The cumulative size of the assets of Romania’s three non-bank financial markets (insurance market, private pension market and capital market) doubled from 2014 to the end of 2021, reveals the latest report on the stability of non-bank financial markets, prepared by the Financial Supervisory Authority (ASF).
Reported to the Gross Domestic Product (GDP), the assets of the system represented 14.1%, the highest level so far, which certifies the recovery after the health crisis generated by the COVID-19 pandemic. However, the outbreak of war in Ukraine earlier this year led to the emergence of a new period of high volatility. The seven major risks considered by ASF remain high, four of which are higher than those of the previous period. “All of these factors keep several risks elevated, as further shocks could lead to heightened tensions and significant corrections in international and local financial markets:
Macroeconomic risk – Given that the new sources of risk posed by the crisis caused by the armed conflict between Russia and Ukraine are expected to affect the global economy and the prospects for recovery and consolidation of state economies in 2022, generating a slowdown in the economic growth and a rapid increase in inflation.
Market risk – likely to increase amid continued decoupling of assets from economic fundamentals amid growing contagion and deteriorating macroeconomic outlook, with high uncertainty in the current crisis and declining consumer and investor confidence, determine the erosion of asset prices.
Operational risk – with a growing trend, in the context of escalating large-scale cyberattacks, in the context of the military conflict between Russia and Ukraine, “the ASF In the same vulnerable macroeconomic context, the trend and the probability of the materialization of the credit risk have been assessed on the increase, the level remaining medium to high. The other risks remain in this category: liquidity risk, the trend and probability of which is increasing, solvency risk and profitability risk. Regarding the particularities of each of the three non-banking financial markets, it should be noted that the capital market managed to recover strongly after the COVID-19 crisis and, subsequently, to a relative stabilization after the shock of the war. in Ukraine.
At the April 2022 level, volatility indicators have returned to the level before the outbreak of the war in Ukraine, but the risks remain elevated. The private pension market grew in 2021, but declined in terms of returns in the first half of 2022, and managers will change their investment strategy, given the current inflationary environment and the decline in value at which government securities are traded. in the secondary market. The high degree of concentration in the insurance market continues to be a vulnerability both in terms of exposure by insurance classes and in terms of the large market shares held by a relatively small number of insurance companies. .
A possible source of stability for the three non-banking financial markets is the concentration in the field of green finance, a segment that is in the spotlight both within the PNRR and at the European level in general. “Given the European and local efforts to encourage green finance, in view of the transition towards a truly sustainable economy, the ASF has examined the opportunity to relax the prudential requirements for green finance.
Currently, there are no legislative or prudential investment restrictions on green finance applicable to institutional investors supervised and regulated by the ASF. Thus, investment funds, private pension funds and insurance companies can contribute to the development of the green economy by investing part of their portfolios in green financial instruments. In this context, the legal investment framework has proven to be very flexible, for each category of institutional investors, which allows an efficient and diversified allocation of the portfolio across several asset classes, depending on the investment policy. individual investment of each investor. , making it possible to encourage and support the development of the green economy, through specific mechanisms of the non-banking financial market”, notes the quoted report.
Full report here