## cr17202

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### Overview of the financial safety net
- Four domestic authorities comprise Bulgaria’s financial safety net:
  - Bulgarian National Bank (BNB) — monetary authority, prudential and resolution authority for banks.
  - Financial Supervision Commission (FSC) — prudential and resolution authority for investment firms, prudential supervisor for other nonbank financial institutions.
  - Bulgarian Deposit Insurance Fund (BDIF) — provides deposit insurance, manages the deposit insurance fund (DIF) and the bank resolution fund (BRF); appoints and oversees bank bankruptcy liquidators.
  - Ministry of Finance (MoF) — politically responsible for financial sector policies.
- The Financial Stability Advisory Council (FSAC) complements these authorities and brings together the Minister of Finance (chair), and the heads of the BNB and the FSC.
- The Bulgarian framework is subject to the EU single rulebook, including CRD/CRR (CRD IV package), BRRD, DGSD, and EBA binding technical standards.

### Banking sector structure and key statistics
- Banking sector accounts for 86.7 percent of system assets (or 101.3 percent of GDP at end-June 2016).
- Financial system assets are 116.9 percent of GDP.
- Foreign-owned banks hold 76.6 percent of banking assets.
- First Investment Bank (FIB) is the third largest bank system-wide (9.6 percent) and is domestically owned.
- The banking system is deposit funded (83 percent of liabilities).
- The banking sector comprises 27 banks, including 9 foreign-bank subsidiaries, 5 branches of foreign banks, 4 banks with majority foreign nonbank owners, and 9 banks with majority domestic owners.
- At 51 percent, bank loans are highly euroized.

### Collapse and liquidation of Corporate Commercial Bank (KTB) — timeline and impacts
- KTB context and pre-collapse indicators:
  - End-2013: KTB was fourth largest bank system-wide in assets (8.4 percent, or 9.4 percent of GDP), third in net profits, first in deposit growth.
  - KTB capital ratio: 12.6 percent (BNB requirement 12 percent; system average 16.9 percent).
  - Reported NPL ratio: 0.2 percent (system average 16.9 percent).
- Key events:
  - June 20, 2014: BNB put KTB under conservatorship.
  - KTB lost BGN 1.2 billion (ca. EUR 600 million) — about 20 percent of its deposits within days.
  - FIB lost about 10 percent of its deposits in one day and was forced to close on Friday, June 27.
  - June 28, 2014: authorities submitted to the European Commission a liquidity assistance scheme up to BGN 3.3 billion (ca. EUR 1.65 billion), or 4 percent of GDP; EC found scheme consistent with EU state-aid rules.
  - June 30, 2014: FIB and other banks reopened; FIB received a state deposit of BGN 1.2 billion.
  - October 22, 2014: final valuations identified impairment deviations of BGN 4.22 billion; BGN 3.4 billion were loans to newly created companies without operations.
  - After recognizing impairment deviations, KTB showed negative capital of about BGN 3.75 billion.
  - November 6, 2014: BNB revoked KTB’s license; BDIF made guaranteed deposits available on December 4, 2014.
  - March–December 2015 and 2016: liquidation procedures, forensic audits, appointing/replacing liquidators, valuators appraised market value at BGN 1.4 billion on April 22, 2015; liquidation plan approved November 2016 and execution started December 2016.
- Consequences and constraints:
  - In absence of a comprehensive bank resolution regime at the time, KTB’s insolvency triggered bankruptcy procedures; liquidation has been protracted and costly.
  - BNB decisions were heavily disputed in courts (113 plaintiffs; all cases but one were unsuccessful).
  - Since conservatorship, borrowers largely ceased servicing debts and loan recovery was difficult.

### Sound foundations and crucial challenges (current weaknesses)
- Recent legal and institutional progress:
  - Since 2008 FSAP Update and mid-2015 EU-driven reforms, Bulgaria introduced a resolution regime for banks and investment firms, designated resolution authorities, and established mechanisms to fund resolution measures (BRF complementing DIF).
  - Toolkit includes four mandatory tools: sale of business, bridge institution, asset transfer, and bail-in; and two optional government stabilization tools: equity support and temporary public ownership.
- Key operational and capacity weaknesses:
  - Early intervention framework (EIF) lacks quantitative escalation policies and procedures, and does not ensure a smooth and decisive transition from early intervention into resolution.
  - For all practical purposes, there is no bilateral emergency liquidity assistance (ELA) facility due to lack of funds and policy choices that impede effective liquidity assistance.
  - DIF is burdened with loans and would be insufficient to cover payouts to the depositors of the smallest mid-sized bank unless BDIF would take on an additional sizeable loan and/or collect extraordinary premiums; BRF just recently started collecting premiums.
  - Bank resolution regime has not been operationalized; for none of the 13 majority domestically owned banks has recovery and resolution planning (RRP) been finalized.
  - Complementarity of the bank bankruptcy and bank resolution regimes is not ensured.
  - Agency-specific and national contingency planning—including all four financial safety net participants—has yet to be updated to fully incorporate the bank resolution regime.
  - Combination of functions within the BNB and BDIF creates potential conflicts (e.g., BNB as supervisor, resolution authority, and ELA provider; BDIF as bridge institution owner and insurer).

### BDIF, deposit insurance, and funding metrics
- Covered deposits totaled BGN 3.7 billion in the KTB case; BDIF funds stood at BGN 2.1 billion at end-October 2014.
- MoF agreed to lend BDIF up to BGN 2 billion, of which BGN 1.7 billion was used.
- BDIF payout progress to depositors:
  - 32.16 percent disbursed to 25,000 depositors when payouts started on December 4, 2014.
  - 55.10 percent within three days.
  - 86.51 percent by end-2014 to 89,291 depositors.
  - By end-2016, 99.59 percent disbursed to 111,468 depositors.
- BDIF financial position at end-2016:
  - DIF about BGN 380 million (target 1 percent).
  - BRF about BGN 178 million (target 2 percent).
  - At current premium collection rates and all other things equal, DIF and BRF would be at target levels in 2024 as required by law.
  - A fully funded DIF (about BGN 470 million) would be sufficient to payout depositors of the smallest mid-sized bank.
  - A fully funded BRF would have been about BGN 940 million.
- International loans to replenish BDIF:
  - World Bank loan: EUR 300 million (February 2016).
  - EBRD loan: EUR 300 million (March 2016).
  - World Bank loan is subject to disbursement-linked outcome indicators focusing on premium collection, asset recoveries, loan/backstop facility, public awareness, coordination with BNB, and a BDIF contingency plan.

### Liquidity support, ELA constraints, and mission three-pronged approach
- Liquidity resources and constraints:
  - BNB excess international reserves stood at about BGN 2 billion at end-2016.
  - BNB excess reserves evolution cited: BGN 5.3 billion at end-2010 to BGN 6 billion at end-2016; after exclusions the balance is about BGN 2 billion at end-2016 representing 3.2 percent of banking sector deposits.
  - Without exclusions, excess reserves represented 9.6 percent of banking sector deposits at end-2016, down from 13.7 percent at end-2010.
  - BNB liquidity support can only be funded from BNB’s excess international reserves; BDIF is not authorized to provide liquidity support.
  - Projected FRA balance for 2017 is BGN 6.2 billion; the 2017–2019 fiscal forecast prescribes a minimum FRA level at BGN 4.5 billion, reducing available funds.
  - Government financial support is subject to EU state aid and parliamentary approval, adding to decision-making time.
- Mission recommended three-pronged approach to strengthen liquidity support capacity:
  1. Increase the funds for liquidity support:
     - Consider an industry-funded ELA fund at the BNB.
     - Complement the fund with higher retained BNB profits.
     - MoF could be vested with standing or recurring statutory authority to borrow for financial stability purposes and—using also the FRA—to lend on to the BNB for liquidity support to banks, following the same conditions typically applicable to central bank ELA.
  2. Enhance distressed banks’ ability to meet collateral requirements:
     - Vest MoF with standing or recurring authority to extend guarantees to the distressed bank to ensure collateral requirements under the BNB’s Lending Ordinance can be met—and excess foreign exchange reserves can actually be used for ELA.
     - Seek swap lines with international financial institutions such as the Bank for International Settlements (BIS) and major central banks such as the ECB.
  3. Ensure authorities can act decisively—yet at their discretion—on liquidity support requests:
     - Support decisive decision making with solvency and viability methodologies, to be included in a contingency plan for liquidity support.
     - Pre-assessment of collateral held by banks with a high-risk profile.
- BNB Ordinance No. 6 on ‘Extending Collateralized Lev Loans to Banks’ conditions:
  - Last-resort loans, maximum three-month maturity, minimum 10 percent haircut on collateral, only euros, U.S. dollars, and Swiss francs; allows as collateral securities issued or guaranteed by the Bulgarian state, and prime-rated securities or guarantees issued by foreign governments and central banks.
- No procedures are in place for prompt decision making on liquidity support.

### Recovery and Resolution Planning (RRP) — implementation status and priorities
- RRP roles:
  - Recovery Plan: prepared by banks; assessed by supervisory authority; shared with resolution authority.
  - Resolution Plan: prepared by resolution authority; entails Preferred Resolution Strategy (PRS), Resolvability Assessment Process (RAP), and documented resolution plan.
  - Resolution authority responsible for ensuring resolvability and may take actions against a bank to ensure it.
- EU scope:
  - All banks in the European Union are subject to RRP requirements; BRRD allows simplified plans at national authorities’ discretion.
- BNB progress and expectations:
  - BNB is updating EIF and follows EBA Guideline EBA/GL/2014/13 on SREP; by mid-2017 intended to adopt response and escalation policies consistent with EBA Guideline EBA/GL/2015/03.
  - All banks assigned CAMELOS risk assessment ratings.
  - BNB expects all 22 recovery plans will be approved by mid-2017.
  - BNB expects by mid-2017 eight of nine resolution colleges will adopt resolution plans for groups with foreign-bank subsidiaries; plans expected to be based on single point of entry strategies and will set indicative MREL.
  - BNB will develop an MREL policy and determine critical functions for majority domestically owned banks and banks with majority foreign nonbank owners.
  - For 13 prioritized banks, BNB will start developing a resolvability assessment methodology and expects by end-2017 to have adopted comprehensive resolution plans, prioritizing banks based on risk profiles.
- Mission prioritization recommendations:
  - Prioritize RRPs for (1) banks for which the 2016 asset quality review (AQR) and stress tests indicated capital shortfalls, and (2) the majority domestically owned domestic systemically important banks (D-SIBs).
  - Adopt alternative resolution strategies for foreign-bank subsidiaries operating in Bulgaria if resolution colleges cannot agree on a common approach.
  - Focus on time-tested sale of business and bridge institution tools as cost-effective resolution instruments.
  - Develop metrics to compare liquidation costs and resolution actions, particularly using sale of business and bridge institution tools.

### Bank bankruptcy regime assessment and recommendations
- Observations:
  - Bank Bankruptcy Act modeled after corporate bankruptcy regime; corporate bankruptcy regime assessed as comprehensive but ineffective with a bias toward liquidation.
  - Private sector concerns: institutional shortcomings, ineffectiveness of sale-of-assets mechanisms.
  - Legislative proposals to strengthen the regime submitted to parliament.
- Mission recommendations:
  - Comprehensively assess and strengthen the bank bankruptcy regime to ensure:
    - Bankruptcy proceedings can be started when the bank is failing or likely to fail and no alternative private sector measure would prevent its failure within a reasonable timeframe (complementing resolution triggers).
    - The bridge bank tool is available under the bank bankruptcy regime.
  - Rationale: liquidation may be needed for sizable parts of banks left out of resolution measures and where public-interest conditions prevent using resolution tools.

### Contingency planning and crisis management — gaps and recommendations
- Institutional arrangements:
  - FSAC established since 2003; national financial crisis action plan adopted in 2009; national plan assumes agency-specific contingency plans; FSC has its own plan.
  - BNB and BDIF signed updated MoU in August 2016 prescribing joint contingency plans and crisis communication plans.
  - Authorities intend to update national and FSC plans for post-BRRD era; BDIF intends by end-2017 to have a contingency plan for resolution funding.
  - Bulgaria benefits from BRRD cross-border arrangements; ECB and SRB are group supervisory and resolution authorities for seven out of nine foreign-bank subsidiaries.
- Mission recommendations:
  - FSAC composition: include BDIF as an FSAC member.
  - FSAC mandate: explicitly include active oversight of national contingency planning.
  - National plan: describe event-specific cooperation (liquidity support by BNB or MoF, runs on banks, supervisory interventions, liquidation and resolution actions), differentiate between D-SIBs and other banks, and between foreign-bank subsidiaries and majority domestically owned banks where needed.
  - Agency plans: under FSAC auspices, all agencies (including MoF and BDIF) should develop agency-specific contingency plans with detailed actions, timely interventions, and effective communications.
  - Crisis communication: updated national plan should focus on keeping officials on message, explaining unconventional actions, and neutralizing speculations.
  - Crisis Simulation Exercises (CSEs): FSAC should oversee regular CSEs (single- or multi-topic, domestic or cross-border) including BDIF participation; cross-border CSEs should focus on EU agencies.

### Staffing, training, and governance capacity
- Current staffing snapshots:
  - BNB Credit Institutions Resolution Directorate (CIRD): 7 FTEs (Head 1; Resolution Planning and Execution 4; Methodology and Reporting 1; Legal Services 1); aims to have 16 FTEs.
  - FSC Restructuring of Investment Firms Directorate: 4 FTEs; aims for 10 FTEs.
  - BDIF: 23 FTEs, including three vacancies intended to be filled in 2017.
  - MoF Financial Markets Regulation Directorate: 13 FTEs; about 4 FTEs work on financial stability issues.
- Mission recommendations:
  - Ensure adequate staffing and resources for all financial oversight authorities and train staff in use of resolution tools, particularly sale of business, bridge institution, and the bail-in tool.
  - Allocate additional resources for training and developing resolution strategies and a resolution handbook.
  - Train all RRP staff on resolution actions to appreciate advantages over bankruptcy procedures and conduct workshops tailored to the Bulgarian context.

### Legal protection for agencies, officials, and staff — gaps and international standards
- Current legal framework and gaps:
  - Organic acts provide that agencies, their officials and staff, shall not be liable for damages caused in execution of their mandate, “unless they have acted with intent.” Authorities clarified this clause should be read “unless they have caused the damage with intent.”
  - Resolution Act limits liability of supervisory and resolution agencies and their staff, temporary administrators, and bridge institutions and asset management companies and their management bodies and senior management.
  - Provisions do not explicitly extend protection to former staff and officials; do not ensure legal costs are compensated when officials have not acted in bad faith.
  - None of the agencies has operationalized legal protection—no policies, procedures, or private/public arrangements in place.
- Mission recommendations:
  - Amend legislative clauses to explicitly include (former) officials, staff, and agents of the agencies and the MoF, and provide indemnification for legal costs.
  - Establish operational arrangements addressing:
    - Choice and timing of payment of legal representation.
    - Protection against self-incrimination during internal investigations while building a defense.
    - Liability and legal aid insurance covering realistic monetary amounts commensurate with high financial stakes in resolution cases.
- International standards summarized (requirements for statutory legal protection and indemnification):
  - Key Attributes KA 2.6 and KA Methodology EC 2.6.1–2.6.2.
  - Basel Core Principles BCP 2 and BCP Methodology.
  - IADI Principle 11 (legal protection for current and former staff; coverage of defense costs as incurred).
  - IAIS ICP 2.10 and IOSCO guidance emphasize adequate legal protection for regulators and staff acting in good faith.

### Selected prioritized actions (summary of Table 1 recommendations with responsible authorities and timing)
- Ensure a smooth and decisive transition from early intervention into resolution; problem-bank metrics should apply consistently through regular supervision, early intervention (including recovery actions), and resolution (planning). (BNB; ¶23) — I, C
- Prioritize RRP for (1) banks for which the 2016 AQR and stress test indicated capital shortfalls, and (2) the majority domestically owned D-SIBs. (BNB; ¶25) — I
- Develop alternative resolution strategies for foreign-bank subsidiaries that operate in Bulgaria, in case the group resolution colleges cannot agree on a common approach. (BNB; ¶25) — NT
- Define strategies for liquidity assistance to banks, including (1) increasing the funds for liquidity support; (2) enhancing banks’ ability to meet collateral requirements; and (3) ensuring that the authorities can act decisively—yet at their discretion—on liquidity support requests. (MoF, BNB; ¶29) — I
- Develop metrics to compare liquidation costs and resolution actions particularly using the sale of business and bridge institutions tools. (BNB, BDIF; ¶30) — I
- Comprehensively assess and strengthen the bank bankruptcy regime and its application, to ensure that (1) its triggers complement the resolution regime, and (2) the bridge institution tool is available under the bank bankruptcy regime as well. (MoF, BDIF, BNB; ¶32) — NT
- Continue implementing the timeline agreed with the World Bank Group for the disbursement-linked outcome indicators to strengthen the BDIF, and include in the contingency plan for resolution measures the policies and procedures that will inform the establishment of bridge institutions. (BDIF; ¶35) — MT
- Under the oversight of the FSAC with an expanded mandate (including contingency planning) and membership (including the BDIF), strengthen the crisis management framework, including agency-specific and national financial crisis preparedness, a national crisis communication plan, and regular single- and multi-agency financial crisis simulation exercises, complemented with cross-border exercises, particularly with EU authorities. (FSAC, MoF, BNB, FSC, BDIF; ¶37) — NT, C
- Ensure adequate staffing and resources for all financial oversight authorities and train staff in the use of resolution tools, particularly the time-tested sale of business and bridge institution tools, and the new bail-in tool. (MoF, BNB, BDIF, FSC; ¶39) — I, C
- Strengthen the legal and operational framework for legal protection for current and former officials, staff, and agents of all financial oversight authorities, including indemnification for legal costs; complemented with agency-specific internal arrangements to ensure legal aid, liability indemnification, and protection against self-incrimination. (MoF, BNB, FSC, BDIF; ¶41) — MT

*Source: cr17202 - EXECUTIVE SUMMARY — https://www.imf.org/-/media/files/publications/cr/2017/cr17202.pdf*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Overview of the financial safety net
- The Bulgarian financial safety net comprises four domestic authorities:
  - Bulgarian National Bank (BNB) — monetary authority, prudential and resolution authority for banks.
  - Financial Supervision Commission (FSC) — prudential and resolution authority for investment firms, prudential supervisor for other nonbank financial institutions.
  - Bulgarian Deposit Insurance Fund (BDIF) — provides deposit insurance, manages the deposit insurance fund (DIF) and the bank resolution fund (BRF); appoints and oversees bank bankruptcy liquidators.
  - Ministry of Finance (MoF) — politically responsible for financial sector policies.
- The Financial Stability Advisory Council (FSAC) complements these authorities and brings together the Minister of Finance (chair), and the heads of the BNB and the FSC.

### Key historical developments and context
- Since the 2008 IMF FSAP Update, Bulgaria’s financial safety net and crisis management arrangements, including bank resolution and contingency planning, have improved.
- In mid-2015, to implement pertinent EU rules, Bulgaria:
  - introduced a resolution regime for banks and investment firms;
  - designated resolution authorities for these financial institutions;
  - established mechanisms to fund resolution measures (BRF complementing DIF).
- The Bulgarian framework is subject to the EU single rulebook, including CRD/CRR (CRD IV package), BRRD, DGSD, and EBA binding technical standards.

### Collapse and liquidation of Corporate Commercial Bank (KTB)
- In 2014, Corporate Commercial Bank (KTB)—Bulgaria’s second largest domestically owned bank and the fourth largest bank system-wide—went bankrupt due to fraud and insider abuse.
- The collapse followed a temporary massive deposit run-off with system-wide consequences:
  - Within days, the KTB lost 20 percent of its deposits.
  - First Investment Bank (FIB) lost 10 percent of its deposits.
- Government liquidity support helped FIB; after valuations found significant impairment deviations, the BNB concluded KTB’s capital was negative.
- In the absence of a comprehensive bank resolution regime at the time, KTB’s insolvency triggered bankruptcy procedures; the ongoing liquidation is protracted and costly.

### Sound foundations and crucial challenges (current weaknesses)
- Key components are recently introduced and not yet fully operationalized:
  - The early intervention framework (EIF) lacks quantitative escalation policies and procedures, and does not ensure a smooth and decisive transition from early intervention into resolution.
  - For all practical purposes, there is no bilateral emergency liquidity assistance (ELA) facility due to lack of funds and policy choices that impede effective liquidity assistance.
  - The DIF is burdened with loans and would be insufficient to cover payouts to the depositors of the smallest mid-sized bank, unless the BDIF would take on an additional sizeable loan and/or collect extraordinary premiums; the BRF just recently started collecting premiums.
  - The bank resolution regime has not been operationalized; for none of the 13 majority domestically owned banks has recovery and resolution planning (RRP) been finalized.
  - Complementarity of the bank bankruptcy and bank resolution regimes is not ensured.
  - Agency-specific and national contingency planning—including all four financial safety net participants—has yet to be updated to fully incorporate the bank resolution regime.

### Actions needed to strengthen operational capacity (major recommendations summarized)
- Ensure a smooth and decisive transition from early intervention into resolution:
  - Problem-bank metrics should apply consistently through regular supervision, early intervention (including recovery actions), and resolution (planning).
- Finalize and prioritize Recovery and Resolution Planning (RRP):
  - Prioritize RRPs for (1) banks for which the 2016 asset quality review (AQR) and stress tests indicated capital shortfalls, and (2) the majority domestically owned domestic systemically important banks (D-SIBs).
  - Adopt alternative resolution strategies for foreign-bank subsidiaries operating in Bulgaria if resolution colleges cannot agree on a common approach.
- Define strategies for liquidity assistance to banks consistent with the currency board arrangements (CBA) and EU state-aid rules; a three-pronged approach is recommended:
  1. increasing the funds for liquidity support;
  2. enhancing banks’ ability to meet collateral requirements;
  3. ensuring that the authorities can act decisively—yet at their discretion—on liquidity support requests.
- Strengthen financial crisis management:
  - Expand the FSAC’s mandate (including contingency planning) and membership (including the BDIF).
  - Update agency-specific and national financial crisis preparedness, including a national crisis communication plan.
  - Conduct regular single- and multi-agency financial crisis simulation exercises (CSEs), particularly with EU authorities with jurisdiction over the groups to which seven out of nine foreign-bank subsidiaries belong.
- Assess and strengthen the bank bankruptcy regime:
  - Ensure bankruptcy proceedings can be started when the bank is failing or likely to fail and no alternative private sector measure would prevent its failure within a reasonable timeframe.
  - Ensure the bridge bank tool is available under the bank bankruptcy regime.
- Staffing, training, and legal protection:
  - Ensure all financial oversight authorities are adequately staffed to expedite RRP and fulfil cross-border responsibilities.
  - Train staff in the use of the sale of business and bridge institution tools, and the bail-in tool.
  - Strengthen the legal protection framework (including indemnification for legal costs) and operationalize protection—covering choice/timing of legal representation, protection against self-incrimination during internal investigations, and liability and legal aid insurance.

### Specific recommendations from Table 1 (recommendation text, responsible authorities, timing)
- 1. Ensure a smooth and decisive transition from early intervention into resolution, with problem bank metrics that apply consistently through regular supervision, early intervention (including recovery action), and resolution (planning). (BNB; ¶23) — I, C
- 2. Prioritize RRP for (1) the banks for which the 2016 AQR and stress test indicated capital shortfalls, and (2) the majority domestically owned D-SIBs. (BNB; ¶25) — I
- 3. Develop alternative resolution strategies for foreign-bank subsidiaries that operate in Bulgaria, in case the group resolution colleges cannot agree on a common approach. (BNB; ¶25) — NT
- 4. Define strategies for liquidity assistance to banks, including (1) increasing the funds for liquidity support; (2) enhancing banks’ ability to meet collateral requirements; and (3) ensuring that the authorities can act decisively—yet at their discretion—on liquidity support requests. (MoF, BNB; ¶29) — I
- 5. Develop metrics to compare liquidation costs and resolution actions particularly using the sale of business and bridge institutions tools. (BNB, BDIF; ¶30) — I
- 6. Comprehensively assess and strengthen the bank bankruptcy regime and its application, to ensure that (1) its triggers complement the resolution regime, and (2) the bridge institution tool is available under the bank bankruptcy regime as well. (MoF, BDIF, BNB; ¶32) — NT
- 7. Continue implementing the timeline agreed with the World Bank Group for the disbursement-linked outcome indicators to strengthen the BDIF, and include in the contingency plan for resolution measures the policies and procedures that will inform the establishment of bridge institutions. (BDIF; ¶35) — MT
- 8. Under the oversight of the FSAC with an expanded mandate (including contingency planning) and membership (including the BDIF), strengthen the crisis management framework, including agency-specific and national financial crisis preparedness, a national crisis communication plan, and regular single- and multi-agency financial crisis simulation exercises, complemented with cross-border exercises, particularly with EU authorities. (FSAC, MoF, BNB, FSC, BDIF; ¶37) — NT, C
- 9. Ensure adequate staffing and resources for all financial oversight authorities and train staff in the use of resolution tools, particularly the time-tested sale of business and bridge institution tools, and the new bail-in tool. (MoF, BNB, BDIF, FSC; ¶39) — I, C
- 10. Strengthen the legal and operational framework for legal protection for current and former officials, staff, and agents of all financial oversight authorities, including indemnification for legal costs; complemented with agency-specific internal arrangements to ensure legal aid, liability indemnification, and protection against self-incrimination. (MoF, BNB, FSC, BDIF; ¶41) — MT

*Source: cr17202 - EXECUTIVE SUMMARY — https://www.imf.org/-/media/files/publications/cr/2017/cr17202.pdf*

### 5.      This note focuses on the banking sector. The sector dominates the financial system with

### cr17202 - 5. This note focuses on the banking sector. The sector dominates the financial system with

### Banking sector structure and key statistics
- Banking sector accounts for 86.7 percent of system assets (or 101.3 percent of GDP at end-June 2016).
- Financial system assets are 116.9 percent of GDP.
- Foreign-owned banks hold 76.6 percent of banking assets.
- First Investment Bank (FIB) is the third largest bank system-wide (9.6 percent) and is domestically owned.
- The banking system is deposit funded (83 percent of liabilities).
- The banking sector comprises 27 banks, including:
  - 9 foreign-bank subsidiaries,
  - 5 branches of foreign banks,
  - 4 banks with majority foreign nonbank owners,
  - 9 banks with majority domestic owners.

### Scope, standards, and objectives of the note
- The note reviews Bulgaria’s financial safety net and crisis management arrangements—including bank resolution and contingency planning—against Bulgaria-specific challenges and emerging international best practices and standards.
- The note is informed by:
  - the Key Attributes (as updated in October 2014 by the FSB),
  - the Basel Core Principles for Effective Banking Supervision (BCP; updated in September 2012 by the Basel Committee on Banking Supervision),
  - the Core Principles for Effective Deposit Insurance Systems (updated in November 2014 by the International Association of Deposit Insurers [IADI Principles]).
- The note is further based on the IMF’s technical assistance experience and aims to help strengthen the Bulgarian financial safety net and crisis management framework.

### Financial safety net and crisis management concepts and components
- Financial safety net (expanded definition used in the note):
  - Traditionally comprises: (1) prudential supervision; (2) deposit insurance; and (3) emergency liquidity assistance (ELA).
  - For this note, a fourth component is added: recovery and resolution of financial institutions.
- Crisis management:
  - Requires tools and procedures to allow authorities to respond decisively when a crisis materializes.
  - Builds on advance preparation, contingency planning, comprehensive tools and powers, sufficient funds, and efficient procedures for both domestic and foreign agencies.
  - Effective contingency planning requires monitoring tools, awareness of policy and operational choices, advance decisions on authorities’ powers, inter-agency cooperative arrangements (domestic and with foreign agencies), and financial crisis-simulation exercises.
- Note: For purposes of this note, ELA refers to ‘bilateral’ (or ‘idiosyncratic’) ELA as opposed to ‘systemic’ ELA.

### Financial oversight architecture
- Bulgarian financial safety net comprises four domestic authorities: the BNB, the FSC, the BDIF, and the Ministry of Finance (MoF), complemented by the Financial Stability Advisory Council (FSAC).
- Bulgaria is represented in the EU Economic and Financial Affairs Council (Ecofin), but not in the Eurogroup. Bulgaria is neither part of the Eurosystem nor the Banking Union, but its agencies participate in many EU cooperative arrangements.
- Bulgarian National Bank (BNB):
  - Monetary authority, and the prudential and resolution authority for banks.
  - Integral part of the European System of Central Banks—but not the Eurosystem—the European Systemic Risk Board (ESRB), the European System of Financial Supervision (ESFS), and the European Banking Authority (EBA).
  - Primary statutory objective: maintain price stability; secondary: support the general economic policies in the European Union; tertiary: support national sustainable and non-inflationary growth policies.
  - Regulation and supervision of banks (including macroprudential supervision), payment systems, and resolution powers amount to an additional financial stability mandate.
  - Functions and powers elaborated in the BNB Act, the Banking Act, and the Resolution Act.
- Financial Supervision Commission (FSC):
  - Resolution authority for investment firms, and—jointly with sectoral deputy chairpersons—the prudential supervisor for all nonbank financial institutions.
  - Integral part of the ESFS, the ESRB, the European Securities and Markets Authority, and the European Insurance and Occupational Pensions Authority.
  - Statutory objectives (equal standing): (1) protect interests of investors, insurance policy holders and beneficiaries, and members of private pension funds; (2) ensure stability of financial markets and their infrastructures.
  - Functions and powers elaborated in the FSC Act, the Insurance Code, the Social Insurance Code, the Public Offering of Securities Act, the Markets in Financial Instruments Act, and the Resolution Act.
- Bulgarian Deposit Insurance Fund (BDIF):
  - Provides deposit insurance and manages the DIF and the BRF; appoints and oversees liquidators in bank bankruptcy proceedings.
  - The Resolution Act authorizes the BDIF to fund resolution measures through the BRF and the DIF.
  - If bridge institution or asset separation tools are used, the BDIF would establish and own—under the BNB’s oversight as the resolution authority—the bridge institution or asset separation vehicle.
  - Functions and powers elaborated in the DIS Act, the Bank Bankruptcy Act, and the Resolution Act.
- Ministry of Finance (MoF):
  - Politically responsible for Bulgaria’s financial sector policies; sets strategic direction for financial stability policies and is the financial oversight agencies' interface with the government.
  - In charge of using government stabilization resolution tools and preparing pertinent legislation for parliament.
  - The minister chairs the FSAC.

### Collapse and liquidation of Corporate Commercial Bank (KTB)
- Background and pre-collapse indicators:
  - In 2014, Bulgaria’s second largest domestically owned bank (KTB) went bankrupt due to fraud and insider abuse, raising concerns about the BNB’s supervision.
  - At end-2013, the KTB was the fourth largest bank system-wide in terms of assets (8.4 percent, or 9.4 percent of GDP), third in terms of net profits, and first in terms of deposit growth (aggressive strategy since 2011 with deposit interest rates well above competition).
  - KTB had sizable exposures to state-owned enterprises.
  - KTB capital ratio stood at 12.6 percent—above the BNB’s 12 percent requirement, but below the 16.9 percent system average.
  - Reported NPL ratio: 0.2 percent, compared with the 16.9 percent system average.
- Timeline and key events:
  - June 20, 2014: BNB put the KTB under conservatorship.
  - Following a massive deposit run, KTB lost BGN 1.2 billion (ca. EUR 600 million) or about 20 percent of its deposits within days.
  - Payments to depositors were suspended, including access to guaranteed deposits.
  - Within a week, liquidity pressures spread system-wide: First Investment Bank (FIB) lost about 10 percent of its deposits in one day and was forced to close on Friday, June 27.
  - June 28, 2014: authorities submitted to the European Commission a liquidity assistance scheme for banks of up to BGN 3.3 billion (ca. EUR 1.65 billion), or 4 percent of GDP, comprising five-month state deposits at market conditions placed at solvent banks; the EC found the scheme consistent with EU state-aid rules.
  - June 30, 2014: FIB and other banks reopened without deposit restrictions and with only limited additional withdrawals. The FIB was the scheme’s largest beneficiary, with a state deposit of BGN 1.2 billion.
  - June 25, 2014: BNB-commissioned independent external auditors started a review of the KTB’s assets and liabilities.
  - July 11, 2014: preliminary results noted significant shortcomings in KTB’s financial documentation; necessitated a more comprehensive revaluation and delayed KTB’s planned reopening by July 21.
  - October 22, 2014: final results identified impairment deviations amounting to BGN 4.22 billion, of which BGN 3.4 billion—64 percent of the KTB’s loan portfolio—were loans extended to newly created companies without operations and staff, and with missing risk assessment documentation.
  - After recognizing the impairment deviations, KTB showed a negative capital of about BGN 3.75 billion.
  - November 6, 2014: BNB revoked KTB’s license; the BNB started bankruptcy proceedings at the district court; on December 4, the BDIF made guaranteed deposits available to depositors.
  - On December 12, 2014, Commercial Bank Victoria (CBV) restarted unrestricted operations after selling parts of its loan portfolio.
  - June 5, 2015: after amendments to the Bank Bankruptcy Act, the BDIF proposed that the KTB liquidator commission a forensic audit.
  - March 25, 2015: court appointed an interim liquidator (nine months after the start of conservatorship).
  - April 22, 2015: court started bankruptcy proceedings against the KTB and declared it insolvent as of June 20, 2014; the BDIF appointed the interim liquidator as the liquidator the next day.
  - November 13, 2015: the BDIF replaced the liquidator.
  - After a one-year review (August 2015–September 2016), valuators appraised KTB’s assets’ market value at BGN 1.4 billion on April 22, 2015; this serves as the basis for the liquidation balance sheet.
  - From June 20, 2014 (start of conservatorship), almost all borrowers stopped servicing debts; making loans current proved difficult due to lack of collateral and cumbersome court procedures.
  - The liquidator started court proceedings against KTB’s former management, officers, and auditor.
  - Mid-October 2016: liquidator submitted a liquidation plan to the BDIF; BDIF approved the plan in November 2016; in December 2016, the liquidator started executing the liquidation plan.
- Legal and procedural constraints and consequences:
  - In the absence of a comprehensive bank resolution regime at the time, liquidation under the Bank Bankruptcy Act was the only available resolution tool.
  - Bulgarian legislation allowed payouts to insured depositors only in case of license revocation; this was noted as inconsistent with the then applicable EU deposit guarantee schemes directive.
  - The liquidation has been protracted and costly, with BNB decisions heavily disputed in courts (113 plaintiffs; all cases but one were unsuccessful).
  - Since conservatorship, recovery of loans has been difficult, and the liquidation process has faced legal and operational challenges.

### Sound foundations and crucial challenges in resolution and crisis frameworks
- Legal and institutional developments:
  - Overhaul of pertinent EU rules has helped enhance Bulgarian arrangements, including recovery and resolution planning (RRP), but they are untested.
  - Bulgaria has designated resolution authorities, subjected all banks to RRP, and introduced a comprehensive resolution toolkit.
  - The toolkit includes the four mandatory tools: sale of business, bridge institution, asset transfer, and bail-in; and the two optional, last-resort government stabilization tools: equity support and temporary public ownership.
  - The authorities are operationalizing the new toolkit and building recovery and resolution capacity.
- Deposit coverage and implications:
  - High deposit coverage—more than 74 percent of deposit values is covered—calls for a highly effective bank resolution regime to mitigate moral hazard.
- Cross-border considerations:
  - Bulgaria is not a member of the Banking Union but benefits from it: the ECB and the SRB are the supervisory and resolution authority, respectively, of the parents of seven out of nine foreign-bank subsidiaries operating in Bulgaria, streamlining cross-border cooperation.
  - The parent banks of the two other subsidiaries are established in Germany and Hungary.
- Potential conflicts from combined functions and institutional responses:
  - Combination of potentially conflicting functions within the BNB and the BDIF offers both advantages and challenges.
  - BNB:
    - Combination of supervision, resolution, and lender-of-last-resort functions could offer synergies but may create conflicts where BNB could represent multiple potentially conflicting interests (resolution authority, buyer’s supervisor, ELA provider/creditor).
    - EU rules require separation among the three functions.
    - BNB has taken steps to separate functions at the decision preparation stage:
      - November 2015: BNB established a Credit Institutions Resolution Directorate (CIRD), reporting to the BNB Governing Council through the deputy governor responsible for the Issue Department; the Supervision and Banking Departments report to two different deputy governors.
      - The BNB has adopted rules for the CIRD’s operations and established information exchange arrangements between the CIRD and other BNB units.
    - The mission stressed the importance of ensuring that all perspectives be fully represented in the Governing Council.
  - BDIF:
    - Where the bridge institution tool is used, BDIF would be both sole owner of the institution and insurer of the institution’s depositors.
    - As shareholder, BDIF would have a fiduciary duty toward the bridge bank; as deposit insurer, BDIF would have responsibilities toward the bridge bank’s depositors.
    - The BDIF has yet to develop procedures to address this legal potential conflict and should develop procedures, possibly in its resolution contingency plan, which it is developing.

*International Monetary Fund — Bulgaria Financial Sector Note (excerpts).*

### 21.      The collapse of Bulgaria’s fourth largest bank provided an opportunity—albeit a bad

### 21.      The collapse of Bulgaria’s fourth largest bank provided an opportunity—albeit a bad one—to renew Bulgaria’s experience in bank bankruptcies, and depleted the BDIF.

### Bank collapse, BDIF payouts, and operational learning
- In 2014, KTB became insolvent, initiating a protracted and still ongoing bankruptcy procedure; it was the first banking collapse of this size since the 1990s.
- The BDIF oversees the bankruptcy procedure, including the liquidator’s activities, and was responsible for paying out KTB depositors, which depleted the BDIF.
- Covered deposits totaled BGN 3.7 billion; at end-October 2014, BDIF funds stood at BGN 2.1 billion.
- The MoF agreed to lend the BDIF up to BGN 2 billion, of which BGN 1.7 billion was used.
- Payout progress (BDIF to depositors):
  - 32.16 percent of deposits disbursed to 25,000 depositors when payouts started on December 4, 2014.
  - Increased to 55.10 percent within three days.
  - 86.51 percent by end-2014 to 89,291 depositors.
  - By end-2016, 99.59 percent was disbursed to 111,468 depositors.
- The BDIF has applied and enhanced its payout and liquidation capacity and is using the experience to update its manuals for payouts and liquidations (late 2017).
- This experience is intended to support development of less costly and less disruptive resolution strategies as alternatives to bank liquidation with conventional depositor payouts.

### Legal and financial constraints on liquidity support
- The Currency Board Arrangement (CBA) anchors financial stability; the BGN is fixed to the euro.
- BNB liquidity support can only be funded from the BNB’s excess international reserves, which stood at about BGN 2 billion at end-2016.
- The government can lend to the BNB using the Fiscal Reserve Account (FRA) to strengthen BNB liquidity support capacity.
- Projected FRA balance for 2017 is BGN 6.2 billion; the 2017–2019 fiscal forecast prescribes a minimum FRA level at BGN 4.5 billion, reducing available funds.
- Government financial support is subject to EU state aid and parliamentary approval, adding to decision-making time.

### Liquidity resources, limits, and historical context
- BNB excess reserves evolution cited: from BGN 5.3 billion at end-2010 to BGN 6 billion at end-2016; after exclusions (valuation adjustments, special drawing rights, gold revaluations) the balance is about BGN 2 billion at end-2016 representing 3.2 percent of banking sector deposits.
- Without said exclusions, excess reserves represented 9.6 percent of banking sector deposits at end-2016, down from 13.7 percent at end-2010.
- Comparison to 2014 bank-run: FIB lost 10 percent of deposits in one day; KTB lost about 20 percent within days.
- The BDIF is not authorized to provide liquidity support and cannot be considered a viable alternative.

### Supervisory, recovery, and resolution planning progress
- BNB is updating its early intervention framework (EIF) and follows EBA Guideline EBA/GL/2014/13 on SREP.
- All banks have been assigned CAMELOS risk assessment ratings by the BNB.
- By mid-2017, the BNB intended to adopt response and escalation policies consistent with EBA Guideline EBA/GL/2015/03 linking early intervention measures to SREP outcomes.
- Recovery planning:
  - ECB (seven banks) and Hungarian and German authorities oversee ongoing group recovery planning through supervisory colleges for nine foreign-bank subsidiaries.
  - BNB instructed nine banks with majority domestic owners and four banks with majority foreign nonbank owners in August 2016 to remedy shortcomings in draft plans received in February; revised plans were yet to be reviewed.
  - BNB expects all 22 recovery plans will be approved by mid-2017.
  - Critical challenge for larger majority domestically owned banks: highly concentrated shareholding structure constraining capital raising from existing shareholders.
- Resolution planning:
  - BNB expects that by mid-2017 eight of nine resolution colleges (seven under the SRB and one under Hungarian leadership) will adopt resolution plans for groups to which the foreign-bank subsidiaries belong.
  - Plans expected to be based on single point of entry strategies; colleges will set indicative minimum requirements for own funds and eligible liabilities (MREL).
  - BNB will develop an MREL policy and determine critical functions for majority domestically owned banks and banks with majority foreign nonbank owners.
  - For 13 prioritized banks, BNB will start developing a resolvability assessment methodology; by end-2017 it expects to have adopted comprehensive resolution plans, prioritizing banks based on risk profiles.
- Mid-November 2016, the BNB designated 10 banks as systemically important based on its ordinance on macroprudential capital buffers.
- The mission recommended prioritizing RRP for majority domestically owned D-SIBs and banks that failed the 2016 AQR and stress tests, and adopting strategies if resolution colleges cannot agree on a common approach.

### Emergency liquidity assistance (ELA), government arrangements, and constraints
- For all practical purposes, the BNB has no ELA facility.
- The BNB Act authorizes the BNB to extend liquidity to individual banks in emergency situations and under strict conditions; discretionary BNB liquidity support is limited to BNB’s excess foreign currency reserves.
- BNB Ordinance No. 6 on ‘Extending Collateralized Lev Loans to Banks’ sets conditions: last-resort loans, maximum three-month maturity, minimum 10 percent haircut on collateral, only euros, U.S. dollars, and Swiss francs; allows as collateral securities issued or guaranteed by the Bulgarian state, and prime-rated securities or guarantees issued by foreign governments and central banks.
- No procedures are in place for prompt decision making on liquidity support.

### Government role and limitations in liquidity support
- Government can lend to the BNB using the FRA; projected FRA balance for 2017 is BGN 6.2 billion, but the 2017–2019 fiscal forecast prescribes a minimum FRA level at BGN 4.5 billion, which limits resources for financial support to about BGN 1.7 billion.
- Additional government borrowing would require parliamentary approval; any government liquidity support would need European Commission approval—both lengthen decision-making time.
- The 2014 experience with liquidity support to the FIB shows that EU approval can be obtained relatively quickly.

### Mission recommendations to strengthen liquidity support capacity (three-pronged approach)
- (1) Increase the funds for liquidity support.
  - Consider an industry-funded ELA fund at the BNB.
  - Complement the fund with higher retained BNB profits.
  - MoF could be vested with standing or recurring statutory authority to borrow for financial stability purposes and—using also the FRA—to lend on to the BNB for liquidity support to banks, following the same conditions as typically applicable to central bank ELA.
- (2) Enhance distressed banks’ ability to meet collateral requirements.
  - Vest MoF with standing or recurring authority to extend guarantees to the distressed bank to ensure collateral requirements under the BNB’s Lending Ordinance can be met—and excess foreign exchange reserves can actually be used for ELA.
  - Seek swap lines with international financial institutions such as the Bank for International Settlements (BIS) and major central banks such as the ECB.
- (3) Ensure authorities can act decisively—yet at their discretion—on liquidity support requests.
  - Support decisive decision making with solvency and viability methodologies, to be included in a contingency plan for liquidity support.
  - Pre-assessment of collateral held by banks with a high-risk profile.
- Appendix 5 (in source) lists several options to fund liquidity support.

*Source: IMF staff report chapter on Bulgaria (content unit cr17202).*

### 30.      A fully operationalized bank resolution regime should significantly reduce the need

### 30.      A fully operationalized bank resolution regime should significantly reduce the need

### Resolution regime implementation and tools
- Authorities will gradually develop internal procedures and methodologies to implement the BRRD and the new Resolution Act; the BNB is identifying D-SIBs’ critical functions that will need to be continued with resolution.
- Mission recommendation: focus on time-tested sale of business and bridge institution tools, which:
  - Have been successfully used in economies and financial systems similar to Bulgaria.
  - Have proven to be cost-effective.
- The BRRD, the Key Attributes, and the Resolution Act prescribe the least-cost principle to economize the BDIF’s limited resources.
- Mission recommended fully exploring advantages of resolution tools compared to costly and protracted bankruptcy procedures and developing metrics to compare liquidation costs and resolution actions, particularly using sale of business and bridge institution tools.
- Contextual note: At 51 percent, bank loans are highly euroized.

### Bank bankruptcy regime: assessment and recommendations
- Observations:
  - The Bank Bankruptcy Act is modeled after the corporate bankruptcy regime.
  - A 2014 World Bank assessment found the corporate bankruptcy regime comprehensive but ineffective in practice, with insufficient out-of-court workouts and a strong bias toward liquidation; private sector representatives voiced similar concerns about the bank bankruptcy regime (institutional shortcomings, ineffectiveness of sale-of-assets mechanisms).
  - Legislative proposals to strengthen the regime have been submitted to the parliament.
- Mission recommendations to ensure effectiveness of the bank bankruptcy regime:
  - Comprehensively assess and strengthen the bank bankruptcy regime and its application to ensure that:
    - Bankruptcy proceedings can be started when non-public interest conditions for resolution are met (that is, (likely) failure and no reasonable recovery prospect).
    - The bridge bank tool is available under the bank bankruptcy regime.
  - Rationale: liquidation may be needed for sizable parts of larger banks left out of resolution measures and when the public-interest condition prevents using resolution tools.

### Depositor protection and resolution funding (BDIF / DIS)
- World Bank April 2015 assessment of the Bulgarian DIS against the IADI Principles found the DIS relatively well developed but identified necessary improvements:
  - Lack of a public awareness assessment and strategy.
  - KTB’s failure demonstrated insufficient early detection and timely intervention/resolution framework.
  - Need to strengthen coordination and information exchange between the BDIF and other financial safety net players.
  - Court proceedings prevented the BDIF from receiving recoveries from the KTB’s estate while the BDIF had already started payouts.
  - Following the KTB payout, the BDIF has been depleted and should be replenished expeditiously.
- BDIF financial position and targets:
  - In 2014 the BDIF drew on a government loan of BGN 1.7 billion to fund the massive payout to KTB depositors.
  - At end-2016, the DIF stood at about BGN 380 million and the BRF at about BGN 178 million—both below their target levels of 1 percent and 2 percent, respectively.
  - At the current rate for premium collection, and all other things being equal, the DIF and BRF would be at their target levels in 2024 as required by law.
  - The current DIF would be sufficient for depositor payouts in case of the simultaneous collapse of the four smallest banks, or, for example, of the largest and the third smallest small bank; it would be insufficient to cover payouts if the smallest mid-sized bank were to fail, unless the BDIF would take on an additional sizeable loan and/or collect extraordinary premiums.
  - The BDIF set the lower and upper limits for mid-sized banks at one and five percent, respectively, of total banking sector assets.
  - A fully funded DIF (about BGN 470 million) would be sufficient to payout the depositors of the smallest mid-sized bank. A fully funded BRF would have been about BGN 940 million.
- Strengthening measures and international support:
  - To replenish the DIF and eventually repay the government loan, the BDIF secured two loans of EUR 300 million each from the World Bank (February 2016) and the EBRD (March 2016).
  - The World Bank loan is subject to disbursement-linked outcome indicators informed by the 2015 assessment; conditions focus on financial resources (premium collection, asset recoveries, a loan or backstop facility), public awareness (assessment and strategy), cooperation between the BNB and the BDIF (with an updated MoU and sharing AQR results), and a BDIF contingency plan (for payouts and resolution).
  - Mission recommendation: contingency plan for resolution should include policies and procedures informing the establishment of bridge institutions including governance structures to mitigate legal conflict between BDIF’s responsibilities as shareholder of the bridge institution and insurer of its depositors.

### Contingency planning and crisis management
- Institutional arrangements and recent developments:
  - Since 2003 the FSAC brings together the Minister of Finance (chair), the BNB governor, and the FSC chairperson; supported by the Permanent National Financial Stability Group at deputy level.
  - In 2009 the FSAC adopted a national financial crisis action plan elaborating FSAC’s mandate and cooperation with the BDIF; the national plan assumes agency-specific contingency plans; the FSC has adopted its own plan.
  - Authorities intend to update national and FSC plans for the post-BRRD era and complement these with plans for the BNB and the MoF; by end-2017 the BDIF intends to have in place a contingency plan for resolution funding, complementing the updated payout plan.
  - In October 2003 BNB and FSC signed a bilateral MoU; in August 2016 the BNB and the BDIF signed an updated MoU prescribing “joint contingency plans for the scenarios which require coordinated joint actions, including crisis communication plans.”
  - Bulgaria benefits from BRRD’s cross-border resolution and crisis management arrangements; the ECB and the SRB are group supervisory and resolution authorities, respectively, for seven out of nine foreign-bank subsidiaries operating in Bulgaria.
- Mission encouraged strengthening crisis management framework—specific recommendations:
  - FSAC Composition: BDIF should become an FSAC member.
  - FSAC Mandate: Mandate should explicitly include active oversight of national contingency planning.
  - National Preparation: Updated national crisis management plan should describe event-specific cooperation (liquidity support by BNB or MoF, runs on banks, supervisory interventions, liquidation and resolution actions), differentiate between D-SIBs and other banks, and between foreign-bank subsidiaries and majority domestically owned banks where needed.
  - Agency Preparation: Under FSAC auspices, all agencies (including MoF and BDIF) should develop agency-specific contingency plans detailing respective actions and ensuring timely, expedient, and less costly interventions supported by effective communications.
  - Crisis Communication: Updated national plan should focus on communication—keeping officials on message, explaining unconventional actions, and neutralizing speculations.
  - Crisis Simulation Exercises (CSEs): FSAC should oversee regular CSEs (single- or multi-topic, domestic or cross-border) including BDIF participation; cross-border CSEs should focus on EU agencies.

### Staffing capability, RRP capacity, and training
- Current staffing and capacity:
  - Because the resolution regime is new, none of the RRP staff has pertinent experience.
  - BNB Off-Site Supervision Directorate oversees banks’ recovery planning without additional staffing resources.
  - BNB’s newly established CIRD tasks: participate in resolution colleges, assess banks’ resolvability, and develop resolution plans.
    - CIRD has seven professional full-time equivalents (FTEs): Head (one); Resolution Planning and Execution (four); Methodology and Reporting (one); and Legal Services (one).
    - CIRD aims to have 16 FTEs.
  - FSC’s newly established Restructuring of Investment Firms Directorate has 4 FTEs and aims to have 10 FTEs responsible for the 19 firms, of which 6 firms with comprehensive resolution plans, including 1 for which the FSC is the home resolution authority; comprehensive recovery plans for the 19 firms are assessed by the 10 supervisors.
  - BDIF has 23 FTE staff, including three vacancies that it intends to fill in 2017.
  - MoF Financial Markets Regulation Directorate has 13 FTEs, including 2 representatives in Brussels, and of whom about 4 FTEs work on financial stability issues, including the FSAC Secretariat, MoF representation in resolution colleges, and the upcoming EU presidency.
- Mission recommendations on staffing and training:
  - Ensure adequate staffing levels and training for RRP development and execution.
  - Allocate additional resources for training and developing resolution strategies for categories of banks; effective strategies can be used to develop a resolution handbook.
  - Train all RRP staff in resolution actions to fully appreciate advantages of resolution tools compared to bankruptcy procedures.
  - Conduct workshops on the cost benefits of time-tested sales of business and bridge institution tools tailored to the Bulgarian context before developing resolution strategies, plans, and handbooks.
  - Train staff in using the bail-in tool.

### Legal protection for agencies, officials, and staff
- Current legal framework and gaps:
  - Organic acts provide that agencies, their officials and staff, shall not be liable for damages caused in execution of their mandate, “unless they have acted with intent.” Authorities clarified this clause should be read “unless they have caused the damage with intent.”
  - The Resolution Act limits liability of supervisory and resolution agencies and their staff; temporary administrators; and bridge institutions and asset management companies, and their management bodies and senior management.
  - Pertinent legislative provisions do not explicitly extend protection to former staff and officials; provisions do not ensure legal costs of agencies’ (former) officials and staff are compensated when they have not acted in bad faith, as prescribed by pertinent international standards.
  - None of the agencies has operationalized legal protection—no policies, procedures, or private/public arrangements in place.
  - High number of court cases against agencies; international experience shows stakeholders are more litigious when recovery and resolution powers are exercised.
- Mission recommendations to strengthen legal protection:
  - Amend existing legislative clauses to explicitly include (former) officials, staff, and agents of the agencies and the MoF, and provide indemnification for legal costs.
  - Establish operational arrangements to make legal protection effective, addressing:
    - Choice and timing of payment of legal representation.
    - Protection against self-incrimination during internal investigations while building a defense.
    - Liability and legal aid insurance covering realistic monetary amounts commensurate with high financial stakes in resolution cases.

### Governance structures (appendix overview)
- BNB governance:
  - Governing Council: main decision-making body; comprises the governor, three deputy governors, and three non-executive members; all serve six-year terms; affirmative vote of four members needed for a decision. Key decisions include (de)licensing, special supervision, resolution actions, triggering BDIF payouts.
  - Governor: directs and oversees BNB operations; Secretary General and several directorates report to governor.
  - Three deputy governors: each responsible for one of the BNB’s departments; Credit Institutions Resolution Directorate reports to the Governing Council via the deputy governor responsible for the Issue Department.
- BDIF governance:
  - Management Board: supreme decision-making body; five members serving four-year terms; adopts budget and rules, decides on powers under DIS Act, Bank Bankruptcy Act, and Resolution Act; affirmative vote of three members needed, except decisions based on the Resolution Act require four affirmative votes.
  - Chairman: BDIF chief executive; seven departments report to the chairman.
- FSC governance:
  - Commission: supreme decision-making body; five members each serving six-year terms; affirmative vote of three members needed for a decision.
  - Chairperson: chief executive and responsible for day-to-day operations; deputy chairpersons have supervisory authority in their respective sectors.

*International Monetary Fund — IMF staff report excerpt (content unit cr17202).*

### Appendix II. Recovery and Resolution Planning

### Appendix II. Recovery and Resolution Planning

### Purpose and framework
- Recovery and Resolution Plans (RRPs) are a key component for contingency planning and crisis management.
- The BRRD and the Key Attributes (KA) establish a comprehensive framework for RRPs to guide the recovery of an institution or to facilitate an orderly resolution while minimizing official financial support.
- The KA allows the authorities to execute alternative strategies deviating from RRPs.

### Roles and responsibilities
- Recovery Plan:
  - Developed by a financial institution to identify options for restoring its finances and viability when faced with distress.
  - Prepared by the banks and assessed by the competent supervisory authority.
  - Shared with the relevant resolution authority, which may identify actions in the recovery plan that could adversely affect the resolvability of the institution and make recommendations to the supervisory authority accordingly.
- Resolution Plan:
  - Prepared by the resolution authority based on information provided by the institution.
  - Intended to facilitate orderly resolution to protect systemically important functions without severe disruptions or losses for taxpayers.
  - Resolution planning entails formulating a Preferred Resolution Strategy (PRS), conducting the Resolvability Assessment Process (RAP), and documenting a resolution plan for each institution.
  - While resolution authorities may ask banks to help in drafting and updating the resolution plan, the ultimate responsibility for the plan rests with the resolution authority, and the supervisory authority must be consulted during the preparation of the plans.
- Ensuring resolvability falls within the competence of the relevant resolution authority, which is empowered to take actions against a bank to ensure its resolvability.

### Scope and applicability in the European Union
- All banks in the European Union, no matter their size, are subject to recovery and resolution planning requirements.
- The BRRD recognizes that not all banks may need comprehensive RRP, and allows for simplified plans at the discretion of the national authorities.
- Key references and standards:
  - Key Attribute 11 and Appendix I, Annex 4.
  - The October 2014 version of the KA also covers financial market infrastructures (FMIs), FMI participants, insurers, and the protection of client assets.
  - The EBA’s final draft RTS on the content of resolution plans and the assessment of resolvability (EBA/RTS/2014/15).

### Principles constraining resolution actions
- No Creditor Worse Off (NCWO) principle:
  - Prescribes that no creditor should be worse off as a result of resolution than if the bank had entered bankruptcy proceedings at the time the decision to commence resolution was taken.
  - If the NCWO principle is breached, the resolution fund should compensate the relevant creditor(s).
- Use of resolution fund for excluded creditors:
  - The BRRD specifies that the resolution fund can only be used to cover the costs resulting from excluding some creditors from bail-in under exceptional circumstances, and if the shareholders and creditors have collectively first absorbed losses of at least 8 percent of total liabilities.

*Source: Appendix II. Recovery and Resolution Planning (extracted content).*

### Appendix VII. International Standards on Legal Protection of

### Appendix VII. International Standards on Legal Protection of Supervisory and Resolution Staff

### Key Attributes for Resolution Authorities (G20 / Financial Stability Board)
- Source: Key Attributes of Effective Resolution Regimes for Financial Institutions; G20 and Financial Stability Board, Key Attributes, October 2014.
- KA 2.6: “The resolution authority and its staff should be protected against liability for actions taken and omissions made while discharging their duties in the exercise of resolution powers in good faith, including actions in support of foreign resolution proceedings.”
- Annex 3: Client Asset Protection in Resolution, item 4.4(ii): “...protection in law for resolution authorities, their employees or appointed administrators against liability for actions taken and omissions made while acting within their legal powers and discharging their duties in good faith.”
- KA Methodology (consultative document, August 2013)
  - Essential criteria
    - EC 2.6.1 The legal framework provides legal protection through statute for the resolution authority itself, its head, members of the governing body, and its staff, against liability for actions taken or omissions made while discharging their duties in good faith and acting within the scope of their powers, including actions taken in support of foreign resolution proceedings.
    - EC 2.6.2 The legal framework provides that the head of the resolution authority, members of the governing body, its staff, and any of its agents will be indemnified against any costs of defending actions taken or omissions made while discharging their duties in good faith or otherwise acting within the scope of their powers, including actions taken in support of foreign resolution proceedings.
  - Explanatory notes
    - EN 2.6 (a) Protection from liability—Protection from liability should not prevent judicial review of the actions of the resolution authority (cf. KA 5.4) and any associated claims for damages.
    - EN 2.6 (b) Agents of the resolution authority—For the purposes of EC 2.6.2, agents include any person, other than an employee, who carries out actions on behalf of the resolution authority under a contract for services. KA 2.6 does not require agents of the resolution authority to be protected by statute against liability for actions undertaken or omissions made when acting in good faith and within the scope of their agency on behalf of the authority. However, where no provision is made for such protection, the agents should be indemnified contractually by the authority for the costs of defending an action and for damages awarded.

### Core Principles for Banking Supervision (Basel Committee)
- Source: Core Principles for Banking Supervision; Basel Committee on Banking Supervision, BCP, September 2012.
- BCP 2: “The legal framework for banking supervision includes legal protection for the supervisor.”
- EC 9: “Laws provide protection to the supervisor and its staff against lawsuits for actions taken and/or omissions made while discharging their duties in good faith. The supervisor and its staff are adequately protected against the costs of defending their actions and/or omissions made while discharging their duties in good faith.”
- BCP Methodology (2006): “The law provides protection to the supervisory authority and its staff against lawsuits for actions taken and/or omissions made while discharging their duties in good faith. The supervisory authority and its staff are adequately protected against the costs of defending their actions and/or omissions made while discharging their duties in good faith.”

### Core Principles for Effective Deposit Insurance (IADI)
- Source: Core Principles for Effective Deposit Insurance; International Association of Deposit Insurers, IADI Principles, November 2014.
- Principle 11: “The deposit insurer and individuals working both currently and formerly for the deposit insurer in the discharge of its mandate must be protected from liability arising from actions, claims, lawsuits or other proceedings for their decisions, actions or omissions taken in good faith in the normal course of their duties. Legal protection should be defined in legislation.”
- Essential criteria
  - Legal protection is specified in legislation and provided to the deposit insurer, its current and former directors, officers and employees, and any individual currently or previously retained or engaged by the deposit insurer, for decisions made and actions or omissions taken in good faith in the normal course of their duties.
  - Legal protection precludes damages or other awards against such individuals and covers costs, including funding defense costs as incurred (and not just reimbursement after a successful defense).
  - The operating policies and procedures of the deposit insurer require individuals with legal protection to disclose real or perceived conflicts of interest, and to adhere to relevant codes of conduct to ensure they remain accountable.
  - Legal protections do not prevent depositors or other individual claimants or banks from making legitimate challenges to the acts or omissions of the deposit insurer in public or administrative review (e.g., civil action) procedures.
- Note in source: “A contractual indemnity in an individual’s contract of employment or engagement with the deposit insurer and/or private insurance is not a substitute for legal protection defined in legislation or recognized in law.”

### Insurance Supervision (IAIS)
- Source: Insurance Core Principles, Standards, Guidance and Assessment Methodology; International Association of Insurance Supervisors, IAIS Principles, October 2011.
- ICP 2.10: “The supervisor and its staff have the necessary legal protection against lawsuits for actions taken in good faith while discharging their duties, provided they have not acted illegally. They are adequately protected against the costs of defending their actions while discharging their duties.”

### Securities Regulation (IOSCO)
- Source: Objectives and Principles of Securities Regulation; International Organization of Securities Commissions, IOSCO Principles, June 2010.
- Methodology (2011) for Principle 2: “The capacity of the Regulator to act independently will be enhanced by adequate legal protection for the Regulator and its staff when acting in the bona fide discharge of their functions and powers.”
- Methodology, Key Issue 5: “There should be adequate legal protection for regulators and their staff acting in the bona fide discharge of their functions and powers.”

*Source: Appendix VII. International Standards on Legal Protection of Supervisory and Resolution Staff (cr17202).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17202.pdf_