Capital Market’s Activities Performed By Banks From Republic Of Moldova

ACADEMY OF ECONOMIC STUDIES OF MOLDOVA

“FINANCE” FACULTY

“INVESTMENTS AND CAPITAL MARKETS” CHAIR

Nicoleta TRUDOV

CAPITAL MARKET’S ACTIVITIES PERFORMED BY BANKS FROM REPUBLIC OF MOLDOVA

Bachelor’s thesis

Specialitatea 364.1 Finanțe și bănci (engl.)

Author:

APPROVED for presentation student FB-13A gr.

Head of Chair: Full-time studies

Univ. Prof., Ph. D.,

Rodica Hîncu Nicoleta TRUDOV

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”__”__________20__ Scientific advisor:

Senior lecturer

Marcelina ROȘCA

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CHIȘINĂU – 2016

Declarația pe propria răspundere

Subsemnatul (a), Trudov Nicoleta absolvent al Facultății Finanțe și Bănci a Academiei de Studii Economice din Moldova, specialitatea Finanțe, declar pe propria răspundere că teza de licență pe tema „Capital markets activities performed by banks from Republic of Moldova” a fost elaborată de mine și nu a mai fost prezentată niciodată la o altă facultate sau instituție de învățământ superior din țară sau din străinătate, iar exemplarul prezentat și înregistrat la catedră corespunde integral cu varianta electronică plasată în sistemul Anti-plagiat.

De asemenea, declar că sursele utilizate în teză, inclusiv cele din Internet, sunt indicate cu respectarea regulilor de evitare a plagiatului:

fragmentele de text sunt reproduse întocmai și sunt scrise în ghilimele, deținând referința precisă a sursei;

redarea/reformularea în cuvinte proprii a textelor altor autori conține referința precisă;

rezumarea ideilor altor autori conține referința precisă a originalului.

Trudov Nicoleta

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Introduction

THEORETICAL BACKGROUND OF BANKS’ ACTIVITIES AND THEIR ROLE IN THE EFFICIENT FUNCTIONING OF CAPITAL MARKET

Theoretical approaches on defining banks activities: concept and role in the economy

For thousands of years, finance is the lifeblood of trade, commerce and industry. Money could not have proved their usefulness and contribution to human progress if banking institution would not have been invented. Nowadays, banking sector acts as the backbone of modern economy. Development of any country mainly depends upon the banking system.

There seems to be no uniformity amongst the economist about the origin of the word ‘Bank’. It has been believed that the word ‘Bank’ has been derived from the old Italian word banca or from a French word banque, both meaning a Bench or money exchange table. This consideration is due to the fact that in the past, european money lenders or money changers used to display coins of different countries in big heaps on benches for the purpose of lending or exchanging.

In India the ancient Hindu scriptures refers to the money-lending activities in vedic period. They performed most of those functions which banks perform in modern times. During Ramayana and Mahabharata eras also banking had become a full-fledged business activity. In other words the development of commercial banking in ancient times was closely associated with the business of money changing.

Although banking in one form or another has been in existence from very early times, modern banking is of recent origin. It is one of the results of the Industrial Revolution and the child of economic necessity. Its presence is very helpful to the economic activity and industrial progress of a country.

A bank can be associated with „a financial service conglomerate able to provide basic financial services and properly function within the economic, political, legal and international environment that determines its profit and expansion opportunities, interest rates, exchange rates and the particular resources a bank needs.”

The efficiency of the banking system is a key determinant of sustainable growth. Thus, banks are essential for any modern economy, not only in terms of turnover, but also as the primary financier of the national economy.

The term ‘Bank’ has been defined in different ways by different economists:

According to Walter Leaf “A bank is a person or corporation which holds itself out to receive from the public, deposits payable on demand by cheque.” Horace White has defined a bank, “as a manufacture of credit and a machine for facilitating exchange.”

According to Prof. David Kinley, “A bank is an establishment which makes to individuals such advances of money as may be required and safely made, and to which individuals entrust money when not required by them for use.”

Thus, we can say that a bank is a financial institution which deals in debts and credits. It accepts deposits, lends money and also creates money. It bridges the gap between the savers and borrowers. In this way, the bank not only makes money from the positive difference of interests, but also creates a mutually advantageous link between lenders and borrowers. Banks are not merely traders in money but also in an important sense manufacturers of money.

Traditionally, the main difference between banks and other financial intermediaries consists in the capacity of banking societies to create new deposits by offering credits, that influences the evolution of broad money through the money multiplier.

Banks can be classified into various types on the basis of their functions, ownership, domicile, status, etc. Of them, the most widely used is in accordance with the basis of functions or activities. Respectively, we have to distinguish between Central banks and Commercial banks.

A central bank functions as the apex controlling institution in the banking and financial system of the country. It functions as the controller of credit, banker’s bank and also enjoys the monopoly of issuing currency on behalf of the government. A central bank is usually controlled and quite often owned, by the government of a country.

In the Republic of Moldova, the role of a central bank is provided by the National Bank of Moldova, that according to Law on the National Bank of Moldova No.548-XIII of July 21, 1995 shall have the following basic tasks:

to establish and implement the state monetary and foreign exchange policy;

to act as banker and fiscal agent of the state;

to conduct economic and monetary analyses and, based on them, to submit proposals to the Government;

to provide credits to banks;

to supervise the payment system of the Republic of Moldova and promote a stable and efficient functioning of the automated inter-bank payment system;

to act as the sole issuer of the national currency;

to establish the exchange rate regime of the national currency;

to hold and manage foreign exchange reserves of the state;

to undertake, in the name of the country, obligations and perform transactions resulting from the participation of the Republic of Moldova in the activity of international public institutions in the banking, credit and monetary areas pursuant to conditions of international agreements;

to elaborate the balance of payments, international investment position and the statistics of the external debt of the Republic of Moldova;

to perform foreign exchange regulation on the territory of the country;

to license, regulate and supervise the activity of providing payment services and the issuance of electronic currency.

On the other hand, commercial banks operate for profit. They accept deposits from the general public and extend loans to the households, the firms and the government. The essential functions of commercial banking are as follows:

the function of deposit’ acceptance, attracting temporarily available resources from business and individual customers;

the investment function, granting loans for those in need of financial support;

the commercial function that enables fund transfer between account holders determined by various activities.

Altogether, banks channel savings into productive capital, facilitate productive use of surpluses to generate employment and promote economic welfare and provide risk-free income to depositors.

The manifestation of these functions, according to the effect they have over the balance sheet, can be grouped into passive and active operations. The passive operations of the commercial bank refer to those operations regarding the constitution of resources, manifested in the following posts:

The bank’s deposits;

Loans from the Central Bank – refer to refinancing loans; banks apply to these operations for 2 reasons:

In order to ensure the necessary liquidity with a view to the exigible debts;

In order to optimize the structure of their bill portfolios.

Loans taken from the monetary and the interbank market;

The bank’s capital.

These are manifested in the assets (the active) of the commercial banks and have the following posts:

Cash + minimum required reserves;

Investments in securities;

Credits;

Corporal immobilizations.

The first and the last posts are generally not profit-generating. Despite this, their constitution is obligatory for at least two reasons:

In order to ensure the neccesary liquidity with a view to the obligations from the passive that have become exigible (the first post);

In order to ensure the well-functioning of the bank.

The other two mentioned posts are important for the profit and, ultimately, for the solidity of the bank.
Out of the total of a bank’s active operations, the loans provided to economic agents have – as a general rule – the greatest weight (just as the deposits represent the most important part of the total of the passives). Thus, loans are the fundamental modality of placement of a bank’s resources. The extraordinary importance of this activity derives from the role that credits play as the fundamental income source of a bank, as well as from the fact that loans represent the main mode of covering the needs and financial difficulties of the economic agents.

As far as the orientation of the placement is concerned – especially as regards the first three posts, the banks have complete freedom of decision. They are nevertheless required to take into account the market conditions. Important in this respect is the fact that banks are confronted with the risk-profit alternative (risk and profit being the essential components of the banking performance). In other words, the bank must both satisfy the liquidity requirements that ensure due payments and to gain the highest possible profits. The banking placements are not homogenous from this point of view, because:

cash placements and the minimum reserves have the highest degree of liquidity – thus, the lowest risk as well as the lowest profit for them;

the investments in the bill portfolio have a medium degree of liquidity and, thus, a medium risk and a medium profit;

the placement in credits has a low degree of liquidity, involves the greatest risk, but ensures the highest profit.

Every bank needs to constantly optimize the mentioned structure of the assets. The diversification of the portfolio must have two major goals: the minimization of the risks and the eventual increase of the profit. At the same time, the diversification of the portfolio must be subordinated to the principle of risk dispersion. Risk dispersion can ultimately lead to the aplatization of the results and to the possibilty of reaching a convenient risk-level. Therefore, the choice of the method of the resource placement and of the credit distribution belongs to each bank, exclusively.
The banking systems of different countries have developed simultaneously, so the main aspects are the same, though they have slight differences. Basically, banks play the same role in the economy, and namely:

Connects surplus and deficit economic agents – mobilize deposits by offering attractive rates of interest, thus converting savings, which otherwise would have remained inert, into active capital, and then, distribute these savings through loans among enterprises which are connected with economic development.

Facilitate the development of savings plans and are instruments of the government’s monetary strategy – allow businesses to invest their cash, households to purchase homes without saving the entire cost in advance, and governments to harmonize their spending by diminishing the cyclical pattern of tax revenues and to invest in infrastructure projects.

Issue debt securities and bills.

Perform transfer operations and render financial services to households and government.

Allow investments, by having a direct contribution to their funding, or through the placement and management of money savings.

Play a main role on the capital market.

To conclude the above mentioned, it is important to highlight the vital role of banks in the socio economic matters of the country. The existence of a banking system assures the mobilization of free resources of the economy and their orientation towards the development of efficient economic activities. As Joseph Stiglitz states, well-functioning financial systems, including banks, enable selecting the most productive recipients for these resources and ensure the use of these resources in high return activities.

Theoretical approaches of Capital Market: concept, segmentation, participants and institutional framework

In the last decades, capital markets have recorded a substantial growth of their impact over the evolution of global economy. Their importance in a good functioning of the market economy’s mechanism is crucial, especially considering that lately, a great part of financial transactions require the existence of a financial market, where people that need credits can meet people that have available funds for lending, and where securities may be sold and bought.

Theorists of financial markets emphasize the fact that these represent a necessary framework for the functioning of market economy, by creating the possibility of owners of capital to use it the most efficient manner. Thus, agents that have a liquidity surplus (such as private investors, insurance companies and pension funds) offer them to those who have business or project ideas of profitabile investments, but don’t dispose of these liquidities (such as firms), the transfer being intermediated on the financial market.

But what the financial market represent? Broadly, it may be considered a market of capital, ensuring the harmonization of demand and supply of financial resources. The financial theory hasn’t cristallyzed yet a widely acknowledged definition for this concept. However, it states that the markets allowing the intermediation of funds, may be classified according to several criteria, of which, the most used, refers to the duration of buy-sell agreements.

The specialty literature has differentiated two approaches towards the financial market, each carrying the mark of its own school: the anglo-saxon theory and continental-european theory.

The continental-european approach, based on the banking system, in which banks are present both on the capital and the financial market, sets the following structure for the capital market:

Money market – attracted capital for short and mid term

Mortgage market – attracted capital mainly for housing construction

Financial market – serves for the issuance, placing and trading of long-term securities.

The anglo-saxon theory, based on the free expression of demand and supply on each type of market, that have to deal with specific instruments, operators and regulatory and supervisory institutions, sets the following stucture for the financial market:

Capital market – capital for medium and long term; in other words, represents the securities market.

Money market – capital attracted and placed for short-term.

If to make reference to the capital market of the Republic of Moldova, we can affirm that the national legislation adopted the anglo-saxon approach, according to which the capital market may be identified with the securities market, and represents the market of middle and long term securities.

Together the money and capital markets comprise a large portion of the financial market and are often used together to manage liquidity and risks for companies, governments and individuals.

The transactions’ object of the money market of Republic of Moldova is represented by treasury bills, National Bank Certificates, interbank deposits (e.g. overnight, REPO) etc.

On the other hand, the capital market has a very complex and specific structure. In this case, the capital is represented by a large range of monetary-financial assets, including some types of bank deposits, and in particular, financial titles or securities.

In the specialty literature, there are many definitions concerning the concept of capital market. For example, the economist Dobrotă N. argues that “capital market is a specific market, which object is represented by securities (shares, bonds, state bonds).The participants at the capital market’s transactions are the owners of liquidities, that are motivated to place in shares and bonds, and those that require money resources and agree to borrow from the intermediaries of these transactions (commercial banks, stock exchange and other intermediaries)”. On the other hand, Cicur D. mentions that “the capital market represents an important financial market on long term for financial assets”. Thus, we can say that the capital market is the market of financial titles with maturity more than 1 year, and includes financial assets that express rights and obligations for more than 1 year, such as shares and bonds.

From the above definitions, we may conclude that the existence and functioning of capital market requires the correlation of a complex of circumstances, of which the most important are:

The existence of available capital surplus

The existence of societies that need capital

The existence on the market of instruments needed for reorientation of capital flows, called “securities”

The existence of specific participants, and mainly legal entities that issue financial instruments.

The backbone of capital market is represented by securities. These are financial negotiable instruments, which represent property titles or receivables that confer patrimonial rights against the issuer, in specific conditions of the issuance, according to the legislation in force.

In our country, The National Commission for Financial Markets establishes, according to the Law on Capital Market no. 171 from 11.07.2012, the coverage of securities. Therefore, on our financial capital market are traded the following financial instruments:

securities;

titles issued by the collective investment undertakings in securities;

money-market instruments;

options, futures, swaps, forward rate agreements and any other derivative instruments relating to securities, currencies, interest or return rates, financial indexes or commodities;

derivative financial instruments for the transfer of credit risk;

financial contracts for differences.

There are various possibilities for investors to capitalize their money, as capital market is divided into primary market and secondary market. (Fig. 1.2.2.) In both markets, banks are key mediators.

Figure 1.2.2. Structure of capital market

Source: Elaborated by the author

The primary market, also called “issuance market”, is the one in which a security is first issued. Companies use the primary market to raise capital. An economic agent that wants to attract available funds, issues stocks or bonds. The obtained money is used to finance development through capital investments or to reimburse the falling due debts.

The secondary market, as Grigoruț C. mentions, “is a component of the capital market, on which financial titles are sold and bought, after they have already been issued by original investors” . Therefore, it offers the organizational framework, necessary for negotiating and trading securities that have previously been issued. In this case, money is received by the seller of securities, and not by its issuer: thus, a share can be sold and bought over and over again.

Also, the secondary market is divided into the stock exchange and the OTC market. Although these 2 markets are, theoretically, separated, between them exists a strong interrelation. A security may be issued and sold much easier (on the primary market), if investors know they can sell their stock portfolios whenever they want.

The secondary market offers greater possibilities to realize the financial titles. In this way, the existence of an organized stock exchange facilitates the meeting of demand and supply of securities, through specialized agents, called stock broker.

Only the stocks issued by known and trustworthy companies are traded at the stock exchange, being registered on the stock exchange list. For this, a company should meet the following conditions:

To have a social capital of at least 10 mln. lei (1st level of listing) or at least 1 mln. lei (2nd level of listing)

To issue securities in amount of at least 10 mln lei (1st level of listing) or at least 1 mln lei (2nd level of listing)

To conduct at least 3 years of activity on the market

To have had gained profit in the last 2 years (1st listing) or 1 year (2nd listing) of activity.

Furthermore, the stock exchange offers protection for investors. Unscrupulous companies may attempt to sell shares, by promising future overstated dividends or by making false statements relating to their disposable assets. By imposing rigorous requirements, the stock exchange authorities may decrease the risk of trading non-reliable securities.

However, in the Republic of Moldova, despite the advantages the stock market offers to its investors, because of the numerous and severe rules that companies should implement in order to operate transactions, often they appeal to transactions operated outside the stock markets.

So, together with the stock exchange, there exist OTC markets, becoming lately more developed and expanded. Initially, these markets were created by developing the “desk transactions”, meaning the operations with securities conducted by financial intermediation agencies. On this type of market are traded securities issued by commercial societies that are at the beginning of the activity, or have a low level of development, that doesn’t allow them to meet the required conditions to be traded at the stock exchange.

As time went on, and the information technology moved forward, the OTC market has become an electronic communications network, based on sophisticated software and computers.

At national level, these markets function according to the Decision on provisional measures on the capital market No. 12/4 from 10.03.2015.

In the Republic of Moldova, the evolution of the securities market may be divided into the following stages:

1992-1994 – in this period was created a provisional legislative basis and the market infrastructure, adjusted to the mass privatization process, and also was established the regulatory authority of the securities market – The State Commission of Securities Market.

In the West capital markets appeared in a natural environment, when companies felt the need for a platform that would attract investors at the best prices possible. Initially, companies borrowed money and invented shares in order to formalize those borrowings. Later intermediaries – known as brokers – appeared to find where investors could place their money and then stock exchanges were created to secure the best price for both buyers and venders.

In Moldova, on the other hand, the stock exchange appeared as a result of an organized action. After gaining independence in 1992 and adopting a market economy, the country passed a number of laws which enabled the largest part of public property to fit into private hands. The Parliament passed the Law on Privatization in 1991, the Law on Joint Stock Companies in 1992, the Law on Securities and Stock Exchange in 1993, and the Government ran a mass privatization process during 1994-1995.

1994-1996 – in this period took place the mass privatization process, and also was created the securities market infrastructure (the institute of independent registrars, nominal holders, for the first time appeared the financial intermediaries – brokerage companies, was established the Stock Exchange of Moldova)

In compliance with the Law on Privatization, Moldova chose the following path of privatization: reorganized the state-owned enterprises into joint stock companies; issued shares for those companies that could be sold at auctions; allowed people to buy shares against vouchers via fiduciary funds or citizen associations. Around 1,400 enterprises were privatized this way. When the stock exchange opened on June 26, 1995, there were 43 investment funds, 10 fiduciary funds, and more than three million shareholders.

1997-1999 – in this period was organized the process of distribution of privatized properties, was established the legislative and normative framework of the market, was created The National Depository of Securities, was set up The National Commission of Securities Market as a public independent authority responsible for the securities market regulation and supervision

2000-2010 – was improved the regulatory framework; was modified the securities market infrastructure, by liquidating investment funds that didn’t confirm the shareholders’ expectations concerning the dividends, and the expectations of the real sector of the economy in terms of attracting investments.

2010-2015 – was improved the regulatory framework by adopting the Law on Capital Market, which should replace the Law on the Securities Market; was licensed the 2nd stock exchange of Moldova, and mainly the Chisinau Stock Exchange, which actually functions in an “embryonic stage” in our country.

Although the national securities market registered recent achievements, both primary and secondary market, have not reached the investors’ expectations, and their development confronts the following problems:

The system of economic and production relations, which operates lately, doesn’t, practically, include as a basic element, the reproduction of consumed resources.

The crediting financial mechanisms do not guarantee one of the most important objectives, and namely the conversion of savings into investments.

The government, in the period on transition to the market economy, hasn’t managed to become an efficient leader of economic processes, in terms of developing the securities market.

It should be mentioned that these causes underlie our country’s failure, regarding the investment sphere, and only by solving them it may be possible the much needed improvement in the respective field.

The importance of the capital market in a good functioning of the market economy’s mechanism is crucial. In the transition economies towards a market economy, like the Republic of Moldova, capital market is meant to contribute towards the overcoming of actual difficulties in order to realize the major and generally available objectives: financing of economic activities and insurance of capital mobility, based on the principles of economic efficiency and minimization of the investment risk.

However, any economy, whatever level of development has, is characterized by the existence and functioning of some specialized markets, where the demand and supply of securities meet, necessary for the creation of resources for the development of goods and services production within firms. As the capital market is a part of the financial market, in order to explain the link between it and the economic growth, should be mentioned the functions of financial markets in general, as follows:

Mobilizing and allocating of savings, that allow the investments financing

Decreasing of risks and the guarantee of liquidity (this function was highlighted by John Hicks in 1969)

Providing information to investors and ensuring control of the issuing companies.

A financial market, through these functions contributes to the increase of savings and investments rate that favorably influences the economic growth.

Actually, a well-organized capital market is the main instrument that ensures the accumulation financial savings of the government, of legal entities and individuals, and may be used for the achieving of efficient investments. According to international experts, about 60-70% of the total amount of investments is realized through the transactions made on the securities market.

Some of the advantages offered by the functioning of capital markets include:

Raise the volume of available cash funds, that allows banks, as well as other financial intermediaries, to sell the receivables before the maturity

Promotes the aggregation of some banks funds through forming a banking pool, for granting a large credit

Offers great possibilities for the transfer of risk through the buy-sell process of securities

Facilitates the “transformation of maturities” by banks, through the possibility of selling short-term receivables

Increases the diversity of financial services for lenders and borrowers, including the range of banking-financial consultancy services.

Highlighting the diversity of possible operations on the capital market of the Republic of Moldova, as well as its importance for the existence of the market economy, it is interesting the fact that either in present, after more than 20 years from the establishment of the Stock Exchange of Moldova, is not clear for sufficient persons what this institution means and what it serves for. Although at the moment we cannot say that in the Republic of Moldova there exists a developed capital market, but a start and a promising jump for this market exists.

Role of Banks on the Capital Market

The bank’s system has a long tradition and large contribution to the economic development.

In international practice, there are 3 types of capital market, depending on the banking or non-banking character of the financial intermediaries:

Non-banking model – as intermediaries in the transactions with securities activate non-banking companies. This model is representative for USA.

Banking model – as intermediaries activate banks, this model being typical for Germany.

Mixed model – as intermediaries activate banks and non-banking companies. This model is specific for Japan, Russian Federation, and partially for the Republic of Moldova, although banks play a major role in the national capital market.

Banks play a major role on the capital market, not only as investors in stocks and bonds, but also as intermediaries for their clients, in the process of buying financial instruments. Many companies don’t have and are not interested in obtaining necessary knowledge to operate on the stock exchange. This fact offers the banks the possibility to administrate in exchange for a fee, the investments of their clients. Also, banks may use their own profits in order to make investments in shares and bonds.

Also, the capital market offers the possibility to enlarge the range of services provided by banks to their clients, increasing in this way their number and contributing to the raising of total revenues.

The main function of banks consists in providing credits. But this activity doesn’t give them liquidity at any time, because „credits, in a great measure, are not liquid assets and cannot be sold at any moment.” That’s why banks proceed to the capital market in order to develop their activity and to increase profits.

The activities developed by banks on the capital market are divided into passive and active activities, similarly to the general operations of banks.

Active operations reflect the method of using the attracted resources for the purpose of obtaining profit as a result of the difference between the interest received and the interest paid, and are classified as follows:

Banks shareholdings – refer to investing bank’s funds in shares issued by other companies. These shares, as long term financial investments, generate annual revenues in form of dividends.

Financial investments in other financial titles – refer both to short-term and long-term placements. Of them, a main role is played by government securities (treasury bonds, government bonds). All the interests collected as a result of investing in these securities are called active interests.

The passive activities developed by banks on the capital market, reflect their own or attracted funds used to conduct their activity, and refer to:

Social capital and reserve funds. Every bank, at the moment of its establishment, should constitute a minimal social capital set by Central Bank. As follows, the shares (and bonds) issuing takes part of these activities.

Attracting subordinated loans. Subordinated loans are contracted from other banks on long-term and can be prepaid only in case of debtor’s bank bankruptcy. In order attract subordinated debts, are issued negotiable debentures. Also, securitization is considered to be an innovation used for this this purpose.

Some of the advantages that might benefit banks by participating to the stock exchange activities include the following:

Getting commissions for the consultancy activities regarding financial investments

Getting commissions for administrating, through stock brokers, of stock sales or purchases, for their own clients

Investing own resources in shares and bonds

Granting loans on international markets.

From another point of view, in one of their papers, Jong-Kun Lee and Biagio Bossone analyzed how capital markets support banks, concluding the following:

larger capital markets help banks to improve their screening of borrowers, monitor their investment more efficiently, and signal their risk attitude through information other than (and possibly complementary to) accumulated financial capital. Banks operating in systems with large capital markets attain the same degree of protection against financial distress, and the same reputation-signaling effect, with lower capital-to-asset ratios than those operating in smaller systems;

larger capital markets enable banks to manage their financial capital with relatively fewer non-financial resources. As banks increase their output and adjust their financial capital position accordingly, they may need to mobilize additional (non-financial) resources to manage and protect their financial capital;

in larger capital markets, with higher-quality information provision and investors’ greater signal-extraction capacity, signaling is more efficient and banks can economize on the financial capital needed to indicate a given level of reputation or risk safety.

Holding of shares and bonds represents an important source of capital. Capital is not only a source of revenues, but it may also be used by banks as a guarantee in case of loans. The bank must not only evaluate the amount of capital represented by shares and bonds, but also to be aware of the fact that the value of these shares may fluctuate, both in sense of appreciation and depreciation.

As banks and financial non-banking institutions perform the same operations on the capital market, between them might arise a fierce competition for the market share of this segment. Might appear the competition for performing the function of financial broker or investment consultant, the race between investment companies.

Banks have some advantages in this sense, because they possess qualities like:

A high level of financial safety and stability, diversified activity (they perform operations not only with securities)

Great possibilities to guarantee the securities placement

Provide credits to the issuer and investor, that a small brokerage company is unable to do

A complex service of the securities settlement operations and other operations.

Moreover, the profit obtained from the crediting activity is subject to taxation, and commercial banks are looking for sources of income that are not subject to taxation. For this reasons, banks have begun to reorient their attention and the volume of assets towards a new activity, and namely the investments in securities. This type of investments, usually stabilize the banks revenues, providing additional income.

The main goals of banks on the capital market are:

Attracting of additional money resources for the traditional crediting and settlement activity, based on the securities issuance

Obtaining of profits from own investments in securities in form of dividends and interest paid; obtaining of profit from the positive difference resulted after the favorable evolution of securities price on the market

Obtaining of profit from providing of services on the capital market to its clients

Increasing of market share of the bank and attracting of new clients

Access to scarce resources through the use of those securities that confer this right, and the owner of which becomes the bank

Maintaining the necessary reserves of liquidity by investing in securities with a high degree of liquidity

Obtaining of additional profits by speculating on the market.

Under actual conditions, the investment activity of the banks from the Republic of Moldova doesn’t have a leading place among the active operations of the bank. The main place is occupied by the crediting activity. This may be explained by the fact that „crediting is the main function of the banks in the domestic economy at the moment, and the investment activity of commercial banks is considered to be a relatively new activity in the banking field from the Republic of Moldova compared to the traditional crediting.”

INTERNATIONAL PRACTICES OF PERFORMING BANKS’ ACTIVITIES ON THE CAPITAL MARKET

The complexity of banking operations with securities from the EU perspective

Some sources from the Euro are tend to classify banks as „Monetary Financial Institutions” (MFIs). However, there should be made a distinction between these 2 notions. According to ECB, „MFIs are called central banks, resident credit institutions, and other resident financial institutions, whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs and, for their own account (at least in economic terms), to grant credits and/or make investments in securities.” Also, the term MFIs includes the Money Market Funds, but these couldn’t be classified as banks as don’t imply the function of attracting deposits.

“European banking has experienced substantial changes over the last two decades as various forces such as structural deregulation, prudential reregulation, technological advances and globalization have changed the competitive landscape.”

Also, the European banking sector changed significantly under the influence of the securities markets. One change was that an explosion of new derivative and securitized products provided banks with opportunities to manage their traditional commercial lending business in new ways by enabling them to remove assets from their balance sheets and convert them into sophisticated capital markets financial instruments. Another was that growth in interest in securities market financing presented some of them with potentially lucrative business opportunities to expand out of traditional lending. Major European banks, particularly German and (outside the EU) Swiss ones, long ago recognized opportunities to generate superior returns on investment banking and asset management to those achievable through traditional relationship banking. Building up an investment banking and asset management franchise (a process that frequently involved the acquisition of established British investment banks) enabled European banks to respond to growing interest in securities market-based financing by the European corporate sector, and to compete with foreign, particularly US, investment banks for that business. It also equipped them with the capability to sell new products and services to existing customers, and to reach out to new customers and markets. How things have changed is illustrated by the position of Deutsche Bank, once known for its role as provider of traditional banking finance for German industry, but now in competition with Wall Street investment houses for global investment banking business.

The EU is a loan-based economy. This can be seen from the size of the loan market compared to other markets. On the one hand, firms are very reliant on bank loans to finance their activities compared to other types of instruments. On the other hand, households store a significant share of their savings in bank deposits, which places bankers in a critical position to act as the major financial intermediary for channeling funds from savers to borrowers.

This reliance on bank lending in Europe, may be explained, firstly, by the fact that many companies and individuals in Europe have a cultural suspicion of risk-taking, entrepreneurialism and ‘Anglo-Saxon’ capital markets. This is also reflected in their savings habits: while Europeans save more than people in the US, far less of these savings are invested.

Secondly, the structure of the European banking system, with a series of national champion banks traditionally operating within their own borders, allied with a strong local network of regional banks (and backed up by all of those deposits) has historically made bank lending the default option for most companies.

The European Central Bank and its national counterparts report that too many small companies that need financing are unprepared for borrowing significant sums of money from their bank and expect banks to provide the sort of risk capital that should be provided by entrepreneurs themselves, angel investors or early stage venture capital firms.

Figure 2.1.1. Size of the different markets in terms of GDP for EU and US in 2014

Source: Elaborated by author based on Eurostat, OECD and The World Bank data

The importance of loan-based finance in the EU is reflected in its share of GDP of the total economy with respect to other types of liabilities. Loan liabilities in the EU account for 212% of EU GDP, debt securities are worth 171% of GDP, and listed shares issued in Europe represent 60% of GDP. Compared to other large economies, the respective shares in the US are: 147% for loans, 115% for listed shares and 220% for debt securities—which indicates an impressive debt market.

The EU has a small equity market with a market capitalization comparable to US, which constitutes half of the US market. (see Fig. 2.1.1.).

Significantly lower than in the US, however, debt securities occupy the second most important position for the EU banking sector, after loans. By studying the debt securities portfolio of the EU banks, may be noticed a growth of 4% in 2014 in comparison with the previous year. The decreased amounts manifested since 2009 (when this indicator reached the peak) are due to the financial crises that took place in the analyzed period. that the growth of debt securities halted in 2014. As a result of the financial crises, the issuance activity of the banking sector has fluctuated significantly, with continuous growths and falls.

Figure 2.1.2. Evolution of Debt securities issued and held by banks from Euro area and their share in total assets, bn. EUR/ % of total assets

Source: Elaborated by author based on ECB statistics

From the same figure may be observed that the growth in the share of debt securities relative to total banking sector assets halted in 2014, with many countries seeing significant reductions in their relative importance, such as Slovakia, Ireland, Denmark or Luxembourg. However, strategies concerning debt securities holdings differ greatly across euro area banking sectors.

Another indicator that should be analyzed in order to appreciate the banking sector’s implication on the EU capital market is the amount of equity instruments.

Figure 2.1.3. Evolution of Equity instruments issued by banks from Euro area and their share in total assets, bn. EUR/ % of total assets

Source: Elaborated by author based on ECB statistics

As it was already mentioned, their amount is significantly lower than the amount of debt securities. However, since 2011 is evident an increase both in terms of volume of issued equity instruments and in terms of their weight in total assets. From this, may be concluded the fact that lately, banks tend to orient their position to issuing equity instruments rather than to issuing of debt securities.

Figure 2.1.4. Asset breakdown for euro area banking sectors in dynamics

Source: Elaborated by author based on ECB statistics

The breakdown of assets highlights the preferences of banks for investing in different categories of assets. As was previously mentioned, the biggest part of banks’ balance sheets is represented by loans (~58% in 2014), whose quota registered a decrease if to compare to 2009 (~62%). Banks tend to invest lately in assets available for sale (6,8% in 2011 to 9,02% in 2014). Financial assets held for trading, purchased with the intention of obtaining short-term gains, are a stable direction for investment for banks, with a quota of 17-18% in total assets. On the other side, banks don’t apply almost at all at investments held to maturity in order to capitalize their resources, reaching insignificant values over time.

Individually analyzing each EU country, appear large cross-country differences in the asset structures of euro area banking sectors. For instance, the share of loans in total assets varies from 34% in Latvia to 77% in Greece. The share of financial assets held for trading is typically below 10%, with the high figures observed in Germany and France reflecting the presence of large banks with sizable investment banking activities. Including foreign branches and subsidiaries in the analysis would single out Finland as having a high share of financial assets held for trading, owing to the regionally concentrated investment banking and derivatives activities of large foreign banks present in the country.

As Europe seeks to build a financial system that delivers enough capital at the right price, securitization has an important part to play in the effective operation of deep and liquid capital markets. Securitization’s benefits for Europe’s economy go beyond its direct effect on funding specific sectors such as SMEs and residential mortgages. By helping banks to recycle and reallocate capital, it helps them to become healthier institutions and frees up capital for further lending to the real economy.

Yet issuance is falling (see Fig. 2.1.5.), due to regulatory uncertainty, weak economic growth and today’s highly unusual monetary conditions, which make securitization look expensive and difficult compared with direct borrowing from central banks. Current issuance is far below the level reached even in the boom years of 2007-2008, when issuance ranged from 595 bn. EUR in 2007 to 819 bn. EUR in 2008. Total issuance in 2015 was 214 bn. EUR, a fall of 2% from 2014 (or ~75% in comparison with 2008).

Figure 2.1.5. European securitization issuance, bn. EUR

Source: Elaborated by author based on AFME reports

In 2015, 70% of all outstanding securitization was placed with third party investors, with 30% retained on banks’ balance sheets. Comparing issuance placed with investors against issuance retained by banks for funding purposes serves as a stark reminder that Europe’s banks still receive considerable funding support from the ECB. Clearly, the ECB remains a vital liquidity provider to Europe’s banking system.

Figure 2.1.6. European Issuance by Collateral, bn. EUR

Source: Elaborated by author based on AFME reports

The structure of securities issued as bonds has changed significantly in recent years. Thus, the tendency to gain long-term secured financing has increased, especially through bonds. RMBSs are by far the most important asset class in Europe (see Fig.2.1.6.). Other securitised products, such as CMBSs, CDOs and most ABS asset classes play a lesser role in the aggregate but may be important for individual countries.

As shown in the above figures, for some years now, we have been witnessing a trend towards more capital market-based financing in the euro area, driven by both deleveraging among banks and the very low cost of market finance. Looking forward, the Capital Markets Union (CMU) project promises to further deepen market finance in Europe by, among other things, making it easier for young firms to access risk capital and smaller firms to issue bonds, as well as deepening markets for high quality securitization.

In terms of effects of these tendencies for the banking sector, in the long run, deeper capital markets may lead to more competition in the provision of financial services and hence weaken banks’ market power. For example, research looking at the pre-crisis period suggests that where banks face limited competition in their domestic markets, they tend to charge higher margins for lending to SMEs, and that effect increases in financial systems which are more bank-based. That would change if small firms had more options to diversify, for instance through efficient private placement markets or further growth in crowdfunding.

There are nevertheless good reasons why banks are the primary lender to SMEs in most national markets – they have the client relationships, information database and domestic networks which are necessary for that type of lending – so banks are unlikely to be displaced by non-banks for quite some time. The challenge posed by CMU is therefore not, at least in the medium-term, about surviving. It is rather about thriving. CMU presents banks with an opportunity to recover profitability and to find a niche within the emerging market for new financial products in Europe.

Because in the euro area we have a universal banking model, more disintermediated finance will have to involve banks as the primary market makers. With CMU on the horizon, there is now a window for banks to specialise in specific products, become market leaders and bolster their sources on non-interest income. In particular, the development of securitisation markets offers significant possibilities for banks. There is clear demand for a conduit between non-bank investors looking for SME exposure and small firms looking for new sources of financing.

This opportunity would ultimately lead to a more robust banking sector as a whole. For example, European securitisation markets would improve risk-sharing among banks: one can imagine a world where small, local banks originate loans while larger, global banks securitise and market them. And a true CMU would also mean convergence of some parts of insolvency law and deepening of markets for distressed debt, which would help banks work through NPLs more quickly in future and hence increase the resilience of the banking sector to shocks.

Moreover, if bank finance declines in importance over the longer-term, that might also encourage some much needed consolidation in the banking sector, which would be beneficial for the real economy.

US involvement of banks on securities market

The fundamental difference in corporate funding between the US and Europe is that European companies rely far more heavily on bank lending. Overall, some 80 percent of corporate debt in Europe is in the form of bank lending, with just 20 percent coming from the corporate bond markets – almost the inverse of the U.S.

A key difference with bank lending is that in the US banks securitize or sell many of their loans on much more developed institutional loan market, whereas in Europe a far larger proportion of bank loans remain on bank balance sheets. Also, alternative sources of funding such as capital markets have been fragmented across national borders and have only in the past few decades begun to catch up with the US. This is reflected in the significant gap in depth in most sectors of the capital markets.

The capital markets in the US are organized differently in comparison with the European one, as the system of supervision and regulation of the capital markets is conceived as a dispersed structure, i.e. the control and respect of investors’ interests are made by different bodies of control: of the banking business, of the insurance activity, of the capital market activity.

“In the USA, the function of capital market surveillance is under the responsibility of the Securities and Exchange Commission (SEC), an institution created, mainly, to ensuring the investors’ protection. Another category of institutions that contribute to the regulatory and supervisory activities of the US capital market (especially, supervision of the intermediaries and transactions), is represented by the self-regulatory bodies (SRB): Stock Exchange, National Association of Securities Dealers (NASD), etc. Under the regulation and supervision system of US financial market, has an important role the central bank (Federal Reserve System – FED). Its influence is extending both to the banking activities and to the activities on the capital market.”

The United States banking system also differs from other industrialized countries. For instance, the United States has more banks per capita, and the banks possess fewer assets because the US government imposed strict regulations. Early in the United States history, the public and government feared big banks, so state and federal governments passed regulations that forced banks to be smaller and encouraged a large number of banks to form. One of these regulations is The McFadden Act, which prohibited a commercial bank from opening a branch in another state. This law put national and state banks on equal footing and helped foster competition. However, this law kept small inefficient banks in business, causing the US to have the largest number of banks in the world (14,217 banks in 1986, which fell to 9,459 banks by 2010).

When analyzing the banks’ involvement on the financial market, firstly should the structure of their assets (Fig. 2.2.1.). As we can see, loans are also the major asset for US banks over time (52-55%). They earn more interest than banks have to pay on deposits, and, thus, are a major source of revenue for them. The second most important role in banks’ assets is played by securities, which share a stable quota of ~20% of total assets.

Figure 2.2.1. Structure of US banks’ assets, % of total assets

Source: Elaborated by author based on US commercial banks’ balance sheets

http://www.federalreserve.gov/releases/h8

The primary securities that US banks own are US Treasuries and municipal bonds. These bonds can be sold quickly in the secondary market when a bank needs more cash, so they are often referred to as secondary reserves.

US Treasury securities (such as bills, notes and bonds), used to finance the federal government debt, are considered to have the bond market’s lowest risk because they are guaranteed by the U.S. government’s “full faith and credit”. This means that it is highly probable your interest and principal will be paid fully and on time. Because of this unique degree of safety, interest rates are generally lower for this class of securities than for other widely traded debt, riskier debt securities such as corporate bonds.

On the other hand, agency bonds issued by Federal Government agencies are less liquid than Treasury bonds and therefore this type of agency bond may provide a slightly higher rate of interest than Treasury bonds.

Figure 2.2.2. Structure of securities held by US banks, bn $

Source: Elaborated by author based on US commercial banks’ balance sheets

http://www.federalreserve.gov/releases/h8

As it is illustrated (see Fig. 2.2.2.), banks prefer to invest more in securities guaranteed by US Government, which share a quota of more than 70%. The amount invested in these securities almost doubled in the analyzed period, increasing from $1423 bn in 2009 to $2220 bn in 2015. On the other side, is observed a tendency of decreasing the interest of banks in investments in securities non-guaranteed by the US Government since 2013.

Source: Elaborated by author based on US commercial banks’ balance sheets

http://www.federalreserve.gov/releases/h8

If to analyze the structure of guaranteed and non-guaranteed by the US government securities (see Fig. 2.2.3. and Fig. 2.2.4.), then might be noticed two opposite situations. On the one hand, banks tend to invest more in MBSs (such as pass-through securities, collateralized mortgage obligations (CMOs), real estate mortgage investment conduits (REMICs), CMO and REMIC residuals, and stripped MBS) issued by US government agencies or by US government-sponsored enterprises, and invest less in non-MBSs. On the other hand, when speaking about securities non-guaranteed by the state, a higher preference is given to non-MBSs (such as securities issued by states and political subdivisions in the United States, ABSs, other domestic and foreign debt securities, and investments in mutual funds and other equity securities with readily determinable fair values), and a lower interest banks have in MBSs (i.e. pass-through securities not guaranteed by the U.S. government and other MBS issued by non-U.S. government issuers, including those collateralized by MBS issued or guaranteed by FNMA, FHLMC, or GNMA).

The recent credit crisis has also underscored the fact that banks held many asset-backed securities as well (see Fig. 2.2.5.). ABSs enable banks to "liquefy" their balance sheets (i.e., raise cash by borrowing against assets) and develop new sources of capital. Assets such as credit cards, automobile loans, and home equity loans are packaged as the collateral for intermediate-term (i.e., maturity of one to five years) securities and sold in the public markets or as private placements. But they register lower share in comparison with MBSs because imply a certain level of credit risk.

Also, often banks will sell the loans, such as mortgages, credit card and auto loan receivables, to be securitized into asset-backed securities which can be sold to investors. This allows banks to make more loans while also earning origination fees and/or servicing fees on the securitized loans.

Figure 2.2.5. US Issuance by Collateral, bn. EUR

Source: Elaborated by author based on AFME reports

However, even though, banks pay more attention to Agency MBSs, the main advantage of which is the guarantee of interest and principal payments by the agency issuing the bond.

United States banks are not permitted to own stocks, because of the risk, but, ironically, they can hold much riskier securities called derivatives.

The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks, and sometimes, these can lead to systemic risks. Derivatives are investment instruments that consist of a contract between parties whose value derives from and depends on the value of an underlying financial asset. Among the most common derivatives traded are futures, options, contracts for difference, or CFDs, and swaps.

Figure 2.2.5. Derivatives exposure of US banks, trillions $

Source: Elaborated by author based on OCC reports

Despite these risks, the derivatives market is steadily growing. Overall, the biggest 5 US banks collectively have more than 170 trillion dollars of exposure to derivatives contracts (see Table 2.2.1.). That is an amount of money that is more than 10 times the size of the US national debt.

Table 2.2.1.

Ranking of Top 10 banks in the United States in terms of "Derivatives"

Source: Elaborated by author based on OCC report

The bankers state that these financial instruments are far less risky than they sound, and that they have spread the risk around enough so that there is no way they could bring the entire system down. But that is the thing about risk – you can try to spread it around as many ways as you can, but you can never eliminate it. And when this “derivatives bubble” finally implodes, there won’t be enough money on the entire planet to fix it.

Tendencies and challenges of banks’ expansion into the securities business

Recognising that banks play an important role in capital markets, in addition to being the main current providers of corporate finance, care needs to be taken to understand, and thereby mitigate, initiatives which could unintentionally negatively impact the market. In terms of firms’ financing, it is important to leverage banks’ expertise, especially with respect to the origination and securitisation of loans. Hence, the regulator needs to be mindful of the unexpected impact of new regulations affecting the banking industry, particularly when it comes to capital requirements.

Improving diversification of funding will enhance cross-border risk taking and allow capital markets to play a greater role in reducing the impact of a shock in one country. Efficient and diversified capital markets will be allowed to have more crossborder banks that are large enough to operate across borders and diversify risks, but small enough to be rescuable.

The innovation processes characterize not only capital markets, but financial markets as a whole, manifested both by the emergence of new financial products or products designed to cover the risks investors may face, and the emergence of new financing techniques, negotiating new markets or new regulations.

Promoting diversified sources of financing would reduce dependency on banking loans. The promotion of alternative methods of financing is important to reduce overreliance on one specific financing method. Crowdfunding has recently appeared as an additional tool for financing small to medium-sized firms. However, crowdfunding is inconsistently regulated across Member States, which impedes the scalability of the sector.

The consensus within the ESBG Marketing Network at a meeting organized recently was that crowdfunding could be a new way of learning to manage or share risk and to promote ethical and local investments. Also, crowdfunding represents a part of Capital Markets Union Action Plan adopted in 2015. Banks could, for example, set up a platform for bringing potential borrowers and lenders together in a digital way to promote and finance local projects, such as the restoration of an old church or a historic building, ethical investments or simply project ideas. They could, for example, agree to finance 50 % of such projects with the remainder of the funding coming from local investors. This would be one way of benefiting from the "collective intelligence" of the crowd as a measurement of a project's potential and would also contribute to sharing the risk. Equity-based crowdfunding may also be a viable alternative to raising capital for start-ups and small businesses.

It was suggested that the creation of a crowdfunding platform could be an interesting business model for banks, as they could charge a fee for providing the platform that brings the potential borrowers and lenders together as well as a fee for the credit scoring and risk assessment of the various projects. The marketing impact of such activities would also be huge as it generates financial cooperation between a group of persons in a digital way. It is also in line with the need for banks to create and improve customer experience and to move away from a product to a relationship-based approach to customers.

Such an activity does, however, also involve risks such as fraud, repayment and liquidity risks to name a few. Currently, the sector also suffers from a fragmented regulatory environment including low or non-existent investor protection provisions. It is generally recognised in the crowdfunding industry that some degree of regulation is helpful to promote confidence and competence within the sector. This would, however, have to be appropriate and proportionate in order to encourage innovation and competition and to allow this new source of finance to flourish.

Looking forward, there is likely to be a trend towards market consolidation in the crowdfunding industry, as is the case with all rapidly expanding sectors with relatively low barriers to entry. This is likely to take place via mergers and acquisition activity as well as a flight to quality by investors, which will only allow the highest quality crowdfunding platforms to survive.

Private placement is also a promising opportunity to diversify financing methods for SMEs and should be considered by market players and regulators. The emergence of private debt placements provides an alternative to bank borrowing for companies without access to the capital markets and is set to bring major changes to the European refinancing system. According to data from the ECB there are already signs of a trend away from a bank-oriented system in Europe, in the direction of the capital markets. Between 2009 and 2013 the volume of bank credit decreased in terms of European GDP by 7.4%, while bond volumes rose by 2.4%.

Securitisation is another key for the development of market based finance and ensuring a simpler, more transparent and standardized securitisation process would significantly revive this market.

A market for prudently designed ABS has the potential to improve the efficiency of resource allocation in the economy and to allow for better risk sharing. It does so by transforming relatively illiquid assets into more liquid securities. These can then be sold to investors, thereby allowing originators to obtain funding and, potentially, transfer part of the underlying risk, while investors in such securities can diversify their portfolios in terms of risk and return. This can lead to lower costs of capital, higher economic growth and a broader distribution of risk.

Ongoing regulatory reform, notably the Basel III agreement, amendments to the Capital Requirements Directive (CRD) and Solvency II, are likely to affect securitisation markets directly and indirectly, through the costs of originators and investor demand.

Banks and investment advisors are currently the most important investors in securitized products. As investors, EU banks must comply with the new proposals contained in CRD 2 and CRD 3 in order to benefit from lower capital charges. CRD 2 and CRD 3 impose ongoing due diligence requirements on banks when they invest in securitised products and require both originator and investor to disclose information. Specific rules for securitized products held in the trading book also stipulate higher capital charges. Future liquidity ratio regulation may also shift some demand from securitisation markets to covered bond markets, as the latter receive a more favourable treatment for liquidity purposes than the former.

DIVERSITY OF ACTIVITIES CONDUCTED BY BANKS ON THE CAPITAL MARKET AT NATIONAL LEVEL

Issuance of securities by banks from the Republic of Moldova: diversity and peculiarities

Banks are organized as joint stock companies under the Law on Joint Stock Companies. Thus, they set up their social capital through the issuance of securities.

The Law on Capital Market stipulates that banks may issue the following financial instruments:

securities;

units (titles) issued by the collective investment undertakings in securities;

monetary-market instruments;

options, futures, swaps, forward rate agreements and any other derivative instruments relating to securities, currencies, interest or return rates, financial indexes or commodities;

derivative financial instruments for the transfer of credit risk;

financial contracts for differences;

other financial instruments admitted to trading on a regulated market and/or a multilateral trading facility.

However, banks prefer to issue only some of them, taking into account the level of risk, preferences of clients and level of income. These are grouped into:

Shares and bonds – as part of the capital market, with a circulation term higher than 1 year.

Certificates of deposits and certificates of economies, bills of exchange – as part of the money market, with maturity up to 1 year.

A share (or stock) may be defined as a unit of ownership that represents an equal proportion of a company's capital. It entitles its holder (the shareholder) to an equal claim on the company's profits and an equal obligation for the company's debts and losses.

Issuance of securities can be carried out by means of:

public offer;

closed offer (closed issuance).

Public offers on the primary market of capital market are not a widespread method of placing financial instruments. Thus, till now, only 3 public offers of shares issuance have taken place. The main cause of the lack of public offers as a mechanism of attracting investments is the low market capitalization and its low level of development. As a result, the volume of securities in free circulation (free-float) is permanently decreasing, diminishing at the same time the potential dimension of capital market.

Banks decide to issue securities in the following cases:

At bank’s founding, by distributing shares to founders;

In order to increase the bank's capital by launching a new issue of shares;

In order to attract borrowed capital through debt securities – bonds.

If in the 90s the highest weight accrued to primary shares issues, as time went on, the quota of additional issues increased (in the 2000s, only a primary issuance of shares has been registered, at the foundation of “ProCredit Bank” SA in 2007). From the following figure we may observe an irregular fluctuation of additional issuance of shares. This is related to the reasons of increasing capital, which vary from bank to bank and focus on the following:

Necessities of the banks – banks issue shares in order to fulfill Central Bank’s requirements concerning the regulatory capital or in order to obtain a higher category license that allows performing a greater diversity of financial activities.

Attracting strategic investors for the bank – this may increase the bank’s image and will enhance clients’ trust.

Figure 3.1.1. Dynamics of additional shares’ issues made by banks from the Republic of Moldova in 2005-2014 (mln. lei)

Source: Elaborated by author based on the annual reports of NCFM

www.cnpf.md/md/rapa/ (cited on 27.11.2015)

In 2014, were issued 3277755 shares in amount of 398250 th. lei (Fig. 3.1.1.), that was by 30% less than in the previous year. Only 4 banks issued shares in 2014 (Fig. 3.1.2.): ProCredit Bank, BCR Chisinau, EXIMBANK-Gruppo Veneto Banca and EuroCreditBank, the biggest weight of 62.77% in the total amount is shared by EXIMBANK-Gruppo Veneto Banca.

Figure 3.1.2. The volume of additional shares issuance performed by commercial banks from the Republic of Moldova in 2014 (mln. lei/units)

Source: Elaborated by author based on the annual reports of NCFM

www.cnpf.md/md/rapa/ (cited on 27.11.2015)

At 31.10.2015, the highest level of social capital was owned by “EXIMBANK-Gruppo Veneto Banca” SA with 1250 mln lei, and the lowest level – by “ENERGBANK” SA and “MobiasBanca-Groupe Societe Generale” SA with 100 mln lei (Fig. 3.1.3.).

Figure 2.1.3. The social capital of commercial banks from the Republic of Moldova at 31.10.2015

Source: Elaborated by author based on the annual reports of NCFM

www.cnpf.md/md/rapa/ (cited on 27.11.2015)

Banks are authorized to issue 2 types of shares:

Common stocks – give the right the shareholder to vote at the General Meeting of Shareholders, the right to receive dividends and a part of the society’s goods in case of its liquidation.

Preferred stocks – offer its owner additional benefits in comparison to the owner of common stocks in terms of the order of receiving dividends and their amount, as well as the order of receiving a part of bank’s assets in case of its liquidation. However, according to the Law, the quota of these shares in the social capital of a bank constitutes only 25%.

Figure 3.1.4. Structure of banks’ capital by origin in the Republic of Moldova during the period 2008-2015 (%)

Source: Elaborated by author based on the annual reports of NCFM

www.cnpf.md/md/rapa/ (cited on 27.11.2015)

In the period analyzed, although approximately 3/4 of banks’ capital was represented by foreign investments, only four banks out of those 15 (actually 11) active banks in the Republic of Moldova were branches of Western banks. Another factor reducing the efficiency of recourses utilization is the state’s share in the banking capital of one of the largest five banks in Republic of Moldova.

Banks from the Republic of Moldova, in analyzed period, have not issued long-term debt securities, focusing primarily on traditional sources of financing. At the moment, the only type of securities that is present on the capital market of the Republic of Moldova is shares. Till now, only 6 debt securities issues have taken place, of which none is in circulation. There are multiple reasons of not issuing bonds in the Republic of Moldova, the most important being the following:

The complexity of registering debt issues procedure and the high requirements for the companies that are going to place them on the market.

The company’s owners and managers lack of knowledge about additional mechanisms of financing through the use of capital market and about the advantages offered by debt securities.

The lack of capital supply on the securities market, that doesn’t allow the stock exchange to become a financing alternative for companies.

To conclude, it may be mentioned that for banks, the efficiency of securities’ issuance depends mainly on the bank’s management knowledge, regarding the capital market situation and opportunities. This means the bank management should take the right decision about the securities it is going to issue, by finding the optimal moment for issuance, as well as by establishing the requirements concerning future gains for potential investors. Also, the existence of an organized secondary market would allow banks to trade electronically securities, with low costs and unique advantages as compared with term deposits, thus raising their profits. Nevertheless, the existence of a large variety of financial instruments and of a satisfactory regulation of the market could improve the activity of the banking system on the capital market.

Banks: investors and investment firms on the Capital Market of the Republic of Moldova

A second function performed by banks on the capital market is to invest in long-term securities. Investment in securities provides another important source of money resources for banks, because:

It serves as a source of bank liquidity

It represents an additional source of earnings from capital gains obtained from the process of selling securities from the investment portfolio.

To invest is an activity sited between saving and speculating, and means to put money in a deal that might lead to a reasonable profit, taking a certain level of risk. The investor should follow the principle, according to which the profit and risk are two interdependent elements, thus in order to obtain a higher profit he should undertake a higher risk.

Banks decide to invest in securities for various reasons, the most important being the following:

Securities allow the bank to use all the resources available at one moment in time

May help the bank with liquid resources, through the acquisition of financial titles that meet the liquidity requirements of the bank

Contribute to the diversification of assets portfolio

Offer a protection against financial risks.

However, by investing in securities, banks undertake some risks, as:

May be forced to sell the titles before maturity. Having a lack of liquidities, and in order to not contract a new loan, the bank is constrained to sell the titles bought before, having some loses.

May be subject to credit risk that means non-recovery of the sum used to buy the titles, as well as non-recovery of dividends, or both of them.

May be subject to purchasing power risk that appears as a result of the inflationary process. The bank may have losses because of the erosion of invested money.

It is up to banks to decide in what type of securities to invest their money. If to refer to the capital market, then there are 2 possible categories of securities in which banks can place their resources:

Corporate securities, such as equity and debt securities.

Banks buy corporate securities because of the following reasons:

Buy shares in exchange of a credit (provided by the bank) reimbursement. In this case, the society’s shares are pledged and the bank becomes automatically the owner of these titles that has to sell on the market in short time.

Buy a controlling stake of shares of a worth company with the goal of reselling them to a strategic investor.

Buy shares with the objective of maintaining the control over a company (it is a risky activity, as the financial situation of the society may change in negative sense over time, fact that will diminish the shares costs, causing loses for the bank).

In order to diversify the funds and to obtain additional profits as dividends or interest, as well as speculative profits as a result of subsequent selling of securities at a higher price on the market.

State securities, of which the most used on the capital market are state bonds.

Government bonds represent state securities, issued at nominal value of 100 MDL, with a circulation term of 2 years, with fixed rate, the interest being paid periodically (every half of the year). Government bonds are redeemed at maturity at nominal value.

These securities are issued in a dematerialized form, and in order to sell them, the National Bank of Moldova organizes an auction, at which have the right to participate only the banks that have signed the “Agreement on fulfilling the functions of primary dealer or participant in the state securities market”.

For the fourth quarter of the year 2015, NBM has set the objective to organize 3 auctions for government bonds sale, as follows:

Table 3.2.1.

The calendar of state securities selling actions for the 4th quarter of 2015

Source: The calendar of state securities selling actions for the 4th quarter of 2015

www.bnm.org/ro/content/calendarul-graficul-desfasurarii-licitatiilor-de-plasare-vms-pe-piata-primara (cited at 27.11.2015)

On the other hand, there exists another method of classification of activities performed by banks as investors on the capital market, which depends on the motivation of holding securities. According to this criterion banks are interested to invest in 2 types of securities:

Securities for selling (for trading and marketing)

Analyzing Tab. 3.2.2, we may observe that the banks that hold most of their securities for sale are EXIMBANK-Gruppo Veneto Banca, followed by VICTORIABANK and MOLDOVA-AGROINDBANK. Also, it should be pointed out that in 2014 was registered a drop in the value of securities held for sale in the banking system of the Republic of Moldova, if to compare with the period 2010-2013, when was recorded an increase in dynamics. At the same time, in 2011-2014 all the banks have kept this type of securities, relatively to 2010 when only 4 banks have used them. The lowest value of selling portfolio belongs to COMERTBANK, that since 2011 didn’t modified the volume of securities held for sale in amount of 100 th. lei.

Table 3.2.2.

Value of securities for selling portfolio held by banks in the Republic of Moldova during 2010-2014

in thousand lei

Source: Elaborated by the author based on annual reports of licensed banks from the Republic of Moldova during 2010-2014

Also, should be taken into account the share of securities for sale in the amount of total assets of banks. From Tab. 2.2.3, we may observe that the weight of these securities is trivial, having values between 0-2.5%, except for BCR Chisinau and EXIMBANK-Gruppo Veneto Banca in 2011-2012, when registered higher values.

At the same time, may be remarked an evident decrease of the weight of securities portfolio held for trading by 2014. This is mainly due to the reduction of portfolios value by 18%, as shown in Tab. 2.2.2.

Table 3.2.3.

Quota of trading securities portfolio in the total assets of banks in the Republic of Moldova during 2010-2014

in %

Source: Elaborated by the author based on annual reports of licensed banks from the Republic of Moldova during 2010-2014

Investment securities (held until maturity).

Analyzing Tab. 3.2.4, may be noted that in 2014 practically all banks hold investment securities, except for EXIMBANK and ProCredit Bank, that during 2012-2013 recorded “0” value for this indicator.

It is worth mentioning that most of banks have also included in their portfolio state securities, such as government debts as instruments of the capital market, thus completing an important part of these portfolios. The reason for including these titles is that they are almost similar to holding cash while receiving a reasonable return. Also, state securities ensure the liquidity of their assets, being considered risk-free assets.

Table 3.2.4.

Value of investment securities portfolio of banks in the Republic of Moldova during 2010-2014

in thousand lei

Source: Elaborated by the author based on annual reports of licensed banks from the Republic of Moldova during 2010-2014

Tab 3.2.5 shows that in 2014, the biggest share of investment securities in the total assets of a bank was held by COMERTBANK and BCR Chisinau, with a quota of more than 20%.

Because of the decreasing value of the investment securities portfolio in 2014 by 20%, in the banking sector has been registered a decrease in the weight of these portfolios in the amount of assets.

However, this indicators’ evolution depends on factors such as the necessity to fulfill the liquidity requirements imposed by the banks, by the “appetite” of for undertaking risky lending activities, as well as the desire to obtain direct incomes, (in form of dividends, interest or by selling these securities at a higher price), or indirect incomes (based on the diversification of activities related to securities transaction in services market).

Table 3.2.5.

Quota of investment securities portfolio in the total assets of banks in the Republic of Moldova during 2010-2014

in %

Source: Elaborated by the author based on annual reports of licensed banks from the Republic of Moldova during 2010-2014

Analyzing the securities portfolio of the banking system from the Republic of Moldova, we can definitely say that investment portfolio is significantly greater than the selling securities portfolio, which results in higher interest for banks to invest. Also, it should be pointed out that in 2014 has been registered a decrease in the bank’s investments not only in securities held until maturity, but also in trading securities. Thus, at 31.12.2014, as shown in Fig.3.2.1, the total securities portfolio in the banking sector amounted for approximately 4552 mln. lei, of which 4103 mln lei, or 90,1%, have been allocated for investment objectives.

Figure 3.2.1. Structure of securities portfolio in the banking sector in the Republic of Moldova during the period 2010-2014 (thousand lei)

Source: Elaborated by author based on the annual reports of licensed banks from the Republic of Moldova during 2010-2014

As a whole, analyzing the banking sector situation, the securities portfolio has insignificant values in banks’ assets, which constitute ~6% of total assets, in comparison with the crediting activity that creates more than half of banks’ assets portfolio (see Fig. 3.2.2.). This fact highlights the low interest of banks for capital market.

Figure 3.2.2. Share of investments in securities and of credits in total assets

Source: Elaborated by author based on the annual reports of licensed banks from the Republic of Moldova during 2010-2014

The efficiency of banks’ activity on capital market shall also be treated according to the obtained revenues from investments in securities.

As banks tend more to invest in securities held to maturity, is evident that the related revenues will have a significantly higher weight in the revenues obtained from investments (see Fig. 3.2.3.). Also, should be pointed out that the increase in revenues obtained from investing in securities in 2014 is due to more active investing of banks.

The same thing is visible from the following graph (see Fig. 3.2.4.), where is observed that the share of revenues from investments in securities reaches 10% of total revenues of banks in 2015, in comparison with 5% in comparison with the previous year.

Source: Elaborated by author based on the annual reports of licensed banks from the Republic of Moldova during 2010-2014

It is also important to mention that at the moment, banks have become important collectors of huge financial resources, and not efficient operators of them. Because of this, they may contribute to the enhancement of investment activity and to the ensuring of economic growth. However, there is a mass of factors that coerce the development of banks’ investment activity on the capital market, as follows:

The investments in the industrial branch are very risky;

The decrease of securities’ profitability reduces the investment possibilities of banks;

There seems to be no way for enlarging the variety of financial instruments that would guide the disposable money resources towards the real sector of the economy;

The lack of analysis methods of securities on the local market;

The low level of financial discipline and of financial information truthfulness;

The limits imposed by the government concerning the compulsoriness for holding a quota of the bank’s assets in state securities.

Thus, in order to optimize the investment activity of the banks it is necessary to implement some modifications in the banking system, in the investment legislation and to diminish the role of government in the investment process.

To conclude, can be said that all banks from the Republic of Moldova hold securities portfolios. However, the biggest share belongs to investment securities portfolio. A deep analysis shows that securities portfolios of banks mainly consist of state securities. This is due to the fact that these are risk-free assets and contribute to maintaining the liquidity in the banking sector. Also, most of banks hold securities of “Moldova Stock Exchange” or “National Securities Depository”, the reason for this being the requirements imposed by the state regarding holding of a certain share in the respective companies’ capital in order to operate on the capital market.

And not less important is the 3rd function played by banks on the capital market: as investments societies, performing one or more types of professional activity on the securities market.

The Law on Capital Market stipulates may be issued 3 types of licenses for investment firms:

Category A license authorizes investments firms to carry out the following activities and services:

Reception and transmission of orders regarding one or more financial instruments

Execution of order concerning financial instruments on behalf of clients

Portfolio management

Investments consultancy

Advice to undertakings on capital structure, industrial strategy and linked matters, and services regarding mergers and acquisitions of firms

Investment research and financial analysis or other forms of general recommendation relating to transactions with financial instruments.

Category B license allows the company to perform, besides the above mentioned, the following services and activities:

Placing of financial instruments without a firm commitment basis

Fiduciary administration of investments

Foreign exchange operations where these are directly connected to the provision of investment services.

Category C license allows to perform, besides the activities stipulated at category A and B license, the following activities and services:

Dealing on own account

Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis

Operation of MTF

Granting credits/loans to a client to allow him to carry out a transaction with one or more financial instruments

Services related to underwriting.

At the moment, 7 out of 11 licensed banks own category C licenses on unlimited term, as follows:

MOLDINCONBANK

MOBIASBANCA-Groupe Societe Generale

Bana de Finante si Comert

MOLDOVA-AGROINDBANK

EXIMBANK-Gruppo Veneto Banca

ENERGBANK

VICTORIABANK.

However, until 2015, these banks have performed the function of dealers as basic activity, and as linked activities: broker, investment consulting and underwriting, according to the Law on Securities Market.

The dealer activity on the capital market should not be confused with the activity of primary dealer on the state securities market, because the last one is performed exclusively with the objective of obtaining profits from selling-buying of state securities.

During 2014, as well as in 2013, have had the right to perform professional activities on the capital market 22 broker/dealer companies, of which 11 (out of 14 at that moment) were commercial banks. Thus, it may be noticed that not all licensed banks could develop professional activities on the capital market.

Through commercial banks as professional participants on the securities market, in 2014 have been registered 310 transactions that is by 170 transactions less than in the previous year. The transactions recorded in 2014 amount for 558.25 mln. lei, that is by 175.08 mln. lei less than in 2013. Of them, 10.2% (or 56.93 mln. lei) represent transactions with banks acting as dealers; the other 89.8% (or 501.32 mln. lei) belong to transactions in which banks acted as brokers.

Figure 3.2.2. Evolution of transactions performed by banks as broker/dealers on the capital market in dynamics during 2010-2014 (mln. lei/units)

Source: Elaborated by author based on the annual reports of NCFM

http://cnpf.md/en/rapa/ (cited on 27.11.2015)

As shown in Fig. 3.2.2., in the period analyzed decreased the number of transactions more than twice in comparison with 2011, fact that refers to their amount as well.

The structure of transactions includes: 299 sale-purchase transactions, in the amount of 453.71 million MDL (81.27 percent), 6 unique-package transactions, in the amount of 100.21 million MDL (17.95 percent) and 5 transactions with public property securities, in the amount of 4.32 million MDL (0.77 percent).

Figure 3.2.3. Structure of transactions (by number) carried out by banking brokers in dynamics during 2010-2014 (%)

Source: Elaborated by author based on the annual reports of NCFM

http://cnpf.md/en/rapa/ (cited on 27.11.2015)

If we analyze Fig. 3.2.3., it may be noticed that the biggest share in the transactions performed by banks on the capital market refers to sale/purchase transactions. Also, since 2012 is remarked a tendency of increase of single package transactions. On the other part, the transactions with public property securities dropped lately, reaching insignificant values in 2014.

The above transactions refer to the fact that commercial banks perform transactions with corporate securities at the Moldova Stock Exchange, close contracts for brokerage services on long term, and accumulate securities of attractive companies for their clients. Brokerage services are provided at a flexible fee, negotiated between bank and client.

Another activity performed by banks is the underwriting which consists in the intermediation at securities issuance. The underwriting activity is performed by professional participants in the issuer’s name, in order to promote the initial public offer and to place the issuer’s securities on the market.

This activity offers the following benefits to the bank:

Helps to attract new clients

Strengthens the bank’s position o the market

Contributes to the increase of bank liquidity, through attracting free funds with no charge.

Although banks are licensed to operate as underwriters, the NCFM reports don’t provide any information regarding this type of activity. Thus, we may say that underwriting services are not offered or required.

A special attention should be paid to investment consulting activity. This means personal recommending given to a client that is involved in one or more transactions with securities.

The consulting activity assumes the following:

Analysis of securities features

Advice and recommendations regarding the creation and administration of securities portfolio

Advice concerning the management and evaluation of risks related to securities investments

Advice regarding negotiation techniques on the securities market etc.

In 2014, out of 14 licensed banks at that moment, only VICTORIABANK offered services of investment consulting, by closing 2 contracts, the same as in 2013, the related revenue from them amounting for 5000 lei. In comparison with the previous year, the revenue resulted from providing this type of activity decreased by 820 lei.

From the above research may be concluded that banks provide a narrow spectrum of activities on the capital market. Banks should diversify their performed activities, as this could increase the bank’s value not only in terms of gained profits, but also in terms of raising the position on the financial and banking market.

Transactions on capital market – a way to improve bank’s performances (on the example of CB “Mobiasbanca-Groupe Societe Generale” JSC)

In an economy with a market based mainly on bank loans, the problem of assets diversification doesn’t delay to appear. However, domestic banks don’t see investments in securities as a method of assets capitalization. With obvious offered advantages, this problem leaves an “open door” for research.

The evaluation of factors related to investments in securities, that could positively influence the efficiency indicators of banks, constitutes an important subject for study, having a huge practical value and application.

In the following econometrical analysis, is pursued the identification of the influence of investment in securities on main efficiency indicators of the bank.

Table 3.3.1.

Variables that form the structure of the econometrical model for evaluation of influence of securities investment on bank’s efficiency

Source: Elaborated by the author

In order to determine the influence of holding securities portfolio on the efficiency of bank’s activity, were analyzed the relationships between securities indicators and various bank’s financial activity indicators.

Firstly, was analyzed the dependence of bank’s revenues on the volumes of securities portfolio and credit portfolio.

Table 3.3.1.

Correlation matrix: relationship between bank’s revenue and volumes of credit and securities portfolio

Source: Elaborated by the author

From Tab. 3.3.1. analysis, it can be stated with a high level of confidence that the volume of bank’s securities influences positively (an increase in securities portfolio probably will cause an increase in bank’s revenue) the formation of its revenue. There exists a dependence of 12% between those 2 indicators. However, a higher intensity of modification of bank’s revenue belongs to crediting activity (between those 2 factors exists a dependence of 77%). Thus, the obtained result can be interpreted as follows: in the given time period the influence of the bank’s securities portfolio on its profitability is insufficient.

Yet there arises a problem of how to activate that constituent of the banking activity and involve it into the general process of increasing the stock market’s significance. In conformity with the above-mentioned, of no less importance is the question what securities influence commercial bank’s revenue more. To solve this task, an econometric model was formed;

That can be determined, for instance, in the course of examining the econometric model of dependence of a commercial bank’s revenue on the volumes of the following structural assets parts of the bank: high liquidity assets, credit portfolio and securities:

As we can see, the analyzed bank is characterized by a conservative investment portfolio, investing less in equity (considered to be risky assets) and more in government securities (considered free-risk securities). Also, this strategy is adopted in conditions in which the corporate securities market in our country is low developed, which makes investors look for other opportunities for investments.

As a result, being involved in the market only by holding risk-free assets (such as securities issued by the government or National Bank), the bank gets insignificant returns, which influence in a low measure the financial result.

The influence of revenues obtained from different categories of securities, in comparison with the interest generated by credits, on bank’s financial result is shown in the below (model I).

For this, let’s create the following equation:

where:

Y – gross profit

β1, β2, β3 – multiple regression indices of the econometric model

X1 – revenues obtained from investing in government securities

X2 – revenues obtained from investing in equity

X3 – revenues obtained from crediting activity

ε – residual error.

From the analysis of endogenous and exogenous indicators, was generated the following values of regression indices:

Table 3.3.2.

Parameters of bank’s profit dependence on the volumes of revenues obtained from investments in different categories of securities and from crediting activity

Source: Elaborated by the author

From Tab. 3.3.2., may be pointed out that both revenues generated by investments in securities and by crediting activity influence positively the amount of profit. These indicators have a high impact on the evolution of gross profit (), thus the level of profit is determined by the level of interests from investments and credits in amount of 83%.

However, the highest effect is manifested by the revenues obtained from credit portfolio, an increase of 1mln. lei of related interest causing an increase of 999 th. lei in the amount of gross profit. Obtaining revenues from government securities in an amount 1 mln. lei higher will determine a profit greater with 125 th. lei. A special attention should be paid to corporate securities, that being carefully included in the portfolio, could substantially increase the level of gross profit. But this is a real challenge for existing banks, as the possibilities are reduced in conditions of a low developed corporate securities market.

The value of β0 shows helps us to predict the amount of profit, which would be -186 mln. lei, if the bank wouldn’t receive any revenues from the above described activities.

(For other related data to this model, see Annex…)

Another indicator that should be analyzed in order to appreciate the efficiency of investing in securities is Return on Assets. Even if between these indicators doesn’t exist a direct relationship, it is worth investigating this matter (model II).

For this, was analyzed the influence of return on different categories of investments over ROA. The following equation expresses this relationship:

where:

Y – ROA

β1, β2 – multiple regression indices of the econometric model

X1 – return on investments in government securities

X2 – return on investments in equity

ε – residual error.

From the analysis of endogenous and exogenous indicators, was generated the following values of regression indices:

Table 3.3.3.

Parameters of ROA dependence on the return on different categories of

investments in securities

Source: Elaborated by the author

As shown, the profitability of investments in securities has a positive impact on ROA. An increase of 1% (or receiving 1 leu more per each leu invested in GS) in ROIGS could increase ROA by 0,081%. And the bank should benefit of this opportunity, because if we analyze the evolution of government securities profitability, we may notice a continuous increase in the last years (see Fig. 3.3.1.), which is due to the increase of weighted average yields of GS on the market (see Annex…).

Figure 3.3.1.

Evolution of return on investments in Government Securities and Corporate Securities

Source: Elaborated by author based on Mobiasbanca GSG annual reports

On the other side, is notable the higher effect of corporate securities, as an increase of 1% in ROICS might rise ROA by 0,199%.

Also, the verification of the econometric model with statistic criteria allows to ascertain the coefficient of determination , which shows that explanatory variables (ROIGS and ROICS) determine the variation of associated dependent variable in a proportion of 61%.

(For other related data to this model, see Annex…)

In conclusion, it is worth mentioning that there is no formula to determine the optimal allocation. Banks must weigh the higher potential return from some uses of funds against the lower return and lower risk of other uses of funds. But when structuring their assets, a special attention should be paid to investments in securities, as these influence positively the main indicators of bank’s efficiency, as was demonstrated above.

Conclusions (sunt doar citeva notite care o sa le includ)

Europe is too reliant on its banks for funding and needs to develop its capital markets in order to improve the availability and cost of finance.

The euro area banking sector is facing challenges on all sides: from new technologies, from new market players, from new rules of the game. Those challenges, insofar as they lead to competition and innovation, are healthy. They are how a well-functioning market economy works.

But we must also recognise that, in the euro area, we need sound banks. A weak banking sector means a weak economy. So I entreat banks to respond to the challenges of the new environment and reinvigorate their business models. And I entreat policymakers to create a fair, clear and consistent level playing field where that can happen.

Annex.

Data used for performing the econometric models for appreciating the influence of investments in securities on bank’s

main efficiency indicators

Source: Elaborated by author based on financial reports of CB “Mobiasbanca-Groupe Societe Generale” JSC

Annex.

Graphic representation of the multifactorial equation (model I)

GP = 0.9989*REVCREDIT + 11.7216*REVCS + 0.1249*REVGS – 186.5846

The calculations were conducted in Eviews 9.0.

Source: Obtained by author based on the multifactorial equation (model 3.3.1.)

Annex.

Graphic representation of the multifactorial equation (model II)

ROA = 0.1995*ROICS + 0.0810*ROIGS + 0.0096

The calculations were conducted in Eviews 9.0.

Source: Obtained by author based on the multifactorial equation (model 3.3.1.)

Annex.

Weighted average yields on Government Securities of the RM

Source: Elaborated by author based on NBM reports