Opinion by Leonardo Badea, First Deputy Governor of the National Bank of Romania

For the Romanian economy and for maintaining the pace of convergence at European level, the quality of the institutional framework is of fundamental importance. In recent decades, international experience has shown that development differences between states are influenced not only by natural resources, geographical positioning, or other specific material advantages, but also by the robustness of public institutions, their capacity to transmit trust and ensure predictability, and the way in which they manage to facilitate the management by economic actors of risks, periods of tension and uncertainty.

One of the central ideas found in the works of Nobel Prize laureate in economics Daron Acemoglu – recently present in Bucharest, at a conference dedicated to the future of the economy – is that the sustainable development of a nation depends essentially on the quality of its institutions. In other words, long-term prosperity is not only the result of capital accumulation or technological progress, but also of the existence of institutional mechanisms capable of supporting stability, trust and the proper functioning of the economy.

Within this institutional set, the banking system occupies a special place. It ensures the circulation of savings towards investments, the financing of the real economy, the transmission of monetary policy and, last but not least, the functioning of the payment mechanisms on which everyday economic activity is based. For this reason, the robustness of the banking system is an essential condition for overall economic and social stability.

In this context, the importance that the bank resolution framework has acquired over the past two decades must also be understood. In the European financial stability architecture, it is now an indispensable component of the set of tools available to the authorities responsible for the robust functioning of the financial system.

However, to fully understand the relevance of these developments, it is important to remember the context in which they emerged. The Great Financial Crisis of 2008-2009 – which affected advanced, emerging, and developing economies alike – had such a broad and profound impact that it led to major paradigm shifts in the way the robustness of the financial system is understood and protected.

• Previously, it was considered that the stability of consumer prices, i.e. low inflation, implicitly brings stability of the price of financial assets, which ensures, as a direct consequence, the stability of the financial system as a whole. At the same time, the concepts of recession and financial crisis were used in a certain equivalence.
• The effects of the financial crisis of 2008-2009 highlighted, however, that a crisis in the financial system can occur without a recession in advance, and, very importantly, even in a period when inflation is at a low level. It also became obvious that, for the economy as a whole, the cost associated with financial crises is much higher than that of recessions.

This new vision of macroeconomic equilibria, in which financial sector stability is an endogenous component, has also led to unprecedented changes in the architecture of the prudential system.

In practice, the financial crisis has led to the emergence of two new components within the prudential system: macroprudential policy and bank resolution.

Until the financial crisis, close microprudential supervision was considered, in an expression often used in mathematics, to be a necessary and sufficient condition for financial sector stability. The reality of this crisis has shown us, however, that, as an old Romanian saying goes: you can see the trees, but you can lose sight of the forest – that is, the risks and vulnerabilities that accumulate in the system as a whole. The answer was to develop and operationalize the concept of systemic risk, in order to characterize and address the kind of problems that arise in a specific area of ​​the financial system or economy, and which then expand and may even become generalized.

And because during the crisis many European and American financial institutions were supported by using public resources, with significant effects on the fiscal positions and the level of public debt in the countries involved, the new post-crisis paradigm aimed to develop mechanisms that would allow the management of the difficulties of systemically important institutions without transferring the costs to taxpayers. In this context, the bank resolution framework has become an essential element of the modern financial stability architecture, including through its role in reducing moral hazard. By consolidating the principle that shareholders and creditors should bear the losses associated with banking activity as a priority, it contributes to strengthening market discipline and reducing expectations regarding the existence of automatic public support in difficult situations.

In this sense, bank resolution is not only a crisis intervention mechanism, but also a structural element of the modern prudential framework, aimed at increasing resilience and maintaining confidence in the financial system.

In Europe, the resolution framework is an important pillar in the architecture of the Banking Union and, from this perspective, contributes to the effort of European financial integration.

The prudential principles developed at European level – whether we refer to the standards of the European Banking Authority (EBA) or the guidelines of the Basel Committee – explicitly recognize that the resolution authority and the micro-prudential supervisor perform complementary functions, with a common objective: maintaining the stability of individual institutions and, thereby, of the financial system as a whole. The two authorities share relevant sets of information, intervene at successive stages of an institution’s life cycle and must communicate constantly to ensure that there are no information gaps or assessment inconsistencies that amplify vulnerabilities.

The complexity of the contemporary prudential framework derives, to a large extent, from the need to simultaneously manage three types of objectives:

• the individual soundness of institutions,
• the stability of the system as a whole,
• and the capacity for orderly management of failure (resolution).

Although conceptually distinct, these three dimensions are deeply interconnected in practice.

Capital and liquidity requirements imposed from the perspective of microprudential supervision and the resolution framework serve a dual role:

• On the one hand, they reduce the likelihood of a resolution scenario materializing, strengthening the institutions’ resilience to shocks.
• On the other hand, they build, over time, the loss-absorbing capacity necessary so that a resolution, if it becomes inevitable, can be achieved without recourse to public resources and without major systemic disruptions.

The macroprudential perspective adds an additional dimension: cyclical risk amplification, systemic interconnectedness and contagion effects cannot be adequately addressed by individual, institution-by-institution assessments. Therefore, macroprudential instruments – the countercyclical capital buffer, the limits on exposure concentration, additional requirements for institutions of global or local systemic importance – contribute to reducing the likelihood of systemic crises that could simultaneously put several institutions under pressure.

In the national context, the collaboration within the National Bank of Romania between the structures involved in the three types of activities mentioned above complies with the principles established in this regard at European level, being governed by the legislative framework transposed from the BRRD (Bank Recovery and Resolution Directive) and by the operational protocols that translate into practice the obligations of cooperation and exchange of information.

This collaboration is not a formal element or procedural compliance, but a functional condition for the effectiveness of all these functions.

The fact that the National Bank of Romania exercises, by virtue of the national and European legal framework, all these functions – microprudential supervision, macroprudential policy, and resolution authority – creates the premises for an integrated and coherent approach, capable of adequately managing the interaction between the specific objectives of each function.

For example, all three relevant departments of the NBR with responsibilities over the prudential framework for maintaining the robustness of the financial system take part in the meetings of the National Macroprudential Supervision Committee.

This institutional concentration also requires rigorous internal discipline: functions must remain operationally distinct, with clearly delimited information, decision-making processes and accountability structures, in order to avoid potential conflicts of objectives.

I would like to recall here an extremely important element: following the global financial crisis of 2008-2009, Romania was among the few states in the European Union that did not resort to public money to save credit institutions. This performance was achieved by only 5 other states.

In my view, in Romania, activities in the area of ​​bank resolution are of strategic importance for the preparation of accession to the Banking Union and convergence towards the Eurozone.

Although Romania is currently not a member of the Banking Union, the bank resolution function of the National Bank of Romania cannot be considered an activity isolated from the European dimension. On the contrary, it must be understood and exercised in close connection with the long-term strategic objective of Romania’s accession to the Eurozone and, as a necessary preliminary step, of participation in the Banking Union.

The adoption of the single currency also implies, at the current stage of the European architecture, accession to the Banking Union. This means that the degree of preparation of national authorities – as well as that of credit institutions – for functioning within the Banking Union becomes an implicit and substantive criterion of convergence towards the Eurozone.

From this perspective, the continuous strengthening of the resolution capacity of the National Bank of Romania takes on a significance that goes beyond risk management in the immediate horizon. The development and updating of resolution plans for credit institutions operating in Romania, the assessment of the resolvability, respectively the credibility and feasibility of the measures included in the resolution plans, the calibration of MREL requirements, and the building of the institutional expertise necessary to operate within the framework of European mechanisms represent, indeed, crisis prevention tools, but also investments in the institutional capacity necessary for full integration into the European financial architecture. Equally, the active participation of the NBR in resolution colleges and in European cooperation structures, the permanent working relationship with the Single Resolution Board in the context of joint decisions for banking groups with a presence in Romania, as well as the use of the SRB (Single Resolution Board) standards and methodologies as good practices contribute to our institutional strengthening in relation to the Banking Union framework. This requires constant efforts to align practices, investments in analytical capacity and human resources, and a clear institutional vision on the direction of convergence. As we know and often discuss among ourselves, the strategic objective of joining the euro area involves not only meeting the nominal convergence criteria, which we are unfortunately still far from, but also building in the meantime financial supervision and risk management infrastructures that are fully compatible and credible within the Banking Union. The resolution function is an integral part of this infrastructure.

The National Bank of Romania, through the Bank Resolution Directorate, continued both the resolution planning and operationalization efforts, as well as the strengthening of collaborative relations with resolution authorities from other Member States, as well as with European institutions and forums with responsibilities in the field, in order to ensure a unified and harmonized implementation of the regulatory framework.

In addition, the current year marks the beginning of a new stage in this journey – that of validating through testing the institutional capacities consolidated in the previous period. This new perspective represents a normal evolution and crystallizes a well-founded objective of the European resolution authorities, that of ensuring that banks can be resolvable not only in theory, but also in practice.

To this end, in Romania, as in other EU Member States, multi-annual testing programs have been developed for those banks for which the resolution strategy identified in the plan is resolution, an approach aimed at ensuring a coherent, gradual, and rigorous approach to the process of verifying the resolution capacities developed to date.

One of the essential dimensions of bank resolution is funding, where the first line of defense is the resources for loss absorption and recapitalization, or as it is known – MREL (Minimum Requirement for Own Funds and Eligible Liabilities).

Ensuring and maintaining an appropriate level of these resources by credit institutions are central objectives of the resolution authority. The Romanian banking sector has also reached a stage of maturity in terms of issuing and managing MREL resources. Also, during this period, the activity of requesting permissions for the reduction or replacement of eligible instruments (the so-called permission regime) has intensified.

Within the resolution financing mechanism, MREL resources are complemented by the Bank Resolution Fund, which aims to ensure an additional level of financial support where the credit institution’s resources would prove insufficient in a resolution case (of course, within the limits set by the legal framework). The Resolution Fund resources in Romania have reached the target level of at least 1% of covered deposits at the banking sector level, which is why banks have already been informed that, in the current year, the NBR will not collect contributions to the Resolution Fund.

The resolution authority and the supervisory authority, although, according to the legal provisions, are operationally independent, do not act in isolation from each other.

The structures that perform the resolution and supervisory functions in the NBR consult each other on a permanent basis in their activity, in line with the specific mandates, on topics that include: resolution planning for credit institutions in the area of ​​responsibility of the NBR, determining the MREL requirements and, more recently, for granting permissions to credit institutions to reduce or replace eligible liabilities.

An important element of the cooperation between the supervisory and resolution structures was the participation in the resolution simulation exercise recently organized by the Financial Stability Institute, in which the European Central Bank SSM (Single Supervisory Mechanism), the European Commission, the Single Resolution Board, the Austrian National Bank, the Austrian Financial Market Authority, the Hungarian National Bank, and the Authorities of Bosnia and Herzegovina participated. The exercise aimed at the resolution of a fictitious credit institution from a Banking Union Member State with significant subsidiaries in two non-Banking Union Member States and in a country outside the European Union.

For Romania, fortunately, success in the field of banking resolution is not counted in the number of crises managed through the resolution mechanism, but especially in those that did not occur. This type of success – difficult to perceive by its nature, but all the more valuable – is the result of a joint effort and a shared responsibility between the institutions of the banking sector and the authorities with a regulatory, supervisory, resolution, or macroprudential role.

In an economic and financial environment characterized by rapid transformations and persistent uncertainties, the continuous strengthening of the capacity for prevention, intervention, and institutional coordination remains essential for maintaining confidence in the financial system and building its long-term resilience.