Leonardo Badea (BNR): Financial Intermediation – Between Reality and Potential

In this article, I intend to revisit the topic of financial intermediation and its growth prospects, since I consider it essential for Romania’s sustainable economic development.

Financial intermediation is not just a matter of accounting reports or system indicators. It fundamentally expresses:

• the trust-based connection between the real economy and the financial system;
• the trust of the population and entrepreneurs in the fair, transparent, and consistent application of economic rules, with a focus on the general interest;
• the confidence of banks that they can take calculated risks within a predictable framework;
• and, just as importantly, the confidence of policymakers that market mechanisms can support progress and development, without jeopardizing fundamental balances.

Therefore, the level of financial intermediation says a lot about the health of the connection between the economy and financing. About how efficiently we manage to transform savings into investments. About how well we connect available capital with initiative, with need, with the idea of progress. And, last but not least, about the development potential we set in motion when financing reaches where it is truly needed.

The most recent data reinforce an already well-known diagnosis: Romania is significantly below the European average in terms of financial intermediation.

However, the banking sector in our country is going through a good period, with several fundamental indicators in the lowest risk band, according to the European Banking Authority’s classification, including the Tier 1 capital ratio, liquidity coverage ratio, and profitability indicators. However, in the third quarter of 2024, the assets of the banking sector accounted for only 49.8% of GDP. By comparison, in Bulgaria, the figure was 92.7%, in Poland 93%, in Hungary 106.3%, in the Czech Republic 130.81%, while the EU average stands at 214%.

Thus, we rank last among Central and Eastern European economies, at a considerable distance from the rest of the region – at nearly half the score of the next lowest-ranked country.

The numbers speak for themselves. And one of the essential questions arising from this diagnosis is related to why credit demand remains structurally low in Romania.

As straightforward as this question may seem, the answer is just as complex.  Valuable questions and proposals on this matter have already been formulated.

Despite these efforts, the results are still not sufficiently visible, and the issue remains highly relevant across the European Union – and even more so in the case of Romania.

Personally, I do not believe in a one-size-fits-all solution that would allow for uniform growth in financial intermediation at the continental level.

On the contrary, I believe it is essential to identify differentiated solutions, based on an adequate understanding of the global and local causes of this structural problem, and, above all, tailored to each segment of lending and each national economy.

Moreover, any intervention in this area must be carefully calibrated according to the stage of the economic and financial cycle we are in.

If we look from a slightly different perspective, analyzing the level of banking assets in the region, the picture becomes more nuanced. Romania’s banking assets in the third quarter of 2024 totaled approximately 172.7 billion euros, compared to 94 billion in Bulgaria, 218 billion in Hungary, 414.5 billion in the Czech Republic, and 760.3 billion in Poland.

Thus, Bulgaria, with the lowest level of assets in the region, nearly half of Romania’s, still has a financial intermediation degree nearly double that of Romania. These figures confirm the idea that the volume of lending to the real economy by Romania’s banking sector is indeed significantly below the level justified by the current degree of economic development.

However, this conclusion also deserves to be placed in a broader context. In evaluating financial intermediation, we must also consider other relevant elements – and one of the most important is the fact that the share of banks’ exposures to the state, as a percentage of total banking assets in Romania, is the highest in the European Union.

Therefore, we can reformulate the initial observation and say that, compared to other economies in the region, Romania manages to generate significant economic activity but benefits disproportionately from a reduced volume of financing from the domestic banking system.

Starting from this observation, it is important to make an analytical distinction. The volume of loans is a stock variable, while the gross domestic product is a flow variable. This difference in nature affects their sensitivity to economic shocks: GDP reacts more quickly and more strongly to transitory shocks, while the credit balance is mainly influenced by structural or cyclical factors, with delayed effects.

In the medium term, Romania’s economic growth rate has placed us among the most performant economies in the region. This development has boosted GDP dynamics and, implicitly, affected the degree of intermediation through an accelerated change in the denominator. Even though substantial increases in the volume of new loans granted were recorded simultaneously, they were not enough for the total credit stock – and, by extension, banking assets — to keep up with the speed of economic growth.

Reduced intermediation is not the result of a single dysfunction, but rather reflects a set of structural, behavioral, and institutional causes that must be understood in all their complexity.

To illustrate more clearly the complex structure of these mechanisms, I would like to focus, in the first stage, on the mortgage credit segment. Romania distinguishes itself in this area through three key characteristics within the European Union context:

1. It has the highest homeownership rate;
2. It registers a significant share of real estate transactions conducted with cash, outside of bank credit;
3. and, although it may seem surprising, our country is among the states with the lowest prices for residential properties.

All these characteristics lead to a lower level of newly issued mortgage credit and, implicitly, a slow advance in financial intermediation. It is clear that, for example, the impact on the total credit balance in the economy of a new mortgage loan for a 100,000 euro home is different compared to home valued at 200,000 euros, as may be the case in countries where real estate market prices are, in general, higher than in Romania. However, this does not mean that we desire such a situation.

On the contrary, I believe it must be clearly stated: these features do not represent vulnerabilities in themselves. They can be interpreted as expressions of relative prosperity — a result of housing policies, social structure, and prudent behavior of the population. However, paradoxically, they limit the volume of mortgage credit. At the same time, they contribute to a form of economic and social balance.

Similarly, in the case of companies, several structural features can be identified that significantly influence the level of banking intermediation in Romania. Three of them are particularly worth mentioning:

1. a consistent dependence on commercial credit as the predominant form of short-term financing;
2. the preference of a significant segment of large companies, especially those with foreign capital, to contract external loans in foreign currency directly from financial institutions abroad;
3. a high number of firms with negative capital – so-called “zombie” companies, which appear to function but have an extremely fragile financial capacity.

At the same time, the prevalence of commercial credit among companies amplifies the contagion risk in the face of adverse shocks, especially given that suppliers of such credit usually do not have the risk absorption capacity that credit institutions possess. I would like to remind that Romania is the country with the highest use of commercial credit in the EU, representing about 20% of total liabilities. In 2023, commercial debts at non-financial companies registered a 7% increase compared to the previous year, reaching 421 billion lei – more than twice the value of bank lending. These have a non-performing rate, calculated as the ratio of overdue debts to suppliers in total commercial liabilities, of 11%, which is significantly higher than the non-performing rate of bank loans.

When large companies prefer external credit in foreign currency, private external indebtedness increases, which can contribute to additional pressures on macroeconomic balances, something that is unjustified given that internal financing resources are consistent and the loan-to-deposit ratio remains below 70%. This results in at least one unexploited opportunity: the opportunity to transform internal savings more efficiently into productive lending. As long as the banking system has adequate and stable liquidity, the preference of some companies for external financing signals competitiveness challenges on the side of the domestic lending offer, rather than real resource constraints.

These characteristics affect not only the volume of banking intermediation but unfortunately also the quality of the relationship between the financial sector and the real economy. With limited access to bank financing, “zombie” companies consume resources – capital and labor – that could be directed toward more productive entities. They perpetuate an inefficient allocation of production factors, limit economic growth potential, maintain fragility and volatility in the labor market and supply during crises. In 2023, the number of undercapitalized companies was 260,000, a 9% increase compared to the previous year, representing 31% of all firms in the economy.

Even in this context, however, not all growth is beneficial – only growth which is based on solid fundamentals, is differentiated, adapted, and accompanied by robust risk assessment mechanisms.

Any plans aimed at increasing financial intermediation must be built carefully – always keeping in mind the need for sustainability, resilience, and robustness of the financial system.

Recent experiences and an economic environment marked by uncertainties and risks highlight the need for progress to be guided by prudence and balance, while the growth of financial intermediation should be approached with thoughtful consideration:

• with careful assessment of premises and risks;
• with guarantees that the expansion of credit does not lead to the accumulation of systemic vulnerabilities in the medium term.

The lesson of the 2008–2009 global financial crisis clearly shows that it is not the volume of credit itself that creates problems, but rather the underestimation of risk and the relaxation of lending standards during periods of exuberance.

This is precisely why any measures to stimulate financial intermediation should be differentiated across credit segments, tailored to national specifics, and calibrated to the phase of the economic cycle. In this way, we can build broader yet still healthy intermediation – serving both economic development and financial stability.

I conclude my remarks by expressing my confidence that the Romanian banking system has the capacity to support a qualitative transformation of the economy, in line with current European requirements. Its assets are of high quality, and its levels of capitalization, liquidity, and profitability place it in a favorable position at European level.

These features allow for a broader focus on lending to non-financial companies, particularly those in strategic sectors, which would contribute to the sustainable expansion of financial intermediation in Romania. Already, over the past year, we have observed a positive trend in lending to key strategic areas such as energy security, food security, digital transition, and the defense industry. In these sectors, the annual growth rate of lending reached 10%, exceeding the overall rate of approximately 6%.

I also consider that the foundations for positive development are already visible. What we need now is a coordinated mobilization of all stakeholders – authorities, banks, companies, universities, and European partners. Through a concerted effort, guided by professionalism, prudence, and a long-term vision, the expansion of financial intermediation can become a key pillar in Romania’s sustainable economic transformation.