Moldova’s Financial System Under Scrutiny: Evaluation Highlights Strengths and Weaknesses

The International Monetary Fund (IMF) has released a comprehensive report evaluating Moldova’s financial system, highlighting both strengths and weaknesses. The assessment was conducted using international best practices and standards, including the Basel Core Principles for banks and the Insurance Core Principles developed by the International Association of Insurance Supervisors.

Key Findings

• Commercial banks remain the dominant financial institution in Moldova, accounting for 90% of total financial system assets.
• Foreign banks have been increasingly present in the Moldovan banking system, with their share growing from just over 1 quarter in 2009 to almost 90% at end-2020.
• Savings and credit associations (SCAs) represent a small but rapidly expanding share of credit institutions, with assets growing from about 0.4% to 1% over the past decade.
• Other financial corporations (OFCs), including non-bank credit organizations (NBCOs) and Category A SCAs, account for around 10% of total bank assets.

Macrofinancial Vulnerabilities

The report highlights several macrofinancial vulnerabilities that expose the financial sector to credit and solvency risk:

• Real-financial linkages: High loan concentration in commercial banks’ lending to only a few relatively large borrowers.
• Fiscal-financial linkages: Commercial banks holding significant amounts of government bonds.
• External-financial and intra-financial sector linkages that could amplify financial vulnerabilities.

Recommendations

To address these vulnerabilities, the authorities are urged to:

• Implement measures to improve loan origination standards and reduce dependence on government bonds.
• Strengthen supervision and regulation of NBCOs and Category A SCAs.
• Improve the resilience of the financial system through enhanced prudential requirements and risk management practices.

Conclusion

The IMF assessment provides a comprehensive overview of Moldova’s financial system, highlighting both strengths and weaknesses. While commercial banks remain dominant, there are concerns about loan concentration risk and fiscal-financial linkages. To mitigate these risks, policymakers and regulators must consider implementing measures to improve loan origination standards and reduce dependence on government bonds.

Overall, the assessment provides a valuable framework for policymakers and regulators to identify areas for improvement and strengthen the financial system to support economic growth and stability.