The Unassuming Economist

The IMF’s latest report on Romania says that:

• “Notwithstanding these improvements, vulnerabilities arise from the high exposure of banks to the real estate sector and sovereign debt. Real estate exposure rose with housing loans increasing from 21 to 54 percent of household loans between 2008 and 2017. These mortgage contracts (mostly at variable rates) expose banks to credit risks in the event of sharp increases in interest rates. The effectiveness of existing macroprudential tools on mortgages is undermined by the Prima Casa program, which allows loan-to-value ratios up to 95 percent. The Romanian banking system has also a large exposure to their own sovereign debt (one of the highest in the EU at around 20 percent of assets in 2017), that could lead to valuation losses in the event of interest rate increases. Finally, despite declining considerably since 2011, about 35 percent of banks’ liabilities and assets remain denominated in foreign exchange (FX), and FX liquidity risks can exist within an environment of ample overall liquidity.”

 

• “A Debt-Service-to-Income (DSTI) limit on mortgage lending would mitigate risks from the exposure of banks to the real estate sector. An appropriately set DSTI limit can boost borrowers’ resilience and should be imposed on all mortgages, including those made under
  the Prima Casa program. In this context, staff welcomed the government’s strategy to gradually scale back the program.”