Romania: Institutional Strengthening and Financial Safety Net Resilience Project

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FGBD was created in August 1996, with the mission of insuring deposits held exclusively by individuals up to the amount of RON 1,000 (then equivalent to roughly USD 239). Over time, and especially after Romania joined the EU, coverage was extended in line with the applicable EU directives, and since December 2010 it is equivalent to EUR 100,000 and benefits not only individuals but also legal entities. There have been substantial improvements in terms of payout time, which came down from 90 to 7 days.Romania has transposed the EU Directive 2014/49/EU, on deposit guarantee schemes, by enacting Law nr. 311/2015 on Deposit Guarantee Schemes and the Bank Deposit Guarantee Fund, which is the current legal diploma regulating FGDB. The law extended FGDB’s mission to include not only paying out depositors, but also (i) managing Romania’s resolution fund, (ii) functioning as temporary administrator for failing institutions, (iii) functioning as special administrator for institutions undergoing resolution, (iv) owning bridge-banks and asset management vehicles incorporated within resolution procedures, (v) functioning as administrative liquidator for failed financial institutions. The law also determines, in line with the EU Directive, that FGDB can be required, by NBR, to contribute from deposit insurance fund to the resolution of financial institutions with an amount equivalent up to 0.4% of the covered deposits. However, there is a need for making provisions for credible and timely funding lines available to FGDB. In case of multiple bank failures, FGDB’s assets may be depleted and the fund may be unable to comply with its obligations thus impacting overall confidence in the financial sector.In this context the FGDB expressed interest in a WB contingent financing instrument for the deposit insurance fund. In a letter to the WB dated December 18th, 2018, the FGDB requested further technical discussions regarding instrument and related operational/procedural workflows. This was followed by a WB identification mission held during March 6-8, 2019 to define the main parameters of the lending product. A pre-appraisal mission was held in August 26-30 2019.Regarding the size of a contingent investment loan, and following best practices, the FGDB calculated its funding needs in the event of the simultaneous failure of 3 large, non-systemically important banks (which would be subject to resolution). In such a case, and after full use of its reserves, the FGDB would need additional financing of around RON 1.2 billion (EUR 250 million). In addition, in the case of resolution of a bank, and according to Romanian law, a request from the NBR (acting as the Resolution Authority) for the FGDB to contribute from deposit insurance fund up to 0.4% of covered deposits, under current conditions would add about another RON 800 million (EUR 170 million) to the funding needs.Considering these two scenarios, the amount of the contingent financing instrument was calculated to EUR 420 million. The FGDB’s preference is to have a contingent facility up to 5 years starting in 2020.