The World Bank Romania: Institutional Strengthening and Financial Safety Net Resilience Project (P171039) Appraisal Environmental and Social Review Summary Appraisal Stage (ESRS Appraisal Stage) Public Disclosure Date Prepared/Updated: 12/13/2019 | Report No: ESRSA00303 Dec 13, 2019 Page 1 of 10 The World Bank Romania: Institutional Strengthening and Financial Safety Net Resilience Project (P171039) BASIC INFORMATION A. Basic Project Data Country Region Project ID Parent Project ID (if any) Romania EUROPE AND CENTRAL ASIA P171039 Project Name Romania: Institutional Strengthening and Financial Safety Net Resilience Project Practice Area (Lead) Financing Instrument Estimated Appraisal Date Estimated Board Date Finance, Competitiveness Investment Project 1/13/2020 3/2/2020 and Innovation Financing Borrower(s) Implementing Agency(ies) Bank Deposit Guarantee Bank Deposit Guarantee Fund (FGDB) Fund (FGDB) Proposed Development Objective(s) The Project Development Objective is to strengthen the institutional capacity and financing mechanism of the deposit Public Disclosure guarantee fund to meet its potential deposit insurance and bank resolution obligations. Financing (in USD Million) Amount Total Project Cost 452.00 B. Is the project being prepared in a Situation of Urgent Need of Assistance or Capacity Constraints, as per Bank IPF Policy, para. 12? No C. Summary Description of Proposed Project [including overview of Country, Sectoral & Institutional Contexts and Relationship to CPF] The FGBD was created in August 1996, with the mission of insuring deposits held exclusively by individuals up to the amount of RON 1,000 (then equivalent to roughly USD 239). Over time, and especially after Romania joined the EU, coverage was extended in line with the applicable EU directives, and since December 2010 it is equivalent to EUR 100,000 and benefits not only individuals but also legal entities. There have been substantial improvements in terms of payout time, which came down from 90 to 7 days. Romania has transposed the EU Directive 2014/49/EU, on deposit guarantee schemes, by enacting Law nr. 311/2015 on Deposit Guarantee Schemes and the Bank Deposit Guarantee Fund, which is the current legal diploma regulating Dec 13, 2019 Page 2 of 10 The World Bank Romania: Institutional Strengthening and Financial Safety Net Resilience Project (P171039) FGDB. The law extended FGDB’s mission to include not only paying out depositors, but also (i) managing Romania’s resolution fund, (ii) functioning as temporary administrator for failing institutions, (iii) functioning as special administrator for institutions undergoing resolution, (iv) owning bridge-banks and asset management vehicles incorporated within resolution procedures, (v) functioning as administrative liquidator for failed financial institutions. The law also determines, in line with the EU Directive, that FGDB can be required, by NBR, to contribute from deposit insurance fund to the resolution of financial institutions with an amount equivalent up to 0.4% of the covered deposits. However, there is a need for making provisions for credible and timely funding lines available to FGDB. In case of multiple bank failures, FGDB’s assets may be depleted and the fund may be unable to comply with its obligations thus impacting overall confidence in the financial sector. In this context the FGDB expressed interest in a WB contingent financing instrument for the deposit insurance fund. In a letter to the WB dated December 18th, 2018, the FGDB requested further technical discussions regarding instrument and related operational/procedural workflows. This was followed by a WB identification mission held during March 6-8, 2019 to define the main parameters of the lending product. A pre-appraisal mission was held in August 26-30 2019. Regarding the size of a contingent investment loan, and following best practices, the FGDB calculated its funding needs in the event of the simultaneous failure of 3 large, non-systemically important banks (which would be subject to resolution). In such a case, and after full use of its reserves, the FGDB would need additional financing of around RON 1.2 billion (EUR 250 million). In addition, in the case of resolution of a bank, and according to Romanian law, a request from the NBR (acting as the Resolution Authority) for the FGDB to contribute from deposit insurance fund up Public Disclosure to 0.4% of covered deposits, under current conditions would add about another RON 800 million (EUR 170 million) to the funding needs.Considering these two scenarios, the amount of the contingent financing instrument was calculated to EUR 420 million. The FGDB’s preference is to have a contingent facility up to 5 years starting in 2020. D. Environmental and Social Overview D.1. Project location(s) and salient characteristics relevant to the ES assessment [geographic, environmental, social] Overall, findings of the most recent 2017-2018 Financial Sector Assessment Program (FSAP) update conducted for Romania confirmed that while the banking sector’s resilience has improved, there are still vulnerabilities that can be addressed by reducing risks, improving banking sector oversight, and enhancing crisis management and bank resolution. In addition, the average value of deposits by most banking depositors (83.6 percent of the total number of depositors, holding 7.3 percent of total deposits) is small - only about 1.1 thousand RON. Moreover, since commercial banks have low branch coverage in rural Romania, cooperative banks play an important role in providing financial services to banking customers in such areas. There are 40 cooperative banks in Romania that serve around 600,000 members and over 650,000 deposit clients through 790 points of service, 500 of which are in rural areas. Since this is a country wide project with low environmental risk, there will be no environmental and social assessment and therefore geographical or environmental and social characteristics have not been described. In the event of the failure of a cooperative bank, depositors shall be indemnified in full by CreditCoop, the single federation for cooperative banks in Romania. If CreditCoop cannot pay depositors (i.e., if it fails), then the Bank Deposit Guarantee Fund (FGDB) would need to step in to compensate depositors, up to the limit of EUR 100,000 as set forth in the law. Dec 13, 2019 Page 3 of 10 The World Bank Romania: Institutional Strengthening and Financial Safety Net Resilience Project (P171039) The proposed Project’s interventions are expected to have a positive impact on improving inclusive and sustainable growth and shared prosperity in two ways: (1) by enhancing financial stability and (2) protecting financial deposits of the most vulnerable banking depositors. Regarding (1), bank failures have been found to be most damaging for small firms and poor households as shown by experience from the global financial crisis. The Project will strengthen FGDB resilience as it will provide it with a reliable source of funds to be assessed in case of a systemic crisis. In times of crises, although FGDB remains solvent, it may not be able to sell its assets (mainly, government bonds) for their fair price because of the lack of interested parties. By having the ability to draw on the contingency line instead of conducting such “fire sales”, FGDB’s financial situation will be significantly strengthened, and so will its ability to effectively contribute to restoring financial stability. In turn, banks operating in Romania will benefit from the FGDB’s increased ability to meet its deposit insurance and resolution obligations, as it reduces the chances of a banking failure from becoming a system-wide issue that could have an adverse impact on the operations of all banks. In turn, this will help to ensure a steady increase in domestic savings that can be channeled into productive investments. In addition, greater financial stability is expected to translate into a lower burden on government finances, which in turn reduces the likelihood of a fiscal crisis. With regard to (2), the project’s activities will bolster financial inclusion by ensuring that the FGDB can adequately fulfill its mandate of protecting deposits of the most vulnerable depositors. The FGDB protects depositors, including natural persons and legal entities, up to a guarantee ceiling of the leu equivalent of EUR 100,000, which is the mandatory guarantee ceiling in all EU Member States. Strengthening the financial capacity of the FGDB through Public Disclosure contingent financing will ensure that the depositors receive prompt compensation in the event of a bank failure. This is of particular importance to individuals and micro, small and medium sized enterprises with small deposit amounts. As of December 31, 2018, guaranteed depositors included 14.1 million natural persons and 1.0 million legal entities. The overwhelming majority (99.8 percent) of natural persons have deposits below the guarantee ceiling and half of the depositors are women. Furthermore, during the Project’s implementation and supervision, the WB team will propose improvements in the financial safety net. D. 2. Borrower’s Institutional Capacity The FGDB will serve as the Borrower and implementing agency. Implementation arrangements for this Project are expected to be fairly straightforward, as i) there may not be any disbursement of funds if no event is triggered, and ii) in case funds are disbursed, they will not be used for procurement of goods or services. The Borrower will be asked to ensure that throughout the project implementation period it maintains adequate governance and financial management arrangements, and support will be provided as necessary by the WB fiduciary team. FGDB is mandated with managing the deposit insurance fund in Romania and more recently the resolution fund. The FGBD was created in 1996, with the mission of insuring deposits held exclusively by individuals up to the amount of RON 1,000 (then equivalent to roughly USD 239). Over time, and especially after Romania joined the European Union (EU), coverage was extended in line with the EU Directive 2014/49/EU, on deposit The FGDB does not have a history of working with WB lending projects and therefore has not developed capacity to address environmental and social policies or standards . As a part of project implementation, capacity concerns will be addressed to ensure proper attention is paid to social concerns especially with regards to stakeholder engagement Dec 13, 2019 Page 4 of 10 The World Bank Romania: Institutional Strengthening and Financial Safety Net Resilience Project (P171039) and developing avenues of access to financial institutions for underserved households. There are no capacity concerns for implementing environmental aspects of this project. The FGDB will designate a small team of relevant staff, led by a Project Coordinator, to ensure the Project is properly implemented. The principal activities of the implementing agency will comprise: (i) gathering required documentation for ex-post verification of trigger events - in case they occur - and use of funds - in case withdrawal(s) are requested - in accordance with protocols agreed with the WB; (ii) reporting on the WB transfers - if any - that result in the financing of the deposit guarantee and resolution obligations of the FGDB; and (iii) liaising with and reporting to the Romanian authorities and the World Bank on Project progress. The National Bank of Romania (NBR) and the Ministry of Public Finance (MoPF) will be important stakeholders, since both in addition to the FGDB, play a critical role in the financial safety net. While the FGDB does not have a history of working with World Bank lending projects, it already utilizes diverse means of public outreach to depositors and the general public that are stipulated by articles 66 and 69 of Law no. 311/2015 on Deposit Guarantee Schemes. Therefore the majority of actions in the Environmental and Social Commitment Plan for this project are a continuation of FGDB’s ongoing efforts in this area. II. SUMMARY OF ENVIRONMENTAL AND SOCIAL (ES) RISKS AND IMPACTS A. Environmental and Social Risk Classification (ESRC) Low Public Disclosure Environmental Risk Rating Low The project's environmental risk is assessed low since its potential adverse risks and impacts on human populations and/or the environment are likely to be negligible. The project will not directly result in any works or procurement of goods, as it provides contingent financing to the FGDB to meet potential deposit insurance and bank resolution obligations. The project will help to ensure that insured depositors individuals and legal entities) will not lose their savings in case of a bank failure. Social Risk Rating Low The social risk rating for this project is low because it is not expected to impact staff within FGDB or other institutions, or involve physical works, and it is expected that will have a positive outcome of improving financial to prevent economic crisis. B. Environment and Social Standards (ESSs) that Apply to the Activities Being Considered B.1. General Assessment ESS1 Assessment and Management of Environmental and Social Risks and Impacts Overview of the relevance of the Standard for the Project: Based on information available at the appraisal stage, no negative environmental or social impacts are expected, and no material environmental and social risks are associated with the proposed project. The project will not finance any works or other construction activities, will not support purchasing of goods, preparation of plans, studies or policies that could potentially generate impact to environment, and no change are expected in FGDB’s staffing. The project is not expected to finance civil works. The proposed Project’s interventions are expected to have a positive impact on Dec 13, 2019 Page 5 of 10 The World Bank Romania: Institutional Strengthening and Financial Safety Net Resilience Project (P171039) improving inclusive and sustainable growth and shared prosperity in two ways: (1) by enhancing financial stability and (2) protecting financial deposits of the most vulnerable banking depositors. ESS10 Stakeholder Engagement and Information Disclosure In addition to FGDB that is the implementing agency and direct beneficiary of this project, NBR and the MoPF are also important stakeholders since play a critical role in the financial safety net and their buy-in will be necessary to ensure that the Project Development Objective is achieved. Banks operating in Romania will also benefit from the FGDB’s ability to meet its deposit insurance and resolution obligations, as it reduces the chances of a banking failure from becoming a system-wide issue that would negatively impact the operations of all banks. As of the end of 2018, all 27 banks authorized to operate in Romania are members of FGDB. Finally, households and enterprises that have deposits in the banking system will also benefit from the Project. The FGDB protects depositors, including natural persons and legal entities, up to a guarantee ceiling of the leu equivalent of €100,000, which is the mandatory guarantee ceiling in all EU Member States. This is particularly important for individuals and micro, small and medium sized enterprises with small deposit amounts. As of December 31, 2018, guaranteed depositors included 14.1 million natural persons and 1.0 million legal entities. The overwhelming majority (99.8 percent) of natural persons have deposits below the guarantee ceiling, and hence would be granted full coverage of their deposits. Half of these depositors are women. Given the low number of stakeholders and their specialized focus within the banking system, as well as lack of clearly identifiable beneficiaries, the Project will not prepare a separate Stakeholder Engagement Plan (SEP). Instead, Public Disclosure measures to promote stakeholder engagement and information disclosure have been included in the Borrower Environmental and Social Commitment Plan (ESCP). The Project will monitor the implementation of FGDB’s efforts to improve public awareness of the deposit insurance system, and to engage with the public during normal times and in the case of a payout event. During normal times, FGDB will continue to utilize existing means of public outreach to depositors and the general public regarding the role of Romania’s deposit guarantee scheme. These outreach efforts will include: utilization of its website to share up-to-date information regarding the deposit insurance system; dissemination through member banks including advertorials in widely-circulated magazines, information packages, videos and brochures; and educational efforts such as introduction to the FGDB’s mandate in the Financial Education Textbook for high schools and research competitions and symposiums for students. Finally, FGDB will continue to conduct checks of the ways in which the units in the territory of member credit institutions provide information to depositors. FGDB will also continue to conduct opinion polls among banked natural persons and micro-enterprise type legal entities to assess their perceptions of the banking system and banking products, their knowledge of FGDB's role, payout procedures, the information sources used to access information on the deposit guarantee scheme, and types of information that they have access to. In case of a payout event, the Law 311/2015 on Deposit Guarantee Schemes stipulates that FGDB will publish on its official website the information depositors need to receive their due compensation within a maximum of two working days of the date deposits become unavailable. FGDB will also send this information to two national news agencies for publication. Within the same time frame, FGDB will also send this information to the credit institution whose deposits have become unavailable. The credit institution whose deposits are unavailable shall display the Dec 13, 2019 Page 6 of 10 The World Bank Romania: Institutional Strengthening and Financial Safety Net Resilience Project (P171039) information it got from the deposit guarantee scheme in all its units nationwide one working day after receiving it. Finally, Law 311/2015 on Deposit Guarantee Schemes also stipulates that in the event of a payout, deposit guarantee scheme shall respond to notifications regarding compensation related issues within five working days of their receipt. B.2. Specific Risks and Impacts A brief description of the potential environmental and social risks and impacts relevant to the Project. ESS2 Labor and Working Conditions FGDB staff will not be financed by the project and therefore not considered project workers. The contingency funds will not be used for services of any kind. As the project will not employ, directly, or indirectly, workers to perform activities related to the project, the Borrower will not prepare a Labor Management Procedure. The FGDB's HR policy has been developed in line with the Romanian labor code. ESS3 Resource Efficiency and Pollution Prevention and Management This project focuses on institutional capacity building of financial institutions. The project will not support any works or procurement of goods, any activities that may result in investments, and therefore the ESS3 is not currently relevant. ESS4 Community Health and Safety Public Disclosure This project will not fund activities which will cause negative impact on community health and safety. It can be stated that with improved safety nets and financial security, their will be reduced stress caused by economic concerns. Therefore, the ESS4 is not currently relevant. ESS5 Land Acquisition, Restrictions on Land Use and Involuntary Resettlement This project does not intend to require land acquisition, impact negatively on assets, or cause loss of assets. ESS5 is not currently relevant. ESS6 Biodiversity Conservation and Sustainable Management of Living Natural Resources As the project will not support any works or procurement of goods the ESS6 is not currently relevant. ESS7 Indigenous Peoples/Sub-Saharan African Historically Underserved Traditional Local Communities No indigenous peoples are known to reside in Romania. ESS8 Cultural Heritage The project will not finance civil works and no interaction with tangible or intangible cultural heritage is expected. Therefore, the ESS8 is not currently relevant. Dec 13, 2019 Page 7 of 10 The World Bank Romania: Institutional Strengthening and Financial Safety Net Resilience Project (P171039) ESS9 Financial Intermediaries ESS9 is not currently relevant. By definition ESS applies to FIs that receive financial support from the Bank. FIs include public and private financial services providers, including national and regional development banks, which channel financial resources to a range of economic activities across industry sectors. FIs use various financial products such as project finance, corporate finance, medium and small enterprise finance, microfinance, housing finance, leasing and trade finance. This ESS covers all types of financing and financial products provided by FIs that are targeted to productive business activities. As the project provides institutional strengthening to reduce risk of economic crisis in banking system, it does not provide support directly or indirectly to FIs. C. Legal Operational Policies that Apply OP 7.50 Projects on International Waterways No OP 7.60 Projects in Disputed Areas No III. BORROWER’S ENVIRONMENTAL AND SOCIAL COMMITMENT PLAN (ESCP) Public Disclosure DELIVERABLES against MEASURES AND ACTIONs IDENTIFIED TIMELINE ESS 1 Assessment and Management of Environmental and Social Risks and Impacts Since this is a country wide project with low environmental risk, there will be no environmental and 12/2026 social assessments. ESS 10 Stakeholder Engagement and Information Disclosure The project will not prepare a separate Stakeholder Engagement Plan (SEP). Instead, measures to promote stakeholder engagement and information disclosure have been included in the Borrower 12/2026 Environmental and Social Commitment Plan. Regular stakeholder feedback on project progress sought through Management Board meetings of the FGDB, which includes representatives from the NBR and MoPF. This will be ongoing during project 12/2026 implementation on a semi-annual basis. Continuation of current awareness raising efforts regarding the role of the deposit guarantee scheme 12/2026 in Romania, and financial education efforts on an ongoing basis during project implementation. Continued use of FGDB's website and other outreach channels to provide up to date & understandable information on procedures to be followed by depositors in case of a payout event. This will be ongoing 12/2026 during project implementation. Dec 13, 2019 Page 8 of 10 The World Bank Romania: Institutional Strengthening and Financial Safety Net Resilience Project (P171039) Piloting of more inclusive outreach approaches (e.g. for depositors with vision and hearing disabilities, 12/2022 and those based in remote rural areas) in collaboration with member banks when possible. Continued checks on information sharing practices with depositors of units in the territory of member credit institutions and incorporation of outreach and information dissemination procedures in stress 12/2026 simulation exercises on an annual basis. Continuation of opinion polls among banked natural persons and micro-enterprise type legal entities 12/2026 on a biennial basis. Review procedures for information dissemination and processing/resolution of compensation related issues for depositors who may be dissatisfied with compensation-related issues in the event of a 12/2021 payout ESS 2 Labor and Working Conditions ESS 3 Resource Efficiency and Pollution Prevention and Management ESS 4 Community Health and Safety ESS 5 Land Acquisition, Restrictions on Land Use and Involuntary Resettlement ESS 6 Biodiversity Conservation and Sustainable Management of Living Natural Resources Public Disclosure ESS 7 Indigenous Peoples/Sub-Saharan African Historically Underserved Traditional Local Communities ESS 8 Cultural Heritage ESS 9 Financial Intermediaries B.3. Reliance on Borrower’s policy, legal and institutional framework, relevant to the Project risks and impacts Is this project being prepared for use of Borrower Framework? No Areas where “Use of Borrower Framework” is being considered: The use of Borrower Framework for addressing environmental and social issues is not anticipated. IV. CONTACT POINTS World Bank Contact: Natalie Nicolaou Title: Financial Sector Specialist Telephone No: 458-1426 Email: nnicolaou@worldbank.org Dec 13, 2019 Page 9 of 10 The World Bank Romania: Institutional Strengthening and Financial Safety Net Resilience Project (P171039) Contact: Isfandyar Zaman Khan Title: Lead Financial Sector Specialist Telephone No: 5258+70584 Email: ikhan2@worldbank.org Borrower/Client/Recipient Borrower: Bank Deposit Guarantee Fund (FGDB) Implementing Agency(ies) Implementing Agency: Bank Deposit Guarantee Fund (FGDB) V. FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects VI. APPROVAL Task Team Leader(s): Natalie Nicolaou, Isfandyar Zaman Khan Public Disclosure Practice Manager (ENR/Social) Kevin A Tomlinson Cleared on 23-Oct-2019 at 14:23:15 EDT Dec 13, 2019 Page 10 of 10