Bancorex was the largest bank in Romania during the 1990s, accounting for more than a fourth of the banking market share when it was closed down in 1999.Sherif, p.87 The bank failed due to

non-performing loan A non-performing loan (NPL) is a bank loan that is subject to late repayment or is unlikely to be repaid by the borrower in full. Non-performing loans represent a major challenge for the banking sector, as they reduce profitability. They are ofte ...

s that were related to political corruption, especially behind-the-scenes political dealings. The bank was bailed out by the Romanian state, its good assets being then merged with the more solvent

Banca Comercială Română Banca Comercială Română (BCR) is a Romanian universal bank A universal bank is a type of bank which participates in many kinds of banking activities and is both a commercial bank and an investment bank as well as providing other fina ...

. It was founded as the ''Banca Română de Comerț Exterior'' ("Romanian Bank for Foreign Trade") in 1968 and for decades it was the bank through which much of Romania's foreign trade was conducted.

Bailout and merger

Toward the end of 1997, Bancorex received a sum of $600 million from the government, representing 2% of Romania's GDP. The

recapitalization Recapitalization is a type of corporate reorganization involving substantial change in a company's capital structure. Recapitalization may be motivated by a number of reasons. Usually, the large part of equity is replaced with debt or vice versa. ...

was followed by a management change in April 1998, but by not restructuring, the situation of the bank further deteriorated. It was only in late 1998, when a crisis hit Bancorex again, that the government considered restructuring the bank, eyeing a

privatization Privatization (rendered privatisation in British English) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation w ...

procedure. By 1999, it became clear that a recapitalization of the bank would require $2 billion (almost 6% of Romania's GDP), which couldn't have been afforded by the government. A February 1999 estimate said that $1.7 billion (or 85-90% of its loan portfolio), much of it in foreign currency, was non-performing. This sum represented 5% of Romania's GDP at the time. In April 1999, Bancorex collapsed as depositors lined up to get their savings out of the bank.Sherif, p.88 In order to prevent further

bank run A bank run or run on the bank occurs when many Client (business), clients withdraw their money from a bank, because they believe Bank failure, the bank may fail in the near future. In other words, it is when, in a fractional-reserve banking sys ...

s, the Romanian authorities decided upon a fast

liquidation Liquidation is the process in accounting by which a Company (law), company is brought to an end. The assets and property of the business are redistributed. When a firm has been liquidated, it is sometimes referred to as :wikt:wind up#Noun, w ...

, transferring bad assets to a newly created Asset Recovery Agency, while deposits and most of the structure of Bancorex were absorbed by another state-owned bank, Banca Comercială Română. The banking license was withdrawn on 31 July 1999, effective from 2 August 1999. The Romanian government compensated Banca Comercială Română for the liabilities transferred from Bancorex and it gave the right to refuse any assets of Bancorex.

Cost of the bailout

In 1999, the government took into

public debt A country's gross government debt (also called public debt or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit occu ...

from Bancorex a sum of $1.5 billion, or 4.5% of GDP, in addition to the 1997 recapitalization of $600 million and the assumption of some

off-balance-sheet In accounting, "off-balance-sheet" (OBS), or incognito leverage, usually describes an asset, debt, or financing activity not on the company's balance sheet. Total return swaps are an example of an off-balance-sheet item. Some companies may have ...

items and

legal liabilities In law, liable means "responsible or answerable in law; legally obligated". Legal liability concerns both civil law and criminal law and can arise from various areas of law, such as contracts, torts, taxes, or fines given by government agencie ...

that have not been disclosed in order to protect the politicians that approved non-performing loans. .

Notes

References

* Khaled Sherif, Michael S. Borish, Alexandra Gross, ''State-owned Banks in the Transition: Origins, Evolution, and Policy Responses'', World Bank Publications, 2003, {{coord, 44.432751, N, 26.096164, E, display=title Defunct banks of Romania Bank failures Banks established in 1968 Banks disestablished in 1999 History of Romania (1989–present) 1968 establishments in Romania Corruption in Romania Companies based in Bucharest