. Evolution of financial soundness indicators of the banking systems
Capital adequacy and liquidity A better capitalized banking system helps to reduce possible contagion effects from individual bank failures in the same country or region. The average capital adequacy and liquidity ratio of Moldova’s banking system recorded for 2006-2013 indicates a high degree of bank safety and the ability to perform risky operations without affecting the capital (see Figure 3). n Figure 3. Capital adequacy and current liquidity ratio 5 (%)
45
40
35
30
25 I 20 m p l i c a
15 t i o n s
10 o f
t h
5 e
f i n a
0 n c i
2006 2007 2008 2009 2010 20 11 2012 2013 a l
c r i
Capital adequacy ratio, % Current liquidit y, % s i s
o n
SOURCE NATIONAL BANK OF MOLDOVA DATABASE 2006-2013 : , t h e
s o u n
Nevertheless these indicators decreased slowly after 2009. Thus the effects of the d n e s s global financial crisis were felt by the Moldovan banking system, even if the capital o f
t h
and liquidity ratios were significantly higher than the Basel requirements and the e
b A 6 a n E
values required by the National Bank of Moldova . Degryse et al. (2013) suggests that k S T i n I g M
s increases in capital do have an effect in reducing bank fragility but only when capital A y T s I t O e m ,
levels are higher than a threshold of around 7%. Taking into consideration the higher T
H i n E
I t values of capital and liquidity ratios in Moldova we could assume that the banking E h B e I N
R T e system is relatively resilient to the crisis. E R p N u A b T l i I O c
N o A f
L
Among Eastern Partnership countries and some EU countries of a similar size and M J O o U l d R N with similar economic problems, Moldova has the highest level of capitalization o A v a L . O C and liquidity (see Figure 4). F l i F c I h N i A c N i ,
C D E .
,
a 2 n 0 d 1
5 G .
r 1 i b 5 0 i : n
8
Current liquidity = Liquid assets/ Total assets. c 8 e - 6 a 1 ,
0
Since June 2012, the minimum capital adequacy ratio established by the National Bank of Moldova has been 16%, up until then it C 9 was 12%. The current minimum liquidity ratio is 20%. .
AESTI MA TIO 97
n Figure 4. Bank liquid reserves-to-bank assets, Bank Regulatory Capital-to-Risk- Weighted Assets (%), International comparison: Eastern Partnership countries and some EU countries, average rates for 2009-2012
Moldo va
Belarus
Ukraine
Georg ia
Armenia
Romania
Macedonia, FYR
Lithua nia
Latvia
Bulga ria . C
, Albania a e c n i 0 10 20 30 40 b i r G
Bank liquid reserves to bank assets, % d n
a Bank Regulatory Capital to RWA, %
. D
, i c i
h SOURCE : WORLD BANK AND IMF DATA BASE , FINANCIAL SOUNDNESS INDICATORS TABLES 2009-2013 c i l C . a v
o The recent financial crisis has shown that banks’ funding structure is key to their d l o M
resilience. Banks can finance themselves with both depository funding and wholesale f o
c i
l funding (i.e. funding from other banks, money market funds, corporate treasuries and b u p
e other non-bank investors). Those relying mostly on wholesale funding have been R
e h
t severely affected by the crisis. Banks in Australia and Canada, for example, have been
n i
m very resilient to the crisis because they rely mostly on depository funding, much of e t s y 9 s 0 et al.
which comes from retail sources such as households (Degryse , 2013). Reliance 1 g - n 8 i 8 k
: on non-core deposits as a funding source, wholesale funding, could prove to be a n 0 a 1 b
. 5 e more volatile source of funding and one that may intensify regional banking fragility. 1 h t 0
f 2
, o E
s C s N e A n N I
d Moldovan banks have demonstrated a high level of resilience to the last financial crisis F n F u O o s L due to their funding structure . They finance themselves with both depository funding
A e N h R t
U and wholesale funding, but they rely mostly on depository funding. The deposits-to- n O J o
L s i A s
N liabilities ratio reached 85.4% at the end of 2013, much of which came from retail i r O I c T
l A a i
N sources (Figure 5). Figure 4 suggests that banks have a strong preference for main - c R E n T a N n I
i taining liquidity. This is mostly due to the uncertain macroeconomic outlook and the f
B E e I h E t
recent history of banking sector instability. H f T
, o
s O I n T o i A t a M I c
i In 2009, a sudden drop in the deposits-to-liabilities ratio was recorded, as a result of l T S p E m I A remittances and trade revenues decreasing. Another indicator – the loans-to-deposits
98 AESTI MA TIO
ratio - recorded a sharp fall from 2007 to 2009, and still remains at a low level. These tendencies suggest that Moldovan banks have a strong preference for maintaining liquidity during the financial crisis. This is mostly due to the uncertain macroeconomic outlook and the recent history of banking sector instability. n Figure 5. Funding structure of Moldova’s banking system (%), at year-end
94 1,4 92 1,2 90 88 1 86 0,8 84 82 0,6
80 0,4 78 0,2 76 74 0 I 2006 2007 2008 2009 2010 20 11 2012 2013 m p l i Deposits/ Total Liabilities, % Loans/Deposits (secondary axis) c a t i o n
SOURCE NATIONAL BANK OF MOLDOVA DATABASE 2006-2013 s : , o f
t h e
f i
Assets quality n a n c i
The general effect of the recent financial crises on the Moldovan banking system was a l
c r i felt on the banks’ asset side . The crisis events have negatively affected the creditworthiness s i s
o n
of Moldovan borrowers and thus the quality of local banks’ loan portfolios. An alarm - t h e
ing feature of the domestic banking sector is the high level of bad loans (14.5% in s o u n
2012). Economic contraction in 2009 due to the global financial crisis caused a sig - d n e s s nificant increase in nonperforming loans (substandard, doubtful and loss) as a per - o f
t h
centage of the total loan portfolio, from 5.9% in 2008 to 16.3% in 2009 (Figure 6). e
b A a n E k S T i n I g M
s n Figure 6. Nonperforming loan ratio and provision for loan losses ratio (%) A y T s I t O e m ,
18 T
H i n E
I t E
16 h B e I N
R T e 14 E R p N u A b T
12 l i I O c
N o A f
10 L M J O o U l d 8 R N o A v a L .
6 O C F l i F c I h 4 N i A c N i ,
C D E
2 .
,
a 2 n 0 d 1
0 5 G .
r 2006 2007 2008 2009 2010 20 11 2012 2013 1 i b 0 i : n
8 Nonperforming loan ratio, % Provision for loan losses ratio,% c 8 e - a 1 ,
0 C 9 SOURCE : NATIONAL BANK OF MOLDOVA DATABASE , 2006-2013 .
AESTI MA TIO 99
The sudden increase of credit risk during this period led banks to restrict lending and to significantly increase the allowances for loan losses. With few exceptions, the trend of deterioration in loan quality continued to be a common feature of the European banking market in 2012 due to the sovereign debt crisis.
The Moldovan banking system is highly sensitive to macroeconomic changes and expectations, showing a pro-cyclical character . Given the pro-cyclical nature of the banking system, the relatively favorable macroeconomic situation in Moldova recorded in 2013 was fully reflected in increased banking credit activity (Figure 7). While this credit growth is from a very low economic base, possibly reflecting catch- up growth, a continued increase will require careful attention to preempt any deterioration in banks’ credit portfolios.
n Figure 7. Growth rate of new credits granted by banks and GDP in the Republic of Moldova (%), 2006-2013
80 10 . C
,
a 8 e
c 60 n i b
i 6 r G
40
d 4 n a
.
D 20
2 , i c i h c
i 0
l 0 C
. 2006 2007 2008 2009 2010 20 11 2012 2013 a -2 v
o -20 d l -4 o M
-40 f -6 o
c i l
b -60 -8 u p
e Credit growth rate, % change GD P growth rate, % change (secondary axis) R
e h t SOURCE : NATIONAL BANK OF MOLDOVA DATABASE , 2009-2013 n i
m e t s y 9 s 0
The danger is now that the banks’ internal risk management systems are not good 1 g - n 8 i 8 k
: enough to preempt nonperforming lending. In this context, it would be useful for the n 0 a 1 b
. 5 e National Bank of Moldova to develop an early warning system that would signal any 1 h t 0
f 2
, o E emerging macroprudential risks to the financial system. s C s N e A n N I d F n F u O o s L Profitability
A e N h R t
U The profitability indicators of the local banking system have been negatively influenced n O J o
L s i A s
N by the global financial crisis. They recorded a sudden drop in 2009: Return On Assets i r O I c T
l A a i
N (ROA) decreased by 1.23 percentage points compared with 2008, and Return On Equity c R E n T a N n I
i (ROE) dropped dramatically by 18.74 percentage points (Figure 8). The banking sector f
B E e I h E t
ended 2009 with a net loss of 173.0 million lei, although some banks made profits even H f T
, o
s O I
n in that year. In 2010, the banking sector recovered from the crisis, due to the recovery of T o i A t a M I c
i the national economy. Although affected by the crisis in 2008 and 2009, rapid recovery l T S p E m I A of domestic consumption was the first and main impetus for economic growth in 2010.
100 AESTI MA TIO
n Figure 8. ROA and ROE of the banking system of the Republic of Moldova (%), 2006-2013
30
25
20
15
10
5
0 2006 2007 2008 2009 2010 20 11 2012 2013 -5 ROA, % ROE, %
SOURCE : NATIONAL BANK OF MOLDOVA DATABASE , 2006-2013
In 2012, due to the indirect effects of the sovereign debt crisis, profitability indicators I m p l i decreased again. In 2013, the banking efficiency indicators recorded an increase c a t i o compared to the previous year: ROA by 0.5 percentage points and ROE by 3.7 n s
o f
percentage points. t h e
f i n a n c i
4.2. Evolution of the structural development indicators a l
c r i s i s
o n
The statistical data (Figure 9) suggest that the local banking system’s level of t h e
concentration has slowly increased since 2008. s o u n d n e s s
Figure 9. Structural indicators of the Republic of Moldova’s banking system, n o f
t h
at year-end e
b A a n E k 100 75 S T i n I g M
s A y T s I t O 80 70 e m ,
T
H i n E
I t E h B
60 65 e I N
R T e E R p N u A b T l i 40 60 I O c
N o A f
L M J O o U
20 55 l d R N o A v a L . O C F l
0 50 i F c I h 2006 2007 2008 2009 2010 20 11 2012 2013 N i A c N i ,
C D E
Share of foreign investments in banking capital (%) .
,
a 2 n 0 d
Assets of the 5 largest banks by assets size/total banking assets, % (secondary axis) 1
5 G .
r 1
Total regulatory capital of the 5 largest banks by capital size/total banking regulatory capital, % i b 0 i : n
(secondary axis) 8 c 8 e - a 1 ,
0 C 9 SOURCE : NATIONAL BANK OF MOLDOVA DATABASE , 2006-2013 .
AESTI MA TIO 101
It is a result of the movement of bank clients toward the biggest banks of the system with higher visibility. Since 2008, two small banks from sixteen have been hit hard by the crisis and become insolvent, as a result of unsatisfactory management of the banks. It could be concluded that in the case of the Republic of Moldova, as with Canada and Australia, a more concentrated financial system is more resilient to financial distress, and the biggest banks have a greater capacity to face risks, due to higher capitalization and liquidity (OECD, 2010).
Despite the crisis, foreign participation in the local banking industry increased from 62.7% in 2006 to 75.1% in 2013. However, due to the low transparency of Moldovan banking capital, it is quite difficult to assess the foreign investment situation. The presence of foreign strategic investors is considerably lower than in other countries.
While those owners who have more than a 5% stake in a bank have been mostly found to be fit and proper, the ability and willingness of such owners to provide know-how and capital or liquidity support is not clear. On the other hand, the limited presence . C
, a
e of foreign banks in the local banking market has protected it from the contagious ef - c n i b i
r fects of the crisis. However the investments of first-tier banks in Moldova are welcome. G
d
n The main arguments for this are the implementation of highly-efficient risk manage - a
. D
, i
c ment practices within the local banking system and the injection of long-term financial i h c i l
C resources into the Moldovan economy. The supervisors should continue to exert pres - . a v
o sure on the banks to consolidate ownership in individual banks through strategic in - d l o M
vestors. Uncertainties in ownership structure still contribute to vulnerability despite f o 7 c i
l the considerable efforts of the NBM . The process of clarifying the ultimate beneficial b u p
e owners has not been completed. This raises concerns in relation to large exposures, R
e h
t connected lending, and loan concentration, and in establishing whether the owner
n i
m can provide contingency funds in case of a bank run or other stress situations. e t s y 9 s 0
1 g - n 8 i 8 k
: The likelihood of a financial crisis is lower in countries where regulation allows more n 0 a 1 b
. 5 e entry, foreign ownership and a wider range of activities, and where the institutional 1 h t 0
f 2
, o E conditions stimulate competition. Levine et al. (1998) find that the presence of foreign s C s N e A n N I
d banks is associated with a lower risk of banking crisis. A greater foreign bank presence F n F u O o s L may lead to greater banking efficiency and competition in the domestic financial
A e N h R t
U system. Empirical studies have shown that by improving overall operating efficiency, n O J o
L s i A s
N foreign entry helps create the conditions for better financial intermediation and long- i r O I c T
l A a i
N term growth (Claessens et al ., 2001). On the other hand, in terms of self-protection, c R E n T a N n I i f
B E e I h E t
H f T
, 7 o
s
O The threshold for significant shareholding was reduced to 5 percent from the previous level of 10 percent. Banks are obliged to I n T o
i submit information on their shareholders exceeding this limit. In case of noncompliance, the NBM limits the operations of the banks A t a M I
c that do not support the enforcement of the regulation. In addition, the NBM requires that information be provided on shareholders i l T S p with holdings between 1 and 5 percent. This requirement attempts to prevent connected parties from circumventing the regulation E m I A by splitting holdings into portions not exceeding 5 percent.
102 AESTI MA TIO
foreign banks might run away at the first signs of trouble, and in this way they may introduce a new source of contagion. This remains to be a supposition which should be verified empirically.
The impact of the global financial crisis can be noted in the number of borrowers of commercial banks per 1,000 adults 8. This indicator reflects the financial access to and usage of banking services, which declined significantly from 64 borrowers per 1,000 adults in 2008, to 37 in 2011. A positive trend is noted in the number of commercial bank depositors per 1,000 adults 9, increasing from 789 in 2004 to 1166 in 2011 (Figure 10). This shows increasing public confidence in local commercial banks. n Figure 10. Number of borrowers and depositors of Moldovan commercial banks per 1000 adults, between 2004 and 2011
70 1400
60 1200 I m
50 1000 p l i c a t i o
40 800 n s
o f
t
30 600 h e
f i n a
20 400 n c i a l
c
10 200 r i s i s
o
0 0 n
t 2004 2005 2006 2007 2008 2009 2010 20 11 2012 h e
s o u
Borrowers per 1000 adults Depositors per 1000 adults (secondary axis) n d n e s s
SOURCE : COMPILED BY THE AUTHORS USING DATA FROM IMF FINANCIAL ACCESS SURVEY o f
t h e
b A a n E
Credit activity is still restricted in comparison with the countries of Central and k S T i n I g M
s Eastern Europe, where opened credit accounts at commercial banks reached 492 A y T s I t O e m ,
accounts in 2011 (per 1,000 adults), compared to 46 accounts open in Moldova. T
H i n E
I t Also, banking accessibility indicators are close to CIS indicators, but there is a big E h B e I N
10. R T e gap in comparison to Central and Eastern European countries E R p N u A b T l i I O c
N o A f
L
The impact of the global financial crisis was felt in terms of the degree of financial M J O o U l d R N intermediation (financial depth indicators) in the Republic of Moldova (2009-2010). o A v a L . O C
Financial depth approximated by private credit-to-GDP, has a strong statistical link F l i F c I h N i A c N to long-term economic growth; it is also closely linked to poverty reduction. i ,
C D E .
,
a 2 n 0 d 1
5 G .
r 1 i
8 b 0 i : n Calculated as: (number of depositors)*1,000/adult population in the reporting country. 8 c 8 9 e - a 1
Calculated as: (number of borrowers)*1,000/adult population in the reporting country. ,
0 C
10 9 IMF Financial Access Survey http://fas.imf.org/. 1 .
AESTI MA TIO 103
The dynamic growth of loans granted to the private sector (20-30% annually) up to 2008, contributed to GDP reaching a value of 39.4% that year, after the damage inflicted by the financial crisis on the portfolio quality of bank loans and a slight decline for two consecutive years. During 2012, this indicator increased from 37.2% to 39.8%, due to an increase in gross loan portfolio (according to prudential reports) that year (NBM, 2012). This fact demonstrates that the banking system continues gradually to increase its influence on the development of the real economy. Despite the achievements in this field, access to finance continues to be identified as one of the main constraints on the development of Moldovan companies (World Bank, 2013).
The share of bank assets in Moldova’s GDP increased overall between 2006 and 2012, from 50.8% to 66.4%, but due to the crisis it decreased by 7.3 percentage points in 2010. The share of assets in GDP had increased from 59.8% at the end of 2011 to 66.4% at the end of 2012, due to a faster qrowth of bank assets in comparison with GDP.
Figure 11. Dynamics of assets, loans and deposits to GDP on
. n C
, a
e banking sector (%), at year-end c n i b i
r 45 70 G
d n
a 40
. 60 D
, i c
i 35 h c i
l 50 C
. 30 a v o
d 40
l 25 o M
f 20 o 30
c i l
b 15 u
p 20 e R
10 e h t
10
n 5 i
m e
t 0
s 0 y 9
s 2006 2007 2008 2009 2010 20 11 2012 0
1 g - n 8 i Private sector credit/GD P Assets/GDP (secondary axis) Deposits/GD P (secondary axis) 8 k
: n 0 a 1 b
. 5 e
1 SOURCE NBM DATABASE h : , 2006-2012 t 0
f 2
, o E
s C s N e A n N I
d The share of deposits in GDP remained between the values of 43.3% and 45.3% in F n F u O o s L the analyzed period, with an insignificant decrease in 2009. In 2012, this indicator
A e N h R t
U increased significantly by 5.5 percentage points, representing 45.3% of GDP and n O J o
L s i A s
N surpassing such countries as Romania, Hungary, Lithuania and Latvia. This positive i r O I c T
l A a i
N evolution is due to a rise in the total amount of attracted deposits of 21.6% compared c R E n T a N n I
i to January 2012. Individuals’ deposits increased by 23%, corporate deposits by 20.2% f
B E e I h E t
and bank deposits by 10.9%. H f T
, o
s O I n T o i A t a M I c
i A comparative analysis of financial intermediation shows that Moldova is currently l T S p E m I A ranked alongside regional countries at similar stages of development (surpassing
104 AESTI MA TIO
countries such as Georgia, Belarus, Armenia), but below the EU average (see appendix B). According to this data, private credit-to-GDP differs widely across countries and correlates strongly with income level. For example, private credit to GDP in high-income countries is more than four times the average ratio in low- income countries. However, a very high ratio of private sector credit to GDP is not necessarily a good thing. For example, all eight countries with the highest ratios of private sector credit to GDP as of 2010 (from highest to lowest: Cyprus, Ireland, Spain, Netherlands, Portugal, United Kingdom, Luxembourg, and Switzerland) have experienced a major crisis episode since 2008.
n 5. Conclusions
In recent years, the Moldovan banking system has demonstrated a high degree of resilience to the global financial crisis. This resilience of the local banking system was
determined by several factors : I m p l i c a t i o a) The Republic of Moldova’s banking system has a high degree of capitalization and n s
o f
liquidity, factors which contribute to and maintain the general stability of the t h e
f i
entire financial system. The average capital adequacy ratio of Moldova’s banking n a n c i
system recorded for 2009-2012 (29.2%) indicates a high degree of bank safety a l
c r i and the ability to perform risky operations without affecting the capital. s i s
o n
t h e
b) Moldovan banks demonstrate a high level of resilience due to their funding s o u n
structure. They finance themselves mostly with depository funding instead of d n e s s
wholesale funding. This preference diminishes substantially the risks of contagion o f
t h
in the banking system. The deposits-to-liabilities ratio reached 85.4% at year-end e
b A a n E
2013, much of which came from retail sources. On the other hand, this makes k S T i n I g M
s banks susceptible to other risks; if many depositors want to withdraw deposits at A y T s I t O e m ,
the same time (depositor runs on the bank) and the bank does not have enough T
H i n E
I t cash on hand, the banks can become illiquid. However, taking into consideration E h B e I N
R T e the high level of liquidity in the Moldovan banking system and high level of required E R p N u A b T l i reserves at the central bank (a minimum level of 14% of attracted resources that I O c
N o A f
L
a licensed bank is required to maintain with the National Bank of Moldova), the M J O o U l d R N possibility of such risks arising is very low. o A v a L . O C F l i F c I h N i A c N c) Concentration ratios of the Moldovan banking system are relatively high, ranging i ,
C D E .
,
a 2
between 60 and 70% for the five largest banks in the system. There is evidence to n 0 d 1
5 G .
r suggest that concentrated banking systems tend to have larger, better-diversified 1 i b 0 i : n
8 c 8 banks, which may help account for the positive link between concentration e - a 1 ,
0 C 9 and stability. .
AESTI MA TIO 105
d) A comparative analysis of financial intermediation shows that Moldova is currently ranked alongside regional countries at similar stages of development (surpassing countries such as Georgia, Belarus, Armenia), but below the EU average. Countries with the highest ratios of private sector credit to GDP have experienced a major crisis episode since 2008.
The local banking system has a low degree of connectivity to the European and world banking systems due to the limited presence of international banks in the market. This has meant that there has been no direct contagion in the last financial crises. The effects of the crises in Moldova were felt indirectly by the banks, through the channel of remittances and foreign trade , which have diminished substantially as a result of the economic decline in Europe, particular in 2009.
However the main implications of the recent financial crisis on the local banking system are the following: . C
, a
e a) Economic contraction in 2009 due to the global financial crisis caused a significant c n i b i
r increase in nonperforming loans (substandard, doubtful and loss) as a percentage G
d
n of the total loan portfolio, from 5.9% in 2008 to 16.3% in 2009. a
. D
, i c i h c i l
C b) The profitability indicators of the local banking system have been negatively . a v
o influenced by the global financial crisis. They recorded a sudden drop in 2009: d l o M
ROA decreased by 1.23 percentage points compared with 2008, and ROE dropped f o
c i
l dramatically by 18.74 percentage points. b u p e R
e h
t c) The impact of the global financial crisis was felt in terms of the degree of financial
n i
m intermediation (financial depth indicators). As a result of the financial crisis, e t s y 9 s 0
private sector credit to GDP decreased for two consecutive years - 2009 and 2010. 1 g - n 8 i 8 k
: n 0 a 1 b
. 5 e The high degree of resilience of the Moldovan banking system to the recent financial cri - 1 h t 0
f 2
, o E sis, however, does not demonstrate a high degree of banks’ involvement in the develop - s C s N e A n N I
d ment of the real economy. Because of this the intermediation function of Moldovan F n F u O o s L commercial banks is undermined (i.e. compromised, weaken). Although the level of liq -
A e N h R t
U uidity in the system is one of the largest in the region they are very cautious in granting n O J o
L s i A s
N loans. The root cause of this undermining is the mutual crisis of confidence: of the indi - i r O I c T
l A a i
N viduals and companies towards banks, and of commercial banks towards potential bor - c R E n T a N n I
i rowers. It explains the conservative approach of local banks’ risk management, the f
B E e I h E t
reluctance in their lending activity and the maintenance of a high level of liquidity. This H f T
, o
s O I
n conservative approach has become even more acute during the recent economic crisis. T o i A t a M I c
i It reveals that lack of resources is not the essential issue in passive lending, and high levels l T S p E m I A of liquidity may be a consequence of this reluctance with regards to credit activity.
106 AESTI MA TIO
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n World Bank (2013). Enterprise Access to Finance Background Note , Vol. 2 of Moldova - Policy priorities for private sector development , World Bank, Washington DC. Available at: www.ebrd.com/pages/research/economics/ data/macro.shtml [Accessed 10 March 2014] 1
n Appendix A. Market share of the commercial banks in the Republic of Moldova . C
, Market share by assets Market share by loans Market share by a
e No Bank name
c (%) (%) deposits (%) n i b i r
G 30.06.2012 30.06.2013 30.06.2012 30.06.2013 30.06.2012 30.06.2013
d n a
. Large banks D
, i c i
h 1 B.C. “VICTORIABANK” S.A. 17.8 17.8 15.7 17.8 22.0 21.1 c i l C .
a 2 B.C. “MOLDOVA - v 19.1 19.2 22.0 21.4 18.2 19.3 o
d AGROINDBANK” S.A. l o M
f 3 B.C. “Moldindconbank” S.A. 13.7 15.7 14.6 18.1 15.0 16.7 o
c i l 4 Banca de Economii S.A. 12.4 9.0 8.1 4.6 13.7 10.0 b u p e
R Medium banks
e h t B.C. “EXIMBANK - n i 1 7.7 7.4 8.8 8.0 5.5 4.9 Gruppo Veneto Banca” S.A.) m e t s y 9 s
0 2 B.C. “MOBIASBANCÅ -
1 g 6.1 5.7 6.0 6.1 5.6 5.1 - n 8 i Groupe Societe Generale” S.A. 8 k
: n 0 a 1 b
. 3 B.C. “BANCA SOCIALÅ” S.A. 6.0 6.2 7.1 6.5 5.9 6.5 5 e 1 h t 0
f 2
4 B.C. “ProCredit Bank” S.A. 4.6 4.7 5.9 5.9 2.0 3.1 , o E
s C s N e
A 5 B.C. “ENERGBANK” S.A. 3.2 2.9 3.1 2.7 3.3 2.9 n N I d F n F u 6 B.C. “UNIBANK” S.A. 2.2 5.2 1.6 3.4 2.2 5.2 O o s L
A e N h 7 “FinComBank” S.A. 3.1 2.7 2.9 2.5 3.0 2.4 R t
U n O J o
L
s Small banks i A s N i r O I c T 1 B.C.R. Chi şinåu S.A. 2.3 1.6 2.3 1.5 1.7 1,1 l A a i N c R E n 2 B.C. “COMERTBANK” S.A. 1.2 1.4 1.3 1.1 1.2 1.5 T a N n I i f
B E e I 3 B.C. “EuroCreditBank” S.A. 0.7 0.5 0.6 0.4 0.4 0.2 h E t
H f T
, o
Herfi ndahl-Hirschman Index (points) 1207,3 1207.6 1238.5 1330.9 1360.3 1341.8 s O I n T
o 11 i A
t CR-4 (%) 63.0 61.7 61.1 65.3 68.9 67.1 a M I c i l T S p E
m 11 I A Four-Banks Concentration Ratio - measures the total market share of the four largest banks in the banking system.
108 AESTI MA TIO
n Appendix B. The degree of financial intermediation group of some EU and CIS countries, 2012
Assets to GDP (%) Credits to GDP (%) Deposits to GDP (%) EU countries Austria 336.4 114.4 105.2 Bulgaria 109.6 70.8 65.8 Czech Republic 116.5 51.7 68.6 Estonia 119.1 84.5 58.4 France 420.7 104.4 93.7 Germany 326.5 100.1 120.2 Greece 221.7 115.5 83.7 Italy 257.6 109.8 87.7 Latvia 146.9 81.1 40.2 Lithuania 80.4 52.1 39.0 I m
Netherlands 402.4 168.7 142.3 p l i c a
Poland 83.7 49.7 47.3 t i o n s
Portugal 335.4 157.2 136.2 o f
t h
Slovakia 84.0 49.9 55.2 e
f i n a
Slovenia 147.1 89.1 59.9 n c i a l
Spain 337.4 168.4 156.5 c r i s i s
Hungary 113.9 56.2 43.9 o n
t
Romania 67.9 38.6 32.4 h e
s o
UE27 366.7 121.4 113.6 u n d n
Some CIS countries e s s
o
Georgia 51.4* 35.0 32.5* f
t h e
Belarus 60.9 32.2 24.2 b A a n E k S T Azerbaijan 67.4 24.7 19.5 i n I g M
s A y
Ukraine 80.0 80.2 39.6 T s I t O e m ,
T
Armenia 62.2 44.2 21.5 H i n E
I t E h Moldova 66.4 42.2 45.3 B e I N
R T e E R Russian Federation 79.1 - 38.1 p N u A b T l i I O c
N o A f
L
* Georgia statistical data refers to end of 2011. M J O o U l d SOURCE : WORLD BANK AND ECB (STATISTICAL DATA WAREHOUSE ) R N o A v a L . O C F l i F c I h N i A c N i ,
C D E .
,
a 2 n 0 d 1
5 G .
r 1 i b 0 i : n
8 c 8 e - a 1 ,
0 C 9
n .
AESTI MA TIO 109