July 11, 2017

IMF published several technical notes on Bulgaria as part of the 2017 Financial Sector Assessment Program (FSAP). These technical notes cover financial safety net and financial management crisis; strategy for reducing nonperforming loans (NPLs); risk assessment and stress testing of the banking system in the country; and assessment of the progress achieved by the Bulgarian National Bank (BNB) in strengthening banking supervision.

Financial Safety Net and Financial Management Crisis. The technical note assesses the crisis management framework in Bulgaria. It highlights that, despite certain improvements, the financial safety net and crisis management arrangements face crucial challenges because none of their components is fully developed. To ensure operational capacity to rapidly deploy recovery and resolution tools, the note recommends further actions needed to strengthen the safety net and crisis management arrangements in the country.

 

NPL Reduction Strategy. The technical note examines the state of NPLs in Bulgaria, including the macro-prudential approach being implemented to reduce NPLs. The note also offers recommendations for a strategy to substantially reduce NPLs. The note sets out macro-prudential approaches and other components of a sound strategy for NPL reduction, including improvements to loan-loss provisioning, income recognition on NPLs, loan write-downs, early warning systems, collateral valuation, risk information for investors, and the NPL market.

 

Risk Assessment and Stress Testing of Banking System. The technical note reveals results of the FSAP team’s assessment (in coordination with the BNB) of bank resilience to solvency, concentration, liquidity, and balance sheet contagion risks. The stress test results revealed that the Bulgarian banking system is vulnerable to the extreme realization of internal and external risks coupled with the need to clean the balance sheets from NPLs. Furthermore, the largest driver of the change in capital positions in the adverse scenario is loan-loss provisions. However, Contagion and spillover risks are minimal from banking system exposures while concentration risks are relatively high. Liquidity risk analysis and ST reveal limited impact of severe run-off rates of liabilities and haircuts on cash inflows on the overall liquidity position as well as on liquidity coverage and net stable funding ratios. All banks meet initial minimum total liquidity coverage ratios of 70%, with wide margins.

 

Stocktaking of Progress Achieved by the Bulgarian National Bank in Strengthening Banking Supervision. The technical note assesses the current state of the implementation of the key recommendations made by the IMF and the World Bank in their 2015 assessment report on the observance of Basel Core Principles, or BCPs, for effective banking supervision in Bulgaria. It provides an overview of the most recent initiatives taken by the BNB to address the shortcomings found in the domestic supervisory regime. It also reflects the regulatory and supervisory framework in place as of the date of the completion of this review.

 

Related Links (PDFs)

Financial Safety Net

NPL Reduction Strategy

Stress Testing of Banks

Progress on Banking Supervision

Keywords: Europe, Bulgaria, Banking, FSAP, NPL, BCP, Stress Testing, IMF