March 22, 2019

IMF published its staff report and selected issues report under the 2019 Article IV consultation with Bulgaria. Directors commended the authorities’ progress in strengthening financial supervision, including implementing the new governance framework, strengthening legislation for related-party lending, and formalizing the supervisory review and evaluation process (SREP). They welcomed the recent decline in non-performing loans (NPLs) and encouraged the central bank to ensure that banks with high NPLs maintain sufficient capital buffers. Directors noted that the country's preparations for Banking Union would help support reforms and enhance the quality of institutions, including by strengthening financial sector supervision.

The staff report highlighted that the Bulgarian National Bank (BNB) has made steady progress in strengthening banking sector supervision. Consistent with the recommendations of the 2017 Financial Sector Stability Assessment (FSSA), BNB has strengthened the legislation for related-party lending and formalized SREP, with the calibration of the bank-specific Pillar II capital add-on expected to be finalized by March 2019. Furthermore, BNB has operationalized the new governance framework, which vests the decision-making authority on banking supervision and payments in the Governing Council. BNB also announced that the countercyclical capital buffer will be raised from 0% to 0.5% as of October 2019. Furthermore, profitability and asset quality of banks continue to improve. Higher lending activity and lower impairment costs have helped raise banking sector profitability to its highest levels since the global financial crisis.

The report noted that NPLs have declined, from 16.9% of total loans in 2013 to 8.7% in the third quarter of 2018. BNB intends to comply with the EBA guidelines on NPLs, which will enter into force in mid-2019. Given that the NPL ratio of Bulgaria remains well above the EU average, BNB should maintain its vigilance on NPLs. The implementation of SREP should ensure that banks with high NPLs have sufficient capital buffers. Staff advises that improving the insolvency framework and NPL market (which has been supported by high liquidity in financial markets) would also help. The authorities are also taking steps to fulfill the Exchange Rate Mechanism II (ERM II) commitments. Additional key developments are as follows:

  • BNB is supporting comprehensive assessment of the banking sector by ECB. Joining the Banking Union, along with the ERM II, will further strengthen banking supervision, with ECB as the central supervisor of financial institutions in Bulgaria. Bulgaria is also joining the single resolution mechanism. 
  • BNB Act has been amended to align central bank independence provisions with EU legislation.
  • The legal framework for borrower-based macro-prudential measures has been established.
  • The authorities have made progress with regard to the non-bank financial sector, including implementing a risk-based supervisory system for insurers and pension funds and adopting guidelines for the valuation of assets and liabilities.
  • In cooperation with the Structural Reform Support Service of EC, the authorities are conducting a review to develop an efficient procedure for publishing information about insolvency proceedings. Work is also underway to identify inefficiency and weakness in the insolvency process.

The selected issues report examines governance reforms and presents areas for further reforms in Bulgaria. It provides an overview of various aspects of governance in Bulgaria, bringing out its relative strengths and weaknesses. The report also highlights key governance challenges and corresponding reforms.

 

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Keywords: Europe, Bulgaria, Banking, Insurance, NPLs, SREP, CCyB, FSSA, Article IV, Basel III, Banking Union, IMF