Bancorex

Bancorex was a Romanian state-owned bank specializing in foreign trade and foreign-currency business. It was established in 1968 under the name Banca Română de Comerț Exterior, or Romanian Bank for Foreign Trade, during the period when Romania’s external commercial transactions were conducted through specialized state institutions. For much of the communist era, the bank served as a principal financial channel for Romania’s international trade, including trade-related payments, foreign-exchange transactions, and financing connected with state-controlled import and export activity. After Romania’s transition to a market economy, Bancorex remained one of the country’s most important financial institutions. During the 1990s it became the largest bank in Romania and at one point accounted for more than one-quarter of the domestic banking market. Its scale reflected both its historical role in foreign trade and its continued importance to state enterprises and politically connected borrowers during the transition period. The bank’s position deteriorated as a large volume of loans became non-performing. The problem was associated with weak credit controls, operational shortcomings, foreign-currency exposure, and politically influenced lending decisions. The failure was widely linked to corruption and behind-the-scenes political dealings involving loans that were not adequately secured or repaid. Rather than undertaking a sufficiently early restructuring, the state initially attempted to stabilize the institution through recapitalization. Toward the end of 1997, the Romanian government provided approximately US$600 million to Bancorex, an amount equivalent to about 2 percent of Romania’s gross domestic product at the time. A management change followed in April 1998, but the bank’s underlying structure and loan portfolio were not adequately reformed. By late 1998, renewed pressure made a restructuring and possible privatization process more urgent. A February 1999 assessment estimated that approximately US$1.7 billion, or 85–90 percent of the loan portfolio, was non-performing; much of the exposure was denominated in foreign currency. In April 1999, concerns about the bank’s solvency triggered a depositor run. To contain the wider banking risk, Romanian authorities chose a rapid resolution rather than allowing the institution to continue operating independently. Bancorex’s bad assets were transferred to a newly created asset-recovery agency, while its deposits and most of its operating structure were transferred to the state-owned Banca Comercială Română. The government compensated Banca Comercială Română for liabilities it assumed and gave it the right to reject certain Bancorex assets. Bancorex’s banking license was withdrawn on 31 July 1999, with the withdrawal taking effect on 2 August 1999. The resolution imposed a substantial fiscal burden. In 1999 the government transferred approximately US$1.5 billion of Bancorex obligations into public debt, in addition to the earlier US$600 million recapitalization and further off-balance-sheet items and legal liabilities whose full details were not publicly disclosed. Bancorex therefore became a major example of the costs of state-directed lending, weak bank governance, and politically connected non-performing loans during Romania’s post-communist transition. The brand ceased to operate as an independent bank after its assets, deposits, and business infrastructure were reorganized or transferred.

Bancorex originated in 1968 as Banca Română de Comerț Exterior, the Romanian Bank for Foreign Trade. Its creation reflected the organization of Romania’s economy around state-owned enterprises and centrally managed international commerce. The institution acted as a specialized channel for much of the country’s foreign trade, handling international payments, foreign-exchange operations, and financing associated with imports and exports. Its role made it strategically important to the Romanian state and gave it a substantial institutional base when the country began its transition away from communism. During the 1990s, Bancorex expanded its significance beyond its original specialist function. It became Romania’s largest bank and held more than one-quarter of the national banking market when it was eventually closed. The bank continued to serve state enterprises and businesses involved in international commerce, while also extending credit in an environment marked by rapid economic change, weak supervision, incomplete corporate restructuring, and significant political influence over state institutions. The central problem was the accumulation of non-performing loans. The bank’s lending weaknesses included inadequate risk management, poor recovery practices, foreign-currency exposure, and lending decisions associated with political connections. The failure was not simply the result of a short-term liquidity shock: the institution carried a deeply impaired loan book, and the authorities struggled to impose a credible restructuring plan. The political sensitivity of the problem was heightened by allegations that some loans had been approved through informal political dealings and that disclosure of certain liabilities could expose influential decision-makers. In late 1997, the state injected approximately US$600 million into Bancorex. The amount was exceptionally large relative to Romania’s economy, but the recapitalization did not produce a durable turnaround. Management changed in April 1998, yet the bank was not comprehensively restructured. Renewed difficulties at the end of 1998 prompted consideration of a more fundamental restructuring and a possible privatization process. A February 1999 assessment estimated that roughly US$1.7 billion of Bancorex’s loans were non-performing, equivalent to approximately 85–90 percent of the loan portfolio. Much of the exposure was denominated in foreign currency, adding to the difficulty of recovery and increasing the sensitivity of the bank to Romania’s macroeconomic and exchange-rate conditions. The scale of the losses made another rescue increasingly difficult for the government to finance. The crisis became public in April 1999 when depositors rushed to withdraw funds. To prevent the failure from spreading through the banking system, the authorities selected a rapid resolution. Bad assets were moved to a newly established asset-recovery agency, while deposits and most of the bank’s operating structure were absorbed by Banca Comercială Română, another state-owned bank. The government compensated the acquiring institution for transferred liabilities and allowed it to reject certain assets associated with Bancorex. The banking license was withdrawn on 31 July 1999, effective 2 August 1999. In fiscal terms, the resolution was costly. The state transferred around US$1.5 billion of Bancorex obligations into public debt in 1999, on top of the 1997 recapitalization and additional liabilities and off-balance-sheet exposures that were not fully disclosed. Bancorex’s end therefore combined the failure of a formerly strategic foreign-trade institution with a major public-sector clean-up operation. Its good assets and operating infrastructure were folded into Banca Comercială Română, while its bad assets became the responsibility of state recovery mechanisms.

• 1999

  Loan portfolio crisis becomes unsustainable

  [1]Bancorexen.wikipedia.org

  A February estimate places non-performing loans at approximately US$1.7 billion, or 85–90 percent of the bank’s loan portfolio.

• 1999

  Assets and deposits transferred to Banca Comercială Română

  [1]Bancorexen.wikipedia.org

  Following a depositor run, bad assets are assigned to an asset-recovery agency and deposits and most operating activities are transferred to Banca Comercială Română.

• 1999

  Banking license withdrawn

  [1]Bancorexen.wikipedia.org

  Bancorex’s license is withdrawn on 31 July, effective 2 August, ending the bank’s independent operations.

• 1998

  Management change and renewed restructuring pressure

  [1]Bancorexen.wikipedia.org

  Management changes in April, but the bank is not comprehensively restructured. By the end of the year, the authorities are considering restructuring and possible privatization.

• 1997

  State recapitalization

  [1]Bancorexen.wikipedia.org

  The Romanian government injects approximately US$600 million into Bancorex as the bank’s credit problems become more serious.

• 1968

  Banca Română de Comerț Exterior is established

  [1]Bancorexen.wikipedia.org

  Romania establishes the Banca Română de Comerț Exterior as a specialized state bank for foreign trade and international financial transactions.

Romania’s principal state-linked foreign-trade and international banking institution during the communist period and a major commercial bank during the 1990s transition.

• Trade finance · 1968

  Foreign-trade financing

  Bancorex’s original and defining function was to finance and support Romania’s external commerce. It provided banking services associated with import and export transactions and served as a principal financial intermediary for state-controlled foreign trade.

• Banking services · 1968

  Foreign-exchange and international payments

  The bank handled foreign-currency transactions and international payment flows connected with Romanian trade. Its foreign-exchange role remained important after the country’s economic transition, when foreign-currency lending and settlement became significant sources of both business activity and risk.

• Corporate banking

  Commercial and foreign-currency lending

  During the 1990s, Bancorex operated as a broad commercial bank in addition to its foreign-trade specialization. Its lending to enterprises and other borrowers generated a large portfolio, much of which later became non-performing. Foreign-currency exposure was a particularly important feature of the troubled loan book.

• 1999

  Politically connected non-performing loans

  Bancorex failed after accumulating a very large volume of non-performing loans. Public accounts associated many of the losses with political corruption and informal political dealings, making the bank’s collapse a major governance scandal and a symbol of the weaknesses of Romania’s transition-era state banking system.

  Source

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• 1999

  Rapid liquidation and transfer of operationsStrategy

  Background

  A depositor run followed estimates that most of Bancorex’s loan portfolio was non-performing, making another full recapitalization financially difficult for the state.

  Action taken

  Authorities withdrew the banking license, transferred bad assets to an asset-recovery agency, and moved deposits and most of the operating structure to Banca Comercială Română.

  Aftermath

  Bancorex ceased to exist as an independent bank, while the state assumed a substantial fiscal burden and Banca Comercială Română became the principal successor for the transferred business.

  Bancorex obligations transferred into public debt. Approximately US$1.5 billion, excluding the earlier recapitalization and certain additional liabilities (1999)

  Source

• 1999

  Absorption by Banca Comercială RomânăM&A

  Background

  The Romanian authorities sought to protect depositors and limit wider banking-system disruption after Bancorex became insolvent.

  Action taken

  Banca Comercială Română absorbed Bancorex’s deposits and most of its structure and operating activities, while bad assets were separated for recovery.

  Aftermath

  The transaction effectively ended the Bancorex brand and consolidated selected assets and banking operations within Banca Comercială Română.

  Source

• 1997

  Government recapitalizationOther

  Background

  Bancorex was experiencing mounting loan losses and operational difficulties while remaining systemically important as Romania’s largest bank.

  Action taken

  The Romanian government injected approximately US$600 million into the bank.

  Aftermath

  The recapitalization did not resolve the structural weaknesses in the loan portfolio or produce a lasting recovery.

  Government recapitalization. Approximately US$600 million injected (Late 1997)

  Source

1. 1Bancorexen.wikipedia.org
2. 2State-Owned Banks in the Transition: Origins, Evolution, and Policy Responsesdocuments.worldbank.org