A Diagnostic Analysis of the Moldovan Banking System in the Context of Signing a Deep and Comprehensive Free Trade Agreement with EU

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Publishing date: Monday, 26 September 2011
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The banking system is deeply integrated into the national economy due to its double role of granting credits and aggregation of firms’ or households’ savings. As a result, its nehavior is very pro-cyclical, being one of the most vulnerable sectors to various macroeconomic shocks. A Deep and Comprehensive Free Trade Area (DCFTA) between Moldova and European Union entails a series of macroeconomic effects which, at least theoretically, should affect the local commercial banks. Hence, the scope of this study is to perform a diagnostic assessment of the Moldovan banking system and to estimate the impact of a DCFTA on commercial banks. The stress-test analysis confirms the fact that the Moldovan banking system is quite sensible to various macroeconomic shocks, due to its interdependence with various branches of the national economy. Still, the commercial banks are well prepared for a DCFTA with EU, as the potential macroeconomic shocks are likely to bring net benefits to the entire banking sector. In order to eliminate the systemic deficiencies and to ensure a more dynamic development of the analyzed sector we recommend a series of policy measures based on the following main objectives: (i) to increase the intermediation level of commercial banks; (ii) to mitigate the banks’ reluctance related to their lending activity; (iii) to foster the competition on the market of banking services; (iv) to improve the regulatory framework of the banking activity.

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