Last week I wrote about cost and competition. This was partially a reaction to an article in Ziarul Financiar by a professor at the Academy of Economic Studies (ASE) in Bucharest. Not a week later I found an article in ZF by another prof.univ.dr. at ASE, Eduard Dinu.
New Year Wishes
This professor explains how last year he wished for “a functional market economy, based on real competition and not just a formal one” and concludes that, a year later, this has not been realized. You can find the article here. I don’t want to make this a series, but simply couldn’t resist the temptation to comment on some of the statements this professor makes. I do this for two reasons, first – him being a professor at – of all places – ASE and second- the fact that the article was published in Ziarul Financiar. Both impose, in my view, minimum standards in terms of quality that in my opinion have not been met.
Interest margins
To illustrate the lack of competition in the financial system the professor used the “method” of populist politicians. He takes the – variable – interest of a minor player for a certain type of loan and the – fixed – interest for a one year deposit. And concludes that “the spread is almost 8 TIMES!!!” Besides the fact that interest spreads are as a rule expressed as a percentage, this is not very scientific. He fails to explain, if there is no competition, why this bank (or the system as a whole) doesn’t make a profit. In reality it is very easy to calculate the interest margin for a bank or the banking system. A student can do it in a few minutes. Interest bearing assets and interest bearing liabilities as well as interest income and interest expense can easily be found in annual reports and other sources that are at the disposal of a professor at ASE. A simple calculation et voila, the interest margin for the Romanian banking system. Apparently this was too much work, or the outcome was not to the liking of the professor.
A tip for the professor, look for a bank with a product that offers zero interest for credit balances, your “spread” becomes infinite.
Stop Export Of Profits
Another interesting point is his “dream to stop or at least limit the export of profit realized by multinationals in Romania to their parent companies“. I would have thought that the freedom of repatriating profits is a fundamental part of a functional market economy, exactly the professor’s wish but he sees things apparently differently. What does he dream about? Should Romania leave the EU, or is he dreaming about changing the Acquis Communautaire of the EU. Surely the ASE university professor knows that repatriation of profit is unlimited within the EU and outside the EU often covered by bilateral treaties.
Why should an investor who made a profitable investment not be allowed to take the profit, over which he paid taxes, out of the country. People invest their money in order to make a profit, if they cannot use the profit as they deem fit, why invest? What foreign investor would invest in Romania or any other country if they were not allowed to take out their profit, professor ? Nobody! Is that in the interest of the country?
A Loan Is Not Repatriation
More delicate is that the example given by our ASE professor doesn’t even seem to be about profit repatriation. He talks about a loan of 25 million EUR that the subsidiary of a Romanian company has given to it parent in France at preferential rates. How can a loan be repatriation? I am sure there are students at ASE that can explain the difference. It is absolutely normal for multinational companies to have a centralized treasury and centralized cash management.
Preferential Pricing ?
It becomes really embarrassing when the professor expresses his opinion that this 25 million EURO loan by the Romanian subsidiary is given to the French parent at “costuri absolut preferentiale” (no translation needed). He mentions a cost of ROBOR minus 0,15% for a 25 million EURO loan. ROBOR over that last year being about 5,5 % this leads to an interest rate of 5,35% ! If this can be called preferential, it is so for the Romanian subsidiary and not for the French parent! The local shareholders should be happy because the company would not get the same rate from a Romanian bank. Maybe the professor doesn’t understand the difference between ROBOR and EURIBOR ?
Please……!
Is it really too much to ask to maintain some minimum standards when writing for the leading financial newspaper in Romania? This should be the platform for real discussion and debate. Based on facts, please. Don’t insult the intelligence of your readers. If I set my standards too high, let me know.
P.S.
In the meantime I saw that Misu Negritoiu, CEO of ING and former professor at ASE himself, also reacted on the same article. Recommended reading here.
{ 9 comments… read them below or add one }
It’s already a while since Ziarul Financiar hosts a plethora of opinion, articles which have transformed it in a bastion of leftism and a financial tabloid. What is even worse is that they are a de facto monopol of daily business news. What is terribly worse is that businesses hurt by their excesses actually support it (advertising, conferences).
Mr. Van Groningen, I think we should not be too harsh.
You are right, investment is about making money (and repatriating them), we should not be naive. As a whole, you are right to calculate the interest margin. You are right about loan/repatriation issue and the ‘preferential pricing’.
But, if we uncover it, we see that the main idea of the ZF article is:
The banks’ costs are transferred to the final client. Obviously true.
Some banks have high costs. Maybe true, but as a new client, you can choose which bank you like.
The real problem comes with the existing loans (I would not discuss OUG50 :) ) and the fact that some banks can transfer these costs to existing clients (since the margin is not fixed) or increase other costs. Because… : if there are some ‘aggressive’ banks in terms of new offerings, the others, in order to stay competitive, will have to lower the rates (for new loans), but the real costs should go somewhere…
Edi (not the professor :-) )
Edi, you are right about cost being high in Romania. Banks pass costs on, they are an intermediary and want to make a reasonable profit as result of their activity. If cost of doing business increase in Romania increases, so will to cost of banking services, maybe not immediately but over time. If costs go down, banking services will become cheaper. At the moment the banking system is at a loss, so there is not a lot of room to make banking services cheaper until the cost come down first. Of course there are different types of costs, some are more likely to be passed on than others. I wrote about this here.
Who covers the cost of training unskilled employees in the banking industry ? I came back into the country couple months ago and I am thrilled to see that corruption penetrated the banking industry so fast.
You cannot get a job in a bank If You have no connections and no money to pay up.Do You know how much is that cost in your bank?
,…too much to tell here.
For years I have been hearing stories about this but we have never succeeded in finding a real case in which this happened in our bank. I also heard from my own staff that they are being asked how they got their job. When they tell that they applied for the job, were interviewed and hired they are not always believed. It seems to be a myth that you need to know people or have to pay in order to get a job. There may be incidents but I don’t believe it is a practice. Rejection is not pleasant and maybe some people prefer to believe that these factors played a role. If you know of any case at our bank I would love to hear about it.
If You agree with me that a branch manager is hired based on his/her banking experience, we are on the same page. I would not hire an egineer who worked in public administration and leave out a guy with a degree in economics and couple years in banking.Am I right ?
I know how these kind of people in the bank can make me loose money.There are many wistleblowers in the bank that are afraid to talk (They are not protected, if You know what I mean.) They know many cases.
Aren’t hneosty and transparency two different concepts? Someone can be honest without being transparent (e.g., answering only questions that someone asks).Transparency in this situation might sound like this: “We need to implement new fees because recent financial reforms have impaired our income.”While being honest might sound like this: “No free rides anymore. We will be charging customers fees appropriate to their level of activity.”
Great article, and I love the pinch of sarcasm! You’re not saying it bluntly, but between the lines we can read that this so called ASE professor is a bloody moron (so he is, and I agree)
But what frightens me more, is that there are probably tens of more professors at ASE who are “stuck in the past” or “have no clue what they’re talking about”, but at the same time teaching these students who will become bankers in the future….
Talking about bankers (on any level), I would love to see you write about your opinion about why in Romania customer care and commons sense thinking is so much behind compared to other countries – regarding the banking sector- . I know you are bound by NBR regulations, but it seems change is slow in Romania
And perhaps you can shed some light on the fact on how you think banks (including Raiffeisen) can, legally – and from a compliance point of view-, reduce the ridiculous amount of paperwork involved with applying for or signing up for ANY banking product..
I am sincerely wondering which banker in Romania will step up to make a change. I am aware you are an Apple fan, and I wish you would act a bit more like the “Steve Jobs of banking” and really make it all a easier so it will “all just work” (as opposed to the current situation in Romanian banking).
Thanks for the comment Pete. Indeed this would be an interesting topic to write about. After a 10 year struggle we are now finally getting rid of the rubber stamps and more is planned. Ihope it will not take another 10 years. I can imagine an “Apple” bank but the world if full of people that explain why this is not possible. I haven’t given up though…