General Overview
The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. However, the IMF indicated that more work needed to be done on the regulation and supervision of country, market and operational risk formalizing information sharing arrangements, and strengthening corporate governance in banks. The Bulgarian National Bank (BNB) - the supervisory body - generally observes good practices with regard to transparency in banking supervision. (IMF 2002, p. 18)
The BNB has made strong efforts to achieve compliance with international standards and practices and the practices and requirements of the European Union (EU). This effort has resulted in the installation of a supervisory and regulatory framework for banks, which is viewed as effective by the market participants. The rules and regulations issued by the BNB are comprehensive and compliance is monitored on an ongoing basis. Supervision is becoming increasingly effective and is expected to be able to deal with the developments in the markets as banks offer more complex products in the future. (IMF 2002, p. 35)
In its 2006 Article IV Consultation with Bulgaria, the IMF states that the implementation of the 2002 FSSA banking sector recommendations has been strong. The Bulgarian authorities have expressed an interest in a follow-up to the FSSA during the latter part of 2007. According to the 2004 IMF Article IV Consultation with Bulgaria, the Bulgarian authorities have implemented several FSSA recommendations. A financial sector supervisory coordination committee, and, on its recommendation, a single supervisory agency for nonbank financial institutions, the Financial Sector Commission, were created. As of 2004, its supervisory capacity, regulatory framework, and enforcement powers, however, needed further strengthening, with a focus on the insurance sector. A more effective bank insolvency regime was introduced. However, its implementation remained either largely untested (no new bank insolvency) or slow (in resolving old problem banks). Progress in identifying and assessing the soundness of banks' ownership structure was made. Where necessary, a process of capital restructuring and replacement of off-shore shareholders was initiated. A Council for Financial Stability was established. While important for improving inter-agency cooperation, the authorities needed to strengthen their ability to monitor and assess how cross-sectoral linkages affect financial stability. (IMF 2006, p. 24; IMF 2004, p.21)
According to the 2002 FSSA, banking supervision is carried out by the BNB, on the basis of the Law on Banks (LB 1997) and the Law on the Bulgarian National Bank (LBNB 1997). The LBNB 1997 specifies as the objective of banking supervision "ensuring the financial stability of the banking system and protecting the depositors' interests." On the basis of the LB 1997, more detailed regulations have been issued. (IMF 2002, p. 32)
The LBNB 1997 provides a sound basis for central bank independence. Provisions relating to appointments of the Governing Board are close to best international practice. The BNB is required by the Law to provide extensive financial disclosure, follow International Accounting Standards (IAS), and has a Chief Auditor reporting directly to the BNB Board. (IMF 2002, p. 21)
In its 2004 Annual Report, the BNB states that Bulgarian bank legislation is harmonized to a high degree with European Union (EU) law. In 2004 the Bank helped prepare amendments to the legal framework regarding the central bank, the banking sector, and payment systems aimed at further harmonization with acquis communautaire. BNB goals were to adopt the amendments in the shortest time, thus enabling the banking sector to prepare for participation in the EU internal market. The prepared amendments were discussed with representatives of the banking sector. With a view to full harmonization with EU law, legislation was drafted, the main focus being central bank independence, banks' capital adequacy, fund transfers, electronic payment instruments, and payment systems. By adopting the Amendments to the LBNB,1997 the Bank's legal framework was brought into line with acquis and with commitments negotiated on the Economic and Monetary Union Chapter, while retaining the currency board conditions and principles. According to the amendments, the primary objective of the Bulgarian National Bank is "to maintain price stability through ensuring the stability of the national currency." Additional guarantees related to institutional, personal, financial and functional central bank independence were introduced in compliance with the Treaty Establishing the European Community and with the Statutes of the European System of Central Banks (ESCB) and the European Central Bank (ECB). (BNB 2004, p. 47)
The Law on the Supplementary Supervision of Financial Conglomerates (LSSFC 2006) and the Law on Credit Institutions (LCI 2006) were adopted in July 2006. The LCI 2006 is intended to achieve a comprehensive compliance between Bulgarian legislation and European Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions; 2000/28/ EC amending Directive 2000/12/EC; Directive 2000/46/EC on the taking up, pursuit of and prudential supervision of the business of electronic money institutions; and Directive 2001/24/EC on the reorganization and winding up of credit institutions. The LSSFC 2006 will bring local legislation into line with the requirements of Directive 2002/87/EC on the supplementary supervision of credit institutions, insurance undertakings, and investment firms in financial conglomerates. It is envisaged for supplementary supervision to be conducted at a financial conglomerate level and includes capital adequacy, intra-group transactions, risk concentration, and risk management provisions. The Law on Bank Deposit Guarantee was amended in July 2006. According to the European Commission, Bulgaria still needed to complete the transposition of the new EU capital requirement rules for credit institutions and investment firms. (EC 2006, p. 24; BNB 2005, pp. 39 - 40)
According to the 2006 Article IV Consultation with Bulgaria, the Bulgarian authorities intended to implement a conservative version of Basel II from January 1, 2007 but cautioned that overly stringent prudential regulations would likely promote regulatory arbitrage, especially with the opening of the domestic banking sector to foreign bank branches under the EU's Single Passport directive following accession. In a 2007 country report, the IMF states that the financial system remains well capitalized and profitable with modest non-performing loans. The Bulgarian authorities and the IMF agreed that the credit restraints should lapse and that Basel II should be implemented cautiously. The authorities were confident in their ability to ensure banking sector soundness in the presence of rapid bank lending through continued tight prudential oversight. Moreover, stringent stress tests are presently comforting. (IMF 2006, p. 15; IMF 2007, p. 1)
As of 2007, there were 27 commercial banks with an international banking license and 5 Branches of foreign banks in Bulgaria. (BNB website)
The Principles
1. (1) Clear responsibilities and objectives for each supervisory agency. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF) 2002 assessment, banking supervision is carried out by the Bulgarian National Bank (BNB), on the basis of the Law on Banks and the Law on the Bulgarian National Bank (LBNB 1997). The LBNB 1997 specifies as the objective of banking supervision "ensuring the financial stability of the banking system and protecting the depositors' interests." On the basis of the Law on Banks, more detailed regulations have been issued. The BNB has clear responsibilities and objectives. The Banking Supervisory Department (BSD) located within the BNB and headed by a Deputy Governor, is responsible for supervisory action. The conditions for the appointment and removal of the Deputy Governor are also laid out in law. (IMF 2002, pp. 32, 35)
Controlling banking regulatory requirements and dispensing supervisory measures and penalties form the BNB Banking Supervision Department's basic workload. 2005 saw 28 supervisory measures imposed on 19 banks. (BNB 2005, p. 40)
1.(2) Operational independence and adequate resources. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
The Bulgarian National Bank (BNB) has independence and adequate resources, which are laid out in the law. The Banking Supervisory Department (BSD) located within the BNB and headed by a Deputy Governor, is responsible for supervisory action. The conditions for the appointment and removal of the Deputy Governor are also laid out in law. The BSD has the required budget and ample powers to enforce laws and regulations and address safety and soundness concerns. The BNB is authorized to issue regulations covering a wide range of subjects including prudential regulations. The law also gives ample power to the BSD to obtain information in the form and frequency necessary to fulfill its supervisory tasks. (IMF 2002, p. 35)
Bulgarian bank legislation is harmonized to a high degree with European Union (EU) law. In 2004, the BNB helped prepare amendments to the legal framework regarding the central bank, the banking sector, and payment systems aimed at further harmonization with acquis communautaire. With a view to full harmonization with EU law, legislation was drafted, the main focus being central bank independence, banks' capital adequacy, fund transfers, electronic payment instruments, and payment systems. By adopting the Amendments to the Law on the Bulgarian National Bank (LBNB 1997), the Bank's legal framework was brought into line with acquis and with commitments negotiated on the Economic and Monetary Union Chapter. According to the amendments, the primary objective of the BNB is "to maintain price stability through ensuring the stability of the national currency." Additional guarantees related to institutional, personal, financial and functional central bank independence were introduced in compliance with the Treaty Establishing the European Community and with the Statutes of the ESCB and the ECB. (BNB 2004, p. 47)
The International Monetary Fund (IMF) conducted a Safeguard Assessment to evaluate BNB accounting, reporting, and audit system reliability in December 2004. This addressed five key spheres of BNB business: external audit mechanisms; legal framework and central bank independence; financial reporting; internal audit; and internal control systems. The IMF did not identify any essential weaknesses in these systems. (BNB 2004, p. 58)
1.(3) A suitable legal framework for authorization and ongoing supervision. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to an IMF assessment conducted in 2002, banking supervision is carried out by the Bulgarian National Bank (BNB), on the basis of the Law on Banks (LB 1997) and the LBNB 1997. The LBNB 1997 specifies as the objective of banking supervision "ensuring the financial stability of the banking system and protecting the depositors' interests." On the basis of the LB 1997, more detailed regulations have been issued. (IMF 2002, p. 32)
The Banking Supervisory Department (BSD) located within the BNB has the required budget and ample powers to enforce laws and regulations and address safety and soundness concerns. The BNB is authorized to issue regulations covering a wide range of subjects including prudential regulations. The law also gives ample power to the BSD to obtain information in the form and frequency necessary to fulfill its supervisory tasks. (IMF 2002, p. 35)
Bulgarian bank legislation is harmonized to a high degree with European Union (EU) law. In 2004 BNB helped prepare amendments to the legal framework regarding the central bank, the banking sector, and payment systems aimed at further harmonization with acquis communautaire. By adopting the amendments to the Law on the Bulgarian National Bank (LBNB 1997), the Bank's legal framework was brought into line with acquis and with commitments negotiated on the Economic and Monetary Union Chapter. (BNB 2004, p. 47)
The International Monetary Fund (IMF) conducted a Safeguard Assessment to evaluate BNB accounting, reporting, and audit system reliability in December 2004. This addressed five key spheres of BNB business: external audit mechanisms; legal framework and central bank independence; financial reporting; internal audit; and internal control systems. The IMF did not identify any essential weaknesses in these systems. (BNB 2004, p. 58)
The Law on Credit Institutions was adopted in July 2006. It is intended to achieve a comprehensive compliance between Bulgarian legislation and European Directive 2000/12/EC relating to the taking up and pursuit of the business of credit institutions; 2000/28/ EC amending Directive 2000/12/EC; Directive 2000/46/EC on the taking up, pursuit of and prudential supervision of the business of electronic money institutions; and Directive 2001/24/EC on the reorganization and winding up of credit institutions. The Law on Bank Deposit Guarantee was amended in July 2006. According to the European Commission, Bulgaria still needed to complete the transposition of the new EU capital requirement rules for credit institutions and investment firms. (EC 2006, p. 24; BNB 2005, p. 39)
1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
The International Monetary Fund (IMF) stated in a 2002 report the Banking Supervisory Department (BSD) located within the Bulgarian National Bank (BNB) and headed by a Deputy Governor, is responsible for supervisory action. The BSD has ample powers to enforce laws and regulations and address safety and soundness concerns. The BNB is authorized to issue regulations covering a wide range of subjects including prudential regulations. The law also gives ample power to the BSD to obtain information in the form and frequency necessary to fulfill its supervisory tasks. (IMF 2002, p. 35)
Bulgarian bank legislation is harmonized to a high degree with European Union (EU) law. In 2004 BNB helped prepare amendments to the legal framework regarding the central bank, the banking sector, and payment systems aimed at further harmonization with acquis communautaire. By adopting the amendments to the Law on the Bulgarian National Bank (LBNB 1997), the Bank's legal framework was brought into line with acquis and with commitments negotiated on the Economic and Monetary Union Chapter. (BNB 2004, p. 47)
1.(5) Legal protection for supervisors. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
The Law on Banks provides legal protection for banking supervisors provided the action in question was not "ultra vires" nor grossly negligent. However, like other public officials, they can be prosecuted under Section 282 of the Penal Code for abuse of official powers. (IMF 2002, p. 32)
1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), cooperation and information sharing with other domestic regulators has been strengthened through a formal agreement between the financial sector regulators. However, the IMF in its 2002 report recommends that information sharing arrangements with other domestic supervisors should be formalized through appropriate agreements or structures. (IMF 2002, pp. 35, 41)
The Bulgarian National Bank (BNB) reported in 2004 that collaboration with institutions responsible for law enforcement in the financial sector remained intensive in 2004. Memorandums of Understanding (MoU) with the Financial Intelligence Agency and the Financial Supervision Commission led to joint actions and coordinated efforts for efficient supervision and ensuring financial sector stability. (BNB 2004, p. 41)
There are legal provisions for information sharing between domestic authorities. The Law on Bank Deposit Guarantee provides a mechanism for the exchange of information between the BNB and the Deposit Insurance Fund and for performing inspections in relation to the deposit insurance law. The Law on Banks and other laws set forth procedures for performing joint examinations such as are presently conducted between the BNB and the Securities and Stock Exchanges Commission (SSEC), exchange of information and consultations between the BNB and the Ministry of Finance (MoF), and through the Financial Intelligence Office. The BNB and the MoF also have legal powers to jointly oversee compliance of the foreign exchange regime. The BNB, MoF and the Securities Commission work jointly on a committee that decides on the approval of primary dealers for government securities. The Law on Banks (LB 1997) provides the mandate for the BNB, in exercising its supervisory powers, to conclude agreements with other central banks or foreign supervisory bodies for the mutual exchange of information. So far, no such agreements have been concluded. Cooperation is reported, by the BNB, to function well on an informal basis. (IMF 2000)
2. Clearly defined permissible activities for banks and control of the use of the word 'bank'. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
The International Monetary Fund (IMF) reports that the activities which a bank may undertake are laid out in the Law on Banks which also prohibits the use of the word `bank; or any of its derivatives to those entities not licensed to carry out banking activities. It also stipulates that only those persons who have been granted a bank (foreign bank branch) license by the Bulgarian National Bank (BNB) are allowed to carry on 'bank activity,' including taking deposits from the public. (IMF 2002, p. 35)
A BNB regulation concerning bank permits and licensing, consistent with the current Law on Banks (LB 1997) and Law on the BNB (LBNB 1997), was issued with effect from February 2000. (IMF 2001)
According to the 2005 BNB Annual Report, no banking licenses were issued in 2005. The application of a foreign bank from a non-EU member country to open a branch in Bulgaria through a subsidiary from a member country was declined since the said bank does not meet the requirement for prime rated banks. Forty-five permits were issued under the Law on Banks. Most of them were under Articles 19 and 19b on acquiring 10 per cent or more of a bank's equity or on qualified participation in the capital increase, with the remainder on changes to banks' names and on acquiring qualified participation in non-bank companies. Also issued were 42 certificates of banking qualifications and professional experience for bank board nominees. Seventeen permits were issued under BNB Ordinance No. 8 for inclusions of subordinated term debt sums (debt/capital hybrid instruments) into supplementary capital reserves, as well as for transforming sums attracted under these conditions into a contribution to the bank's equity increase. (BNB 2005, p. 41)
3. Criteria for structure, directors, operating plan, controls, financial condition and capital base. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
Applicants are required to submit relevant documents on the organization, management and capital and funding structure of the proposed bank and the Banking Supervisory Department (BSD) is required by law to check the validity of all documents and the financial status of the applicant before ruling on the application. Within six months of the receipt of the application, the central bank must notify the applicant of the decision. The law also lays down the situations in which the Bulgarian National Bank (BNB) may refuse a license. Foreign banks applying for branch licenses are also required to submit details of the parent bank and written consent of the home supervisor. The BNB may refuse a license if the home supervisor is not considered effective. (IMF 2002, p. 36)
4. Authority to review and reject transfer of ownership. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), acquisition of 10 percent or more of the voting shares in an operating bank requires written permission of the Bulgarian National Bank (BNB). Information can be requested by the BNB on all shareholders, and is mandatorily provided for shareholders above 3 percent. If the shares are acquired on the stock exchange or other regulated markets, the owner cannot exercise his voting power over these shares without obtaining the permission of BNB. (If permission is withheld, he must sell these shares.). Further, when the shareholder transfers his voting shares in a domestic bank, and the result of this transfer is that his stake falls below 50, 33, 20, and 10 percent, he is required to notify the BNB within 10 days. Although the criteria for rejection of transfer are not specifically laid down, in practice the BNB applies the same criteria as at the licensing process to refuse the transfer. As part of its portfolio of remedial actions, BNB is also empowered to order the shareholder holding qualified equity in a bank to transfer his shares within 30 days and to prohibit the exercise of voting power. Although the BNB has sufficient authority to refuse transfer of significant ownership, it did not have adequate authority to identify the ultimate beneficial owners in the case of transfer or licensing. Amendments to the Law on Banks, passed in December 2001, have enhanced the BNB's powers in this area. (IMF 2002, p. 36)
The IMF in its 2002 report recommends that the BNB should establish a system for identification of all eventual owners including beneficial owners of banks. (IMF 2002, p. 41)
5. Authority to review major acquisitions and investments. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), the Bulgarian National Bank (BNB) has the authority to establish criteria for reviewing acquisitions or investments by a bank. No bank may acquire equity in a company (other than a bank) the value of which exceeds 15 percent of the bank's own funds, without obtaining written permission from BNB. Further, the total amount of a bank's investment in real estate and other tangible fixed assets is capped at 50 percent of its own funds. However, tangible fixed assets and equity participation in companies other than banks acquired from mortgages, pledges and other collateral for the purpose of preventing losses from its bank operations are exempted from this rule provided they are transferred within two years following the acquisition. Banks are required to submit the details of investment to the BNB which may refuse to grant a permit for the acquisition for reasons such as breach of prudential regulations, sharp increase in credit risk or doubts on the bank's ability to finance the acquisition. (IMF 2002, p. 36)
6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks). |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles, however gaps remained in allocation of capital for market risk. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF) 2002 assessment, the Law on Banks (LB 1997) and the supporting regulation require all banks to calculate and maintain a minimum capital adequacy ratio for credit risk on the lines of the Basel Accord. The Bulgarian National Bank (BNB) currently prescribes a minimum capital adequacy requirement of 12 percent, which is expected to be sufficient to cover market risks under current conditions. Detailed instructions have been issued for the management of liquidity and foreign exchange risks but interest rate risk and operational risks have not been given adequate regulatory attention. From July 2001, banks are also required to put in place systems to identify and measure country risk but no specific system for provisioning against country risk has been imposed. Further, the procedures for the supervisory assessment of this risk, both on and off-site, are still being developed. (IMF 2002, pp. 36-37)
The IMF in its 2002 report recommended that the BNB should introduce regulatory capital for market risk based on the Basel requirements. (IMF 2002, p. 41)
In its 2006 Article IV Consultation with Bulgaria, the IMF stressed that the existing tight prudential framework for banks should be maintained. Although the banking system is well capitalized and profitable, its health had been supported by propitious operating conditions, including robust economic growth and high global liquidity. (IMF 2006, p. 15)
According to the 2005 BNB Annual Report, the capital position was adequate to bank risk profiles which meant that capital adequacy indicators levels were above regulatory minima. Individual temporary falls below minimum admissible levels were reported, each case being analyzed and followed by prompt supervisory response. Analyses showed delayed reactions by the relevant banks' managements with regard to the amount and instrument of capital support. This shows certain weaknesses in capital planning and capital position management. (BNB 2005, p. 38)
7. A method exists for the evaluation of procedures related to loans, investments and portfolio management. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
The International Monetary Fund (IMF) 2002 report states that banks are required to adopt and submit to the Bulgarian National Bank (BNB) the policy and rules governing their credit activities. They must also establish a credit committee as a specialized internal body for monitoring, assessment, classification and provisioning of their risk exposures. While asset quality assessment under the CAMELS (Capital, Asset, Management, Earnings, and Liquidity) model includes the loan and investment policies and procedures, the rating on management evaluates banks' ability to oversee the credit and investment process. (IMF 2002, p. 37)
There are comprehensive rules for granting credit and for the evaluation of loans and of loan-loss provisions. Moreover, the Central Credit Registry became operational and was made accessible to all banks in March 2000, after the introduction of a new software system. All banks began to report credits in excess of 10,000 Bulgarian Levs from June 2000, and the system was extended to credits from abroad in September 2000. (IMF 2001)
In its 2004 annual report the BNB indicated that lending reviews in certain banks showed up underdeveloped rules and procedures which did not allow adequate evaluation of the variety of credit products, poorly compiled credit files which did not contain requisite information, overworked inspectors, and hence incorrectly classified and provisioned exposures. Responding to fierce competition for customers, some banks introduced shortened procedures for studying and approving new loans which, coupled with the lack of experience in administering lending, resulted in default increases. To improve lending, various stabilizing measures were recommended and followed up. (BNB 2004, p. 40)
In its 2006 Article IV Consultation with Bulgaria, the IMF stressed that the existing tight prudential framework for banks should be maintained. Although the banking system is well capitalized and profitable, its health had been supported by propitious operating conditions, including robust economic growth and high global liquidity. (IMF 2006, p. 15)
8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), banks are required to periodically assess (at least quarterly) their loans and other risk assets, including off-balance sheet liabilities, and to allocate provisions to cover the risk of losses. The supervisors may require from the bank to enforce a stricter evaluation and classification. (IMF 2002, p. 37)
There are comprehensive rules for granting credit and for the evaluation of loans and of loan-loss provisions. Moreover, a Central Credit Registry became operational and was made accessible to all banks in March 2000, after the introduction of a new software system. All banks began to report credits in excess of 10,000 Bulgarian Levs from June 2000, and the system was extended to credits from abroad in September 2000. (IMF 2001)
Bulgarian National Bank (BNB) regulation number 9, concerning asset risk classification and provisioning, was amended in November 1999. The amendments, inter alia, tightened the definition of highly liquid collateral; required banks to disclose in their annual published reports the methods used to evaluate collateral and their impact on specific provisions, as well as classified and restructured exposures in their portfolios; and required banks to evaluate and classify their exposures to individual countries. The amendments came into force on January 1, 2000, although banks required to increase provisions on claims secured by nonresidential real estate mortgages had until end-September 2000 to comply. (IMF 2001)
In its 2004 annual report, the BNB indicated that lending reviews in certain banks showed up underdeveloped rules and procedures which did not allow adequate evaluation of the variety of credit products, poorly compiled credit files which did not contain requisite information, overworked inspectors, and hence incorrectly classified and provisioned exposures. Responding to fierce competition for customers, some banks introduced shortened procedures for studying and approving new loans which, coupled with the lack of experience in administering lending, resulted in default increases. To improve lending, various stabilizing measures were recommended and followed up. (BNB 2004, p. 41)
In its 2006 Article IV Consultation with Bulgaria, the IMF stressed that the existing tight prudential framework for banks should be maintained. Although the banking system is well capitalized and profitable, its health had been supported by propitious operating conditions, including robust economic growth and high global liquidity. There was agreement that although the NPL ratio remained broadly stable, the lagging nature of the indicator could possibly mask a latent deterioration of the quality of loan portfolios. (IMF 2006, p. 15)
9. Prudential limits and management information system on concentration of exposure. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
The International Monetary Fund (IMF) reported that banks are required to report large exposures, which are defined as exposures equal or more than 10 percent of the bank or the banks group, as part of the quarterly reporting system, although there is no separate reporting for sectoral concentrations. The limit on large exposures (the sum of the balance-sheet assets and off-balance-sheet commitments to one person or "related persons") stands at 25 percent of the bank's own funds. "Related persons," are defined by regulation and the supervisor has the discretionary power to include persons into the category of related groups. Banks/bank groups are also required to create and maintain adequate administrative and accounting procedures, as well as effective internal control to identify and record all large exposures and subsequent changes to them as well as to place internal caps on concentration of exposures to an economic sector and/or geographic region. (IMF 2002, p. 37)
According to the 2005 BNB Annual Report, banks complied with regulatory requirements with isolated deviations from exposure limits. Such deviations carried no threat for the financial stability of individual institutions but prompted banking supervision reaction through ratings assigned under CAMELS/CAEL. (BNB 2005, p. 39)
In its 2006 Article IV Consultation with Bulgaria, the IMF stressed that the existing tight prudential framework for banks should be maintained. (IMF 2006, p. 15)
10. Arm's length rule and monitoring for connected lending. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), decisions on connected lending beyond a threshold can only be made by a unanimous decision of the bank's managing body and with the approval of the head of specialized internal control office. The threshold has been kept at the annual remuneration of the connected natural persons including bank supervisors; twice the annual remuneration for employees and at one percent of the paid in capital for loans made to connected legal persons or major shareholders. The total amount of the loans made to connected persons shall not exceed ten percent of the bank's own funds, and unsecured loans provided by the bank to its employees shall not exceed three percent of the bank's own funds. (IMF 2002, p. 37)
According to the 2005 BNB Annual Report, risk analysis associated with exposures to economically related persons showed no significant violations of regulatory provisions. Individual cases of business relatedness did come to light in the course of full on-site supervisory inspections, the banks in question being mandated to initiate corrective action. Significant supervisory resources went into analyzing business relatedness risks, with relevant supervisory instructions issued to individual banks. (BNB 2005, p. 39)
In its 2006 Article IV Consultation with Bulgaria, the IMF stressed that the existing tight prudential framework for banks should be maintained. (IMF 2006, p. 15)
11. Policies and procedures for country risk and transfer risk. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles, however, the report indicated that there was a gap in the regulation and supervision of country risk. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), the Bulgarian National Bank (BNB) has issued detailed guidelines for managing liquidity and foreign exchange risks. Further, even though banks are allowed to trade in commodities, in fact no bank actually does so. Thus, equity price risk and commodity price risk are absent. As far as interest rate risk is concerned, although this is evaluated as part of the on-site examination as part of the test of market risk sensitivity (the S component of the CAMELS system), there has not been any specific guidance to banks on this issue. (IMF 2002, p. 37)
The IMF in its 2002 report recommended that guidance should be given to banks on specific provisioning for country risk and supervisory oversight should be developed to assess the country risk management practices of banks. (IMF 2002, p. 41)
In its 2006 Article IV Consultation with Bulgaria, the IMF stressed that the existing tight prudential framework for banks should be maintained. (IMF 2006, p. 15)
12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles, however, the report indicated that there was a gap in the regulation and supervision of interest risk. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), banks are in the process of putting in place state of the art risk management systems and are investing in technology for this purpose. There are no capital requirements at present for operational and other risks. Management of these risks is largely in the domain of banks' internal audit system, which are required to assess the risk management techniques and the technical facilities against breaches of the law, and to make recommendations for improvement. (IMF 2002, p. 38)
The IMF in its 2002 report recommended that the Bulgarian National Bank (BNB) should develop the supervisory capacity to assess interest rate risk (and market risk in general) and they should also test and eventually validate the risk management systems of banks, and the assumptions made by them in this regard, and also to provide necessary guidance to them on the subject. It is understood that a special unit is being contemplated which would be trained for this purpose. (IMF 2002, p. 41)
In fulfillment of pre-accession (EU) commitments by the close of the year, a new Ordinance No. 8 on the capital adequacy of banks was adopted to include market risk capital requirements. The changes were intended to prevent banks forming significant trading portfolios of financial instruments. Banks may apply two approaches to measuring and reporting market risk (a function of capital requirement from the second half of 2005): a standard one, or one based on value-at-risk (VaR) internal models. The standard approach will be mandatory for measuring market risk, while the internal models applied by banks will be recognized for supervisory purposes where sufficient expertise is demonstrated and sundry qualitative criteria are met. (BNB 2004, p. 39)
The new Ordinance (No. 8) on bank capital adequacy provides for greater precision in reporting bank transactions as well as safeguards for the necessary capital coverage under existing credit risk requirements. Credit risk weights are retained and include an additional requirement to mortgages risk-weighted at 50 per cent: the amount of loans may not exceed 70 per cent of property values. Where this ratio is violated, exposures have to be assigned a 100 per cent risk weight. The new requirements are expected to help restrain excessive credit risk in mortgage lending. (BNB 2004, p. 39)
In its 2006 Article IV Consultation with Bulgaria, the IMF stressed that the existing tight prudential framework for banks should be maintained. (IMF 2006, p. 15)
13. Comprehensive risk management processes. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF) 2002 assessment, banks are in the process of putting in place state of the art risk management systems and are investing in technology for this purpose. There are no capital requirements at present for operational and other risks. Management of these risks is largely in the domain of banks' internal audit system, which are required to assess the risk management techniques and the technical facilities against breaches of the law, and to make recommendations for improvement. (IMF 2002, p. 38)
The IMF in its 2002 report recommended that the Bulgarian National Bank (BNB) should both issue guidance and develop capacity to assess the risks and controls in banks IT systems (and in the e-banking products being offered). (IMF 2002, p. 41)
In fulfillment of pre-accession (EU) commitments by the close of the year, a new Ordinance No. 8 on the capital adequacy of banks was adopted to include market risk capital requirements. The changes were intended to prevent banks forming significant trading portfolios of financial instruments. Banks may apply two approaches to measuring and reporting market risk (a function of capital requirement from the second half of 2005): a standard one, or one based on value-at-risk (VaR) internal models. The standard approach will be mandatory for measuring market risk, while the internal models applied by banks will be recognized for supervisory purposes where sufficient expertise is demonstrated and sundry qualitative criteria are met. (BNB 2004, p. 39)
The new Ordinance (No. 8) on bank capital adequacy provides for greater precision in reporting bank transactions as well as safeguards for the necessary capital coverage under existing credit risk requirements. Credit risk weights are retained and include an additional requirement to mortgages risk-weighted at 50 per cent: the amount of loans may not exceed 70 per cent of property values. Where this ratio is violated, exposures have to be assigned a 100 per cent risk weight. The new requirements are expected to help restrain excessive credit risk in mortgage lending. (BNB 2004, p. 39)
In its 2006 Article IV Consultation with Bulgaria, the IMF stressed that the existing tight prudential framework for banks should be maintained. The IMF states that risks to the banking sector in an environment of rapid credit growth need to be monitored closely. Although the banking system is well capitalized and profitable, supervisors need to scrutinize developments in non-performing loans and ensure the adequacy of banks' risk management frameworks. The credit limits introduced by the BNB helped reduce excessive growth in bank lending, but their effectiveness has diminished as banks found means of circumvention. The BNB's plan to phase out the administrative credit measures while maintaining the existing tight prudential framework is therefore appropriate. (IMF 2006, pp. 15, 20)
14. Adequate internal controls. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
The International Monetary Fund (IMF) reports that the scope and coverage of the internal control and audit function has been defined, and its efficacy is evaluated as part of the on-site inspection. The internal control regulation (2003) sets out detailed requirements not only for internal control but also for the management control over basic banking risks. However, banking laws are not explicit on the responsibilities of the board of directors nor does the commercial code cover them adequately though these do find mention in the on-site inspection manual. (IMF 2002, p. 38)
In 2004 supervisory inspections primarily aimed to identify risk zones and levels, and determine managements' capability to measure, control and manage risks effectively were conducted. Also checked were capital adequacy, shareholder quality (support), credit risk (extent and management), management actions, internal rule and procedure quality, observance of banking legislation, earnings adequacy and trends, liquidity management, market risk (extent and management), off-balance sheet commitment risks, the scope and quality of internal control, and information technology reliability. (BNB 2004, p. 40)
In its 2006 Article IV Consultation with Bulgaria, the IMF stressed that the existing tight prudential framework for banks should be maintained. (IMF 2006, p. 15)
15. Strict "know-your-customer" rules and high ethical and professional standards. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), in Bulgaria, the Financial Investigations Bureau (FIB), under the Ministry of Finance (MoF), is the central agency for the implementation of Law on Measures against Money Laundering (LMAML 2003). The LMAML 2003 requires banks, among other financial and commercial institutions, to report all suspicious transactions over the amount of BGN 30,000. The LMAML 2003 requires banks to have internal rules and procedures to prevent money laundering and to train staff. The FIB has circulated models for banks' internal rules. The BNB verifies banks' anti-money laundering (AML) systems and procedures through on-site inspections and sometimes-joint inspections with the FIB. (IMF 2002, p. 38)
In an effort to lessen the impact of secrecy laws on law enforcement functions, in 2006 the government of Bulgaria (GOB) issued amendments to both the LMAML 1998 and the Law on Credit Institutions. The amendments to the Law on Credit Institutions facilitated the investigation and prosecution of financial crimes by giving the Prosecutor General the right to request financial information from banks without a court order in cases involving money laundering and organized crime. (U.S. DoS 2007)
Banks and the 29 other reporting entities under the LMAML 1998 are required to apply "know your customer" (KYC) standards. Since 2003, all reporting entities are required to ask for the source of funds in any transaction greater than $19,000 or foreign exchange transactions greater than $6,500. Reporting entities are also required to notify the Financial Intelligence Agency (FIA) of any cash payment greater $19,000. (U.S. DoS 2007)
The LMAML 1998 obligates financial institutions to a five-year record keeping requirement and provides a "safe harbor" to reporting entities. Penal Code Article 253B was enacted in 2004 to establish criminal liability for noncompliance with LMAML 1998 requirements. Although case law remains weak, when it was assessed in September 2003 for purposes of EU accession, Bulgaria's anti-money laundering legislation was determined to be in full compliance with all EU standards. (U.S. DoS 2007)
A May 2006 report from the European Union (EU) regarding the status of Bulgaria's application for admission to the EU called Bulgaria's enforcement of anti-money laundering provisions an area of "serious concern," requiring "urgent action". This issue was one of several, resulting in a potential delay of entry date into the EU. In response, Bulgaria's Parliament tightened the LMML with further amendments. The 2006 LMAML amendments expanded the definition of money laundering and the list of reporting entities; allowed FIA to obtain bank records without a court order; outlawed anonymous bank accounts; expanded the definition of "currency"; and required the disclosure of source for currency exported from the country. Overall, these amendments are expected to strengthen the investigative capabilities of both the FIA and law enforcement when dealing with money laundering cases. Experts view this legislation as comprehensive and in line with international standards. All financial sectors are considered susceptible to money laundering and subject to anti-money laundering regulations. Under the LMAML 1998, 30 categories of entities, including lawyers, real estate agents, auctioneers, tax consultants, and security exchange operators, are required to file suspicious transactions reports. To date, only the banking sector has substantially complied with the law's filing requirement. Lower rates of reporting compliance by exchange bureaus, casinos, and other nonbank financial institutions can be attributed to a number of factors, including a lack of understanding of or respect for legal requirements, lack of inspection resources, and the general absence of effective regulatory control over the nonbank financial sector. (U.S. DoS 2007)
In its 2006 Article IV Consultation with Bulgaria, the IMF stressed that the existing tight prudential framework for banks should be maintained. (IMF 2006, p. 15)
16. Effective supervisory system consisting of on-site and off-site supervision. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), a system of off-site reviews based on quarterly/monthly returns is in place, which is analyzed to provide updated information on the financial condition of banks and to serve as an input to on-site inspection. Manuals are in place both on-site inspection and off-site monitoring. Bulgarian National Bank (BNB) supervisors maintain regular contact with the bank management. The findings of on-site inspection are discussed first by inspection team with the bank's management. The overall CAMELS (Capital, Assets, Management, Earnings, and Liquidity) rating is communicated to the bank management. At the same time, banks are also required to inform the BNB of major events such as changes in capital, insider loans and large exposures; interruptions in activities, change in auditors, change in board of directors, opening and closure of branches and amendments to the Articles of Association. The quality and competence of management is evaluated as part of arriving at the Management (M) rating as part of the CAMELS ratings. (IMF 2002, p. 38)
A system of off-site reporting is in place, which calls for quarterly reporting on both a solo and consolidated basis. The frequency of the reporting can be increased to monthly in view of enhanced risk to an institution. The reports are used to evaluate the bank on a CAMEL rating (Capital, Asset quality, Earnings and Liquidity). An analytical framework has been built for the analysis of the statistical and prudential information. (IMF 2002, p. 39)
According to the 2005 BNB Annual Report, risks by type of operation for individual banks were evaluated through scheduled on-site inspections and risk-based supervisory strategies. Objective approaches as well as inspectors' professional opinion and experience were applied to arrive at properly supported conclusions on the degree of risk in specific fields and on overall performance at inspected banks. Twenty full supervisory inspections of five Group I banks, 13 Group II banks, and two foreign bank branches, were conducted in 2005. Of them, 18 were at domestic banks and the remaining two at foreign bank branches. CAMELS criteria allowed 13 of these banks to retain their previous ratings, four to raise and one to lower ratings, and one was assigned its first rating. Most inspections comprised analyses and evaluations of risk indicators such as capital sufficiency and adequacy, shareholder support, asset quality and management systems, off balance- sheet commitments, organization and management, the adequacy of internal rules to operation types and volumes and compliance with supervisory requirements, the amount and quality of earnings, the source of equity growth and operation maintenance, liquidity levels and management, and efficiency of internal control and information systems. (BNB 2005, p. 41)
Off-site supervision aimed at early identification of risks at individual banks and for the whole system. In 2005 continuous monitoring of bank performance by quarterly and monthly financial analyses of any individual bank continued. Monthly supervisory profiles were applied where a bank was assigned ratings below 2 (good overall financial performance). Quarterly supervisory analyses focused mostly on trends in individual banks' performances and the dynamics of major indicators: assets quality, earnings, capital stability, and liquidity. (BNB 2005, p. 42)
Data from off-site supervision went into preparing statements and analyses for domestic and foreign bodies, the Commercial Banks in Bulgaria quarterly, monthly press releases on the banking system, and the Monthly Bulletin. It regularly went to the IMF, the World Bank, the ECB, central banks, and foreign supervisory bodies. With regard to pending EU accession, significant effort went into exchanging and analyzing information and data on European banking and finances. This resulted in new financial stability indicators for more thorough bank risk monitoring and comparing trends in Bulgarian and European banks. (BNB 2005, p. 42)
17. Regular contact with bank management and understanding of bank's operations. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), the Bulgarian National Bank (BNB) supervisors maintain regular contact with the bank management. The findings of on-site inspection are discussed first by inspection team with the bank's management. The overall CAMELS (Capital, Assets, Management, Earnings, and Liquidity) rating is communicated to the bank management. At the same time, banks are also required to inform the BNB of major events such as changes in capital, insider loans and large exposures; interruptions in activities, change in auditors, change in board of directors, opening and closure of branches and amendments to the Articles of Association. (IMF 2002, p. 38)
18. Analytical reports and statistical returns on solo and consolidated basis. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
The International Monetary Fund (IMF) reports that a system of off-site reporting is in place, which calls for quarterly reporting on both a solo and consolidated basis. The frequency of the reporting can be increased to monthly in view of enhanced risk to an institution. The reports are used to evaluate the bank on a CAMEL rating (Capital, Asset quality, Earnings and Liquidity). An analytical framework has been built for the analysis of the statistical and prudential information. (IMF 2002, p. 39)
In addition to off-site inspections inspectors from the Bulgarian National Bank (BNB) helped prepare reports of varying type and complexity on pending amendments to supervisory regulations and on developments in databases for the purposes of BNB competent bodies. Significant efforts were made to improve analytical instruments resulting in changes in the set of indicators included in the Unified Bank Performance Report. Since 2004 analyses of the banking system performance are published in the Commercial Banks in Bulgaria quarterly bulletin. (BNB 2004, p. 41)
According to the 2005 BNB Annual Report, the ambition to increase supervision quality prompted new products. Quarterly reports on banks' operations and analyses of system performance are an integral part of preventive control over credit institutions and an important BNB management database. In compliance with the CAMEL system, 135 quarterly analyses of 28 banks and six foreign bank branches were conducted, alongside 34 monthly reviews of institutions with ratings below 2. Processing of information available at the Banking Supervision Department and used to prepare full on-site supervisory inspections improved over 2005. This helped integrate off-site and on-site supervision into a single permanent and proactive supervision program. Important issues affecting the overall state of banks and extending beyond the supervisory cycle were reflected in 68 supervisory memoranda prepared by inspectors. They enforced supervisory measures, prompted meetings with bank managements, and settled a number of methodological issues. Over the year under review 54 statements of opinion were prepared relating to capital increases, acquiring subsidiaries or interests, and using subordinated term debt and/or debt/capital (hybrid) instruments. (BNB 2005, p. 42)
According to the IMF, as of 2007, statistical methods conform to the key classification and valuation principles of the IMF's Monetary and Financial Statistics Manual, 2000. Consistency in the coverage of the BNB's claims on banks (which included claims on liquidated banks) and the banks' liabilities to the BNB improved in January 2003 after the BNB wrote off most of the claims on the liquidated banks. With respect to its near-term statistical program, the BNB is progressively harmonizing its data collection and compilation methods in line with the European Central Bank's framework for monetary statistics. In particular, a significant number of enhancements in sectoral and instrument detail and classification have progressively been made in the data for 1995 and onward. These were reflected in the revised monetary statistics published in the August 2002, November 2003, and October 2004 issues of IFS. The latter revision in IFS is a consequence of the BNB's statistical work in earl 2004, which allowed to recast monetary data to further harmonize with ECB requirements. Among the changes in the national presentation was the creation in February 2004 of a new longterm liabilities category outside the money supply that includes deposits and securities with a maturity over 2 years, deposits redeemable at notice over three months, and capital and reserves. For program purposes, deposits of the newly created public investment company, municipalities and social security funds are considered part of the consolidated general government. These deposits are excluded from M3 and included in net lending to the consolidated general government. (IMF 2007, p. 49)
19. Independent validation of supervisory information through on-site examination or external auditors. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), the validation of supervisory information is primarily done through the on-site inspections, which are conducted using in-house examiners. External auditors are not used for this purpose, although the Bulgarian National Bank (BNB) has the authority to do so and in fact does require certain prudential reports to be certified. The planning process, responsibilities of examiners, objective of examination and procedures to be followed are well documented in an on-site manual, which is disclosed to banks. (IMF 2002, p. 39)
In 2004, inspectors evaluated bank risks through formal on-site inspections. The annual inspection schedule was prepared and followed in accordance with supervisory strategies and the risk ratings of individual banks consistent with the principles of a risk-based approach. Banks from all bank groups were inspected. CAMELS ratings were assigned to banks to determine supervisory strategies and importance (seriousness) criteria for follow-up supervisory measures at inspected banks. (BNB 2004, p. 39)
Supervisory inspections primarily aimed to identify risk zones and levels, and determine managements' capability to measure, control and manage risks effectively. Significant legislative framework amendments coupled with consistent efforts to integrate on-site and off-site supervision entailed updating of the On-Site Inspections Manual. The most significant changes were in respect of International Accounting Standards. Given extensive lending, a number of statements in the set of required documents were supplemented or supplanted to provide comprehensive information and adequate risk evaluation. Procedures and questionnaires throughout the Manual were extended and supplemented. (BNB 2004, p. 40)
20. Ability to supervise on a consolidated basis. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), all banks are supervised on a consolidated basis, which includes the operations at foreign locations. As of now there are no complex structures or bank groups or bank holding companies in Bulgaria with the exception of an insurance company, which owns a bank. However, the Bulgarian National Bank (BNB) has put in place the components of a regime of consolidated supervision. The parent bank in a bank group or the bank in a financial holding company is also obliged to submit to the BNB information on the structure, size of participations and the changes made therein. Further, the central bank is authorized to inspect other banks and non-bank enterprises on issues related to the inspection. In the on-site inspection manual, there is a separate chapter on related organizations, the procedures under which require the inspector to evaluate these risks. (IMF 2002, p. 39)
In its 2002 report, the IMF recommends that the exemption from consolidated supervision in the exceptions to consolidation laid out in Art. 8 of regulation 12, subsidiaries situated in countries where there are legal impediments for supplying required information can be exempted from submitting consolidated reports. This exemption should be reconsidered. (IMF 2002, p. 41)
The BNB entered into a Memorandum of Understanding (MoU) with the other major domestic financial supervision agencies other than the Deposit Insurance Fund (DIF), with which it already had an agreement. The agreement creates a framework for cooperation, coordination and exchange of information. As regards locations abroad: branches of domestic banks require licenses, subsidiaries and joint ventures do not require similar permission. The law provides an exception for the application of consolidated supervision, i.e., for subsidiaries in countries where there is an impediment to the flow of information. This exception should be reconsidered. (IMF 2002, p. 39)
21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), banks are required to have their annual accounts audited by external auditors chosen by them from among a list maintained by the Bulgarian National Bank (BNB). The format of the audited accounts and the disclosures are laid down by the BNB. Banks are also required to publish half yearly balance sheets and the BNB on its own publishes balance sheet data on a quarterly basis based on off-site data. Auditors are obliged to inform the central bank about any circumstances that may put the bank's activity at risk though there is no protection available in the banking law to auditors for such disclosure. Promoting such protection for the auditors should be considered. (IMF 2002, p. 39)
The Accountancy Law (AL 2002) that came into effect in 2002 requires from financial institutions to apply the International Financial Reporting Standards (IFRS) from the beginning of 2003. (Petranov & Tchompalov 2004, p. 4)
22. Adequate supervisory measures to ensure timely corrective action. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
The Bulgarian National Bank (BNB) can take a range of remedial measures against banks and penalize the banks, its administrators or major shareholders. Triggers of remedial action or the penalty are laid down in law and include actions such as violation of the law or regulations, posing a threat to depositors' interests, money laundering, hindrance of bank supervision, etc. Supervisory actions range from the issue of written instructions and cease and desist orders, to prohibition of dividend payments, dismissal of managers and revocation of license, etc. These BNB has been taking timely action as evidenced by the Quarterly Report on Enforcement and Compliance Action. (IMF 2002, p. 40)
According to the 2005 BNB Annual Report, quality analysis was seen to call for further improvement in financial stability indicators. To this end analysts' major instrument, the set of indicators for continuous bank monitoring known as the Uniform Bank Performance Report, changed. Analytical capacity was directed at designing and testing various bank supervision and behaviour models such as scenarios for curbing credit and the possible effects of supervisory regulation changes. Quarterly stress test models including major risks (credit, market and liquidity) improved. Significant funds went on monitoring credit risk dynamics, including new instruments for continual monitoring of credit risk scope and depth, implemented jointly with the Information Systems Directorate. (BNB 2005, p. 42)
23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), banks are supervised on a consolidated basis, including the operations of foreign branches. Domestic banks require prior approval of the Bulgarian National Bank (BNB) for opening branches abroad, though no similar permission has been contemplated for subsidiaries. Currently, there are no foreign subsidiaries of Bulgarian banks. BNB may refuse the permit for instance if host country supervision is not considered sufficiently effective or if there are legal or administrative obstacles to supervision exercised over the branch by the BNB. The operations of the overseas branch are reviewed through on-site inspection of the parent bank, which includes an evaluation of management competence to oversee the global operations of the banks. (IMF 2002, p. 40)
Bulgarian banks have overseas branches only in Cyprus and Albania. The BNB has entered into a Memorandum of Understanding (MoU) with Cyprus, Austria and the U.S. and is negotiating MoUs with Greece and Albania. Banks are required to obtain BNBs permission before opening a branch abroad. The BNB may refuse the permit if it considers the overseas supervisors to be ineffective or if there is an impediment to supervision. (IMF 2002, p. 40)
24. International exchange of information with other supervisors. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
The International Monetary Fund reported that the Law on the Bulgarian National Bank (BNB) authorizes the BNB to conclude bilateral agreements with other central banks or foreign supervising agencies on exchange of information on a reciprocal basis and a commitment to keep bank secrecy. Sharing of information with overseas supervisors is on an ad hoc basis, and is in the process of being formalized through Memoranda of Understanding and exchanges of letters, in which BNB has taken a proactive stance. (IMF 2002, p. 40)
Bulgarian banks have overseas branches only in Cyprus and Albania. The BNB has entered into a Memorandum of Understanding (MoU) with Cyprus, Austria and the U.S. and is negotiating MoUs with Greece and Albania. Banks are required to obtain BNBs permission before opening a branch abroad. It may refuse the permit if it considers the overseas supervisors to be ineffective or if there is an impediment to supervision. (IMF 2002, p. 40)
The two-year PHARE (PHARE program is one of the three pre-accession instruments financed by the European Union to assist the applicant countries of Central and Eastern Europe in their preparations for joining the European Union) 2001 program financed project on cooperation between the BNB and the French and Dutch central banks was completed in September 2004. Its essential purposes were to improve BNB administrative capacity, to adopt and apply European Community law, and to introduce best European practice to the BNB in the process of preparing for membership in the European System of Central Banks and the financial system of the European Union. (BNB 2004, p. 48)
Together with the successful cooperation with European Union (EU) central banks, the BNB also maintains contacts and exchanges expertise with other central banks on a bilateral basis. In this direction, cooperation with the central banks of the Russian Federation and the Ukraine should be noted. A People's Bank of China delegation visited the BNB in October 2004. During the discussions, its representatives received detailed information on BNB organization and managerial structure, management, the functioning of the currency board, international reserves management, and its status as lender of last resort. (BNB 2004, p. 49)
According to the 2005 BNB Annual Report, efforts to enhance supervisory cooperation continued in 2005. Following negotiations between the BNB and Turkey's Bank Regulation and Supervision Agency, a bilateral supervisory memorandum was signed. It regulates exchanges of information between banks operating under the direction of the host supervisory body, as well as interaction and coordination in exercising control over them. The memorandum between the BNB and the Austrian Financial Market Authority was updated and significantly expanded. The BNB has now set up rules of cooperation with the supervisory bodies of practically all countries with operating banks in Bulgaria, as well as with countries in which Bulgarian banks operate through branches or subsidiaries. (BNB 2005, p. 40)
25. Supervision of local operation of foreign banks and information sharing with home country supervisors. |
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The International Monetary Fund (IMF) in its 2002 Financial System Stability Assessment (FSSA) of Bulgaria found the banking supervisory system in Bulgaria to be 'fully compliant' or 'largely compliant' with the near totality of the 25 Basel Core Principles. The assessment indicted that the supervisory system is found to be largely in compliance with the Basel Core Principles. (IMF 2002, pp. 18, 35) However, there is no information publicly available as to Bulgaria's compliance with this Principle.
According to the International Monetary Fund (IMF), foreign banks operate in Bulgaria both as branches and as subsidiaries and are subject to the same supervisory and prudential regime as domestic banks, with minor exceptions, which reflect the control of the parent bank and the supervisory regime of the host country, in the case of foreign bank branches. (IMF 2002, p. 40)
In its off-site inspections the BNB analyzing the financial performance of foreign institutions with subsidiaries in Bulgaria with regard to financial backing where necessary. In its 2004 inspection the BNB conducted inspections on four foreign banks' branches. The Banking Supervision Department's core work is managing bank regulation and applying measures and penalties. The year saw 34 supervisory measures imposed at 29 banks. Eleven of the measures (including lifting two earlier measures) were instructions. Less formal measures included a supplementary agreement on a rehabilitation memorandum with a bank, and a warning to a foreign bank branch for legal breaches in customer operations. (BNB 2004, p. 41)
Bulgaria