FOCUS: Romanian Ctrl Bk’s New Reserve Rule May Have Positive Effects On Lending

Romania’s central bank BNR decided Tuesday to cut to zero from 40% at present the minimum reserve ratio on foreign-denominated liabilities with residual maturities of over two years. It kept unchanged the key monetary policy rate at 10% on the year, and left unchanged the current minimum reserve requirements ratios on leu-denominated liabilities at 18%, as well as on foreign-currency denominated liabilities with residual maturities of up to two years, at 40%.

The analysts agreed that banks will turn short-term finances on long-term ones and the decision’s effects will be seen in the last months, as the central bank chose a suitable applying period for this measure in order to avoid a reduction of the reserve.

The decision will be applied starting with the May 24-June 23, 2009 maintenance period.

According to ING Bank Romania, banks’ minimum reserves on foreign-denominated liabilities were at EUR12.9 billion at the end of February, out of which EUR5.4 billion were aimed for deposits and EUR7.5 billion for other types of debts, such as the financing lines.

“The central bank’s decision should theoretically have a medium-term positive effect upon lending, of reducing the pressures of a leu depreciation against the European currency. (…) Banks might turn part of their short-term funds into long-term liabilities,” ING Bank’s economist Vlad Muscalu said.

Raiffeisen Bank’s economist Ionut Dumitru said he cannot estimate the impact of the measure as the banks’ long- and short-term financing structure is not known.

According to Dumitru, the last period, dominated by the country’s agreement with the IMF and the engagements on fiscal policy, has sent a positive signal to investors and have a positive influence upon the evolution of the leu exchange rate.

The economist of Romania’s largest bank by assets BCR, Lucian Anghel said BNR’s decisions could support the leu’s exchange rate on the backdrop of a higher interesest rate difference compared with the euro area.

“Maybe part of the short term debt will be turned into long term overdue, that should reduce the rating agenies’ concerns,” Anghel said.

The central bank governor Mugur Isarescu said last week that BNR will reduce the minimum required reserves ratio “extremely gradually”, starting with banks’ liabilities in foreign currency and might exclude long term financing from their calculation base.

Romania agreed with the IMF, the E.U. and other financial institutions a EUR20 billion program to support the country’s external and internal deficit. The first instalments of the loan are expected in May.