Evolution of the Main Banking Sector Risks in Romania in the Last Decade

The evolution of financial sector stability risks is a major cause of concern for central banks in democratic countries, the macroprudential approach being a top priority nowadays, amid efforts to overcome the current global financial crisis.The systemic risk management approach has a major impact on economic growth. It refers to financial, economic and social cycles as well. The analysis that reveals this evolution is based on the correlations between risk indicators and economic indicators. It is worth mentioning that the banking sector is the largest part of the financial system in Romania, while the equity stock market is relatively small. In this context, the paper presents the correlations between the main banking sector risk indicators, namely the solvency indicator, leverage and total risks, and key and derived economic and financial indicators. In addition, this paper presents a stress test that predicts the impact of macroeconomic shocks on financial soundness indicators, such as the domestic credit and its main components – governmental and, respectively, non-governmental credit – each of them having a different impact on economic growth. The stress test is based on an econometric model, i.e. the historical scenario. Finally, conclusions are drawn, emphasizing the essential role of prudential regulation, which diminished before the financial crisis that emerged in the United States in 2007. As a result, toxic financial assets could no longer be kept off markets, leading to the destabilization of the financial system and of economy of democratic countries.