The National Bank has come to the conclusion that a 19% exchange rate increase would not have significant effects over banks' balance sheets or gains, given that they have low foreign currency exposures and are well capitalised.
A considerable interest rate modification would have bigger effects over banks but even so the banking system has a "moderate" exposure to market risk. This is the conclusion of the stress test the NBR conducted while drafting the Financial Stability Report.
"The analysis related to the cumulated effect of the interest rate shocks and of the foreign exchange rate over banks' balance sheets and profit & loss account points to a low impact over the banking system, in the form of a decrease in banks' own funds by some 16%," shows the NBR.
As part of the stress-test scenario, the NBR simulated a 19.1% drop in RON. This would, however, generate a decline by 0.15% to 2.86% in commercial banks' own funds.
The central bank notes the direct exposure of lending institutions to foreign exchange rate risk is still low. Moreover, the difference between assets and liabilities in a certain foreign currency is further narrowing. On the other hand, the NBR points our banks have derived bigger net revenues from foreign currency transactions.
According to NBR's scenario, only two banks would experience a decrease in own funds ranging between 1% and 3%. Another 27 banks would register equity capital variations of between -1% and 1%.
"The impact is low mainly owing to an adequate capitalisation, but also to a relatively balanced correlation between foreign currency assets and liabilities. Indirectly, however, foreign currency risk is passed on to debtors, reflecting over banks through lending risk," concludes the NBR.
The NBR shows the lending risk is the most important risk domestic banks are facing, though the quality of portfolios has remained unchanged. The main concerns about lending risk are born from the rapid expansion of loans contracted in foreign currency on long term.
In the case of a shock at the level of the interest rate, the effects over banks would be stronger, and this is the most significant market risk. Should the interest rate be cut by 6.1%, net interest revenues would go down, generating a negative impact over equity capitals put at 15.6% at the level of the system.
Eight banks would be affected, posting own fund contractions by up to 20%.
The monetary authority notes interest risks are still "moderate". Moreover, some banks' practice of offsetting the interest rate decrease by a raise in fees or the introduction of new fees lessens the effects of a possible plunge in interest rates.
The weight of net interest revenues has shrunk, but they still account for about half of operating revenues.
NBR's stress test
The National Bank has come to the conclusion that a 19% RON increase would not have significant effects over banks' balance sheets or P&Ls, given that they have low foreign currency exposures and are well capitalised
A 19.1% RON decrease would generate a decline by 0.15% to 2.86% in commercial banks' own funds
A considerable interest rate modification would have bigger effects over banks but even so the banking system has a "moderate" exposure to market risk
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