##ndi of an inflation targeter. some of these tools would later be referred to as “ macroprudential instruments ”, but back then we referred to them as unorthodox monetary policy measures, the nbr responsibilities including not only monetary policy, but also financial stability, the supervision of credit institutions and the issuance of secondary legislation in the field of banking regulation. consequently, i have come in front of you today with the hope that at least some of the lessons we learned at the time might prove relevant for this panel ’ s discussions. bis central bankers ’ speeches my intervention today is structured along 4 lines, namely : 1. what made the economic context in which the nbr was operating in the run - up to the european union exceptional? 2. how far has the nbr departed from the standard paradigm? 3. did markets and banks react to the departure from the paradigm? 4. was the unorthodox approach effective? allow me to sketch the answers to these questions : 1. what made the economic context in which the nbr was operating in the runup to the european union exceptional? first of all, the banking system was dominated by foreign - owned banks. after a string of domestic bank failures ( particularly in the late nineties ), the lack of domestic private capital, combined with the fragile situation of the state budget, made it compulsory to privatize the existing banks by selling them to foreign entities. as a matter of fact, the dominant view at the time was that opening the banking system to foreign capital was essential for improving efficiency and expertise, alleviating the shortage of domestic capital, and increasing competition. against this background, by facilitating a better resource allocation, the penetration of foreign capital into the romanian banking sector was seen as a means to promote restructuring of the loss - incurring soes and to stimulate convergence to the eu. of course, such a development brought about positive effects in the economy, as it came with stronger corporate governance and modern banking practices. however, it also had the byproduct of rapidly growing forex credit, undermining the effectiveness of conventional monetary policy and giving rise to risks from the financial stability perspective. this occurred against the background of a significant interest rate differential, given the comparatively high inflation and increasingly abundant capital flows, as the removal of capital controls was proceeding rapidly due to the requirements of the forthcoming eu membership. such an environment naturally produced nominal appreciation of the domestic currency, providing further incentive for foreign currency

the departure from the paradigm? yes, especially since we also used a number of administrative measures, controversial at the time, but which now – after the crisis has warranted their use – are considered valid macroprudential instruments. i will name some of them : enforcing maximum loan - to - value ratio, introducing debt service ceilings relative to households ’ monthly disposable income ( the scope of which was subsequently expanded to include non - bank financial institutions engaged in lending ), setting limits to banks ’ forex exposure vis - a - vis unhedged borrowers, using differentiated coefficients in stress tests ( higher for exposures to eur than lei, with even stricter coefficients for chf - and usd - denominated credit ). at the time, banks perceived such measure as excessive administrative interference and i even remember a rather uncomfortable discussion with the president of a large foreign bank operating in romania, who reproved me for the fact that, only a few years after being invited to invest in our country, banks were facing regulatory “ innovations ” that narrowed their scope of business. 4. was the unorthodox approach effective? with the benefit of the hindsight, i would say it was, at least to some extent. i see now 3 limitations and 3 benefits of the approach we took 10 years ago. let me start with the limitations : first, the measures were not entirely successful in cooling off foreign currency lending, as banks found ways to circumvent the restrictions in place by externalising credit portfolios. forex credit continued to expand, its share in total credit approaching 60 percent by the end of 2008. we are still dealing with this legacy : for instance, swiss franc loans, even though accounting for a much lower share of total credit than in neighbouring countries, proved troublesome in the wake of the recent chf appreciation. second, implementing the unorthodox measures has also proven very difficult from the communication perspective. these measures proved difficult to explain to the public at large, which saw them as preventing improvements in welfare, and also to the commercial banks themselves, which – as i said earlier – were protesting against what they saw as an uncalled for injunction into their activity. on top of that, we had a tough time explaining our policies even to the ecb. fortunately, president trichet understood why we had to take the unusual monetary policy approach, acknowledging that the standard policy consensus was not enough to deal with the challenges a small open economy