Moldova: Consortium of Banks Emergency Liquidity Program, 2014

In a review of the intervention several years later, the NBM said that the large number of depositors at the banks combined with the banks’ size in the banking system meant that a disorderly resolution could result in bank runs and contagion, which could endanger the Moldovan financial system as a whole (NBM 2020). The NBM said that it made the emergency loans “to ensure financial stability in case of danger of [a] developing systemic financial crisis” (NBM 2015c, 46); the loans were meant to safeguard the entire domestic financial system and to protect the deposits of non-affiliated individuals and legal entities (Inquiry Commission 2019; NBM 2015b).

With few exceptions, the Moldovan government authorized the emergency loans only to pay out the deposits of individual depositors and state agencies at the three banks. The Inquiry Commission also said that the use of the loan proceeds was “very suspicious,” citing the following breakdown of loan proceed uses: 64% for interbank loan repayments, 35% for legal entities holding deposits at BEM, and 1% for deposits of natural persons (Inquiry Commission 2019).

The NBM chose the banks for consideration in emergency aid because it concluded that the banks were insolvent and had misreported key balance sheet statistics. The NBM considered the banks systemically important. The banks’ consolidated share of the banking system was 30.4% (NBM 2016; NBM 2020).

The NBM’s adjusted consolidated balance sheet of the banks (see Figure 7 at Appendix) shows that the NBM considered the banks to have negative accounting equity as early as September 2014. The NBM’s adjusted consolidated balance sheet showed that the banks, if treated as a consolidated entity, would have had negative equity of MDL 12.3 billion, compared to the positive equity of MDL 2.3 billion the banks reported (NBM 2020). According to the NBM, at the time of the emergency loans, the three banks had virtually no liquidity (Inquiry Commission 2019). According to the NBM Law, the NBM may extend credit under emergency situations to “solvent and viable banks that are experiencing temporary liquidity problems” (Moldovan Parliament 1995, art. 18[1]).

In 2011–2012, the IMF and World Bank recommended that the Moldovan government privatize BEM; as a result, the government, the NFSC, and the NBM created a strategic plan for BEM’s privatization. In June 2013, the IMF and World Bank recommended a state-led recapitalization of BEM and subsequent privatization. From January–October 2014, the IMF and World Bank proposed to the NBM “repeatedly” that the NBM introduce special administration of the banks, but the NBM ignored those proposals (Inquiry Commission 2019).

During 2014, before the crisis, the Moldovan National Anticorruption Center (CNA) and the Security and Intelligence Service had provided “exhaustive information” to the government about deterioration in the financial sector as well as the NBM’s and government’s failure to address the issues (Inquiry Commission 2019).

In August of that year, the CNA proposed to the Moldovan government that it create a contingency plan for a financial crisis and require the banks to return investments from Russian financial institutions (Inquiry Commission 2019).

The NBM completed such a contingency plan on September 30, 2014, in collaboration with auditing company KPMG.^FNThe contingency plan relied upon KPMG’s special diagnostic audit of BEM conducted from February to May 2014, World Bank mission materials related to the situation of the three banks, and supervisory information as reported by the banks to the NBM (NBM 2020). The contingency plan adjusted reported balance sheet data at the banks to account for their misreporting and misrepresentation of key supervisory measures. The contingency plan also estimated recovery costs in the case of resolution. (For the NBM’s adjusted balance sheets of the banks in September 2014, see Figure 7.) The analysis showed that while the banks reported a consolidated equity figure of MDL 2.3 billion, the banks’ adjusted consolidated equity was negative MDL 12.4 billion. At that time, the NBM estimated that the total cost of resolving depositor claims at the banks would be MDL 6.3 billion (NBM 2020). Figure 3 shows the NBM’s cost estimates for deposit coverage of the banks. For the NBM’s adjusted consolidated balance sheet of the banks in September 2014, see Figure 7. 

In the context of BEM’s involvement in the liquidation of another bank from 2010, and in order to limit BEM losses thereon, the Ministry of Finance provided MDL 428.5 million in repo financing to BEM, to be repaid (repurchased) on a quarterly basis in equal tranches, with a final maturity date of December 30, 2015 (Inquiry Commission 2019; NBM 2015c).

Per the government’s decision (No. 938), the NBM’s special administration over the banks was a condition for the state guarantee of the emergency loans (Inquiry Commission 2019; Leanca et al. 2014). However, there were delays between the disbursal of emergency loan funds and the imposition of special administration at BEM and UB (which prosecutors have claimed was intentional—see Summary Evaluation). In the case of BEM, the NBM granted the emergency loan on November 27 but did not impose special administration until the afternoon of November 28 (special administration should have begun in the evening of November 27). In the intervening time, BEM used emergency loan money to originate loans to customers (though prosecutors have alleged that those companies included Shor Group companies and, thereby, were part of the money laundering operation—see Summary Evaluation). In the case of UB, the NBM granted the emergency loan on November 30, but did not place UB under special administration until exactly one month later. The Inquiry Commission said that the imposition of special administration at UB was done “in a very suspicious manner” (Inquiry Commission 2019).

On October 16, 2015, the NBM withdrew the banking licenses of the three banks because of both their insolvency and their illegal conduct, assigned liquidators (NBM staff) to each bank, and began the process of liquidation (NBM 2015a).

Shortly after the first announcement of emergency loans on November 27, 2014, the NBM announced a moratorium until March 27, 2015, with respect to repayment of various of the banks’ liabilities (Inquiry Commission 2019).

In granting the emergency loans, the NBM said:

[The] emergency loans have been granted under the provisions Article 5 e), Article 18 (par. 3) and Article 26 a) of the Law on the National Bank of Moldova No. 548-XIII of 21 July 1995, in the terms and conditions set out in the Regulation on emergency loan (approved by Resolution of the Board of Directors of the National Bank of Moldova no. 130 of May 28, 2012). (NBM 2015c, 46)

Article 18(1) of the NBM Law authorized the NBM to extend credit in emergency situations

• To solvent and viable banks^FNWhile our research did not uncover any NBM statements on the viability of the banks, the NBM said that the three banks had, in aggregate and individually, negative equity as of September 30, 2014 (NBM 2020). that are experiencing temporary liquidity problems;
• Secured against collateral enumerated in Article 18, paragraph 1 of the NBM Law (government securities, NBM securities, deposits at the NBM or other bank(s), or any other eligible assets as dictated by the NBM);
• For a term of three months, with allowable extension not exceeding one year;
• At a penalty rate (Moldovan Parliament 1995).

The “regulation on emergency loan” (Resolution No. 130 of May 28, 2012 of the Board of Directors of the NBM) was an internal rule that was never published in the Official Gazette of Moldova and was never registered with the Ministry of Justice (NBM 2019). Our research was unable to uncover the regulation.

On September 25, 2014, the Moldovan government amended the NBM Law, the Law on Financial Institutions, and the Law on Public Debt, State Guarantees and State Recrediting to issue state securities without parliamentary approval to recapitalize banks or to secure loans from the NBM to banks in situations of financial crisis. These amendments allowed the government to issue—without parliamentary approval—state securities for the purposes of bank capitalizations and guarantees of NBM bank lending. On November 7, 2014, the NSFC decided that the position of the banks represented a threat to national systemic financial stability and recommended that the Moldovan state provide guarantees to NBM emergency lending in order to avoid a crisis (Inquiry Commission 2019).

On November 27, 2014, the Supreme Court of Justice ruled that a previous share issuance at BEM—diluting the state’s share ownership from 56.7% to 33.3%—was illegal and overturned the share issuance, returning control of BEM to the state (Infotag 2014a; Infotag 2014b). NBM governor Dragutanu said that, as a result of the Supreme Court of Justice decision, BEM was returned to state ownership and that the NBM had to quickly intervene and impose special administration at BEM (prosecutors later said that delay for special administration was intentional or negligent—see Summary Evaluation) (Dragutanu 2014).

Law No. 419-XVI of December 22, 2006, regarding public debt, state guarantees and state recrediting (as amended in September 2014—see Figure 1) authorized the state guarantee of NBM loans (Inquiry Commission 2019). According to September 2014 amendments to Law No. 419, in the event of non-repayment of loans extended by the NBM during systemic crises, the state securities comprising the Ministry of Finance’s state guarantee become the property of the NBM in the amount of the full guarantee and unpaid interest. Law No. 419 stipulated that the Ministry of Finance could issue state guarantees without parliamentary approval only if issued during a systemic crisis or risk of one (Moldovan Parliament 2006). The Inquiry Commission said that the government did not announce a financial crisis or danger of one, which it said violated the law (though it did not specify which law) (Inquiry Commission 2019).

In 2015, NBM governor Dragutanu resigned following weeks of street protests related to the bank fraud scandal; he accused politicians of interfering with the NBM’s independence (Rusnac 2015).

In 2017, the NBM’s internal audit department carried out an audit with respect to the legality of the loans and said that all emergency loans had been made consistent with all applicable rules and regulations and that there was no indication that the banks had used the emergency funds in any illegal manner (NBM 2020). A 2019 Parliamentary Inquiry Commission found that during the period of the banking crisis, the government and the NBM acted with abuse and gross negligence. As of 2019, the Anticorruption Prosecutor’s Office had opened a criminal case on that subject (Inquiry Commission 2019).

In 2020, Moldovan prosecutors detained numerous former NBM staff—including then–governor of the NBM Dragutanu—in connection with the 2014–2015 interventions. Prosecutors also arrested the former special administrator of BEM (who also served as a department head at the NBM) for abuse of office in connection with the management of state guarantees of the NBM’s lending. Also in 2020, prosecutors confiscated documents from the NBM related to its handling of the 2014–2015 interventions (Prijmireanu et al. 2021). Ultimately, numerous arrests and prosecutions were made by Moldovan authorities (see Summary Evaluation).

The Ministry of Finance issued the repo finance under the Law on Measures to Ensure Financial Stability, No. 190, of September 30, 2011 (NBM 2015c).

The emergency loan funds were transferred to the banks’ current accounts held at the NBM (which contained the banks’ other funds as well). Initially at least, the NBM had preauthorized multiple tranches of draws under the emergency loans (for example, MDL 5.3 billion to BEM in 11 tranches; see Figure 4 at Key Design Decision No. 7, Source and Size of Funding) (NBM 2020). Our research did not uncover whether the emergency loan draws were ultimately drawn in tranches.

Once the emergency loans were made, the special administrators from the NBM requested draws to pay out the depositors (see Key Design Decision No. 12, Other Conditions) (NBM 2020). See Figure 8 at Appendix for the payments made to depositors by depositor class.

On January 28, 2015, the NBM contracted the investigative consultancy Kroll to conduct an investigation into transactions among the three banks leading up to their special administration in 2014; Kroll furnished a preliminary report on April 2, 2015 (Kroll 2015). On December 20, 2017, Kroll produced a second-phase summary report examining the causes of the banks’ collapse and identifying the perpetrators and beneficiaries of the bank fraud (Kroll 2017). Finally, on March 22, 2018, Kroll produced a third detailed report providing detailed analysis of fund flows and mechanisms by which the bank fraud was carried out by its perpetrators (Kroll 2018).

At the direction of parliament, in 2020, the NBM’s internal audit department carried out an audit with respect to the legality of the loans and said that all emergency loans had been made consistent with all applicable rules and regulations and that there was no indication that the banks had used the emergency funds in any illegal manners (see Key Design Decision No. 3, Legal Authority). The report disclosed the decision-making process behind the loans, legal authorities, sequence of events, loan amounts, the NBM’s September 2014 contingency planning, and key details including the NBM’s expected program cost and evaluation of the banks’ balance sheets prior to November 17. The report did not discuss the loans’ collateral or interest rates (NBM 2020).

On June 10, 2019, the Moldovan Parliament established the Inquiry Commission to investigate the bank fraud and systemic crisis of 2014. The Inquiry Commission published its final report on October 8, 2019. The Inquiry Commission said that the use of the loan proceeds was “very suspicious,” citing the ultimate use of the loan funds (see Key Design Decision No. 1, Purpose). The report also said that more clarification was needed to explain why the NBM charged 10 bps on its emergency loans while the state debt securities issued to pay off the NBM emergency loans carried an interest rate of 500 bps (Inquiry Commission 2019); see Key Design Decision No. 8, Rates and Fees.

On November 24, 2014—11 days after the government decision to provide the loans—the Moldovan media outlet NewsMaker reported that the Cabinet of Ministers had decided to provide MDL 9.5 billion through the NBM to needy banks, although neither the prime minister’s office nor the NBM confirmed or denied the reporting. A source at an EU member nation embassy in Moldova originally reported the development to NewsMaker, and the journalists confirmed the report by speaking with an individual in an international financial institution. While the details of the decision were kept secret by the government, one of the sources speaking with journalists said that most of the money would likely go to BEM; the article also names BS and UB as large Moldovan banks comprising the majority share of foreign funds to Moldovan banks, and banks that, in addition to BEM, were controlled by Shor (NewsMaker 2014).

When the NBM disclosed the lending in its 2014 annual report (which it published on its website on July 14, 2015), it said that it was a macroeconomically essential policy without which Moldova could have faced systemic financial instability (NBM 2015b). Starting in May 2015, the NBM began issuing press releases related to the status of the banks, their resolution and liquidation, and recovery of funds from them (NBM n.d.a).

In its financial statements for 2014, the NBM referred to its liquidity assistance as short-term loans and as “credit lines” with a limit (NBM 2015c). It also disclosed the size of the loans and the amounts used, as well as some details about the banks’ financial positions at year-end 2014 (NBM 2015c).

In a press briefing on December 1, the NBM revealed that the government had appointed special administrators for BEM and Banca Sociala (Dragutanu 2014). A media report said that, in that press briefing, the president of the NBM directed media outlets to “show maximum attention and responsibility” when reporting on the banks so as not to provoke a banking crisis (Infotag 2014a).

On December 24, 2014, a monthly press release about the conditions of the banking sector noted the statistics for November were “strongly distorted” by suspicious and large transactions by the three banks (NBM 2014a).

The Inquiry Commission referred numerous times to decisions related to the emergency loans as “secret” (insofar as the decision excluded parliament) (Inquiry Commission 2019; Transparency International Moldova et al. 2017). The NBM only disclosed the emergency loans in its 2014 annual report, issued during the early part of the following year (see Key Design Decision No. 5, Governance). The Inquiry Commission said that the state guarantees were “undertaken in secret” and said that meetings of the NFSC were held in secret (Inquiry Commission 2019). The Inquiry Commission said that the government did not declare a financial crisis or the danger of one—in the Commission’s view, this violated the law (Inquiry Commission 2019).

News media reported BEM’s alleged role in money laundering and theft as early as February 2013, noting that the transactions began in 2008, as uncovered by the Russian anti-corruption attorney Sergei Magnitsky (RIA Novosti 2013). In 2012, Hermitage Capital—the American firm that Magnitsky represented—filed a complaint in Moldova alleging that USD 53 million of laundered money could be traced to BEM (Coalson and Solash 2013).

The special administrators issued monthly reports about the use of the emergency loans (NBM 2020).

The NBM provided the emergency loans. The Moldovan government provided a state guarantee via the Ministry of Finance (see Key Design Decision No. 10(A), Collateral). The NBM said that the source of emergency loans granted to the three banks represented a “monetary issue” for the NBM (NBM 2020). The domestic money supply increased significantly in November 2014 and nearly all the increase was attributable to NBM lending to banks (see Key Design Decision No. 11, Impact on Monetary Policy Transmission). In October 2016, the Ministry of Finance paid out the loan to the NBM using funds (equal to MDL 13.3 billion, representing the MDL 12 billion in losses with an inflation adjustment) from the issuance of state debt (NBM 2016). At the time, the NBM said in a public statement that it faced billions of lei in credit losses on the emergency lending. The Ministry paid the NBM MDL 13.3 billion, representing the MDL 12 billion sum of the emergency loans “which were not repaid on the date of the issuance of the state bonds,” adjusted for inflation (NBM 2016).

Emergency lending totaled MDL 14.1 billion; the total authorized lending capacity was MDL 14.4 billion (see Figure 1 at Overview). The NBM initially authorized a total lending size of MDL 7.8 billion on September 30, 2014, but on November 13 authorized a larger MDL 9.4 billion in NBM emergency loans with a state guarantee (Inquiry Commission 2019; NBM 2020). That amount—MDL 9.4 billion—represented roughly a third of the Moldovan government’s budget at the time (NewsMaker 2014). In November and December of 2014, the NBM made loans to the banks for a total of MDL 9.4 billion in available credit, of which nearly all (98.9%) was drawn by the banks. In April 2015, the NBM expanded the facility, lending a second tranche of MDL 5.0 billion in available credit under the same terms, of which nearly all (96.5%) was drawn by the banks (NBM 2020). Figure 4 shows the loan amounts approved and used throughout 2014 and 2015.

While our research did not uncover a specific rationale for the sizes of the loans extended, it does not appear that the loans were made in close proportion to the individual banks’ share in the size of the total consolidated consortium. Figure 5 shows the aggregate authorized lending to each bank as a share of its reported total assets and liabilities.

The NBM charged 10 bps annually on the emergency loans. In 2014, the average interest rate on NBM repo facility^FNThe NBM’s repo facility comprised repurchase operations with bank counterparties for state securities, the aim of which was liquidity provision (NBM 2014b). borrowing was 412 bps. Loans made by the NBM for construction purposes in the same year carried an interest rate of 1,000 bps. The average interest rate on the NBM’s portfolio of Moldovan government securities was 457 bps (NBM 2015c). By law, the NBM was required to lend at a penalty rate (see Key Design Decision No. 3, Legal Authority).

In a post on its webpage, the NBM posted a question-and-answer section about the interest rate charged on the emergency lending with the title “Why was the interest on emergency loans only 0.1%?” (NBM 2016). In its response, the NBM explained that a higher interest rate would have reduced available bank assets to repay depositors and was responsive to the limited credit servicing abilities of the banks in their troubled states (NBM 2016).

The emergency loans had a four-month duration. The NBM made the emergency loans on November 27, 2014, with a maturity date of March 27, 2015 (NBM 2015c). While our research did not uncover a formal renewal, the banks were under special administration and by October 2015 were put into liquidation; the loans had not been repaid at that point (see Key Design Decision No. 2(B), Part of a Package). By October 2016, the NBM had not been repaid in full and was fully compensated for its exposure on the emergency loans by the Ministry of Finance (NBM 2016). As of year-end 2022, the banks were still in the process of liquidation and had repaid a total of MDL 2.7 billion, with a remaining balance of MDL 11.4 billion outstanding (NBM 2023).

On October 5, 2016, the Ministry of Finance announced that it had enacted the state guarantee of NBM emergency lending by repaying the NBM with proceeds from the issuance of sovereign debt (NBM 2016). According to September 2014 amendments to Law No. 419, in the event of nonrepayment of loans extended by the NBM during systemic crises, the Ministry of Finance was legally obligated to transmit state securities that constituted the state guarantee to the NBM (see Key Design Decision No. 3, Legal Authority) (Moldovan Parliament 2006). But even if the Ministry of Finance had not exercised its state guarantee, the NBM would have been left with negative equity and reserves. By law, in the event that the NBM had negative equity, the Ministry of Finance would have had to recapitalize the NBM by issuing debt (in other words, the Ministry of Finance would have had to recapitalize the NBM in either case).^FNAlthough, in the case that the NBM had defaulted, recorded negative equity, and been recapitalized by the Ministry of Finance, the recapitalization would have occurred in annual stages over five years (and at an estimated higher interest rate of 785 bps) instead of at one time (NBM 2016). To implement the state guarantee, the Ministry of Finance issued MDL 13.3 billion in government bonds with a 25-year maturity and interest rate of 500 bps (NBM 2016).

As of 2019, MDL 13.3 billion remained outstanding from the emergency loans, and the Moldovan government estimated that the conversion of that debt into state debt would cost MDL 25 billion over a period of 25 years (Inquiry Commission 2019). As of December 31, 2022, the NBM reported that the three banks were still in the process of liquidation and had repaid a total of MDL 2.7 billion, with a remaining balance of MDL 11.4 billion outstanding. After having been compensated by the Ministry of Finance for the remaining balance of the emergency loans, the NBM continued to liquidate assets from the banks as part of its normal bank resolution process; asset liquidations would pay off the banks’ outstanding liabilities in resolution (NBM 2023).

According to the NBM, as of December 31, 2014, collateral pledged by all licensed banks in Moldova against all loans made by the NBM—including the emergency loans (“the one under State guarantee”)—were MDL 9.7 billion (NBM 2015c, 47).

Pursuant to the NBM Law, emergency credit must be secured against collateral enumerated in Article 18: government securities, NBM securities, deposits at the NBM or other bank(s), or any other eligible assets as dictated by the NBM (see Key Design Decision No. 3, Legal Authority) (Moldovan Parliament 1995). While our research did not uncover what specific collateral secured the loans, the NBM’s internal audit concluded that the emergency loans were made in accordance with the NBM Law, without addressing the issue of collateral (see Key Design Decision No. 3, Legal Authority).

In its 2014 financial statements, the NBM said that, given the “specific nature” of the emergency loans and the fact that they were state-guaranteed, it did not need to account for impairment losses on the emergency loans (NBM 2015c, 46).

The NBM was secured in its lending by a guarantee from the government of Moldova. On November 7, 2014, the NFSC held a meeting in which it noted the risks of a systemic crisis and proposed state guarantees of NBM loans of up to MDL 9.4 billion to secure the NBM in its lending to troubled banks. According to the NBM, at the time the three banks had virtually no liquidity. On November 13, 2014, the government approved the NFSC’s proposal for MDL 9.4 billion in state guarantees for NBM emergency loans to licensed banks in order to ensure systemic financial stability; neither the NBM nor the government publicly disclosed these decisions at the time (Inquiry Commission 2019; NBM 2020).

The state guarantees specified that guaranteed NBM emergency loans only be used to pay depositors not identified to be associated with money laundering or terrorism financing (Inquiry Commission 2019).

On October 5, 2016, the Ministry of Finance implemented its state guarantee of the emergency loans by issuing sovereign debt and transferring the proceeds from that issuance to the NBM, thus compensating the NBM in full for its outstanding exposures and ensuring that the NBM remained fully capitalized (NBM 2016).

The Economist reported that the “huge expansion” of the money supply caused a doubling of inflation and currency devaluation (The Economist 2015). The NBM said that the source of emergency loans granted to the three banks represented a “monetary issue” for the NBM  (NBM 2020). Nonetheless, the broadest measure of the money supply available­—M3—decreased month-on-month in November 2014.

This is because of the countervailing effect of foreign exchange intervention. While the NBM expanded net domestic assets by MDL 3.6 billion (almost entirely as a result of bank loans), it also decreased its foreign reserve assets by MDL 3.7 billion in foreign exchange market interventions or other transactions that resulted in a drop in official foreign reserves;^FNSuch as sales of monetary gold or Special Drawing Rights. this resulted in a small net decrease in the overall money supply. In other words, the domestic money supply increased significantly (52.2%) as a result of NBM bank lending (the vast majority of the expansion of the domestic money supply was an increase in claims on banks), while the foreign component of the money supply—foreign reserves—decreased (-11.2%) as a result of foreign reserves transactions. Figure 6 shows the changes to the constituent parts of the broad monetary base, according to the NBM.

Figure 6: Changes to the Money Supply, October–November 2014 (MDL millions)

As the leu continued to depreciate against the dollar, a similar dynamic of decreasing aggregate money supply coupled with a depreciating currency and increasing inflation continued in the months following the emergency loan.

In response to the jump in inflation (which The Economist said was caused by the emergency aid), the NBM raised its benchmark interest rate from 850 bps in January 2015 to 1,550 bps by August 2015 (The Economist 2015) (see Figure 1).

On October 5, 2016, the Ministry of Finance announced that it had replaced the state guarantee of NBM emergency lending with state securities—in other words, it converted the loans initially funded by monetary expansion into fiscal debt (NBM 2016). 

The NBM and Ministry of Finance permitted the use of the emergency loans only to pay out the banks’ deposits

and only those not associated with money laundering. An interagency special commission verified designated depositors (natural persons or organizations with deposits equal to or greater than MDL 500,000) to ensure that depositors were not associated with money laundering. To assess which individuals or businesses were identified in these categories, the Ministry of Finance, NBM, Ministry of Economy, Ministry of Internal Affairs, Information and Security Service, and the National Anticorruption Center set up a special commission to analyze the deposit balances of individuals and businesses to determine which were associated with money-laundering activities (Inquiry Commission 2019). In addition to deposits associated with money laundering, most foreign accounts were also excluded from coverage by the emergency loans (the Russian deposits on which the banks relied to originate new loans were later shown to have never existed, but were rather fraudulent entries in the banks’ supervisory reporting to the NBM) (Kroll 2017; NBM 2020).

Additionally, the NBM imposed restrictions on certain liabilities payments (see Key Design Decision No. 2(C), Part of a Package).