IMF Executive Board Approves Bulgaria’s 2017 Financial System Stability Assessment

IMF News, May 23, 2017

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Canonical URL: IMF Executive Board Approves Bulgaria’s 2017 Financial System Stability Assessment

Press Release No. PR17/190; May 23, 2017.
On May 22, 2017, the Executive Board of the International Monetary Fund (IMF) discussed the Financial System Stability Assessment (FSAP) of Bulgaria.
Media contact: PRESS OFFICER: Silvia Zucchini; Phone: +1 202 623-7100; Email: MEDIA@IMF.org

Bulgaria’s financial system was resilient to shocks in recent years but was shaken in 2014 by the collapse of the system’s fourth largest bank due to fraud and insider abuse.
The 2014 failure:
- raised questions about the viability of other banks, some of which experienced deposit outflows;
- raised concerns about supervision by the Bulgarian National Bank (BNB).
The Currency Board Arrangement:
- has contributed to economic stability;
- constrains the BNB’s ability to provide liquidity support in times of financial stress.

Authorities’ actions to restore credibility included:
- requesting the FSAP;
- conducting an asset quality review (AQR) for banks and nonbanks;
- initiating reforms to BNB supervision;
- introducing a new bank resolution function.
Progress since the 2015 Basel Core Principles (BCP) assessment noted, but additional work and resources are needed.
The AQR exercise provided a deep assessment of:
- bank impairment practices;
- loan data quality;
- collateral valuation processes.

System-wide risks remain, including:
- weaknesses in some banks identified by the authorities’ AQR and stress test;
- high nonperforming loans (NPLs).
NPL statistics:
- NPLs in Bulgaria’s banks stood at 13.7 percent of total loans as of June 2016.
- EU-weighted average NPLs: 5.5 percent.
Contributing factors to high NPLs:
- certain accounting practices;
- collateral valuation practices;
- risk management practices that create disincentives for NPL reduction.
Preparatory requirement:
- Banks will need to build provisions in preparation for the implementation of the forthcoming expected credit loss provisioning standards beginning next year.

Beginning January 1, 2018, EU banks will be subject to the new International Financial Reporting Standard 9 (IFRS 9) for determining loan-loss provisions.

The financial safety net and crisis management arrangements rest on sound foundations but face important challenges.
Authorities have:
- introduced a comprehensive resolution toolkit;
- designated the BNB as the resolution authority for banks;
- established mechanisms to fund resolution measures.
Remaining gaps and concerns:
- resolution planning for larger domestically owned banks is incomplete;
- in practical terms, an emergency liquidity assistance facility would not be available if needed;
- financial safety net components are still underdeveloped.
Directors saw merit in developing a framework to provide for lender of last resort liquidity assistance to address constraints from the currency board arrangement and European Union state aid procedures.

Executive Directors agreed with the main findings and recommendations of the FSAP and commended authorities for steps taken to rebuild credibility after the 2014 bank collapse.
Key Director recommendations and emphases:
- continue efforts to strengthen financial sector resilience;
- address weaknesses identified by the AQR and stress test, prioritizing restructuring and capitalization plans for domestically owned banks with capital weaknesses;
- strengthen supervision and address governance concerns, with particular attention to related-party exposures and credit concentration;
- extend the BNB’s macro-prudential mandate to address high NPLs comprehensively through a combination of measures, including:
- strengthened loan-loss provisions;
- higher NPL write-offs;
- improved collateral valuations;
- enhanced disclosure practices;
- strengthened data collection;
- strengthen supervision and address weaknesses in the non-bank sector;
- fully develop all components of the financial safety net and crisis management arrangements.
Anti-money laundering (AML):
- Directors noted progress in enhancing AML supervision of the banking sector and encouraged implementation of a risk-based approach to AML supervision in line with the Financial Action Task Force standard.

The Financial Sector Assessment Program (FSAP), established in 1999, is a comprehensive and in-depth assessment of a country’s financial sector; FSAPs assess the stability of the overall financial system and not that of individual institutions. Certain categories of risk, such as operational or legal risk, or risk related to fraud, are not covered in FSAPs.
The 13.7 percent NPL figure is based on the European Banking Authority’s measure.
Summary of Executive Directors’ views was transmitted to the country's authorities at the conclusion of the discussion.

IMF Press Release No. PR17/190; May 23, 2017.