Comment: What comes cheap is actually very expensive for the Romanian banking system

When I recently read that 4,000 people from the Romanian banking system had been laid off, more than 820 branches closed and the average salary in the industry decreased from RON 4,000 to RON 3,400, I remembered something that my mother used to tell me “What comes cheap is really very expensive.” I believe this saying reflects very well what is happening in the Romanian banking system. The devastating effects of the international crisis was the reason cited for the cost cutting measures in the banking system. We all know by now how real the crisis is and feel it ourselves but, at the same time, it is clear that the crisis started in the very heart of the banking system as a result of far exceeding any good sense and limits. Or to put it differently, the crisis is one result of excessive greed put into practice. To understand what is happening now in the banking system, it is necessary to go beyond the emotional face of this international affair and be aware of the need of a cold and rational view based on facts, figures and particularities. According to my own experience – almost my entire professional life was spent in the banking system - I can say that cost cutting policies, in spite of a few good results they often have, also bring many adverse effects, especially here in Romania. The reasons can be found by looking at a few particulars of the banking system in Romania. The banking system in Romania wasn't filled with those toxic financial instruments which mostly led to the financial crisis. The banks in Romania were only partially contaminated by the situation on the international markets, and this was only due the activities of their parents banks from abroad. For instance, a one well known example, but not unique, is about the exposure of the Erste Bank Group to the Icelandic banking system which put pressure on the local Banca Comerciala Romana (BCR)'s financial situation and which had effects on the entire Romanian market, as BCR is the largest lender in the country. With more than 80 percent of the Romanian banking system in the hands of foreign financial groups or branches of European banks, and with all these inside the international banking circle, it is easy to conclude that the banks in Romania did not have a direct and active contribution to the financial crisis. But rather that it duly paid the costs of the financial globalization. Of course this should not be an excuse for the current situation, which is more complicated and has much more causes, but it is a finding which, in my opinion should be taken into account. Why almost the entire banking system in Romania was privatized and whether this was a smart move by the Romanian state is certainly another topic for debate, but at least one remark is needed: the Romanian banking system, before the large process of privatization and the penetration of the foreign banks, wasn't too productive, nor too professional. The next question is: is it productive and professional now? This remains an interesting topic. Another particularity of the Romanian banking system stems from the state ownership before privatization and from the predominant weight of the corporate banking transactions and operations. When foreign banks came and developed the retail activity, the Romanian banking system wasn’t prepared. The head office policies between 2000 and 2009, together with the so called “economic boom” - which turned out to be just an illusion- led to Romanian banks employing many people and training them only in the narrow field of the retail. In those days, beyond the increasing of the number of employees, the salaries, the bonuses, the training expenses, in one word the personnel costs, went up too much and especially too rapidly compared to the concrete financial results. Between 2000 and 2008 many changes occurred at a management level in the Romanian banking system, and in many cases without a serious and professional analysis. Later on, when the crisis was rolling across the world and finally affected Romanian banks, the system found itself in a delicate situation. It had unbalanced portfolios, large exposure and a high number of employees and managers mostly with very poor knowledge and experience, but with big salaries and bonuses. When the effects of the international financial crisis became more difficult for the banking system to handle and the effects were doubled by the inappropriate economic and fiscal policies, the Romanian banking system found itself on the brink of the abyss. The only solution came from the National Bank of Romania's wise policy and the “anchor” provided by the international financial and the EU institutions. This is how relative financial stability was achieved, but these measures and these institutions should not support the unprofitable bank structures. Looking at only the few things mentioned above provides the basic information that paints at least a partial view of what has been happening in Romania's banking system. So in this context, the banks applied the personnel cut cost policies as an almost unique, miraculous solution to survive. Remember my mother's expressions, that what comes cheap is actually expensive? In my opinion, even if the cost cutting policies are needed, they had unexpected results, and were more expensive than initially estimated. Some of their results were: