Introduction¹

1. This assessment of the current state of the implementation of the Basel Core Principles for Effective Banking Supervision (BCP) in Bulgaria has been completed as a stand-alone Report on the Observance of Standards and Codes undertaken by the International Monetary Fund (IMF) and the World Bank (Bank) during March of 2015 at the request of the Bulgarian authorities. It reflects the regulatory and supervisory framework in place as of the date of the completion of the assessment. It is not intended to assess the response to the 2014 banking crisis, and it is not intended to represent an analysis of the state of the banking sector or crisis management framework.

2. The Bulgarian National Bank (BNB) has an internal governance structure which, by vesting the majority of the powers of supervision in the Deputy Governor for banking supervision, exposes the supervisory function to risks. The law gives the Deputy Governor strong powers to act separately and independently, even though the Governing Council has a role and responsibilities over troubled banks in addition to its licensing and regulatory powers. Under the BNB’s legal structure, supervision and enforcement is dissociated from the Governing Council, and the Governing Council has no right to compel transparency of decision making or to impose a framework to ensure consistency in the use of the enforcement regime. The Governing Council is, however, responsible for issuing the regulations that articulate and establish the BNB’s supervisory standards and expectations despite the disadvantage of being at arms’ length from the supervisory process. The distribution of powers and lack of transparency and accountability including the lack of an internal framework to ensure consistency in decision making in the use of many of the enforcement powers are not conducive to an assertive and confident supervisory process. It is of particular concern that the potential for pressure to be exerted on a single individual may in fact inhibit any Deputy Governor from using powers as strongly or as frequently, or using escalating severity as needed. Further, it is noted that should the position of Deputy Governor fall vacant unexpectedly, there is no legal possibility for the enforcement powers to be delegated to another individual. This flaw exposes the BNB to unnecessary uncertainties in its supervisory activities.

3. There are material concerns that the BNB is too resource constrained to deliver effective minimum levels of supervision. Demands on regulators have increased markedly through the international regulatory reform agenda in the wake of the global financial crisis and which are transmitted to Bulgaria mainly through the EU legislative and convergence program. The supervisory mandate for anti-money laundering and combating the Financing of Terrorism (AML/CTF) brings additional demands not least through support provided to external bodies such as the Prosecutor and the Financial Intelligence Unit in investigative matters in complex cases of fraud, embezzlement, and money laundering. Furthermore, the BNB’s mandate for transparency of products and monitoring of consumer trends is also resourced from the supervisory department. As a consequence, many areas of the BNB’s supervisory operations, ranging from the scope and scale of its supervisory inspections, ability to launch proactive investigations, and ability to ensure a sufficiently high level of supervision for the local segment of the banking market, which as a cluster represents nearly a quarter of the market, are notably under strain. Certain specialist skills are also lacking or under-represented at the BNB, including IT, market risk and quantitative skills. The BNB staff have been further diverted from their supervisory tasks by the additional demands of dealing with a banking failure and liquidity stress in 2014. This necessary diversion of resources has, though, inevitably adversely affected the BNB’s planned supervisory program and will lead to a number of institutions not being brought under scrutiny in a timely manner and follow up monitoring and actions may be unduly delayed.

4. Despite a broad range of supervisory powers, there are some gaps in the legal framework that unduly restrict the BNB’s locus. There are a number of elements which may have the cumulative effect of discouraging an intrusive supervisory approach. The relevant gaps touch on a range of areas but most notably including the relationship with the Board of a bank – the BNB cannot instruct banks to change their internal organization or structure or composition of the Board; or to insist upon a change of the external auditor of a bank; and an aspect of the legal protection available to BNB staff. On a related issue, the continued delays in the transposition of the Directive on Bank Recovery and Resolution has prevented the BNB from being able to carry out a number of tasks in relation to preparation for orderly resolution procedures should they be necessary.

5. As Bulgaria is a Member State of the European Union, the regulatory framework is based on EU legislation and architecture. The recent changes to the EU framework have, however, removed some flexibility from the supervisory authority. Previously the BNB applied a minimum capital adequacy ratio of 12 percent, but this requirement is now capped at 8 percent under the Capital Requirements Regulation. In response, and at a period of heightened systemic stress, the BNB has “frontloaded” capital buffers so that the capital conservation buffer and the systemic risk buffer are both currently in force. The advent of the CRR and its implementing technical standards has also removed the BNB’s former power to set supervisory provisions against problem exposures. The BNB retains, however, the power to set higher capital requirements in respect of problem assets. At present the BNB is practicing close monitoring of the evolution of the relevant portfolios and is exercising what might be termed an “informal Pillar 2 approach.” The BNB does, however, need to be ready and able to apply additional capital requirements through Pillar 2 in future.

6. The BNB employs a risk-based approach to supervision and enjoys a cadre of dedicated and professional staff. The BNB employs sound methodologies for the analysis and assessment of individual banks and banking groups. This work is strongly enriched by the efforts of the macro-prudential and financial stability directorate. The supervisory approach in the BNB relies to an important extent on its on-site inspection process, but is undermined by scarcity of resource to implement a sufficiently broad and frequent program of inspections. In the resource constrained environment it is important for the BNB to maximize its internal arrangements and use of its supervisory tool kit. This includes an internal skills audit and strategy to identify gaps, a review of internal organization to maximize efficiency and communication and a greater use of such supervisory techniques as horizontal assessments.

7. The BNB has a good understanding of risk and many strong practices, and also making good use of international standards and guidelines, but there are some important system wide vulnerabilities. The most significant risk in the banking sector is credit risk and while the BNB takes an assiduous approach to credit risk, this is undercut by system-wide weaknesses in concentration risks, related party and connected lending as well as corporate governance. Although the BNB is alert to these concerns and has identified many violations and bad practices in the banking institutions, overall, enhancements in supervisory approach are needed. Enhanced transparency in ownership structure of clients, especially for legal entities located overseas (including in off-shore centers) with undisclosed ultimate beneficial owners is of paramount importance. The BNB could employ horizontal inspections and the issue requirements for more robust processes for determining connectedness between customers or groups of affiliated parties.

Methodology

8. It should be noted that the ratings assigned during this assessment are not directly comparable to previous assessments. The current assessment of the BNB was against the BCP methodology issued by the Basel Committee on Banking Supervision (BCBS) in September 2012. The authorities took a rigorous approach and opted to be assessed against both essential and additional criteria. The last BCP assessment in was conducted in 2002. The methodology has been revised twice since the last assessment in Bulgaria, first in 2006 and again in 2012. There was an FSAP update in 2008 but it did not include a BCP assessment.

9. In the 2012 revision of the Core Principles, the BCBS sought to reflect the lessons from the recent financial sector crisis, to raise the bar for sound supervision reflecting emerging supervisory best practices. New principles have been added to the methodology along with new essential criteria (EC) for each principle that provide more detail and additional criteria (AC) that raise the bar even higher. Altogether, the revised Core Principles now contain 247 separate essential and additional criteria against which a supervisory agency may now be assessed. In particular, the revised BCPs strengthen the requirements for supervisors, the approaches to supervision and supervisors’ expectations of banks. While the BCP set out the powers that supervisors should have to address safety and soundness concerns, there is a heightened focus on the actual use of the powers, in a forward-looking approach through early intervention.

10. The assessment team reviewed the framework of laws, rules, and guidance and held extensive meetings with officials of the BNB, and additional meetings with the Finance Ministry, the Financial Intelligence Unit (FIU), auditing firms, professional bodies, and banking sector participants. The authorities provided a comprehensive self-assessment of the CPs, as well as detailed responses to additional questionnaires, and facilitated access to supervisory documents and files on a confidential basis as well as staff and systems.

11. The team appreciated the very high quality of cooperation received from the authorities. The team extends its thanks to staff of the authorities, who provided excellent cooperation, including extensive provision of documentation and technical support, at a time when many other initiatives related to domestic concerns and international regulatory initiatives were in progress.

12. The standards were evaluated in the context of Bulgaria’s financial system’s sophistication and complexity. The CPs must be capable of application to a wide range of jurisdictions whose banking sectors will inevitably include a broad spectrum of banks. To accommodate this breadth of application, a proportionate approach is adopted within the CP, both in terms of the expectations on supervisors for the discharge of their own functions and in terms of the standards that supervisors impose on banks. An assessment of a country against the CPs must, therefore, recognize that its supervisory practices should be commensurate with the complexity, interconnectedness, size, and risk profile and cross-border operation of the banks being supervised. In other words, the assessment must consider the context in which the supervisory practices are applied. The concept of proportionality underpins all assessment criteria. For these reasons, an assessment of one jurisdiction will not be directly comparable to that of another.

13. An assessment of compliance with the BCPs is not, and is not intended to be, an exact science. Reaching conclusions required judgments by the assessment team. Banking systems differ from one country to another, as do their domestic circumstances. Furthermore, banking activities are undergoing rapid change after the crisis, prompting the evolution of thinking on, and practices for, supervision. Nevertheless, by adhering to a common, agreed methodology, the assessment should provide the Bulgarian authorities with an internationally consistent measure of the quality of their banking supervision in relation to the revised Core Principles, which are internationally acknowledged as minimum standards.

Institutional and Market Structure—Overview

14. Banking represents the most significant sector of the Bulgarian financial system. As at June 2014, financial system assets in Bulgaria accounted for 141.5 percent of GDP with the banking sector representing 76 percent of this. There is a relatively low exposure of the financial system to external markets and little use of external market financing which may have contributed to relative insulation from the global financial crisis. The risk profile of the banking system is largely focused on credit risk.

15. The structure of the non-banking sector of the financial system is relatively evenly distributed between sub-sectors.

Source: BNB Quarterly Bulletin on Banks.

Sector	Asset size BGN bn
Insurance Companies	5.5
Supplementary pension insurance funds	7.6
Local investment funds	0.8
Non-bank investment firms	4.6
Vehicle finance corporations	1.5
Leasing companies	4.3
Specialized lenders	2.6

Source: BNB Quarterly Bulletin on Banks.

View Table

Sector	Asset size BGN bn
Insurance Companies	5.5
Supplementary pension insurance funds	7.6
Local investment funds	0.8
Non-bank investment firms	4.6
Vehicle finance corporations	1.5
Leasing companies	4.3
Specialized lenders	2.6

Source: BNB Quarterly Bulletin on Banks.

16. Bulgaria is predominantly a host state to EU banking groups. While most banks in Bulgaria are locally incorporated, less than a quarter of the market share, 23 percent, is held by domestic banks and 73 percent is held by subsidiaries with EU parents. Approximately a quarter of the market share, 24 percent, is held by Greek-owned subsidiary banks.² Altogether there are 28 banks in Bulgaria (excluding one recently failed bank), of which 6 are branches. Banking establishments from outside of the EU represent less than 1.5 percent of the banking system.

17. The banking sector weathered the global financial crisis, but stress emerged in June 2014 with two bank failures. Following runs on deposits, the BNB put two banks into conservatorship. Soon after this intervention, a third domestic bank suffered a depositor run and was supported by emergency liquidity (state aid approved by the EC). As Bulgaria introduced a currency board arrangement (CBA) in July 1997, following a systemic banking crisis, the Lender of Last Resort function from the BNB is limited to the excess coverage of the arrangement.

18. Notwithstanding the damage to confidence from the banking crisis the banking system has shown resilience. Reported system wide capital adequacy figures remain strong. Capital adequacy has been calculated under the EU Capital Requirements Regulation since January 2014, which permits a slightly more generous treatment for some risk weights than the previous BNB regime. As of December 2014, the system CAR stood at 22 percent, and the Tier 1 capital ratio was 19.9 percent. In Bulgaria, the majority of tier 1 is held in common equity and the system wide CET1 ratio was 19.5 percent. With the advent of the CRR, the BNB can no longer apply a minimum 12 percent CAR as it had formerly done. The BNB has however, imposed the capital conservation buffer of 2.5 percent since May 2014 and has also applied a capital buffer for systemic risk of 3 percent of total risk weighted exposures located within the country and calculated in accordance to Article 92 (3) of Regulation 575/2013/EC.

19. Resilience to liquidity shocks is also important in the Bulgarian context. Here too, reported liquidity indicators are strong. The liquid assets-to-liabilities ratio in the banking system, as at end January reached 31.8 percent. The EU equivalent of the Basel Liquidity Coverage Ratio (LCR) is not yet fully in force and will not be until October 2015 according to the EU timetable, but the BNB continues to maintain its prior liquidity regime, which requires banks to avoid maturity mismatches over a range of maturity bands. Daily reporting enables the BNB to monitor the situation closely.

20. However, system wide non-performing loans (NPLs) are also high. The reported NPLs (on a gross basis), and excluding the failed bank, in Bulgaria stood at 18.1 percent as of end-September 2014, representing an increase of 15 percent of total loans since the global financial crisis began in 2008.

Preconditions for Effective Banking Supervision

Sound and Sustainable Macroeconomic and Financial Sector Policies

21. Bulgaria’s supervisory credibility came under scrutiny in 2014, following the banking failures. In addition to the shock to the banking system stability there was a sharp deterioration in the hitherto strong fiscal stance. Political turbulence and unaddressed governance issues have heightened concerns about the direction of macroeconomic and financial policy, putting increased strain on the economic outlook. The currency board arrangement (CBA)—which has served as an effective policy anchor since 1997 and helped Bulgaria successfully weather the global and Euroarea crises—both reinforces and relies on sustained, sound macro-financial policies, comfortable buffers, and progress in advancing the convergence agenda with the EU. Under the rules of the CBA, the aggregate amount of the Bulgarian National Bank’s monetary liabilities (including all banknotes and coins in circulation) may not exceed the equivalent in Bulgarian levs of the gross foreign exchange reserves. The Bulgarian lev is fixed to the euro (BGN 1.95583 equals €1).

The Framework for Financial Stability Policy Formulation

Institutional and Legal Setting

22. Responsibilities for supervision of financial institutions and markets are divided between the BNB for banks and the Financial Supervision Commission (FSC) for non-banks and markets. The FSC was established on March 1, 2003 under the Financial Supervision Commission Act. The FSC is established as an independent institution and reports to the National Assembly of the Republic of Bulgaria. The Commission is responsible for the regulation and supervision of the non-banking financial sector, including markets, insurance and pensions.

Financial stability coordination

23. The BNB and FSC, together with the Ministry of finance cooperate and share information within a formal macroprudential framework, namely the Financial Stability Advisory Council (FSAC). The FSAC is established under the Financial Supervision Commission Act (FSCA) as an advisory body. The FSAC consists of the Minister of Finance, the Governor of the BNB and the Chairman of the FSC. The macro-prudential framework in Bulgaria was initially implemented in 2003 and further enhanced in 2010 through amendments to the Financial Supervision Commission Act (FSCA) that provides for significantly strengthened role of the Financial Stability Advisory Council (FSAC).

24. The BNB, FSC and FSAC are the authorities and bodies responsible for financial stability policy formulation According to the existing framework for financial stability and macroprudential policy in Bulgaria, the Bulgarian National Bank and the Financial Supervision Commission are responsible for maintaining financial stability in their respective areas of competence. Furthermore FSAC has competence for carrying out advisory and coordination functions. The FSAC is chaired by the Minister of Finance, had adopted Rules on its Operation, and takes all decisions by consensus. The FSAC can address proposals and recommendations to its members in connection with the powers of the institutions represented by them with regard to the protection and maintenance of the financial stability, and to the prevention and management of financial crises. Moreover, with regard to the improvement of macro-prudential policies in the country, the FSAC shall discuss proposals arising from recommendations or warnings of the European Systemic Risk Board (ESRB), on the initiative of each of the Council’s members. The Council also has the responsibility to approve a national action plan in the event of crisis. The FSAC meets quarterly, though more frequently at will, and is supported by a standing committee.

25. The FSCA stipulates that: the main objective of the FSAC shall be to foster a more efficient cooperation for maintaining the financial stability through information exchange and assessment of the status and development of the financial system and the financial markets in Bulgaria and the potential impact of external and internal factors on its stability, and co-ordinating the actions in this direction. FSAC conducts its monitoring and analysis of systemic risks based on analytical work carried out by its member institutions.

26. The BNB is responsible the assessment of systemic risks facing the banking system, while the FSC – for the non-bank financial sector. The analytical contribution from the BNB comes from the the Macro-prudential Supervision and Financial Stability Directorate, which was created in 2014 out of a merger of two previous units and with the objective of achieving synergies between financial stability and prudential supervision. The unit also contributes to the work of the BNB’s macro-prudential mandate and is in line with the new EU supervisory architecture (ESRB and the ESA’s) and the ESRB recommendation on the macro-prudential mandate of national authorities.

A Well Developed Public Infrastructure

System of business laws

27. As a member of the EU, Bulgaria is subject to a comprehensive suite of EU legislation on company law. This includes the EU First, Second, Fourth, Seventh, and Eighth Company Law Directives, as well as the Transparency Directive, the IAS Regulation, and the Banks and Insurance Accounts Directives. According to European Commission monitoring of transposition at January 2012, Bulgaria had notified, and been examined by the Commission on the implementation of 90 percent of applicable Company Law and Anti-Money Laundering Directives. Only one directive postdates the monitoring exercise, relating to coordination of safeguards in respect of the formation of public limited liability companies and the maintenance and alternation of their capital. The prevailing business legislation in Bulgaria includes the Commerce Act, the Bank Bankruptcy Act, the Obligations and Contracts Act, the Consumer Protection Act, the Ownership Act, etc. The Consumer Protection Act and the Consumer Credit Act contain specific mechanism for the fair resolution of disputes.

Efficient and independent judiciary

28. The judiciary is formally independent. Pursuant to the Bulgarian Constitution (Article 117) the judiciary protects the rights and legitimate interests of the citizens, the legal persons, and the State. In the performance of their functions, all judges, jurors, prosecutors and investigating magistrates are subservient only to the law. The judiciary has an independent budget. The right to a fair and open trial within a reasonable time before an independent and impartial court, according to the Judiciary System Act (Article 7) all citizens are entitled to a fair and open trial. Citizens and legal entities are entitled to judicial protection that can not be denied to them. The fundamental principles of efficient and independent judiciary are stipulated also in the Code of Civil Procedure, Criminal Procedure Code, Criminal Code and Administrative Procedure Code.

29. External perception of judicial independence and efficiency in Bulgaria is, however, weak. According to the 2015 EU Justice Scoreboard (an annual exercise) the perceived independence of justice in Bulgaria has decreased, with Bulgaria now jointly sharing the worst rating in the EU. The Global Competitiveness Report for 2014-15 ranks Bulgaria 126th out of 144 countries on judicial independence, 124th on the efficiency of the legal framework in settling disputes and in challenging regulations, and 110th on protection of property rights. In December 2014, the government adopted a new judicial strategy to guarantee the independence and professionalism of the courts and other judicial authorities. Bulgaria is also preparing to amend the Judicial System Act.

30. The administration of justice in Bulgaria is based on three instances and the courts administer civil, criminal and administrative cases. The governing law is the Judicial System Act, which sets out the structure and operating principles of the judicial bodies and governs their interaction with each other and with the legislative and executive bodies. The Supreme Judicial Council is the highest administrative authority and is responsible for managing the judiciary and ensuring its independence. It determines the composition and organization of the judiciary.

31. The legal profession is governed by the Constitution of the Republic of Bulgaria and the Judicial System Act. The main legal professions in Bulgaria are the public prosecutor, investigator, judge, attorney-at-law, notary public, private bailiff, State bailiff and registration judge.

• The public prosecution service in the Republic of Bulgaria consists of a number of offices, including but not limited to, the Prosecutor-General, and the National Investigation Service. All prosecutors and investigators are subordinate to the Prosecutor-General. The prosecutor leads an investigation as supervising prosecutor and the prosecutor’s acts are open to appeal unless subject to judicial review. The Prosecutor-General is appointed (and removed) by the President of the Republic of Bulgaria, acting on a proposal from the Supreme Judicial Council for a period of seven years, and is not eligible for a second term in office. Subject to a positive appraisal of performance, prosecutors acquire tenure after five years in office. The Prosecutor-General may refer matters to the Constitutional Court.

• Investigators in the Republic of Bulgaria have the status of magistrates (judges and prosecutors) under the Judiciary Act. Investigative bodies are the National Investigation Service (NSlS), the provincial investigation departments at the provincial prosecutors’ offices and the investigation department at the Specialized Prosecutor’s Office. When carrying out their tasks in connection with criminal proceedings, the investigating authorities act under the direction and supervision of a public prosecutor. Orders issued by investigators in the course of an investigation are binding on all State bodies, legal entities and citizens.

• Judges in Bulgaria are appointed, promoted and demoted, transferred and relieved of office by decision of the Supreme Judicial Council. Subject to a positive comprehensive appraisal of their performance, judges acquire tenure by decision of the Supreme Judicial Council after five years in office. The profession of attorney-at-law is an activity governed by the Constitution. The status, rights and obligations of attorneys-at-law are regulated by the Bulgarian Bar Act. The Supreme Bar Council is a legal entity comprising representatives of the provincial bar associations, keeps a register of attorneys-at-law. Registration judges order or refuse entries, endorsements and removals from the property register and decide whether references and certificates are issued; they perform notarial and other deeds laid down by law. Registration judges may act only in their own district and their number is decided by the Minister for Justice.

Accounting principles and rules

32. Under the EU’s legislation, all listed EU companies must prepare their consolidated accounts in accordance the International Financial Reporting Standards (IFRS). Bulgaria has applied IFRS since 2003, predating its accession to the EU. Hence all listed companies in Bulgaria, as well as banks, insurance companies, mutual funds, and other financial institutions, have been required to prepare their consolidated financial statements using IFRSs since 2003. The obligation of listed companies and financial institutions and all large Bulgarian limited liability entities to report both the consolidated and individual company financial statements has been in place since 2005, again pre-dating membership of the EU which took place on 1 January 2007. National Financial Reporting Standards for Small and Medium-sized Enterprises apply to entities which fall under de minimis criteria. Such entities may, though, adopt International Accounting Standards. All credit institutions are subject to International Accounting Standards, regardless of being listed companies or not.

System of independent external audits

33. The annual financial reports of the banks are subject to independent financial audit, according to the Law on Accountancy. The annual report must be audited and has to include the full audit report. The auditor shall perform the audit in accordance with ISA’s generally accepted auditing practices, which are introduced with the Law on Independent Financial Audit. The audit of the public financial reports is conducted in accordance with internationally accepted auditing practices and standards and related procedures determined by International Auditing Standards (Article 2 of the Law on Independent Financial Audit). Under the LCI the annual financial statements of each bank, and the supervisory reports as determined by the BNB are subject to audit and certification by a specialized auditing company which is a registered auditor under the Law on the Independent Financial Audit.

34. Bulgaria has established a Commission for Public Oversight on Statutory Auditors (CPOSA). The CPOSA was established in compliance with the European Union Directive on statutory audits (Directive 2006/43/EC).

35. The profession of Registered Auditors is a protected title in Bulgaria. Statutory Audit and consulting services are reserved to Registered Auditors. In 2011 there were over 600 qualified professional and over 90 specialist auditing companies. New trainees were accepted to the profession at a rate of approximately 150 per year. As in other jurisdictions, auditors must pass professional exams and have two years professional experience as an assistant auditor before qualification. The Institute of Certified Public Accountants, which also acts as the professional body for accountants, is responsible for the registration of auditors.

Payment and clearing systems

36. The BNB has responsibility for assisting in the establishment and overseeing the functioning of efficient payment systems and for supervising payment systems operators in Bulgaria under the organic Law on the Bulgarian National Bank (LBNB). The Banking Integrated System for Electronic tRAnsfers (BISERA; the system processing customer transfers which are to be settled at a designated time) was introduced in 1992. A system for servicing interbank client payments in euro initiated for settlement at a designated time (ie not RTGS) BISERA7-EUR was put into operation in 2010. The BNB launched the national component system TARGET2-BNB on February 1, 2010. The ancillary system BISERA7-EUR, operated by BORICA-BANKSERVICE JSC, joined TARGET2 on the same date. Membership of TARGET2 is not yet mandatory for Bulgaria as it is not yet a Eurozone member. The national card operator, the Bank Organization for Payments Initiated by Cards (BORICA), was established in 1995 to process card payments in Bulgaria. Two securities settlement systems have also been established: the Government Securities Depository (GSD) in 1992 and Central Depository AD (CDAD) in 1996. In June 2003 the RTGS system RINGS was launched. This provides final settlement for all payments in the country.

Framework for Crisis Management, Recovery and Resolution

37. The current legal framework for the recovery and resolution of credit institutions needs essential improvements since it does not grant the authorities sufficient scope to manage a crisis fully effectively. The collapse of Corporate Commercial Bank AD (KTB) in 2014 revealed a series of major weaknesses in the domestic regime for dealing with problem banks, including the absence of a good bank/bad bank option. As of today, the BNB can address problem banks (including in case of risk of insolvency) by subjecting a bank to a special supervision regime. The BNB Governing Council will appoint one or several conservators who will take, under the authority of the BNB, all measures to redress the bank. If the conservatorship of the bank does not improve its financial situation (i.e. its solvency or liquidity position is still deteriorating), the BNB can withdraw the license and petition to the competent court for initiation of bankruptcy proceedings.

38. The difficulty to apply an orderly resolution has prompted the authorities to revisit its legal framework for the recovery and resolution of credit institutions. Such framework will be available after the implementation of the BRRD (EU Directive 2014/59/EC (Resolution and Recovery of Credit Institutions and Investment Firms)) in the Bulgarian legislation by means of new legal provisions and amendments to the existing legal framework (e.g., the Law on Credit Institutions, the Law on Bank Bankruptcy, and the Law on the BNB). At the time of the assessment it was expected that the BNB would be designated as the Resolution authority and the Bulgarian Deposit Insurance Fund (BDIF) as the Resolution fund. This transposition into the national regime is in progress and it is expected to come in force by end of 2015.³

The adequacy of systemic protection (public safety net)

39. The Bulgarian Deposit Insurance Fund (BDIF) is a legal entity established by the 1998 Law on Bank Deposit Guarantee. The Fund protects depositors’ funds in banks up to BGN 196,000 (EUR 100.000) as well as creditors’ interests in bank bankruptcy proceedings. The BDIF is entering in a transition phase in the context of the revision of the law on bank deposit guarantee and the transposition into the Bulgarian regime of the EU Bank Recovery and Resolution Directive.⁴ The BDIF expects to be granted more powers particularly in relation to funds management and to new approaches for banks’ contribution calculation. Also, the new law will address important weaknesses that have surfaced during the KTB crisis, including by facilitating timelier payout of insured deposits.⁵ Further, in the wake of the KTB collapse, the BDIF has processed through a network of nine participating banks the claims of 104,640 depositors of the bank for a total amount of BGN BGN 3,5 billion (EUR 1.7 billion).

Effective market discipline

40. Transparency in banks’ ownership structures is a reducing concern. The Banking Supervision Department of the BNB expressed doubts on transparency in a few banks, including one in which three companies with qualifying shareholdings were located in off-shore centers with undisclosed UBO. Further analysis was performed to collect information to establish the true identity of the beneficial owners and lift any reservation about the transparency of the institutions. In addition, the BNB has fostered its due diligence in that regard by sending every year a letter requesting shareholders (holding more than 3 percent of share or voting rights) to confirm information about their business, type of investments (shares, bonds), and audited financial statements. The BNB told the mission that it is confident about the transparency of ownership structure in banks.

Detailed Assessment

A. Supervisory Powers, Responsibilities and Functions

Principle 1	Responsibilities, objectives and powers. An effective system of banking supervision has clear responsibilities and objectives for each authority involved in the supervision of banks and banking groups.6 A suitable legal framework for banking supervision is in place to provide each responsible authority with the necessary legal powers to authorize banks, conduct ongoing supervision, address compliance with laws and undertake timely corrective actions to address safety and soundness concerns.7
Essential criteria
EC1	The responsibilities and objectives of each of the authorities involved in banking supervision8 are clearly defined in legislation and publicly disclosed. Where more than one authority is responsible for supervising the banking system, a credible and publicly available framework is in place to avoid regulatory and supervisory gaps.
Description and findings re EC1	In Bulgaria, the provisions relating to responsibilities, objectives and powers can be found in two major legislations, (i) the Law on the BNB (hereafter LBNB) and (ii) the Law on Credit Institutions (hereafter LCI) that governs the activity of financial institutions. The BNB has sole responsibility for banking supervision in accordance with the laws mentioned above. The LBNB (art. 20, paragraph 3) explicitly empowers BNB to be the bank supervisor, with authority over banks and branches of foreign banks operating in Bulgaria, and branches of Bulgarian banks operating in other countries. Along the same lines, the LCI art. 1 (2) stipulates that the BNB “is empowered to supervise banks.” The BNB is also competent for the supervision of financial holding companies and mixed financial holding companies. The Law states that BNB has the power to supervise such institutions, and in doing so, is authorized to develop standards of safety and soundness. Both the LBNB and the LCI, through various articles therein, empower BNB with the authority to carry out virtually all supervisory functions, such as conducting on-site examinations, licensing banks, and collecting information for supervisory purposes. It is noteworthy that supervision and monitoring over the implementation of the AML/CFT requirements is placed under the oversight of both the BNB and the Financial Intelligence Directorate (FID) [the Financial Intelligence Unit located within the State Agency for National Security (SANS)]. The primary responsibility for the supervision of AML/CFT measures for banks (and all obliged persons) rests with FID-SANS. However, the BNB is also empowered to conduct on-site AML inspections either on its own – through its Special Supervision Directorate within the Banking Supervision Department (BSD)- or jointly with the FID. According to the BNB, this dual oversight arrangement does not create gaps or duplication and the delineation of duties between the two bodies are clear. The Internal Manual on Banking Supervision Process sets the governing structure of the Banking Supervision Department. This manual describes the banking supervision process and determines the responsibilities of the separate directorates as well as their interrelationship in executing their tasks. The BNB has no supervisory responsibilities over non-bank financial institutions. This functions lies with the Financial Securities commission (FSC) which regulates, licenses and oversees participants to the non-banking financial market (Insurance, Pension funds, Securities). The responsibilities and objectives as described above are defined in legislations and publicly disclosed, particularly on the BNB website. On the other hand, the normative acts of the BNB, which are compulsory for financial institutions, are also available on the BNB website.
EC 2	The primary objective of banking supervision is to promote the safety and soundness of banks and the banking system. If the banking supervisor is assigned broader responsibilities, these are subordinate to the primary objective and do not conflict with it.
Description and findings re EC2	There are several provisions either in the LBNB or the LCI stipulating that supervision related activities are performed with the goal of achieving banking system safety and soundness. Art. 1 (1) of the LCI stipulates that BNB’s activities particularly in relation tosupervision of “compliance with the prudential requirements” aim to ensure a “stable, reliable and sound banking system.” According to art. 2 (1) of the LBNB, the primary objective of the BNB is to maintain price stability. There are however several provisions that seem to satisfy the requirement under EC2. Art.2 of the LBNB, in paragraph (6), stipulates that the objectives of the BNB are also to “regulate and supervise other9banks’ activities in this country for the purpose of ensuring the stability of the banking system and protecting depositors’ interests.” Further, the LCI, in its art. 79 (2) indicates that the BNB “shall exercise also macro-prudential supervision of banks in order to maintain the stability of the banking system.” Lastly, pursuant to art 14 (3), subparagraph 4, the BNB should, before granting a banking license, determine whether the activities that the applicant intends to carry out “ensures the required soundness and financial stability.” On its website, the BNB has also made clear that a “strong and efficient banking supervision, together with an effective macroeconomic policy, is vital for the financial stability of a country. Supervising the credit institutions operating in Bulgaria is a major function of the BNB, and it aims to maintain the stability of the banking system and to protect the interests of depositors.” It is noteworthy however that the BNB exercises other functions, in particular with regards to transparency of products and monitoring of consumer trends. Within the Banking Supervision Department, the Special Supervision Directorate (SSD) has been assigned multiple activities that go beyond its primary objective of ensuring integrity in the banking sector. Originally, the directorate was established for AML/CFT supervision only but progressively, as the BNB mandate expanded, the directorate was assigned additional activities including transparency of products10 related issues and compliance with deposit insurance rules to be performed together with AML. It is also important to note that the employees of SSD are frequently asked to assist the law enforcement authorities and Bulgarian Courts in investigations of ML cases. Against this background, the assessors come to the conclusion that these activities should continue to be addressed efficicently by ensuring additional staff to be employed at SSD. It would be advisable to refocus the Special Supervision Directorate on its core AML mandate by assigning non-AML related activities to other relevant BNB departments.
EC3	Laws and regulations provide a framework for the supervisor to set and enforce minimum prudential standards for banks and banking groups. The supervisor has the power to increase the prudential requirements for individual banks and banking groups based on their risk profile11 and systemic importance.12
Description and findings re EC3	In Bulgaria, the LBNB and the LCI provide the main general framework for the supervisor to set and enforce prudential standards for banks and banking groups. The legal basis for the BNB to exercise pillar II types of measures are contemplated in the LCI art. 79 (c) as well as art. 103 (2). According to the latter (in subparagraph 5), the BNB can impose additional capital and/or liquidity requirement based on the risk to which the bank is exposed or the risks that the said bank pose to the financial system. Another provision can be found in art. 20 (3) of the LBNB whereby, in exercising his supervisory powers, the Deputy Governor is empowered to “apply, separately and at his own discretion, the actions and penalties as provided for by law” on Credit Institutions. One can infer from this statement that the DG in charge of supervision can subject banks to increased prudential obligations in light of their risk profile.
EC4	Banking laws, regulations and prudential standards are updated as necessary to ensure that they remain effective and relevant to changing industry and regulatory practices. These are subject to public consultation, as appropriate.
Description and findings re EC4	Since the last FSAP update (2008), the legal and regulatory framework for banking supervision has been updated several times, with several amendments over the last years in laws and subsequent regulations. The most prominent recent changes to the laws governing banking and banking supervision relates to supervisory requirements imposed on European banks as set forth in EU Regulations. In effect, the European framework for banking supervision including the EU Directive 2013/36, the EU Regulation №575/2013 that entered into force on January 1st, 2014 as well as the amendments in the Law on Credit Institutions (LCI) published in the State Gazette on March 25, 2014 led the BNB to issue new ordinances, such as the Ordinance №7 on the Organization and Risk management in Banks and Ordinance №8 on the Formation of Capital Buffers. Other recent amendments have included developing criteria relating to licensing, independence of Audit Committee members, among others. These new reforms also led the BNB to dropping off some of the existing ordinances as Ordinance №7 on the banks’ large exposures, Ordinance №8 on the capital adequacy of credit institutions and Ordinance №9 on the evaluation and classification of risk exposures of banks and the allocation of specific provisions for credit risk as well as for supplement to the existing ordinances. More significant are the amendments in Ordinance №20 on the issuance of approval under Art.11, para 3 of the LCI, Ordinance №4 on the requirements for remunerations in banks13 and in Ordinance №11 on bank liquidity management and supervision. The law on Bank Bankruptcy is also expected to undergo a major revision in the wake of the KTB crisis. While in practice the BNB generally consults on draft regulations (e.g ordinance), these drafts are always subject to “unofficial” consultation with the Bulgarian banking industry (the Association of Banks in Bulgaria); there is however no legal obligation on it to do so. As indicated by the authorities, the BNB is normally heavily involved in drafting new laws affecting banking activities or any amendments to existing laws. When it comes to transposing EU regulation for examples, the MoF set up an inter-institutional working group involving the BNB, the Banking Association, the FSC and all other relevant stakeholders.
EC5	The supervisor has the power to: (a) have full access to banks’ and banking groups’ Board, management, staff and records in order to review compliance with internal rules and limits as well as external laws and regulations; (b) review the overall activities of a banking group, both domestic and cross-border; and (c) supervise the activities of foreign banks incorporated in its jurisdiction.
Description and findings re EC5	a) The BNB has the power to have access to banks and banking group’s information for supervisory purposes. In effect, as stated in art. 4 (1) of the LBNB, the BNB is empowered to “demand from banks to submit any documents and information, and may also carry out the requisite examinations.” The LCI also provides similar broad powers to the BNB. As per art. 80 (1), the BNB “shall have the right to require banks and, when applicable financial holding companies, mixed financial holding companies and their shareholders or partners to submit to it all the relevant accounting and other documents, and any information on their activities, and to conduct on-site inspections […], and to investigate possible breaches of [regulations].” Further, art. 80 c of the same law stipulates that the BNB has the right to (i) have free access to the office premises and information systems of the bank, (ii) demand documents and collect information in relation to the performance of its tasks, (iii) attend the meetings of the managing and controlling bodies of banks and express opinions that are to be written down in the minutes of the meeting, etc. b) For banking groups, in virtue of LCI art. 89 (1), the BNB is empowered to carry out supervision on a consolidated basis over banks, banking groups, financial holding companies, mixed financial holding companies and mixed holding companies. These institutions are required to implement arrangements, processes and mechanisms required by the LCI also in their subsidiaries, including these which are not subject to this law. Those arrangements, processes and mechanisms shall also be consistent and well-integrated and those subsidiaries shall also be able to produce any data and information relevant to the purpose of supervision. Therefore, the BNB can require parent companies and banks’ subsidiaries to provide all the relevant documents and information, as well as right for free access to the information. c) Foreign banks incorporated in Bulgaria are subject to the same degree of regulation and supervision, and locally incorporated operations of foreign banks are treated as local banks.
EC6	When, in a supervisor’s judgment, a bank is not complying with laws or regulations, or it is or is likely to be engaging in unsafe or unsound practices or actions that have the potential to jeopardize the bank or the banking system, the supervisor has the power to: (a) take (and/or require a bank to take) timely corrective action; (b) impose a range of sanctions; (c) revoke the bank’s license; and (d) cooperate and collaborate with relevant authorities to achieve an orderly resolution of the bank, including triggering resolution where appropriate.
Description and findings re EC6	a), b) and c): The LCI and the LBNB grant powers to the BNB to take (and/or require a bank to take) corrective actions and impose sanctions. Art. 103 (1) of the LCI sets out a list of measures that can be taken by the BNB when banks do not comply with regulations or, for example, when they constitute a threat to depositors’ interest. Art. 103 (2) sets out the type of administrative sanctions available to the BNB. The list appears comprehensive with a very few exceptions, ranging from issuing wrtiien warnings to revoking the licence. The BNB, however, seems not to be able to dismiss other relevant staff beyond senior management. As indicated above, the BNB can dismiss one or more individuals authorized to manage and represent the bank as well as members of the management board, board of directors or supervisory board. If within the time limit set by the BNB the bank has not dismissed the respective person, the BNB may remove that person from office and appoint another person in his place. Nevertheless, this power does not seem to apply to other staff, particularly to risk officers and other relevant staff holding important functions in the bank (Compliance, RM, AML and credit Officers). The BNB is not empowered either to change bank’s internal structure. The LCI, Art. 103 (2)15 empowers the BNB to change bank’s internal rules and procedures but not its internal organization or structure. In assessors’ opinion, this is an important power to have, even though it should be used only in extremis. The LCI provides the BNB with other enforcement power under the so-called “Special Supervision” regime (art. 115) according to which the BNB may establish a special supervision procedure concerning a bank if it finds that the bank is “at risk of insolvency.” In such case, a “conservator” is appointed by the BNB for a period of 6 months. An example of this is the decisions taken in June 2014 by the BNB Governing Council to place Corporate Commercial Bank AD (‘KTB’) and Victoria Commercial Bank EAD (‘VCB’) under respectively conservatorships and special supervision due to a risk of insolvency, for a period of three months.14 Lastly, the BNB is also vested with the power to impose fines and pecuniary sanctions in the conditions established in art. 152 of the LCI. d) In consonance with art. Art. 121a of the LCI, the BNB has some resolution powers. The law empowers it to prepare a plan for “orderly resolution of each bank, licensed in the Republic of Bulgaria, which might be applied if the bank is in financial difficulties.” However in light of the collapse of KTB in 2014, the fourth bank in the country, the resolution regime for banks has exhibited major weaknesses (see CP 11 for more details). As indicated by the authorities, the country has not developed yet a single legal framework for the recovery and orderly resolution of credit institutions. Further, the Resolution authority is still to be established under the new regime. In fact, Bulgaria is currently in the process of transposing the EU Bank Recovery and Resolution Directive (BRRD) into its legal apparatus and the final transposition of the BRRD framework for banks is set to August 2015.15 As a result, the conditions for cooperation and collaboration with relevant authorities -as required under this EC- are still to be determined and implemented.
EC7	The supervisor has the power to review the activities of parent companies and of companies affiliated with parent companies to determine their impact on the safety and soundness of the bank and the banking group.
Description and findings re EC7	The BNB is empowered to carry out supervision on a consolidated basis over banks, banking groups, financial holding companies, mixed financial holding companies and mixed holding companies. The supervisor enjoys free access to all relevant information.
Assessment of Principle 1	Largely Compliant.
Comments	Primary objective of banking supervision (CP 1, EC 2) In addition to promoting the safety and soundness of banks and the banking system, the BNB exercises other functions in particular with regard to transparency of products. Within the Banking supervision Department, the Special Supervision Directorate (SSD) has been assigned multiple activities that go beyond its primary objective of ensuring integrity in the banking sector. Originally, the directorate was established for AML/CFT supervision only but progressively, as the BNB’s mandate expanded, the directorate has been given additional responsibilities including transparency of products and monitoring of consumer trends related issues (e.g., transparency of banking products and monitoring of existing complaints’ handling procedures) as well as oversight of compliance with deposit insurance rule. It is also noteworthy that in addition to their responsibilities, the employees of SSD are frequently asked to assist the law enforcement authorities and Bulgarian Courts in investigations of ML cases. Against this background, the authorities are recommended to find a way to permit the SSD to focus on its core objective. The transfer of non-core activities outside the Supervisory ambit could be an option. Another aspect, less essential tough, is the title of the SSD that may create some confusion with the “special supervision” regime contemplated in the LCI. It is advisable to rename the department. Supervisor’s power to impose a range of sanctions (CP1, EC 6(b)) The BNB has available a wide range of supervisory tools to address situations where banks do not comply with laws and regulations or where banks engage in unsound practices. Under the LCI Art. 103 (2), the BNB may, depending on its view of the seriousness and nature of detected shortcomings take one or more of a broad selection of supervisory measures, as deemed appropriate. These measures include both administrative compulsory measures and administrative penalties. In more serious scenarios, the BNB can force the bank to change its internal rules and procedures. However, the BNB is not empowered to require a bank to change its internal organization or structure. As indicated above, this is an important power to have, even though it should be used only in extremis. If a management fails, then it may be necessary for the BNB to ensure a new one can be put into place. It is of course of paramount importance to ensure that the BNB under its capacity of supervisor does not interfere in bank’s management. Cooperation and collaboration with relevant authorities for orderly resolution of banks(CP1 EC 6 (d)) The collapse of Corporate Commercial Bank AD (KTB) in 2014 revealed a series of major weaknesses in the domestic regime for dealing with problem banks, exacerbated by the lack of certain types of resolution powers. In the midst of the KTB crisis the BNB worked with the relevant authorities to draft a law that would have increased BNB powers to address KTB’s situation, including the creation of a good bank/bad bank option. The law was not passed but the incident illustrated that the current legal framework permitted the authorities insufficient scope to manage a crisis fully effectively. The eventual transposition and implementation of the EU Bank Recovery and Resolution Directive (BRRD) into national law is critical to address the gaps in the resolution and crisis management toolkit, and to provide for coordinated and timely remedial actions to deal with problematic banks. In considering this criterion it is important to make the distinction that the deficiency for the purposes of the BCP is that the BNB does not, at present, have sufficient options in order to cooperate and collaborate to achieve the orderly resolution of a bank. The lack of resolution powers is not a valid basis for a downgrade because the BCPs do not expect the supervisory authority necessarily to be the resolution authority. Once the BRRD is trasnsposed and implemented and the archtiectures for resolution is put into place, including designation of the resolution authority for banks and investment intermediaries as well as resolution funds and adequate resolution and recovery planning. Recommendations Refocus the Special Supervision Directorate on its core AML mandate by assigning non-AML related activities to other relevant BNB departments. Explore possible amendments to the LCI to provide the BNB with additional powers including the possibility to impose changes in banks’ internal organization and structure. Consider the possibility to rename the SSD in a way that does not introduce confusion with the “special supervision” regime.
Principle 2	Independence, accountability, resourcing and legal protection for supervisors. The supervisor possesses operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources, and is accountable for the discharge of its duties and use of its resources. The legal framework for banking supervision includes legal protection for the supervisor.
Essential criteria
EC1	The operational independence, accountability and governance of the supervisor are prescribed in legislation and publicly disclosed. There is no government or industry interference that compromises the operational independence of the supervisor. The supervisor has full discretion to take any supervisory actions or decisions on banks and banking groups under its supervision.
Description and findings re EC1	The BNB, as noted in CP1, is the institution with responsibility under the law for the regulation and supervision of banks (Law of the BNB 2(6)). The BNB itself is managed by its Governing Council which is composed of the Governor, three Deputy Governors and three non-executive members. Each of the three Deputy Governors is responsible for one of the three “basic” departments of the BNB as established in law (Law of the BNB Art 19). The three deputy governors of the BNB are proposed by the Governor and elected by the National Assembly for a term of 6 years. The remaining three members of the Governing Council are appointed by the President. (Art 12 Law on BNB). The Banking Supervision Department of the BNB is one of the three “basic” departments and the Deputy Governor heading the Banking Supervision Department exercises supervision over the banking system (Article 20(3) of the Law of the BNB). The Deputy Governor for the banking supervision department may organize, direct and is responsible for the activities of the department. (Article 19 (3) of the Law on BNB). In exercising his supervisory powers under the law, the Deputy applies, separately and at his own discretion, the actions and penalties as provided for by the law on Credit Institutions (LCI) (Article 20 (3) of the Law on BNB). As set out in Article 151 (1) of the LCI, there are three types of decision that the Governor and the Deputy Governor with responsibility for supervision present jointly to the Governing Council for a decision. These are decisions for license (or its rejection), revocation of authorization or appointing a conservator or placing a bank into special supervision measures when at risk of insolvency. The Governing Council also has responsibility for issuing regulations. In all other cases, the supervisory decision to issue an administrative act, meaning the use of the corrective and remedial powers of the supervisor (whether fines, restrictions or dismissals etc.), which are found in Article 103 of the LCI rests with the Deputy Governor. The Deputy Governor may delegate this authority. At the time of the assessment, the Deputy Governor with responsibility for supervision had been dismissed by the National Assembly and an Acting Deputy Governor was in place. The dismissal of the former Deputy Governor took place on 21 January 2015, two months prior to the assessment. The Deputy Governor had initially stepped down, taking leave from his office, in June 2014 as a result of the events surrounding the failure of Corporate Commercial Bank (KTB). When the Deputy Governor took leave of absence from the BNB, the supervisory powers were delegated by the Deputy Governor to the Acting Deputy Governor. The LBNB does not address the situation where the Deputy Governor is absent or unavailable due to unforeseen reasons (for example, sudden fatal illness).
EC2	The process for the appointment and removal of the head(s) of the supervisory authority and members of its governing body is transparent. The head(s) of the supervisory authority is (are) appointed for a minimum term and is removed from office during his/her term only for reasons specified in law or if (s)he is not physically or mentally capable of carrying out the role or has been found guilty of misconduct. The reason(s) for removal is publicly disclosed.
Description and findings re EC2	As noted above, the Deputy Governor for supervision is proposed by the Governor and is elected by the National Assembly (Art 12(1) LBNB). The BNB has no authority to suspend or dismiss any member of the Governing Council. Only the National Assembly has the authority to dismiss the appointees it has elected, which are the Governor and the three Deputy Governors of the BNB. The remaining three members of the Governing Council, who do not hold executive positions in the BNB are appointed by the President, who has the power of dismissal in respect of these positions. Under the LBNB (Art 11(3)) all Members of the Governing Council must be persons of the highest integrity and prominent qualifications in economics, finance or banking. The law further sets out a number of conditions that disqualify an individual from being appointed as a member of the Governing council. These conditions include, broadly, having served a custodial sentence, bankruptcy, conflicts of interests, or having a close relationship to another member of the Governing Council (Article 11(4) LBNB). The term of office of the Deputy Governor heading the Banking Supervision Department is six years (Art 12 (4) LBNB). Article 14 (1) of the LBNB establishes that a member of the Governing Council may only be relieved from office if that person meets any of the terms of disqualification as set out in Article 11(4)LBNB or for reasons of incapacity for more than six months or for serious misconduct. (Art 14(1) LBNB). The LBNB follows the statutes of the ECB with respect to this issue. There is no legal requirement for the reason for dismissal to be publicly disclosed within the LBNB but disclosure is required under the rules of procedure of the National Assembly itself. The decision to relieve the Governor from his or her post may be referred to the Court of Justice of the European Union by the Governor or the Governing Council of the ECB. (Art 14(3)). As also noted in EC1, the Deputy Governor for Supervision was dismissed in January 2015. At the time of the assessment, the Governor had made a proposal for a new candidate but the National Assembly had not taken any decision and no further actions could be taken to replace the Deputy Governor until the National Assembly had made its determination.
EC3	The supervisor publishes its objectives and is accountable through a transparent framework for the discharge of its duties in relation to those objectives.16
Description and findings re EC3	The objectives and responsibilities of the Banking Supervision Department are set in the BNB law and the LCI. The performance of the main tasks of BSD is reflected in the semi-annual and annual BNB reports to the Parliament. The BNB annual report, (published both in Bulgarian and in English), is adopted by the BNB Governing Council under LBNB (Art 1 (2) and Art 51), and is presented to the National Assembly for information. This report, against the background of the analysis of the macroeconomic development in Bulgaria and the global economic developments, reviews the Bank’s activities and functions over the year and the forthcoming tasks. The report includes the Bank’s consolidated financial statement for the respective year, as well as statistical appendices. With respect to supervision, the reports outline the condition of the banking sector, regulatory developments and any other developments, such as changes in the management of banks in Bulgaria, issuance of capital instruments, and notifications such as inward or outward use of EU “passporting” to provide services within the EU.
EC4	The supervisor has effective internal governance and communication processes that enable supervisory decisions to be taken at a level appropriate to the significance of the issue and timely decisions to be taken in the case of an emergency. The governing body is structured to avoid any real or perceived conflicts of interest.
Description and findings re EC4	The governance structure of the BNB as set out in the LCI and BNB provides that most supervisory decisions and actions must be taken by the Deputy Governor for supervision, unless powers have been delegated by the Deputy Governor. Decisions on licensing, revocation, special supervision (putting a bank into conservatorship) or issuance of regulations are made by the Governing Council on the basis of a joint proposal by the Governor and Deputy Governor. Prior to the stepping down of the Deputy Governor in 2014, powers of decision making had not been delegated. The internal document, “Manual for the banking supervision process,” (dated June 2010) sets out the roles and functions of the various directorates within the banking supervision department, including the relationship between the directorates. The manual confirms that there are processes to ensure the review of reports before they are submitted to the director. Also the manual indicates at which level of seniority which functions need to be carried out (whether identification of issues, or upward reporting). When supervisory measures or administrative penalties are initiated, time lines are set out for certain procedures. The manual does not, however, describe processes to scutinise key supervisory decisions that might need to be made (i.e., a “four eyes” process). Nor does the manual specify procedures for instances when a more rapid escalation of an issue might be required. Staff indicated that in such cases, such as occurred in 2014, the process was to increase the speed and intensity of supervisory engagement to ensure that information was provided to senior management as quickly as possible. In practice the Governing Council met on a daily basis as needed. It is permissible for a member of the Banking Supervision Department to hold shares in a bank that is authorized in Bulgaria but the interest must be declared (see EC5). The LBNB has extensive provisions seeking to prevent the possibility of conflicts of interest in the Governing Council of the BNB. The law excludes certain persons from eligibility to sit on the Governing Council. According to Article 11(4) of the LBNB no member of the Governing Council may have a close relationship with another member of the Governing Council (item 5) or be the owner or board member of a commercial company (including a cooperative) (item 4). Furthermore, there are restrictions on the activities in which the Members of the Governing Council may engage in order to prevent conflicts of interest from arising (Art 12(5) and (6) LBNB). Essentially these provisions state that the Members of the Governing Council may not engage in remunerative activities, including working for financial institutions (including banks and insurance companies). The Governor and the Deputy Governor are permitted to take teaching engagements and may perform unremunerated activities if there is a unanimous decision by the Governing Council and there is no conflict of interest. The law also states that Members of the Governing Council shall not participate in the deliberation and shall abstain from decision-making on issues in which they or members of their families may have interest. They must notify the Governing Council in advance of any such interests. (Art 17(4) LBNB). As public office holders the Members of the Governing Council and the staff of the Banking Supervision Department shall observe the requirements of the Conflict of Interest Prevention and Ascertainment Act (Article 3, items 13 and 25).
EC5	The supervisor and its staff have credibility based on their professionalism and integrity. There are rules on how to avoid conflicts of interest and on the appropriate use of information obtained through work, with sanctions in place if these are not followed.
Description and findings re EC5	The staff of the BNB working in the Banking Supervision Department is appointed by a transparent competition – vacancies are publicly advertised - and aims to promote principles of professionalism and ethics. Professional secrecy The LCI contains a range of provisions establishing professional secrecy requirements, and administrative sanctions (fines) for failure to maintain such restrictions. Employees of the BNB must observe professional secrecy regarding the banking activities and relationships of the BNB (Art 23(2)). Sanctions are applied under the LBNB (Art 61(2) unless the violation constitutes a criminal offence. The members of the Governing Council, employees, external auditors, experts and other persons working for the BNB are bound by professional secrecy even after the termination of their relations with the BNB. (Arts 63 and 64 LCI). Furthermore any violation under LCI, Regulation (EU) No 575/2013 (ie the CRR) or the regulatory acts governing their enforcement or Regulation (EU) No 1031/2010, provided the act does not constitute a crime shall be sanctioned by a fine, with escalating penalties. (Art 152(1) LCI). Conflicts of interest Safeguards put in place to prevent conflicts of interest for Members of the Governing Council are discussed in EC4 above. All employees are subject to the BNB Code of Conduct which also states (Art 9) that employees of the BNB must behave in such a way that conflicts of interests are avoided. Employees must also declare membership of the governing body of a political party. Employees of the BNB may hold shares in a credit institution but are required to make a written declaration. Also, under a decision of the Governing Council, (Decision № 155/20.12.1999 r.) relationships between employees are not permitted (eg spouse or relative). The Code of Conduct of the BNB Employee contains clear provisions to avoid conflict of interest, in addition to the provisions of Article 3 the Conflict of Interest Prevention and Ascertainment Act (LPACI) which are noted in EC4 and which indicate that neither members of the Governing Council, nor employees of the Banking Supervision Department, as public officials, shall participate in decisions in respect of issues in which they or their families may have an interest. Specifically, under the Code of Conduct affecting them or their affecting an institution: An employee of the Bulgarian National Bank shall behave in way through which any conflict of interest is avoided (Art. 9. (1)). An employee shall declare in writing to his/her line superior any election in a managerial or controlling body of a political party. (Art. 9. (2)). An employee, unless occupying a technical function, must file a declaration of incompatibility and for private interests pursuant to Art. 12 of the Law on Prevention and Ascertainment of Conflict of Interest (LPACI) according to a procedure determined by an order of the BNB Governor (Art. 9. (3)). An employee must resign from exercising the powers or obligations of office, when on a particular occasion there is a private interest. An employee may be removed in a particular occasion from exercising of his/her powers or obligations of office with a written act of the BNB Governor on a proposal by the relevant line manager, if the employee has declared a private interest. Under the law, a technical function is defined as a position that does not include any managerial and controlling functions, or any position that requires the participation in the preparation of decisions, orders, internal rules and acts of legislation, analyses, forecasts, concepts, assessments, expert opinions and correspondence in the BNB sphere of competence. The technical function includes roles such as secretary translator or archivist. Where an issue is not directly regulated by the Code of Conduct, the provisions of the LPACI apply.
EC6	The supervisor has adequate resources for the conduct of effective supervision and oversight. It is financed in a manner that does not undermine its autonomy or operational independence. This includes: (a) a budget that provides for staff in sufficient numbers and with skills commensurate with the risk profile and systemic importance of the banks and banking groups supervised; (b) salary scales that allow it to attract and retain qualified staff; (c) the ability to commission external experts with the necessary professional skills and independence, and subject to necessary confidentiality restrictions to conduct supervisory tasks; (d) a budget and program for the regular training of staff; (e) a technology budget sufficient to equip its staff with the tools needed to supervise the banking industry and assess individual banks and banking groups; and (f) a travel budget that allows appropriate on-site work, effective cross-border cooperation and participation in domestic and international meetings of significant relevance (e.g., supervisory colleges).
Description and findings re EC6	Source of funding and budget sufficiency The BNB is financed mainly by the revenues from its currency reserves operations. The annual budget of the BNB (including the BSD budget) is approved by its Governing Council and is published. The BNB has the full discretion on the internal re-distribution of it’s own budget and the ceiling of it’s expenditures. The Bulgarian National Bank, pursuant to the LBNB (Art 51) addresses the annual budget, approved by the Governing Council, to the National Assembly and officially reports twice a year on the progress of it’s activities and it’s consolidated financial statement. Salary scales and staff retention By law, the remunerations of the employees of the BNB shall be determined by the Governing Council but it cannot be lower than the average remunerations of employees with respective functions in other banks of the country. (Art 23(3) LBNB). The HR department takes into consideration the salary scales of the commercial banks in making this determination. The salary scales apply across the BNB and are not differentiated for supervisory staff. While the BNB enjoys status and a reputation for security its salary levels are not necessarily commensurate with the market and some skilled staff have been lost over the previous 5 years. Recruiting staff with experience, for example over 10 years, has not proved to be easy. Progression to senior positions within banking supervision has been through internal promotion rather than direct appointment of senior staff from outside the BNB – the position of the Deputy Governor for Banking Supervision has been an external appointment in the past. There were vacancies in the banking supervision department at the time of the assessment and there were very high numbers of applicants for each post. Use of external experts While in practice it has rarely happened, the BNB has the right to appoint external independent experts and to appoint an external auditor for a bank, to carry out a financial or other type of audit (Art 80(3)(3) and (4) LCI). Professional secrecy requirements apply to both external experts as well as to BNB staff, even after the termination of their relations with the BNB. (Art 63(3) LCI). Training budget The Banking Supervision Processes Manual requires the directorates of the banking supervision department to identify training needs and budget for them in each year’s planning process. In the legal department, staff are conscious for the need to maintain continuous professional development and, in terms of delivery, are conscious of the demands made upon them for provision of training by other banking supervision staff as a result of the wide raft of EU legislation in the banking field in recent years. The assessors understood that a general approach was for the HR department notify the banking supervision department of any external training opportunities, such as courses, conferences, lectures and seminars eg from other supervisory institutions or the Vienna Joint Institute so that staff can be given the opportunity to apply. There have been cases where permission had been granted to attend seminars but pressure of work had prevented attendance. Technology budget At the time of the assessment there was a project in train to enhance the IT tools available to supervisory staff. This project was to update the IT and data systems to take into account the changes driven by the introduction of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive IV (CRDIV). The generation of automatic indicators and integration with the ratings databases had been lost with the inception of the new regulatory framework. The project is aimed at replacing lost functionality that was a result of the regulatory changes but is not seeking to introduce new developments. Travel budget The General Director and the five subordinate Directors in the Banking supervision department draft plans and budgets for the operational needs of the department, including not only domestic supervisory activity such as on site inspections, training programs and participation in international meetings, whether international fora such as Basel working groups, supervisory colleges, or meetings and processes driven by the European Commission or European Banking Authority. It is not always possible for representatives from the BNB to attend all meetings related to the EU legislative process (ie preparation and negotiation of proposals), due to limited numbers. However, the BNB has met all its commitments in terms of supervisory cooperation and collaboration, including supervisory colleges, and attendance at (including leading working groups as necessary) meetings of the EBA. Reports are prepared on a semi-annual and annual reports basis to track targets and additional ad-hoc assignments, supervisory knowledge-sharing missions, educational training, etc.
EC7	As part of their annual resource planning exercise, supervisors regularly take stock of existing skills and projected requirements over the short- and medium-term, taking into account relevant emerging supervisory practices. Supervisors review and implement measures to bridge any gaps in numbers and/or skill-sets identified.
Description and findings re EC7	As noted in EC6, the Director General and the five subordinated Directors in the Banking supervision department draft programs of the yearly targets and prepares the Directorates’ corresponding budgets. This annual planning process is required to include the identification of training needs and skills developments. Although directorates are asked to propose training plans on an annual basis there is no formal process to identify the gaps in skills and the development needs for staff on an individual basis or for directorates or the department as a whole. In the context of a small department it is accepted that the directors and director general will have a general sense of department needs and gaps but at the time of the assessment there has been no opportunity for the BNB to make an effective assessment of current and future skills needs, or indeed to be able to protect time in the calendar for any relevant training.
EC8	In determining supervisory programs and allocating resources, supervisors take into account the risk profile and systemic importance of individual banks and banking groups, and the different mitigation approaches available.
Description and findings re EC8	The frequency and intensity of a bank inspection according to the supervisory programs depends on the size of the respective bank, the evaluation of its systemic importance and nature, the volume and complexity of its activities. The assessors were able to review the current annual plan for supervision. The plan is updated through an annual exercise but can be adapted to take account of emerging issues, as had happened during the course of 2014.
EC9	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.
Description and findings re EC9	The BNB, its bodies and the persons authorized by them are not liable for any damages caused in exercising their supervisory functions, unless they have acted with intent. (Art 79(8) LCI). It is in the competence of the BNB Governing Council to a decision to cover such costs case by case. The law contains no explicit reference to the BNB being required to cover such costs. There is a decision of the Governing Council to cover the costs of members of the Governing Council, including Deputy Governors. There is no such decision yet taken for other staff of the BNB but there would be a case by case decision made and the general presumption is that the precedent set by the decision covering costs of the Governing Council would lead to costs being covered for other staff.
Assessment of Principle 2	Materially Non Compliant.
Comments	Internal Governance of the BNB for banking supervision (CP2 EC1, EC4) Even though the legal framework currently in place reasonably provides the necessary powers to authorize banks, conduct ongoing supervision, address compliance with laws and undertake corrective actions, the current mission found that the governance structure of the BNB, particularly as it relates to the allocation of enforcement powers presents significant concerns. In presenting the arguments below, the assessors wish to stress that their comments are designed to be read solely in the context of banking supervision. It is not within the scope of the assessment of the BCPs to comment on the governance of the BNB in carrying out its other mandates. The structure of the internal governance in the BNB for banking supervision in relation to the distribution of powers and responsibilities regarding banking supervision which are described in preceding sections presents a significant concern. It is noted that this structure is established under the law, as opposed to the exercise of delegated powers. It is recognized that the concentration of power for supervisory action in a single individual, the Deputy Governor for supervision, was a conscious decision, designed to ensure responsibility and accountability. Some checks and balances have been put in place in the sense that not all powers are reserved to the Deputy Governor. Entry to, exit from the banking sector and handling the extreme distress of an bank (namely licensing, revocation, conservatorship) are decisions that must be made by the full Governing Council based on a joint motion by the Governor and Deputy Governor. Also the Governing Council has responsibility for issuing the regulations of the BNB, including those regulations pertaining to supervision. Nonetheless, there are no internal checks and balances in the majority of the supervisory decision making process. Neither the law nor the internal BNB procedures ensure the quality of due process in terms of transparency, scrutiny or challenge in reaching such decisions. One option would be for the Governing Council and Governor to be fully informed or consulted with in respect of decisions made by the Deputy Governor, or of the grounds for such decisions either before or after the fact. In principle the Governing Council can, of course, be informed but there is no obligation and notification is at the discretion of the Deputy Governor. The LBNB (Article 16 item 10) provides that reports on the activities of the Bank’s basic departments (including banking supervision) must be provided to the Governing Council but this is not equivalent to a timely transparency and consultation requirement on detailed decisions made by the Deputy Governor. The decision making structure exposes the decision making process to the consistency of approach, or otherwise, and appetite for enforcement or lack of enforcement of a single individual. Moreover, the individual holding the position of Deputy Governor of Supervision could become the subject of undue and intense pressures to act or not to act in any given case. In other words, the structure isolates the DG with responsibility for supervision and puts undue pressures on the individual holding the post. It appears to the assessors that the design of the structure is not conducive to supporting a vigorous and intrusive supervisory program. It is noted that the Deputy Governor could institute an internal framework by which to judge individual decisions, as well as to ensure that the Governing Council is both notified of decisions and has the opportunity to comment. Equally, it is recognized that even though a Deputy Governor would be well advised to take this course of action, as recommended in the 2008 FSAP, the Deputy Governor cannot be legally compelled to do so. At the time of the assessment, another unanticipated weakness of the current design had been revealed in that as the supervisory power to make enforcement actions is vested in one individual, then the absence of this individual could impair or cast doubt on the BNB’s supervisory enforcement powers. While the LBNB requires the Deputy Governor to delegate supervisor powers in his/her absence, there is no contingency arrangement foreseen in legislation to take into account a situation when the Deputy Governor might become suddenly and unexpectedly unavailable, for example in the case of a sudden fatal illness. Moreover, the appointment of a new Deputy Governor is not subject to any maximum time limit under law. It is essential for there to be full clarity and certainty with respect to the BNB’s powers to act in all circumstances in order to foster an assertive and confident supervisory process. In effect, therefore, the LBNB gives the Deputy Governor of Banking Supervision strong powers to act separately and independently, even though the Governing Council has a significant role and responsibilities over troubled banks in addition to its licensing and regulatory powers. The legal structure creates a situation whereby supervision and enforcement is dissociated from the Governing Council even though the Governing Council is responsible for issuing the regulations that articulate and establish the BNB’s supervisory standards and expectations. That is to say that the Governing Council is asked to issue regulations upon which supervisory practice depends while at the same time being at arms length from the supervisory process and key supervisory decisions. Taking all factors together, the assessors find that the internal governance structure considered both from the perspective of the effect on the individual role of the Deputy Governor for supervision and from the effect on the collective role and responsibility of the Governing Council to be unsatisfactory. In particular it is noted that supervision cannot be effective unless effective enforcement powers are in place. The legal structure that has been put into place is, in the view of the assessors, not conducive to timely, consistent, transparent and if necessary persistent and escalating enforcement decisions and actions. Skills and professionalism (CP2 EC5) The professionalism and skills of the BNB staff in banking supervision is impressive. The high reputation of the skill and dedication of the BNB staff was universally commented upon in the assessors’ range of meetings. It is to the significant credit of the banking supervision staff of the BNB that they have maintained their reputation despite resource constraints and heavy pressure of work, particularly over the last year where additional burdens have stemmed from external regulatory changes and domestic issues alike. Budget, training, IT resources, external experts (CP2 EC6(c), (d) and (e)) Resources are insufficient for the range and nature of the tasks the BNB must carry out for effective supervision. It is also noted that as a result of the changes introduced by the global regulatory reform agenda, and implemented largely through EU legislation, demands have increased significantly for all supervisory authorities. The basic investment any supervisory authority must make in order to be able to perform has increased notably in the past 5 years, during which time the budget envelope for the supervisory function of the BNB has remained largely static. This insufficiency adversely affects the numbers of staff as well as their continued training and the IT capabilities that are available to them. The assessors note that the BNB is already conscious that it has insufficient access to certain specialist skills, notably IT and quantitative skills, which are becoming ever more critical components in the supervisory arsenal, even in banking systems focused on credit such as Bulgaria. The supervisory approach of the BNB, not uniquely, depends heavily on the on-site inspection process so the availability of resource to carry out a suitable program of inspections is critical. Although an IT project was in progress at the time of the assessment its objective was primarily to re-instate the loss of functionality that had been triggered by the regulatory reporting changes. A more ambitious and forward looking project to integrate the different quantitative and qualitative data bases would be highly valuable so that staff time - which is at a premium - is spent in analysis rather than in compilation and calculations of data. Skill gaps assessment (CP2 EC7) There is currently no mapping of the skills that are needed in the evolving supervisory processes and assessing the skills of the staff against these needs and ensuring that a strategy is in place to remedy any such gaps. This is an important task to aid current and longer term planning and budgeting for resources. RBS approach (CP2 EC8) It is clear that the BNB carries out an analysis of the risk profile of the banking system, on an annual basis, and allocates its resources and targeted supervisory activity on this basis. There is a particular challenge for supervisors to identify how to distribute its supervisory attention when a banking sector is largely concentrated in a small number of banking institutions but the remainder of the sector is distributed among numerous much smaller entities which typically will have weaker risk profiles and practices. This is the situation in Bulgaria. It is welcome that the BNB undertakes close analysis, published in its regular reports, of the connections between the banks so has a database from which to assess potential for contagion and spillover effects. This analysis provides an important input into making decisions for supervisory activity. Legal protection (CP2 EC9) According to the LBNB (Art 3(4))only the Governor has the legal option to challenge the decision for his/her dismissal at the European court of justice. Such a possibility is not provided for the Deputy Governors. The BNB does have legal safeguards for protection of staff, but it is noted that it is at the discretion of the Governing Council as to whether legal costs incurred by staff, should they be subject to a lawsuit, will be covered by the BNB. A decision has been made in respect of members of the Governing Council and it is presumed that staff would, in practice be covered but no formal decision has yet been taken. Recommendations Revise the internal governance design of the BNB for banking supervision, through legal amendment as necessary, to ensure that significant powers are not vested in a single individual. Ensure that there are clear checks and balances in decision making processes, including transparency and challenge processes. Ensure that the absence or unavailability of any one individual will not prevent the full and effective use of all of the BNB’s supervisory powers. Ensure that the Governing Council is supplied with timely information in respect of major developing supervisory issues including advance information on any changes of control or corrective actions, so that it is well placed if becomes necessary to make major decisions at critical junctures – including licensing, revocation, conservatorship and issuance of prudential regulation. Increase resource allocation to banking supervision to: ensure sufficient skilled personnel available to conduct a full program of on-site inspections; ensure sufficient representation of skill-sets, including IT, quantitative and models analysis and IFRS - training and recruitment will both be needed. Upgrade the IT capability available to supervisory staff so that they can effectively and efficiently make use of the range of data and information that is submitted to the BNB. This upgrade should be more than replacing functionality that was lost due to the regulatory changes. Carry out a mapping of the skills that are needed in its supervisory process, taking into account the fact that the nature and volume of demands required in supervision are continuing to increase and evolve, not least as a result of the international regulatory reform agenda. Identify a clear current and projected assessment of any skills gaps and put in place a strategy to address such gaps. Ensure that the reasons for the dismissal of the Governor and the Deputy Governor are publicly disclosed, ie on a mandatory not discretionary basis. Ensure that the BNB will cover the legal costs faced by a staff member should a lawsuit be brought against the staff member.
Principle 3	Cooperation and collaboration. Laws, regulations or other arrangements provide a framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors. These arrangements reflect the need to protect confidential information.17
Essential criteria
EC1	Arrangements, formal or informal, are in place for cooperation, including analysis and sharing of information, and undertaking collaborative work, with all domestic authorities with responsibility for the safety and soundness of banks, other financial institutions and/or the stability of the financial system. There is evidence that these arrangements work in practice, where necessary.
Description and findings re EC1	The LCI contains several provisions governing the cooperation and collaboration among supervisors, particularly between the BNB and the Financial Supervision Commission (FSC), the State National Security Agency, the Public Prosecutor’s Office and the Ministry of Internal Affairs. Moreover, the modalities of cooperation have been established in the so-called “agreements on cooperation and collaboration” that were signed with the Bulgarian Deposit Insurance Fund (November 30, 1999), the Financial Supervision Commission (October 27, 2003), the FIU (2003) and the Prosecutor General’s Office (2006). These agreements formally arrange the conditions for information sharing, cooperation and joint actions to be undertaken by domestic supervisors and other relevant authorities. With the FSC, the BNB collaborates mainly on licensing and on-site inspection related issues. For example, prior to authorize a bank for providing other financial services under the Law on Markets in Financial Instruments, the BNB seeks FSC written opinion. If the opinion is negative, the BNB will not grant the license; otherwise, the BNB will send a copy of the license to the FSC (Art. 15, para. 6 LCI). Another area of cooperation concerns acquisition of significant ownership in banks. For direct or indirect acquisition of qualified holding in a licensed bank by a person licensed by the FSC, before granting the authorization, the BNB has to hold consultations in advance and cooperate with the Commission (Art. 28, para. 6). Joint on-site inspections involving staff from both the FSC and the BNB are also possible in virtue of art. 80 of the LCI. Consultation about draft legislations is another stream of cooperation. In the MoU reviewed by the mission, the BNB and the FSC conduct mutual coordination of draft regulatory acts in the financial market fields. One recent example is the draft law transposing CDR IV and the BRRD. In the area of money laundering, there is a high degree of cooperation between the BNB, and the competent authorities including the prosecutor’s office, national investigative authorities, police authorities and the FIU (FID-SANS). With respect to the latter, the cooperation is governed by a Memorandum of understanding signed between BNB and the SANS in 2003, which is in fact no longer valid due to the fact that the then Financial Intelligence Agency (FIA) was transformed in 2008 into the Financial Intelligence Directorate (FID) within the State Agency for National Security (SANS) pursuant to the Law on State Agency for National Security (LSANS). As indicated by the authorities, BNB is constantly involved in providing expertise and assistance for the analysis of sophisticated transactions and important cases involving embezzlement with EU funds, money laundering, financial fraud, and cross border complex financial transactions. Further, the FIU and the BNB can perform joint missions for assessing compliance with AML/CFT requirements; in that case, meeting are held between the FIU and the SSD (the Directorate responsible, inter alia, for AML matters within the Supervision department) to decide areas to inspect. The two bodies also arrange annual meetings to determine which banks will be subject to joint inspections to avoid duplication of efforts. The BNB also collaborates with the Bulgarian Deposit Insurance Fund (BDIF) by exchanging relevant information. In particular, the BNB Special Supervision Directorate (SSD) carries out inspections at the request of BDIF essentially to ascertain the correct level of contribution of banks to the Fund. Inspection questionnaires are used for checking-up compliance with the Law on Bank Deposit Guarantee (LBDG). However, the cooperation between BNB and the BDIF has been established in a MoU signed in 1999 and there is a need for updating it to broaden the scope of collaboration and information exchange. According to Art. 9 from the Law on Bank Deposit Guarantee, the Deputy Chairperson of the Bank Deposit Insurance Fund is designated by the Governing Council of the BNB. There are also other mechanisms for cooperation (though not formalized) with other relevant Government agencies, in particular the Ministry of Finance (MoF) for sharing relevant information on regular basis on banks (the ones acting as primary dealers of Government bonds) or in case of emergency. The BNB also assists the MoF in preparing national positions for relevant EU or other international fora, as well as in improving the domestic financial and regulatory framework. Interagency working groups for legislation drafting are also another work-stream of cooperation between the BNB, the MoF and other relevant stakeholders. The Governor of the BNB has also been participating since 2007 in the Financial Stability Advisory Council. It is an advisory body responsible for maintaining financial stability through the exchange of information and the assessment of the national financial system, as well as the monitoring of potential systemic risks. The Council comprises the Minister of Finance (chairing the Council), the Governor of BNB and the Chair of the FSC. According to the provisions in the Law on FSC (Art. 31), the BNB supports the CFS by providing, inter alia, supervisory reviews on developments in the banking sector and on cross-border related issues that may impact the financial stability. The most recent decisions made by the CFS concerned the KTB case and consisted in recommending the BNB to draft a bank resolution law and take appropriate measures to address the situation by involving all interested parties. A protocol was signed on July 7, 2014 to organize the functioning of this Council.
EC2	Arrangements, formal or informal, are in place for cooperation, including analysis and sharing of information, and undertaking collaborative work, with relevant foreign supervisors of banks and banking groups. There is evidence that these arrangements work in practice, where necessary.
Description and findings re EC2	The legal basis for the formal cooperation and for information sharing by the BNB with other supervisory authorities are to be found in several articles of the LCI, in particular the Articles 87-87d. These provisions provide powers to the BNB relative to engaging in collaborative arrangements with foreign bank supervisory authorities either within the EU or outside. General principles for cross-border cooperation Article 87 – 87 d of the LCI determine the condition of cooperation between Bulgaria and the EU States. In exercising its supervisory powers, the BNB is empowered to cooperate with the relevant competent authorities of the Member States where a bank licensed in the Republic of Bulgaria carries out activities through a branch in an other Member State or where a bank from another Member State carries out activities through a branch in the Republic of Bulgaria. In that context, the BNB can exchange with its Member States’ counterparts any information and documents relating to the (i) management of and ownership of credit institutions, (ii) as well as to the supervision of credit institutions on a solo or consolidated basis, including their liquidity, solvency, deposit insurance, large exposures restrictions, risk management, other factors that may affect the systemic risk arising from the bank’s activities, administrative and accounting procedures, and internal control mechanisms. The cooperation mechanism also covers situations that warrant immediate attention. For example, the BNB shall inform the competent authorities of all host Member States immediately where liquidity stress occurs or can reasonably be expected to occur in relation to a bank licensed in the Republic of Bulgaria which carries out activities in other Member States through a branch. That information should include details about planning and implementation of a recovery plan and about any prudential supervision measures taken in that context. Information sharing and undertaking of collaborative work arrangements are also expected for on-site supervision purposes. Art. 87 (9) stipulates that the competent supervisory authorities of a Member State which are responsible for the supervision of banks with branches on the territory of the Republic of Bulgaria, after a prior notice to the BNB, may carry out on-site inspection, on their own or with the assistance of duly authorized persons. In that case, the BNB provides assistance to the foreign supervisory authority. The same arrangement also exists when the BNB carries out (in very rare occasions though) on-site visits in Bulgarian branches operating in a Member country. Further, the BNB can, upon request from a Home supervisor, perform an on-site inspection. In that case, a representative of the home Member State supervisor (or an auditor authorized by it) may take part in these inspections. Conversely, the BNB can make the same request and ask the Host authority to conduct an inspection on its behalf. In practice however, there has been very rare occasions of such cooperation. Art. 88 of the LCI lays down the principles the cooperation with non-EU countries; the conditions for cooperation are established through MoUs, particularly in relation to the exchange of information covered by professional secrecy (see below). Cooperation in the context of consolidated supervision Consolidated supervision is another area where cooperation is key. To that end, the BNB is empowered to sign written coordination and cooperation arrangements with the competent supervisory authorities of the respective Member States (LCI, art. 87 and 92). The BNB may take responsibility for the performance of additional supervisory tasks, by agreement with the competent authorities of Member States. Conversely, where a bank licensed in Bulgaria is controlled by a credit institution in another Member State, the BNB may delegate to the parent supervisor the responsibility for supervising the subsidiary bank. For the purpose of consolidated supervision, the BNB has signed MOUs with the competent authorities of Austria, Cyprus, Greece, Italy, The Netherlands, Slovenia, France, Romania, and Hungary. Further aspects of cross-border cooperation with national competent authorities can also be found in the LCI, consistent with EC regulations and EBA technical standards. They mostly relate to the following aspects: (i) addressing situations of disagreement with measures taken by other NCAs, (ii) how to send alerts to other relevant NCAs regarding insufficient liquidity, (iii) how to undertake on-site inspections in the relevant country, (iv) how to determine fine with the home/host authority if a local foreign branch is significant, (v) how to exchange regular information or information on measures imposed on significant branches (See Art. 87, paragraphs 3 to 13, and articles 87a to 87d of LCI). The mission got a copy of a cooperation agreement signed with a foreign authority. It was observed that the arrangements include information in connection with the authorization and licensing process, the ongoing supervision of the cross-border establishments, on-site inspections, financial crime, exchange of information in emergency situations, corrective actions, confidentiality requirements, etc. Most of the agreements comprise provisions for requests for additional information and on-going coordination, including cooperation through visits for information purposes and exchange of expert staff. For the conduct of routine supervision or in the context of emergency situations, cooperation is further strengthened through supervisory colleges (SC). The LCI contains several provisions governing the participation of Bulgaria in these bodies. Bulgaria is the host authorities for 9 subsidiaries and one significant branch; as a result, the BNB has signed multilateral agreements, based on the EBA Template for a Multilateral Cooperation and Coordination Agreement on the Supervision and participates in 10 Supervisory Colleges. According to the authorities, participation has been very active and fruitful (especially with the Banca d’Italia) and there has not been any budgetary restriction for staff to attend the meetings. The SCs in which the BNB participates are an opportunity to collect information on groups’ structure and shareholdings. Also, the BNB has recently used the framework of SC for requesting the home supervisor to provide the recovery plans of two foreign banks which did not accommodate BNB requests. Regional cooperation and cooperation with non-EU countries The LCI also governs the condition for cooperation and information exchange with non-EU members. Article 88 stipulates that in performing its supervisory functions, the BNB may conclude agreements with other central banks or supervisory authorities of third countries on cooperation and information exchange on a reciprocal basis, making the commitment to keep bank and professional secrecy. To that end, the BNB has signed Memoranda of Understanding with third countries, e.g., Turkey, Kosovo, Macedonia, Albania, and other South Eastern Europe countries). Bulgaria is a member of the Group of Banking Supervisors from Central and Eastern Europe (BSCEE). The members of BSCEE consist of banking supervisory authorities from Albania, Austria, Belarus, Federation of Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Russia, Serbia, Slovak Republic, Slovenia, Ukraine, and Moldova. The BSCEE Group aims to, among other things, (i) promote and maintain close cooperation and communication among the Central and Eastern European banking supervisory units, (ii) facilitate the Central and Eastern European banking supervisory authorities for a better performance of their supervisory functions, (iii) provide possibility for exchange of supervisory techniques, experiences, information and know-how, and (iv) help with the integration to the European banking supervisory system. Bulgaria is also a member of the South Eastern Europe Initiative that comprises several supervisory authorities from South Eastern Europe (e.g., Albania, Armenia, Greece, the Federation of Bosnia and Herzegovina, Cyprus, Georgia, Moldova, Montenegro, Macedonia, Romania, Serbia). The Initiative promotes a more structured cooperation in the field of banking supervision in order to enhance financial stability in South Eastern Europe and improve the effectiveness and efficiency of supervisory measures. An MoU has been signed between members countries that includes provisions on information exchange, convergence of supervisory practices, monitoring banking groups’ systems and controls, crisis management, cooperation in the field of AML/CFT and confidentiality requirements.
EC3	The supervisor may provide confidential information to another domestic authority or foreign supervisor but must take reasonable steps to determine that any confidential information so released will be used only for bank-specific or system-wide supervisory purposes and will be treated as confidential by the receiving party.
Description and findings re EC3	The LCI contains several provisions on confidentiality and determines the condition under which professional secrecy can be lifted, including with foreign supervisors. As stipulated by Art. 63 (1), professional secrecy –as opposed to bank secrecy- (art. 62) applies to the information which the BNB obtains or generates for banking supervision purposes or in relation thereto, and whose disclosure could damage the commercial interest or reputation of a bank or its shareholders. The same article stipulates that this information covered by professional secrecy can be disclosed under certain circumstances strictly defined. BNB staff can share information with the Bulgarian Deposit Insurance Fund, the State National Security Agency (in particular for AML/CFT purposes) and other relevant counterparties, including but not limited to, liquidators of banks in case of bankruptcy proceedings, auditors of credit institutions, etc. In practice, the BNB has signed MoUs with domestic bodies that govern the conditions for information exchange (see EC1). The same LCI describes the conditions under which confidential information can be shared with foreign counterparties like Member States’s supervisors, and authorities responsible for the oversight of banks under bankruptcy, liquidation or other similar proceedings. The BNB can also exchange information with the authorities which administer deposit-guarantee schemes in Member States, the ECB as well as the European Systemic Risk Board (ESRB). The same law stipulates that the persons and bodies empowered to request and receive information covered by professional secrecy are obliged to keep it confidential and may use it only for the purpose for which they have requested it or for which it was provided to them, according to the law or the agreements concluded, and shall not provide it nor disclose it to third parties, unless otherwise stipulated by law. When it comes to non-EU jurisdictions’ supervisory authority, any information subject to professional secrecy may be provided as long as certain conditions are met: (i) the conditions for the exchange are stipulated in an agreement for cooperation; (ii) the recipient ensures at least the same level of protection of information as provided for in the LCI; (iii) the recipient is authorized and agrees to provide information of the same type to the BNB, where needed, (iv) the information exchange is intended for supervisory purposes; and (v) the recipient has justified the needs for the requested information (Article 66, items 1 - 4 and Article 88 - LCI). The members of the Governing Council, employees, external auditors, experts and other persons working for the BNB shall keep the professional secrecy even after the termination of their relations with the BNB.
EC4	The supervisor receiving confidential information from other supervisors uses the confidential information for bank-specific or system-wide supervisory purposes only. The supervisor does not disclose confidential information received to third parties without the permission of the supervisor providing the information and is able to deny any demand (other than a court order or mandate from a legislative body) for confidential information in its possession. In the event that the supervisor is legally compelled to disclose confidential information it has received from another supervisor, the supervisor promptly notifies the originating supervisor, indicating what information it is compelled to release and the circumstances surrounding the release. Where consent to passing on confidential information is not given, the supervisor uses all reasonable means to resist such a demand or protect the confidentiality of the information.
Description and findings re EC4	BNB staff is required to observe professional secrecy obligations that are intended to protect the confidentiality of supervisory information. These obligations can be found in Art. 65 of the LCI and stipulate that BNB staff (i.e members of the Governing Council, employees, external auditors, experts and other persons working for the BNB) shall use the information received from the Member States’ competent supervisory authorities only for the performance of the BNB supervisory responsibilities and only for the following purposes: (i) to check if the conditions for granting a bank license have been met, (ii) to facilitate the supervision on a consolidated or a solo basis, including for monitoring liquidity, solvency, large exposures, managerial and accounting procedures, and internal control mechanisms; (iii) to apply measures and sanctions in accordance with this Law or (iv) in proceedings for appeal against administrative acts of the BNB in an administrative or judicial procedure. Confidential information may be provided by the BNB to the Member States’ competent supervisory authorities, the European Systemic Risk Board, the European Banking Authority and the European Securities and Markets Authority as long as these authorities are also bound by professional secrecy. Also, as set forth in LCI Art. 65(3), when the information covered by professional secrecy comes from a foreign body, it may be disclosed or provided only with the express consent of the competent body which has provided the information and, where applicable, only for the purpose for which the consent has been given. In this regard, the MOU reviewed by the mission contains provision addressing the treatment of confidentiality information. The language is relatively standard and governs information acquired by BNB in the course of performing its duties and information received from other supervisors. Lastly, any information received by the BNB employees during on-site examinations carried out in a Member State may not be provided without the express written consent of the competent supervisory authority of the Member State where the examination took place.
EC5	Processes are in place for the supervisor to support resolution authorities (e.g., central banks and finance ministries as appropriate) to undertake recovery and resolution planning and actions.
Description and findings re EC5	Bulgaria has not developed yet a single legal framework for the recovery and resolution of credit institutions and has not established a Resolution authority. When the Bank Recovery and Resolution Directive (BRRD, 2014/59/EU) is transposed into the domestic legal regime, Bulgaria will have processes in place that will permit resolution authorities (likely the BNB) to undertake recovery and resolution planning and actions, as required by this EC.
Assessment of Principle 3	Largely Compliant.
Comments	BNB is in a position to exchange information and to cooperate effectively with home supervisors over Bulgaria-based subsidiaries of foreign banks through a number of bilateral MOUs. Adequate information sharing arrangements are also in place with all relevant domestic authorities. During interviews, assessors were told that the authorities are satisfied with the quality and effectiveness of existing cooperation arrangements. There are however a certain number of areas where some improvements would be needed. For AML/CFT purposes, the current MoU governing cooperation and information exchange between the BNB and the FIU is no longer valid. The Financial Intelligence Agency (FIA) was initially established as an administrative-type FIU within the Minister of Finance. In 2008, the FIU was transformed into the Financial Intelligence Directorate (FID) within the State Agency for National Security (SANS) pursuant to the Law on State Agency for National Security (LSANS). However, the MoU signed in 2003 with the then FIA has not been revised after the establishment of the new authority. A revised draft version has been in the making for three years and the authorities are encouraged to finalize it. With respect to the issue of safety net, a new draft law is being prepared to transpose into the Bulgarian regime the EU directive 2014/49 on deposit guarantee schemes. The current mechanisms for cooperation and information sharing between the BNB and BDIF was signed in November 1999 and is now outdated. In particular, there is a need to reflect the changes in powers and responsibilities stemming from the new law. Along the same lines, once the draft law transposing in Bulgaria the EU BRRD is enacted, the BDIF will exercise new responsibilities as Resolution Fund while the BNB will likely to be designated as the resolution authority.18 Here again, a thorough revision of the existing MoU between the two authorities will be warranted. In the area of external audit, the Commission for Public Oversight on Statutory Auditors (COPSA) was established following the amendments of the Independent Financial Audit law adopted by the National Assembly in June 2008. The law regulates the establishment and the functioning of the public oversight system of the statutory auditors in Bulgaria. Public oversight of this profession is exercised by CPOSA which is an independent body in charge of the oversight over acquisition of competence, registration of statutory auditors and audit firms, adopting and observing standards for professional ethics, internal quality control of auditors firms, audit quality assurance system, investigation and enforcement. Establishing mechanisms of cooperation and information sharing between the BNB and the CPOSA would be beneficial considering the complementarities of the two bodies. There is no formal mechanism of cooperation between the BNB and the MoF particularly for bank resolution. This would require the enactment of proper legal regime for bank resolution, the designation of an official resolution authority with adequate powers and the development of appropriate procedures to support the latter. With respect to crisis management, the Financial Stability Advisory Council (FSAC) approved in March 2011 the members of the Permanent National Standing Group on Financial Stability and following a proposal on behalf of the BNB Governor entrusted it with the responsibility to develop a National Financial Crisis Action Plan. In July 2011 the FSAC approved this plan. Its main purpose is to outline the institutions’ actions in times of crises so that the normal economic and financial sector processes are ensured and the confidence in public institutions is maintained. According the the BNB, during the KTB crisis in June 2014 the BSD’s actions, in particular the activation of the daily reporting framework and the continuous analysis of the situation, were in accordance with the main provisions of the plan mentioned above. The authorities may wish to consider the following recommendations: Establish mechanisms for cooperation between the BNB, the MoF and other financial institution regulators to undertake recovery and resolution planning; Speed up the revision of the MOU with the Bulgarian Deposit Insurance Fund; Finalize the new MoU between the BNB and the Financial Intelligence Unit; and Cooperate with the Commission for Public Oversight on Statutory Auditors (CPOSA), in particular on policy issues or information that is publicly available and sign an MoU in due course.
Principle 4	Permissible activities. The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined and the use of the word “bank” in names is controlled.
Essential criteria
EC1	The term “bank” is clearly defined in laws or regulations.
Description and findings re EC1	The LCI (art. 2) defines a bank as a legal entity accepting deposits or their equivalents (other repayable funds) and extending loans and other financing on its own account and risk. The BNB also uses alternatively the term credit institution for a bank, as opposed to financial institutions which include leasing companies, payment services providers, financial holding companies, payment institution, and asset management companies (LCI, art. 3).
EC2	The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined either by supervisors, or in laws or regulations.
Description and findings re EC2	Permissible activities of institutions that are licensed and subject to supervision as banks are defined under the LCI. In effect, art. 2, subparagraph2 lists in detail the financial activities permissible for banks, including those that are directly ancillary or supplemental. According to art. 5 of the LCI, a bank may not engage in financial activities that are not included in the authorization. According to the BNB Ordinance No2 on the Licences, Approvals and Permissions granted by the BNB, a license for a bank confers the right to conduct only the activities specified in the license. Within the BNB, the Special Supervision Directorate carries out specific thematic inspections including on-site checks in companies that could perform unauthorised banking activities. Such checks are usually initiated upon alerts submitted by other institutions or natural persons.
EC3	The use of the word “bank” and any derivations such as “banking” in a name, including domain names, is limited to licensed and supervised institutions in all circumstances where the general public might otherwise be misled.
Description and findings re EC3	As stated in the LCI, no one shall use the word ‘bank’ or any derivative thereof without having received a banking license pursuant to this law. In effect, according to Art. 6. (1), a person who does not have a license to conduct bank activity shall not use either in his name or in his advertising or other activity the word ‘bank’ or any of its derivatives in a foreign language. The same article, in its subparagraph (3) also stipulates that the name of a bank may not bear a resemblance to the name of another bank operating in the Republic of Bulgaria.
EC4	The taking of deposits from the public is reserved for institutions that are licensed and subject to supervision as banks.19
Description and findings re EC4	As stipulated by art. 2 (5) of the LCI, the taking of deposits from the public can be carried out only by: (i) a person who has been granted a bank license by the BNB; (ii) a bank with a seat in a third country, which has been granted a license by the BNB to conduct bank activities in the Republic of Bulgaria through a branch; and (iii) a bank authorized by the competent authorities of a Member State to carry out bank activities, which provides services on the territory of the Republic of Bulgaria either directly or via a branch. Along the same lines, art. 5 (2) states that the activity of taking deposits from the public is explicitly regulated by law and by the European Law and is subject to supervision aimed to protect depositors and investors. According to the authorities, there are a growing number of consumer credit companies currently operating in the country. The latter, which are registered at the BNB but not supervised, provide micro loans (below 200 euros) to individuals. The mission was told that none of them collect deposits.
EC5	The supervisor or licensing authority publishes or otherwise makes available a current list of licensed banks, including branches of foreign banks, operating within its jurisdiction in a way that is easily accessible to the public.
Description and findings re EC5	The licenses granted by the BNB are recorded in a register kept by it under Article 15, para 5 of the LCI. The BNB maintains a list of current licensees accessible on its website BNB http://www.bnb.bg).
Assessment of Principle 4	Compliant.
Comments
Principle 5	Licensing criteria. The licensing authority has the power to set criteria and reject applications for establishments that do not meet the criteria. At a minimum, the licensing process consists of an assessment of the ownership structure and governance (including the fitness and propriety of Board members and senior management)20 of the bank and its wider group, and its strategic and operating plan, internal controls, risk management and projected financial condition-(including capital base). Where the proposed owner or parent organization is a foreign bank, the prior consent of its home supervisor is obtained.
Essential criteria
EC1	The law identifies the authority responsible for granting and withdrawing a banking license. The licensing authority could be the banking supervisor or another competent authority. If the licensing authority and the supervisor are not the same, the supervisor has the right to have its views on each application considered, and its concerns addressed. In addition, the licensing authority provides the supervisor with any information that may be material to the supervision of the licensed bank. The supervisor imposes prudential conditions or limitations on the newly licensed bank, where appropriate.
Description and findings re EC1	The LCI (art. 13) provides the statutory requirements for the licensing of a bank. The BNB has the exclusive right for the issuance of bank licenses and no person shall engage in financial activities without a license issued by the BNB. Foreign banks wishing to establish a subsidiary on the territory of Bulgaria need also to receive a license from the central bank. The BNB has the right to reject an application if the criteria set in the law or in the BNB ordinance No 2 are not fulfilled or if the information provided is inadequate (art. 16). The law also grants the BNB power to set additional requirements and necessary information to be provided while applying for a banking license. The BNB can also issue a limited license (see EC 2). It is noteworthy that in practice, the initiative for granting a license is a joint competence shared between the Governor and the Deputy Governor. In effect, art. 151, para. 1 of the LCI stipulates that for any issuance, rejection or revocation of a license, a motion should be presented by the Deputy Governor in charge of Banking Supervision Department, jointly with the Governor, to the BNB Governing Council. The power of withdrawing the license also belongs to the Governing council of the BNB. The LCI, art. 36-38 set the conditions for the withdrawal, including when, for example, the bank becomes insolvent, the bank conducts unsound practices, the license has been obtained on the basis of false information, the bank has not commenced operations within twelve months after receiving the license, the bank no longer meets the conditions under which its license was granted or does not ensure the security of the assets entrusted to it. In November 2014, the BNB revoked the license of the troubled Corporate Commercial Bank on the ground that, as indicated by external audit reports, the institution had a negative own capital of 3.75 billion levs ($2.4 billion/1.9 billion euro) as of September 30, and no longer met the relevant capital requirements. In Bulgaria, all banks are following traditional universal banking model and are set up as Joint Stock Companies. There are no-other types of banks (e.g., cooperative banks, mutual saving companies) in the country.
EC2	Laws or regulations give the licensing authority the power to set criteria for licensing banks. If the criteria are not fulfilled or if the information provided is inadequate, the licensing authority has the power to reject an application. If the licensing authority or-supervisor determines that the license was based on false information, the license can be revoked.
Description and findings re EC2	Criteria for licensing banks are prescribed by the LCI. Art. 13, 14, 15 and 16 of the LCI set the requirements to be met in order to obtain authorization for banking business. The law also grants the BNB power to set additional requirements and necessary information to be provided while applying for a banking license. Other important provisions relevant to licensing can be found in the BNB Ordinance No2. The most relevant information to be provided by the applicants are: a) article of association; b) appropriate information about fitness and propriety of administrators; d) documents containing information on the paid in capital of the bank; e) information about the 20 largest shareholders (name, address and professional activity over the past 5 years); f) origin of funds for persons with subscription of 3 percent and above of the capital g) a business plan with exhaustive description of the activities to be performed, customer and product structure, objectives, policy and strategy of the bank, financial forecast of development over a three-year period; h) a description of the managing and organizational structure including the activities of individual organizational units, distribution of responsibilities among managing directors and other administrators, organization and management of the bank’s information system; i) a description of the internal control systems and the risk management systems, and a program of anti-money laundering measures; and j) the names and addresses of the members of the supervisory and management boards (board of directors) of the bank, and detailed written information concerning their qualifications and professional experience. Further, prior to deliver a license, the BNB is responsible for conducting a review of the valididity and accuracy of the materials provided by the applicant. In virtue of art. 14, the license will be issued if certain conditions are met (in addition to the criteria mentioned above). In particular, the BNB will check whether (i) the activities that the applicant intends to carry out ensure the required soundness and financial stability; (ii) the members of the management board and of the supervisory board are not subject to a legal injunction to hold such a position; (iii) in case of groups, the parent undertaking will not place obstacles to conducting consolidated supervision; and (iv) there is no evidence that the existence of close relations between the bank and other persons can hinder the efficient exercise of banking supervision. The above LCI allows the BNB to reject a bank’s business if the documents submitted by the applicant contained incomplete, contradictory or unreliable information. This happened once in 2008 due to the lack of key information in the application particularly in regard to criminal records and professionalism of prospective applicants. In the same vein, the BNB can revoke authorization for banking business if the authorization was based on false information or if the bank is no longer able to meet the conditions for performing its business (Art. 36 of the LCI). Over the past five years, one license has been revoked (decision of the GC dated November 6, 2014) due to the insolvency of the institution. The BNB can also issue a limited license if the applicant is not prepared to carry on all activities as planned. The BNB can limit the scope of these activities. There is no formal mechanism (at least written procedures) to subject the newly established bank to some sort of follow up inspection visit to ascertain that the bank is performing according to the terms and conditions of the license. It is the duty of the Legal Services and Administration Directorate (LSA) to carry out administrative activities in relation to issuing licenses, authorisations, and approvals, maintaining license files and data about the current status of banks and respective registers, and passportisation when the BNB is notified by a bank of an EU Member State. Three staff of the LSA are assigned to these activities. The latter cooperate with their colleagues from other directorates, especially those from the Credit Institution Supervision Directorate before formulating an opinion on the business plan of the prospective bank. The LSA will also consult the Special Supervision Directorate to perform checks on the shareholding structure of the applicant, including for the determination of the UBO of companies holding qualifying interests in the capital of the future bank.
EC3	The criteria for issuing licenses are consistent with those applied in ongoing supervision.
Description and findings re EC3	Necessary requirements to be met while applying for a banking license are broadly consistent with those applied in ongoing supervision. As detailed above, criteria include complying with shareholding limits, executives (which includes Board members) to meet fit and proper criteria, the entity to meet prudential standards, have adequate internal control and risk management systems in place, adequate human resources, etc.
EC4	The licensing authority determines that the proposed legal, managerial, operational and ownership structures of the bank and its wider group will not hinder effective supervision on both a solo and a consolidated basis.21 The licensing authority also determines, where appropriate, that these structures will not hinder effective implementation of corrective measures in the future.
Description and findings re EC4	The LCI read in conjunction with the BNB Ordinance No2 on Licenses, Approvals and Permissions granted by the BNB and Ordinance No20 on the Issuance of Approvals to the Members of Board of Directors and Supervisory Board of Credit institutions enable the BNB to determine that the proposed legal and managerial structures of the bank will not hinder effective supervision on a solo and consolidated basis. The organizational structure of the bank is vetted during the BNB licensing process both in terms of the management structure of the organization and the capacity of the structure to facilitate sound risk management and internal control systems. The applicant has to submit –and the BNB to review-all relevant data, comprising, inter alia, a description of the managing and organizational structure including the activities of individual organizational units, distribution of responsibilities among managing directors and other administrators, organization and management of the bank’s information system, etc. The BNB process also entails the analysis of a business plan of the bank with exhaustive description of the activities to be performed, customer and product structure, objectives, policy and strategy of the bank, financial forecast of development over a three-year period. Also, the suitability of shareholders (3 percent of sharing and above) as well as their possible links to related parties are also examined by the supervisors. In doing so, the BNB will pay particular attention to the following aspects: -persons having significant shareholdings cannot, either by their activities or through their influence, hamper bank’s safety and soundness; -the existence of close relations between the bank and other persons does not hinder the efficient exercise of banking supervision. With respect specifically to consolidated supervision the BNB will verify that: -the applicant’s charter does not contain provisions, which hinder the application of principles and the best practices of corporate management; -the parent undertaking (in case of a financial holding company, mixed financial holding company or mixed holding company) will not place obstacles to conducting consolidated supervision; -the requirements or difficulties in applying third country’s particular regulation or administrative acts regulating one or more legal or natural persons, with whom the bank has close links, will not impede the efficient conduct of banking supervision. The LCI also stipulates in art.24 on mutual recognition that when it comes to a bank with a seat in Bulgaria but which carries out activities in a member state either through a branch or directly if it is a subsidiary of a Bulgarian bank, or is jointly owned by two or more banks licensed in Bulgaria, the BNB shall exercise a consolidated supervision over the bank above and shall monitor its shareholders’ structure following a procedure defined by the BNB. The team found no indication according to which the BNB determines, where appropriate, that these structures will not hinder effective implementation of corrective measures in the future.
EC5	The licensing authority identifies and determines the suitability of the bank’s major shareholders, including the ultimate beneficial owners, and others that may exert significant influence. It also assesses the transparency of the ownership structure, the sources of initial capital and the ability of shareholders to provide additional financial support, where needed.
Description and findings re EC5	The legal basis for identifying and determining the suitability of the bank’s major shareholders, and others that may exert significant influence can be found in the LCI art. 13, (2) paragraph 7 and 8 as well as in the BNB Ordinances No 2 and 20. Bank’s shareholders with significant interest are subject to BNB scrutiny. As stipulated in the regulations above, the prospective bank should provide the name and address of the persons who have directly or indirectly subscribed for 3 percent and above of the voting shares. The same information is also required for all persons holding 10 percent or more of bank’s capital (the major shareholders) and specifically for the 20 largest shareholders (LCI art. 14 (3)). Further, the BNB will determine if the qualification, experience –during the past five years-, integrity of the shareholders with significant interest are appropriate, including their reliability to provide additional financial support, where needed. As indicated in the law, the BNB will have to be informed –in writing- about the origin of funds used by shareholder for acquiring 3 percent and above of the capital (to ascertain their transparency and legitimacy) and whether the shareholders have used their own resources to acquire their holdings. Moreover, the law stipulates that the BNB will have to assess whether major shareholders’ financial capacity is commensurate with the scale and activities of the bank (Art. 14, par. 3, p. 12 of the LCI). In case of a legal entity having 10 percent and more of voting rights in a bank, the Ordinance No2 subject the entity to provide, inter alia, the following data: -structure of the capital and its allocation between the shareholders (partners), -article of association -auditor’s reports and financial statement for the last three years -balance sheets, income statement, and -detailed information about the structure of the group in which the applicant participates. Moreover, in case of granting a license to a foreign bank, the BNB will hold consultation with the home supervisor with the view to obtain information about the shareholders (art. 13 (6)). Lastly, the BNB is empowered by law to request any additional information deemed necessary for making a judgment about the suitability of the bank’s shareholders with significant interest (art. 13, (2) 9). Regarding the concepts of indirect holding and beneficial ownership, the LCI does not provide a specific definition of UBO; art. 13 (2) subparagraph 8 stipulates that for licensing purposes, the application should contain “a document of registration and written data about the persons holding shares or equity in their capital or property, or controlling them – for legal persons under item 7 [i.e., shareholders holding 3 percent and above of voting rights]. There are two provisions however containing the concept of UBO. The first one can be found in the AML law (a customer acting on his own behalf and for his own account or on behalf and for the account of a third party). It is not clear however whether the obligation to disclose the true identity of the ultimate beneficial owner applies in case of a person applying for a license. The second one, contemplated in Ordinance #2, art 19 (4) seems to apply only in the case where the acquisition of bank shares is done by a trust.22 In practice it is the role of the Legal Services and Administration Directorate to perform the assessment of suitability, on the basis of the “fit and proper” criteria, concerning members of the managing bodies of credit institutions. It is noteworthy that the Special supervision directorate conducts detailed analysis in respect of banks’ ownership structures and control. The main objective of this work is to minimise risks related to the actions of banks’ major shareholders and to understand their influence on the operations at the level of individual banks. The mission was given access to SSD reports performed respectively in 2012 and 2014, one assessing the financial status of the shareholders of a few banks and another one analyzing shareholding structure and ownership in the context of the Act on the Economic and Financial Relations with Companies Registered in Preferential Tax Regime Jurisdictions, the Persons Related to Them and Their Beneficial Owners. In that respect, the SSD expressed concerns on several key aspects relating to (i) the poor financial conditions of major shareholders (some of them exhibiting important losses or having no real activity at all) and (ii) the absence of clarity on their ultimate owners some of whom with location in off-shore centers. According to the discussion with the BNB, most –if not all- of the missing information have been collected by the SSD.
EC6	A minimum initial capital amount is stipulated for all banks.
Description and findings re EC6	The LCI y stipulates that banks must have a minimum initial capital of at least BGN 10 million (EURO 5 million).
EC7	The licensing authority, at authorization, evaluates the bank’s proposed Board members and senior management as to expertise and integrity (fit and proper test), and any potential for conflicts of interest. The fit and proper criteria include: (i) skills and experience in relevant financial operations commensurate with the intended activities of the bank; and (ii) no record of criminal activities or adverse regulatory judgments that make a person unfit to uphold important positions in a bank.23 The licensing authority determines whether the bank’s Board has collective sound knowledge of the material activities the bank intends to pursue, and the associated risks.
Description and findings re EC7	The suitability, professionalism, qualification, fitness and propriety of board of directors and supervisory board members are assessed under the conditions set forth in the BNB Ordinance No20 (28 April 2009). Further, the Regulation on the requirements to Bank’s administrators, under LCI art. 11 establishes the fit and proper requirement, including the criteria on qualification, work experience, reputation and probity (absence of criminal background). When assessing the fitness criteria, the BNB due diligence includes determining whether the elected members of the Board and those of the Supervisory body have the relevant academic background and past professional experience (e.g., at least 5 years of professional experience as manager in a bank or in a company comparable to a bank). For assessing the “propriety” of prospective administrators, prospective administrators are required to fill a detailed questionnaire called “Fitness and Propriety Test Question Form) to prove their fitness and propriety. The form reviewed by the mission appears very detailed covering a wide range of issues including, but not limited to, professional background, former management positions, absence of criminal or administrative sanctions and conflict of interest. The form, however, does not require information about administrator’s income and assets. This due diligence also extends to legal entities managed by elected members of the Board. Regarding potential conflict of interest, the BNB will determine, based on information provided, the personal interests of the applicants, including possible existence of any relationship of the elected members of the Board with other persons in relation to the bank The LCI, Art. 11, (1), subparagraphs 7 and 9 states that a member of the Board of directors as well as a procurator should not be [married] to or a relative, in direct or lateral lineage up to the third degree, to another member of the managing or controlling body of the bank and is not in factual cohabitation with such a member. The Ordinance also requires applicant to submit a declaration in writing stating that own resources have been used for the subscribed shares and also stating the origin of funds used to make these contributions. However, the mission was told that there is no further due diligence to ascertain the reputable source of funds, beyond the analysis of financial statements and the terms of the written declaration. There is no specific requirement for the individual Board members or the Board collectively to have a sound knowledge of the material activities that the bank intends to pursue, and the associated risks.
EC8	The licensing authority reviews the proposed strategic and operating plans of the bank. This includes determining that an appropriate system of corporate governance, risk management and internal controls, including those related to the detection and prevention of criminal activities, as well as the oversight of proposed outsourced functions, will be in place. The operational structure is required to reflect the scope and degree of sophistication of the proposed activities of the bank.24
Description and findings re EC8	In the LCI, art. 14 (3) subparagraph 14, prospective banks should submit to the BNB a set of documents to support the request. This includes (i) a business plan with exhaustive description of the activities to be performed, customer and product structure, objectives, policy and strategy of the bank, financial forecast of development over a three-year period; (ii) the organizational structure; (iii) a description of the AML internal program and (iv) information on the internal audit function and risks management functions. Regarding the later, in consonance with art. 15, the license will be granted if –inter alia- the applicant has confirmed to the BNB that: -internal control rules have been drafted, including clear administrative and accounting procedures; -an internal control office is established and the recruited employees have the qualifications and professional experience required for that activity; -sound internal management rules have been drafted which include a clear organizational structure with well-defined, transparent and adequate levels of responsibilities and efficient procedures for identifying, managing, monitoring and reporting of the risks to which the bank might be exposed. Further, as stipulated in art. 15, the bank’s rules governing internal control systems and risk management should reflect the character, scale and complexity of the bank’s operations and be commensurate with the risks to which the bank may be exposed. The law however does not contain particular requirement on the oversight of proposed outsourced functions.
EC9	The licensing authority reviews pro forma financial statements and projections of the proposed bank. This includes an assessment of the adequacy of the financial strength to support the proposed strategic plan as well as financial information on the principal shareholders of the bank.
Description and findings re EC9	As contemplated in the LCI, art. 13 (2) subparagraph 3, the BNB collects the financial projections for the first three years of operations of the proposed bank. According to the authorities the materials are reviewed and analyzed with particular attention focused on the validity of the submitted documents, the applicant’s reliability and financial status. Qualifying shareholders (holding 10 percent and above of the capital) are assessed as to their financial capacity in terms of their financial strength at the time of the application, and prospective capacity to provide additional capital to the bank in the event it is needed (LCI, art. Art. 14, par. 3, p. 12). Each such prospective qualifying shareholder must provide financial information that demonstrates an appropriate level of financial capacity (BNB Ordinance 2).
EC10	In the case of foreign banks establishing a branch or subsidiary, before issuing a license, the host supervisor establishes that no objection (or a statement of no objection) from the home supervisor has been received. For cross-border banking operations in its country, the host supervisor determines whether the home supervisor practices global consolidated supervision.
Description and findings re EC10	Since Bulgaria is a member State of the European Union, the principle of the Mutual Recognition applies. As a result, the distinction should be made according to whether or not the prospective bank belongs to the EU. If the applicant is licensed in a Member State and is planning to conduct activities on the territory of the Republic of Bulgaria through a branch, a license is not needed provided that the projected activities are covered by its license and that the competent authority which has granted the license has notified the BNB (LCI, art. 20). If the applicant projects to establishing a bank on the territory of Bulgaria as a subsidiary of another bank from a Member State, a licensing procedure under Art. 13 – 15 of the LCI applies. In those cases, the BNB holds preliminary consultations with the competent home supervisory authority in accordance with Art. 13, par. 4 of the LCI. Consultations with the competent supervisory authorities cover issues related to shareholders, reputation and experience of the prospective managers, the assessment of compliance with supervisory requirements, as well as any other information of relevance to granting the license. A bank with headquarters in a non EU-Member country has to apply for a license before operating in Bulgaria through a branch. A written consent for opening of a branch issued by the respective bank supervision authority is a precondition for granting the license by the BNB. In accordance with Art. 17 of the LCI, several pre-requisites should be met. In particular, the third-country applicant bank shall submit an application with the following enclosures: -a verified copy of the registration certificate of the bank and a document issued by the registration authority containing current data on the seat and registered address, subject of activities, amount of capital, management system, and details on the persons who represent the bank; - a verified copy of the license granted by the home authorities; - a verified copy of the Charter; - a business plan including a description of the projected activities; - the organizational structure of the branch; - financial annual reports for the past three years; - a written consent for opening a bank branch given by the home authority; - a written statement of the home supervisor authority containing information on the bank’s financial status and a commitment for cooperation with the BNB; - data about the persons entrusted with the management of the branch, including their qualifications and professional experience in banking. In addition, the LCI subjects the license to other conditions and particularly if (i) the home supervisor supervises effectively the bank and its branches abroad; (ii) an agreement of supervisory cooperation between the BNB and the home supervisor has been concluded; (iii) the home country’s legislation does not create obstacles to the exercise of efficient banking supervision on a consolidated basis, (iv) bank’s financial status is sound and stable, its organizational structure is aligned with the projected activities and bank’s managers meet the requirements in terms of professional expertise and reputation.
EC11	The licensing authority or supervisor has policies and processes to monitor the progress of new entrants in meeting their business and strategic goals, and to determine that supervisory requirements outlined in the license approval are being met.
Description and findings re EC11	As indicated by the authorities, The BNB is entitled to monitor the progress of new entrants as it monitors all other banks and may undertake certain measures if the bank does not meet the criteria as set forth in the license. In particular, the BNB can revoke a license if the bank fails to commence its activity within 12 months after getting the license (LCI, art. 36). There is however no specific mechanism whereby the BNB staff monitors the progress of new entrants in meeting their business and strategic goals. One could suggest that right after the license, an on-site visit be performed to assess whether the bank is implementing the business plan approved by the founders, whether the proposed objectives and policies are achieved and whether the activities are performed according to the terms of the license.
Assessment of Principle 5	Largely Compliant.
Comments	The Bulgarian licensing regime for banks appears exhaustive. The legal and regulatory framework provides the BNB with good leverage to ensure that the licensing process is sound, particularly in relation to ownership structure and governance. The BNB retains adequate powers to require applicants and potential shareholders to submit all information required and there has been a number of instances where licenses have been refused due to concerns over fitness and propriety of prospective applicants or absence of realistic business strategies. Nevertheless, there are a few aspects described below that would merit attention, particularly because the BNB has no day to day exposure to licensing; the last applications were examined in 2008/2009. There is no explicit reference in the LCI to the concept of UBO; the latter is captured only in the AML law. The LCI refers several times to the concept of indirect holdings or indirect acquisition but does not provide an explicit definition of the ultimate beneficial owner. It would be advisable to align the LCI on the AML law so that both laws provide a common definition of UBO. As As discussed above, prospective applicants are obliged to submit information on the source of funds to be used as capital. This includes a declaration in writing stating that own resources have been used for the contributions paid for the subscribed shares and the origin of funds used to make these contributions. However, the types of supporting information that the applicant should provide to establish the legitimacy of funds are not specified in the law or in the ordinance. In addition, the mission was told that there is no further due diligence to ascertain the reputable source of funds, beyond the analysis of financial statements and the writing statement of the applicant whose terms, in practice, are too general. The BNB should enhance its due diligence in that regard; this could entail, for example, approaching the FIU as well as the police (criminal records registry, Interpol office), and other financial sector supervisors in case the same applicants already have engagement with other parts of the financial sector. As set forth in the Ordinance #2, prior to filing an application for a license, the applicant shall hold “preliminary consultations” with the Deputy Governor in charge of the Banking Supervision Department. The ordinance does not specify however the purpose and objectives of this consultation with prospective applicants. It would be useful to clearly indicate in the ordinance that these consultations aim to evaluate further the bank’s proposed Board members and senior management as to their expertise and integrity. Besides, these consultations take place in practice before the application for a license is formally submitted to the BNB; as a result, according to the discussion during the mission, a representative of the applicant could take part of the preliminary consultations in lieu of the prospective applicant. Besides, if the preliminary consultation is mandatory, there is no provision about holding interviews after the formal submission of the application. The Deputy Governor can decide whether or not to hold an interview with such applicant, but it is optional. As a result, in theory at least, there might be situations where there is no formal meeting with the prospective applicants before the license if granted. The authority are advised to amend the Ordinance to establish formal and mandatory mechanism for interviewing future administrators in addition to preliminary consultations. The BNB has the power to restrict in the banking license certain transactions or activities, for which the BNB considers the applicant unqualified, or for which the other requirements, stipulated in a law, are not met. It would be useful to set up a procedure subjecting newly licensed institutions (particularly those with limited scope) to more intensive supervision during their first year of operation. It is recommended to: Include in the LCI a clear definition of UBO in consonance with the definition provided by the AML law; Enhance BNB due diligence with respect to the origin of funds used for disbursement of capital; Include in the relevant regulation a provision requiring the individual Board members or the Board collectively to have a sound knowledge of the material activities that the bank intends to pursue, and the associated risks; Establish formal procedures to subject the newly established bank to follow up on-site inspection to ascertain that the bank is performing according to the terms and conditions of the license; Establish formal mechanism for interviewing applicants after the application is formally submitted to the BNB. The content and objective of these interviews should also be specified and made mandatory; and Include in the Fitness and Propriety Test Question Form information about administrator’s income and assets.
Principle 6	Transfer of significant ownership. The supervisor25 has the power to review, reject and impose prudential conditions on any proposals to transfer significant ownership or controlling interests held directly or indirectly in existing banks to other parties.
Essential criteria
EC1	Laws or regulations contain clear definitions of “significant ownership” and “controlling interest.”
Description and findings re EC1	The Bulgarian regime regarding transfer of significant ownership is governed by several provisions of the LCI as well as by the BNB Ordinance № 2. These provisions empower BNB to (i) approve such transactions; (ii) lay out the criteria for approval of the transfer by making several references to the licensing rules; (iii) stipulate the grounds for rejection of the transaction; and (iv) describe the possible sanction of an ownership interest gained without going through the regulatory process. As set forth in art. 28 of the LCI a preliminary approval of the BNB is needed when the holdings of a natural or legal person, as well as of persons acting in concert are reaching or exceeding the thresholds of 20, 33 or 50 per cent of the shares or voting rights. The same approval is required when holdings of the same persons mentioned above are becoming “qualifying.” There is no specific definition of “qualifying interest” in the law26 but it is understood that any acquisition of share above 10 percent provides such qualification. A controlling interest is not defined either but according to the BNB, it is understood as a relationship in which a shareholder owns directly or indirectly the majority of shares or voting rights (more than 50 percent), and de facto determines the policies or practices of the institution, or controls in any way the election, appointment and dismissal of the majority of the bank’s administrators. Although there are no specific definitions of “qualified interest” and “control,” Bulgaria, in that respect, applies the definitions of the EU Regulation 575/2013 by virtue of the Additional provisions of LCI - § 1. (1) points 6 and 7. The LCI does not define the concept of “significant ownership” either but it is assumed that any person holding 10 percent or more of the voting rights has a significant ownership. The definition of “action in concert” can be found in the LCI (additional provisions (i) 4 (a). Pursuant to Art. 32 of the LCI, where a person has acquired 3 or more than 3 per cent of the shares or the voting rights, the Central Depository shall notify the BNB of the person’s name and address following the recording of acquisition in the book of shareholders. The acquirer is obliged to submit, at BNB request, a series of documents (comparable to those required to get a license; e.g., name and address of the subscribers, professional experience, origin of funds –see CP 5 for more details).
EC2	There are requirements to obtain supervisory approval or provide immediate notification of proposed changes that would result in a change in ownership, including beneficial ownership, or the exercise of voting rights over a particular threshold or change in controlling interest.
Description and findings re EC2	The Bulgarian regime contains provisions whereby changes in ownerships or the exercise of voting rights over a certain threshold require BNB intervention. Such changes are made upon the written approval of the BNB, which is issued in accordance with the LCI, which gives the BNB the power to enforce the “fit and proper” requirement. According to Ordinance No. 2, Art.18, any person that intends to acquire holding in the capital of a bank is required to notify the BNB by submitting an application specifying whether the planned acquisition is: - a primary acquisition or an increase of the holdings in the capital, - a direct or indirect acquisition, - is made by the acquirer on his own, or with other persons acting in concert. In addition, natural persons and legal entities shall include in their applications data on bank shares owned by them, the number of shares planned to be acquired and which of the thresholds is to be achieved and/or exceeded. In case of indirect acquisition, data on the manner of implementing the planned acquisition shall be included, as follows: - by acquiring qualifying holding or its increase in the capital of a shareholder who exercises control over the bank, or - by acquiring control over a shareholder owning qualifying holding in the bank. In case the acquisition -or part of- is implemented in concert, the application shall contain detailed information about legal and actual grounds of the actions taken in concert with other persons. Once the BNB has received the application for transferring significant ownership, the Legal and Administrative Directorate will perform a series of due diligence in a timeframe of 60 days. In particular, the BNB will ascertain whether the applicant/acquirer has a good standing, is financial sound and willing to provide financial support if needed. Also, special attention will be given to the following: (i) if the bank becomes a part of a group, the structure of this group shall not impede implementation of prudential banking supervision; (ii) there is no obstacle for exchanging information between the supervisory authorities and there is clear distribution of the responsibilities amongst them; (iii) there is no reasonable grounds to suspect any money laundering or terrorist financing activity. Further, the BNB will capture and analyze the documents and information about the applicant (Article 19a.). In case the applicant/acquirer is a natural person, the application should contain the following: 1. the full name of the applicant, citizenship, identity card number, permanent and present address; 2. a certificate showing no previous conviction or relevant criminal records; 3. details on qualifications and professional experience; 4. information about previous compulsory administrative measure/disciplinary actions. The BNB will also capture information about the financial condition of the acquirer in terms of assets (revenues and earnings, including their sources, property owned) and liabilities (pledges, mortgages in favor of third parties, issued guarantees and other commitments). The BNB will also check about the existence of possible financial linkages or interests of the applicant with affiliated persons of the bank, including bank shareholders, members of the board or controlling bodies, or with any person that may cause conflict of interest with the bank. In case the applicant is a legal entity, the BNB will require other information: a certified transcript of the Articles of Association, a list of the shareholders (associates/partners) of the applicant up to the ultimate owner; the structure and allocation of its capital among the shareholders (associates/partners); a list containing the names and addresses of the persons who manage or represent the applicant, together with detailed written data on their qualifications and professional experience; a description of the group structure if the applicant participates in a group as a subsidiary or as a parent entity, along with its organizational and intra-group corporate structure, specifying relevant participation shares of the other persons in the group, as well as a description of the business activity of the group. The annual financial statements of the applicant for the last three years will also be submitted. In case the applicant is a trust that already exists or will be established after the acquisition, the following documents and information shall be submitted: 1. the names and addresses of the persons who will manage the assets of the trust under the terms and procedure of the contract establishing the trust and their respective shares in distribution of the asset management income; 2. the names and addresses of the persons up to the ultimate owner who are beneficial owners of the legal entity. In addition to collect data on the applicant, the BNB is, by law, obliged to perform other diligence before granting the approval, particularly in relation to the targeted bank. The central bank will be provided with information permitting an understanding of the rationale of the transfer of ownership and its possible impact of the targeted bank. As prescribed by LCI art. 19b the following documents and information concerning the target bank will be submitted: 1. data on the overall aim of the acquisition, the total number of shares acquired; the nominal and total value of the shares, the single and total acquisition price of the shares and their amount in the total capital, in percentage; 2. a written declaration concerning the origin of the financial funds for the acquisition; 3. a declaration and documents on the financing of the acquisition specifying the source of the funds and the means used to provide (transfer) funds for the acquisition. It is noteworthy that the quantity of information to be submitted by the prospective acquirers – acting alone or in concert- increases according to the level of targeted holding (less than 20 percent, between 20 and 50 percent). Pursuant to Art. 32 of the same law, where a person has acquired 3 or more than 3 per cent of the shares or the voting rights, the Central Depository shall notify the BNB of the person’s name and address following the recording of acquisition in the book of shareholders. In practice, the request for transferring significant ownership is processed by the Legal Directorate which can request additional information to the applicant, if needed. A memo will be drafted, containing an opinion on the application and will be presented to the Deputy Governor in charge of banking supervision, for review. The latter will make a determination on the application and will sign an official order for approval. It is worthwhile mentioning that the DG has full discretion to approve – or reject- any request for change in shareholding, irrespective of the amount of targeted holding. The approval will take the form of an official order of the DG in which the later “ascertaines that the conditions for issuance of the approval are met.” The order is an individual administrative act and can be challenged before the administrative court.
EC3	The supervisor has the power to reject any proposal for a change in significant ownership, including beneficial ownership, or controlling interest, or prevent the exercise of voting rights in respect of such investments to ensure that any change in significant ownership meets criteria comparable to those used for licensing banks. If the supervisor determines that the change in significant ownership was based on false information, the supervisor has the power to reject, modify or reverse the change in significant ownership.
Description and findings re EC3	As a result of the quality assessment of the proposed acquirer, as described under EC2, the BNB will issue or refuse to issue the permission. Clearance will be given only if the BNB is assured of the suitability and adequacy of the quality of the proposed acquirer, including its financial strength, qualified experience and integrity. In that respect, BNB due diligence will be comparable to those applied for licensing. As stipulated in the LCI, transactions, decisions and actions concluded and taken without BNB preliminary approval are declared null and void. The same applies when, for example, the acquisition of ownership was based on false or partial information. This will also be the case if there are reasonable grounds to suspect that, in connection with the proposed acquisition, money laundering or terrorist financing is being or has been committed or attempted, or that the proposed acquisition could increase the risk thereof. Further, the righting votes of the shareholder(s) involved can be suspended or the BNB can issue a written order instructing the shareholder to dispose its shares wrongly acquired. Over the past 5 years, 16 requests for transfer of significant ownership have been approved. There were no formal refusals. After prior consultations with the DG of the BNB in charge of Bank supervision department (as required according to BNB regulation #2), some intentions for acquisitions were withdrawn.
EC4	The supervisor obtains from banks, through periodic reporting or on-site examinations, the names and holdings of all significant shareholders or those that exert controlling influence, including the identities of beneficial owners of shares being held by nominees, custodians and through vehicles that might be used to disguise ownership.
Description and findings re EC4	As indicated in the LCI, banks licensed in the Republic of Bulgaria shall notify the BNB within 7 days from becoming aware of any acquisition or disposal of shares of their capital, as a result of which the shareholders’ holdings exceed or fall below any of the thresholds contemplated in the law (Article 28, paragraph 1). Further, on a monthly basis, banks are required to submit to the BNB reports detailing bank’s shareholders who hold qualifying holdings. Banks should indicate in these reports the name of the shareholders as well as the size of their holding. As described in the BNB Risk Assessment System manual, the BNB verifies the quality of shareholders’ participation primarily through on-site inspections and, discretionally, by requiring additional information for off-site supervision purposes. In that regard, every year, all changes in ownership structure of banks is assessed by the SSD. The department uses different sources of information including banks’ report and data from the Central Depository. Moreover, The assessors reviewed a series of reports prepared by the SSD in which particular attention has been paid to ownership composition, financial status of companies holding qualifying interest as well as ultimate beneficial ownership of those companies. In that respect, several gaps and missing information, in particular on the true identity of UBOs located overseas have been detected and reported to BNB management (see CP 5 for more details).
EC5	The supervisor has the power to take appropriate action to modify, reverse or otherwise address a change of control that has taken place without the necessary notification to or approval from the supervisor.
Description and findings re EC5	The LCI contains some enforcement provisions that allow the BNB to take appropriate actions. The Central bank can suspend the voting rights attached to the shares wrongly acquired. Another possible supervisory action is a written order issued by the BNB to force the sale of the shares which were acquired without prior permission. It is worth mentioning that under Article 28 of the LCI, shares acquired without obtaining the appropriate approval from BNB are “null and void.” The mission was also informed that the Officer in charge of the Trade register has to ensure that new acquisitions have received BNB approval.
EC6	Laws or regulations or the supervisor require banks to notify the supervisor as soon as they become aware of any material information which may negatively affect the suitability of a major shareholder or a party that has a controlling interest.
Description and findings re EC6	There is no such requirement in the Bulgarian law.
Assessment of principle 6	Materially Non Compliant.
Comments	The mission reviewed a recent file of a proposed acquisition of significant ownership in a bank by a local private company. The analysis performed by the LSA and the due diligence to ascertain that the acquisition of shares will not have negative impact of the bank were found adequate. The BNB determined in particular whether the documents and information submitted with the application show that the proposed acquirer possesses financial stability and has declared that if a financial support for the development of the Bank’s activities is needed or in case of financial difficulties the later could provide additional funds. The LSA also ascertained that there will be no change in the control the acquirer exercises over the Bank and that there are no indications that the acquisition will cause breach of the applicable supervisory regulations. However, the mission also considered a change of control/acquisition between two banks – ie the 100 percent acquisition by KTB of a French subsidiary (CB Victoria, former name Crédit Agricole, Bulgaria EAD) in June 2014. With respect to this acquisition, the most recent development with the collapse of KTB almost concomitant to the purchase of a subsidiary of a French SIFI27 raises questions about the adequacy of BNB internal processes for change of control just as much for acquisitions. It seems that due diligence was not robust or intrusive enough to ascertain that the acquirer (KTB) had the risk management capacity to properly manage the subsidiary and that, conversely, the subsidiary would be prudently managed by its new parent. In assessors’ opinion, the change of control left CVB in less stable/vulnerable position due to a failure to consider KTB properly in the light of “parent of a bank.” Changes of control are by their nature fairly uncommon events in most jurisdictions and as a result, supervisory expectations are high in ensuring that transfer of significant ownership is performed in a consistent way from the perspective of both parties. It is also important to bear in mind that these types of transactions must in fact pass two tests. It is not inevitable that passing CP7 as discussed below means that CP6 is satisfied. Implementing some mechanism to consult the external auditors before any major acquisition would be beneficial as well. Some improvements described below would be needed. The BNB has a full range of option to enforce legal provisions in relation to transfer of ownership in banks. It would be, however, useful to add a clear provision in the LCI stipulating that a person who no longer meets the requirement for holding equity (e.g., when exercising an influence that might jeopardize bank’s sound management) cannot further hold directly or indirectly new shares in the bank. The authorities should also set a specific timeframe for that prohibition and also get the power to ban the same person from holding interest, directly or indirectly in other banks. The LCI does not contain a provision requiring banks to notify the supervisor as soon as they become aware of any material information which may negatively affect the suitability of a major shareholder or a party that has a controlling interest. It is recommended to: Establish stronger mechanism to ascertain that the new owner, beyond its financial soundness, has the risk management capacity to properly manage the acquisition. Institute a mechanism whereby external auditors’ opinions are sought before approving a major transfer of significant ownership. Provide BNB more powers over shareholders who no longer meet the requirement for holding equity in banks. Include in the law a provision requiring banks to notify the supervisor as soon as they become aware of any material information which may negatively affect the suitability of a major shareholder or a party that has a controlling interest.
Principle 7	Major acquisitions. The supervisor has the power to approve or reject (or recommend to the responsible authority the approval or rejection of), and impose prudential conditions on, major acquisitions or investments by a bank, against prescribed criteria, including the establishment of cross-border operations, and to determine that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision.
Essential criteria
EC1	Laws or regulations clearly define: a) what types and amounts (absolute and/or in relation to a bank’s capital) of acquisitions and investments need prior supervisory approval; and (b) cases for which notification after the acquisition or investment is sufficient. Such cases are primarily activities closely related to banking and where the investment is small relative to the bank’s capital.
Description and findings re EC1	a) By virtue of Art. 28 of the LCI, a bank may not, without the preliminary approval by the BNB, directly or indirectly acquire shares or voting rights in another bank licensed in the Republic of Bulgaria, if as a result of such acquisition their holding becomes qualifying or if this holding reaches or exceeds the thresholds of 20, 33 or 50 per cent of the shares or voting rights. Preliminary approval from the BNB shall also be required where holdings become qualifying or the thresholds mentioned above are reached or exceeded as a result of acquisition of shares in the stock exchange or another regulated market of securities. Opening a branch in a third country is also subject to BNB approval in consonance with Art. 29, para. 1, point 1 of the LCI. The same obligation to seek BNB clearance applies to other acquisitions realized through merger (LCI – Art. 29, para. 1, point 8. as well as to the acquisition of control over a bank with a seat abroad (Art. 29, para. 1, point 8). To obtain approval, the bank shall notify the BNB via a written proposal of their decision on acquisition within the meaning of Article 28 and attach all necessary documents specified in BNB No 2 on “Approvals and Permissions Granted by the Bulgarian National Bank According to the Law on Credit Institutions.” It is worthwhile noting that acquisitions of banks in a non-financial company do not require notification –even ex post- and thus are not subject to supervisory approval. In that regard, Bulgaria applies the requirements of Art. 89 of Regulation (EU) No. 575/2013 for qualifying holdings outside the financial sector. Furthermore, Art. 26 of BNB Ordinance No. 7 on Organization and Risk Management of Banks states that as regards the application of Article 89, paragraph 3 of EU Regulation above mentioned, the bank may not have qualifying holdings in an entity outside the financial sector, which exceeds the individual limit of 15 percent of eligible capital and the aggregate limit of 60 percent of eligible capital. b) According to the BNB, there is no case for which notification after the acquisition or investment is sufficient.
EC2	Laws or regulations provide criteria by which to judge individual proposals.
Description and findings re EC2	The conditions for judging individuals proposals for major acquisitions are laid out in the LCI as well as in the ordinance No2. As stipulated in the LCI, the BNB shall carry out an assessment based on the documents and information provided by the proposed acquirer, as well as on the basis of other information and documents. BNB will issue the approval having regard to the potential influence of the proposed acquirer on the credit institution in order to ensure its sound and prudent management. Due consideration will be paid to the suitability and financial soundness of the proposed acquirer. The assessment shall be based on each of the following criteria: 1. the reputation of the proposed acquirer; 2. the financial soundness of the proposed acquirer, in particular in relation to the type of business pursued and envisaged; 3. the reputation, knowledge, skills and experience of the members of the management boards (boards of directors) and board of supervisors, as well as senior management, who will direct the business of the bank as a result of completion of the proposed acquisition; 4. whether the bank will be able as of the moment of acquisition to comply and continue to comply with the prudential requirements based on the effective legislative framework, including the LCI 5. whether there are reasonable grounds to suspect that, in connection with the proposed acquisition, money laundering or terrorist financing is being or has been committed or attempted, or that the proposed acquisition could increase the risk thereof. The requirements for considering the application are further elaborated in Articles 18-19c of BNB Ordinance No. 2. During the procedure of considering an application for major acquisition, the BNB may request from the applicant to submit additional information with the purpose of ascertaining that all conditions for granting the approval are met. The BNB shall come up with a decision on the application for granting permission within a three-month period after its receipt. Besides the grounds detailed above, the BNB can reject the acquisition if the documents submitted by the applicant contain incomplete, inconsistent, improper or untrustworthy information. The conditions for acquiring control over a bank with residence abroad are stipulated in art. 29 and 30 of BNB Ordinance No. 2. The bank shall submit an application to the BNB along with several supporting documents, including (i) data about the type, number, single and total nominal value of the shares that will be acquired, their portion in the bank’s capital and acquisition price; (ii) data about the type, number, single and total nominal value of the shares, already possessed, their portion in the bank’s capital and acquisition price; (iii) documents and data about the bank to be acquired; (iv) a certified transcript issued by the respective Commercial Register with current information concerning the name, registered office and head office address of the bank, its legal organizational structure and the persons who represent and manage the bank; (v) audited financial statements of the foreign bank for the last two years; (vi) a certified transcript of the Articles of Association (Act of Association) of the bank; (vii) information about bank’s related persons; and, most importantly, (viii) an economic substantiation of the reasons to acquire a bank with residence abroad. The analysis of the project for major acquisition is led by the Legal Directorate that will review, in addition to the materials stipulated in the regulations, other important data including prudential reports, financial conditions of the purchaser, liquidity report on both solo and consolidated basis of the new bank. The BNB will ascertain whether the acquirer has enough liquidity and can cover additional CAR. Moreover, consideration will be given to the strategy of the acquirer, particularly vis-à-vis the target bank (change of business model, business strategy, closing of branches, etc.). In this analysis, the Legal department will seek the opinion of the inspectors of the Credit Institution Directorate before submitting the application to the Deputy Governor for final decision.
EC3	Consistent with the licensing requirements, among the objective criteria that the supervisor uses is that any new acquisitions and investments do not expose the bank to undue risks or hinder effective supervision. The supervisor also determines, where appropriate, that these new acquisitions and investments will not hinder effective implementation of corrective measures in the future.28 The supervisor can prohibit banks from making major acquisitions/investments (including the establishment of cross-border banking operations) in countries with laws or regulations prohibiting information flows deemed necessary for adequate consolidated supervision. The supervisor takes into consideration the effectiveness of supervision in the host country and its own ability to exercise supervision on a consolidated basis.
Description and findings re EC3	As explained above, the BNB will perform a series of due diligence in relation to the project for major acquisition. The Central bank will ascertain that the acquisition will not expose the bank to undue risks. Also, in case of acquisition abroad, the BNB will pay attention to the requirements set forth in the Regulation (EU) No 575/2013, in particular whether the group of which the bank will become a part has a structure that makes it possible to exercise effective supervision, effectively exchange information among the competent authorities and determine the allocation of responsibilities among the competent authorities. Yet, the mission could not find any specific provision according to which the BNB also determines, where appropriate, that these new acquisitions and investments will not hinder effective implementation of corrective measures in the future.
EC4	The supervisor determines that the bank has, from the outset, adequate financial, managerial and organizational resources to handle the acquisition/investment.
Description and findings re EC4	The notification to the BNB (by submitting an application) is the trigger for initializing the procedure for granting an approval for major acquisition. According to Ordinance No2, the BNB determines that the bank has adequate financial, managerial and organizational resources to handle the acquisition (see EC 1 above and comments below).
EC5	The supervisor is aware of the risks that non-banking activities can pose to a banking group and has the means to take action to mitigate those risks. The supervisor considers the ability of the bank to manage these risks prior to permitting investment in non-banking activities.
Description and findings re EC5	As indicated under EC1, acquisitions of banks in a non-financial company are not subject to supervisory approval. It is understood, from the discussion with the BNB, that there is no particular process in that regard. Since Bulgaria applies the EU Regulation 575/2013 without any additional diligence, it is difficult to ascertain that the BNB will be in a position to monitor that a bank processing a major acquisition in non-financial sectors does not evade the regulatory limits (individual limit of 15 percent of eligible capital and the aggregate limit of 60 percent of eligible capital). The mission was told that in case of breach with the EU limits, deduction from CET 1 will be applied. Yet, in the absence of formal BNB approval, there is no mean to determine whether an investment in or major acquisition of a non-banking company does not pose a risk to the group. The BNB has no ability either to ascertain that the bank has the ability to manage the risk.
Additional Criteria
AC1	The supervisor reviews major acquisitions or investments by other entities in the banking group to determine that these do not expose the bank to any undue risks or hinder effective supervision. The supervisor also determines, where appropriate, that these new acquisitions and investments will not hinder effective implementation of corrective measures in the future.29 Where necessary, the supervisor is able to effectively address the risks to the bank arising from such acquisitions or investments.
Description and findings re AC1	It is not a usual (or frequent) practice for BNB to approve the major acquisitions or investments by other entities in the banking group. According to BNB practice and observations, such investments are rare and they are not driven by speculative or regulatory circumvention objectives. Most of them relate to set-up or buying companies which perform ancillary services to the primary banking business. However, the activities of such entities are being subject to checks and review predominately within the process of supervisory review and on-site inspections, as well as when there are relevant comments on that topic, it is put either in the Capital, Earnings or Management section (depending on the major risk driver related to that investment). The risks raised from nonbank activities, including the investments and acquisitions of the entities within the group in cases of the cross-border banking groups, are also being discussed within the supervisory colleges. As indicated by the BNB, there have been cases in the past where a bank approaches the BNB to discuss it’s planned acquisition of another non-bank company, but the main purpose of the meetings has been to discuss whether (and how) those entities shall be consolidated in the financial reports, as well as what will be the effect on the overall corporate structure.
Assessment of Principle 7	Largely Compliant.
Comments	The following aspects warrant attention: In the past five years, three major acquisitions have been approved by the BNB. Two acquisitions concerned a Bulgarian bank acquiring respectively 100 percent of a Bank located in the Republic of Macedonia and 75.961 percent of a bank established in Russia. As discussed under EC 1, acquisitions of banks in a non-financial company do not require notification –even ex post- and thus are not subject to supervisory approval. In that regard, Bulgaria applies the requirements of Art. 89 of Regulation (EU) No. 575/2013 for qualifying holdings outside the financial sector.30 However, beyond the regulation, the BNB has not established any particular protocol or procedure in relation to major acquisition of banks in non-financial companies. As a result, the BNB seems to lack the systematic ability to (i) assess compliance with the limits, (ii) determine whether an investment in or a major acquisition of a non-banking company does not pose a risk to the group and (iii) ascertain that the bank has the ability to manage the risk, especially the risk relative to regulatory capital. In the past, the BNB regulation #17 contained some restrictions in terms of acquisition/investments in certain sectors (e.g., real estate) but the ordinance has been repealed. The approval for major acquisitions is processed by the Legal Directorate with inputs from the banking supervision directorate. An opinion is formed as to whether the acquisition meets all criteria stated in the LCI and the BNB ordinance and whether the project is sound from a financial/prudential perspective. The final decision to approve or reject the acquisition rests with the Deputy Governor in charge of banking supervision only, irrespective of the magnitude of the acquisition. The mission was told that consultation with the Bulgarian Commission on Protection of Competition is established but no formal protocol has been defined. It is not clear either whether the acquisition that has been approved by the BNB is subject to follow up review; here again, the mission understood that the Credit Institution Directorate is responsible for that but no evidence has been given to the mission about the materiality of this mechanism. Against the background, it is recommended to: Subject any major acquisition to a formal follow up mechanism to ascertain that the new activities acquired do not expose the bank to undue risks. Subject major acquisitions in non-financial companies to enhanced BNB scrutiny, in particular with respect to the compliance with limits. BNB also needs to know that (i) the structure will not bring additional risks and (ii) actions can be taken to mitigate riks. Explore the possibility to set restrictions for major acquisitions in non-financial sectors deem to pose particular concern. Establish an explicit provision by which the supervisor determines, where appropriate, that new acquisitions and investments will not hinder effective implementation of corrective measures in the future.
Principle 8	Supervisory approach. An effective system of banking supervision requires the supervisor to develop and maintain a forward-looking assessment of the risk profile of individual banks and banking groups, proportionate to their systemic importance; identify, assess and address risks emanating from banks and the banking system as a whole; have a framework in place for early intervention; and have plans in place, in partnership with other relevant authorities, to take action to resolve banks in an orderly manner if they become non-viable.
Essential criteria
EC1	The supervisor uses a methodology for determining and assessing on an ongoing basis the nature, impact and scope of the risks: (a) which banks or banking groups are exposed to, including risks posed by entities in the wider group; and (b) which banks or banking groups present to the safety and soundness of the banking system The methodology addresses, among other things, the business focus, group structure, risk profile, internal control environment and the resolvability of banks, and permits relevant comparisons between banks. The frequency and intensity of supervision of banks and banking groups reflect the outcome of this analysis.
Description and findings re EC1	Since 2014, the BNB has been under a legal obligation to undertake supervision to evaluate (1) risks to which the banks are or might be exposed and (2) risks banks pose to the financial system. In respect of item (2) the BNB must take into consideration the work of the EBA and the ESRB. (Art 79c(1)LCI). The methodology used by the BNB to determine and assess the nature, impact and scope of risks to which banks and the banking system are exposed rests primarily on the Supervisory Review and Evaluation Process (SREP). The SREP is part of the overall Pillar 2 process, (Pillar 2 being the Supervisory Review Process of the Basel capital framework) and is a key tool to relate risk to an appropriate level of capitalization of the banks. In other words, The SREP is to ensure that institutions have sufficient capital to support all material risks to which their business exposes them. It should therefore reinforce the link between risk and capital, so that the institution’s risk management strategy, approaches and systems are integrated with its capital planning and thus the SREP is not a purely quantitative approach but requires qualitative assessment of each type of risk and its management, within the overall context of the institution’s internal governance. The BNB reviews the arrangements, strategies, processes and mechanisms implemented by the credit institutions and determines whether they ensure sound management and coverage of their risks. The Supervisory Review and Evaluation Process (SREP) must take into account the nature, size and complexity of the bank’s operations, and supervisory measures should be imposed, as required. This process includes: assessment of the bank’s risk profile based on a review of all significant risks and reflecting the quality of risk measurement, reporting, and monitoring systems; verification of the adequacy and stability of the bank’s internal control and Internal Capital Adequacy Assessment Process (ICAAP) systems; verification of own funds and internal capital adequacy corresponding to the bank’s risk profile. The SREP is performed on a consolidated basis, but there is a focus on assessing the individual risk profiles and management systems of the individual banks belonging to the relevant group, and the overall SREP takes into account the position of the individual banks within the group. The key factors that may be taken into consideration by BNB’s Banking Supervision Department in the Supervisory Review and Evaluation Process are: level, structure and stability of regulatory capital; credit risk, including concentration risk; market risk; operational risk; interest rate risk in the banking book; liquidity risk; ability to generate profit; organisational structure of the bank, including corporate governance and internal control; financial measures against money laundering and terrorism, financial crimes and reputational risk; level and allocation of internal capital depending on the specific risk profile of the bank. The BNB must also determine the frequency and intensity of the review and evaluation having regard to the size, systemic importance, nature, scale and complexity of the activities of the credit institution concerned and taking into account the principle of proportionality. Nevertheless, the review and evaluation must be updated at least on an annual basis – as required by the legislation. The Supervisory Review and Evaluation Process (SREP) is structured with a view to ensuring consistency of treatment across banks, keeping in mind that institutions differ in risk profile, strategy and management. The findings or “result” of the SREP is a score or rating obtained by the BNB comparing the results of RAS (Risk Assessment System) and the assessment of Risk factors (and including risks and risks controls not covered under RAS) with the outcome of the ICAAP and analyzing the consistency of these separate processes. This approach facilitates constancy of treatment across the banking sector.
EC2	The supervisor has processes to understand the risk profile of banks and banking groups and employs a well defined methodology to establish a forward-looking view of the profile. The nature of the supervisory work on each bank is based on the results of this analysis.
Description and findings re EC2	The Risk Assessment System (RAS) is the tool used by the Banking Supervision Department to organize and perform an assessment of the bank’s risk profile. The RAS is structured so as to provide common guidance, applied consistently to all credit institutions as the first phase of SREP. Through the RAS, the BNB assigns assessment scores to the material risks and controls in the bank and the quality of their management. The RAS is part of the Supervisory Review and Evaluation Process and includes an assessment of each significant risk. The system includes and operates two core methods: CAMELOS (used for the assessment in on-site inspections) and CAEL (used for the ongoing off-site assessment of the bank). The CAMELOS is performed annually, based on findings from on-site inspections, although it should be noted that inspections are not always performed annually, and the CAEL is updated quarterly though offsite evaluation. The CAMELOS composite rating is based on detailed quantitative and qualitative analysis of the overall bank’s activity, including its risk profile, financial status and the adequacy of the internal control and management mechanisms. The seven basic components used for making this assessment are: C - capital adequacy; A - quality of assets and credit risk; M - management and internal control; E - earnings and profitability; L - liquidity risk and ability to meet liabilities; O- level and management of operational risk; S - sensitivity to market risk. CAEL component ratings are based on quantitative assessment of all bank’s activities, including: risk profile, financial situation and adequacy of the internal control and management mechanisms. The four main components are: C - capital; A - asset quality; E - earnings; L - liquidity. Component ratings for both internal assessment systems (CAMELOS and CAEL) vary from 1 to 5. The composite RAS rating of 1 represents the best performance, very good systems for risk management and requires minimal supervisory attention. Composite rating 5 is the worst score and shows critical performance weak or missing systems for risk management and requires maximum attention from the supervisor. The rating system is also designed to be forward looking, in common with good practice elsewhere, so the direction of risk is indicated for the ratings.
EC3	The supervisor assesses banks’ and banking groups’ compliance with prudential regulations and other legal requirements.
Description and findings re EC3	Under the LCI (Art 79), the BNB is required to supervise banks, including to ensure the observance of the rules of the Law. The LCI (Arts 89-101) provide that supervision shall also take place on a consolidated basis for the banking groups.
EC4	The supervisor takes the macroeconomic environment into account in its risk assessment of banks and banking groups. The supervisor also takes into account cross-sectoral developments, for example in non-bank financial institutions, through frequent contact with their regulators.
Description and findings re EC4	A Macro-prudential Analysis and Strategy Directorate (MPASD) was established in 2009 within the Banking Supervision Department with the responsibility for addressing the macro-prudential issues and challenges facing the banking system in Bulgaria. The MPASD was responsible for carrying out stress test simulations, developing and proposing macro-prudential instruments and evaluating the risks facing the banking system. It actively cooperated with the Financial Stability Directorate, formed in the beginning of 2010. The main analyses of the two units was presented to the BNB Governing Council through the Report on the State of the Banking System and the Financial Stability Report. The MPASD and the Financial Stability Directorate supported the BNB participation in the work of the ECB (FSC) and the ESRB and the MPASD supported the EBA in its work on studying the risks and vulnerabilities of the EU banking system. Following the LCI amendments and the explicit macro-prudential mandate of the BNB for the banking system, the Macro-prudential Supervision and Financial Stability Directorate was established in April 2014. The reorganization was designed to reflect the need to achieve synergies between the fields of financial stability and prudential supervision and to further strengthen the analysis and skills base. The changes also responded to the new EU supervisory architecture (European Systemic Risk Board (ESRB) and the European Supervisory Authorities) and the ESRB recommendation on the macro-prudential mandate of national authorities. The new Macro-prudential Supervision and Financial Stability Directorate is responsible for evaluating and proposing, as necessary, macro-prudential measures and instruments; formulating recommendations and requirements for to the banking system (via BNB Governing Council decisions), participating in proposals for revisions of secondary legislation (BNB ordinances) and other regulations. The directorate carries out a regular review of the macroeconomic environment and potential macro-related risks for the banking system. This includes, for example, the indebtedness of households and non-financial corporations, their financial profile and the quality of their loan portfolios. The directorate seeks to employ forward-looking approaches and its work examines major factors on the demand-side for credit (households and non-financial corporations) – eg through collection of data not only on credits that have been granted, but on credits that have been rejected. An additional layer of the financial stability analysis is the regular monitoring of the data for nonbank financial institutions, focusing mostly on pension funds, insurers, leasing and credit companies. Interconnectedness with the banking system is monitored, as well as the main risks stemming from their exposures and activities. The analysis is presented in the “Report on the state of the banking system.” Since the merger of the financial stability unit into the Banking Supervision Department this material has been augmented to incorporate parts of former financial stability report – focusing on the macroeconomic risks for the banking and risks stemming from the cross-sectoral developments. The work of the directorate, and its support for the supervisory analysis also is also based on cooperation with other divisions of the BNB that focus on the analysis of international financial markets (re FX reserves management) and the local economy. In terms of cross sectoral work the BNB regularly communicates with the FSC (the supervisor of the non-bank financial sector) and exchanges information. The working level relationships are in addition to the official framework for communication and cooperation between the two supervisory authorities which were introduced with the establishment of the Financial Stability Advisory Council, FSAC. The FSAC consists of the Minister of Finance, the Governor of the BNB and the Chairman of the FSC. The FSAC is chaired by the Minister of Finance, and decisions are taken by consensus. The FSAC can address proposals and recommendations to its members in connection with regard to the protection and maintenance of the financial stability, prevention and management of financial crises. Moreover, with regard to the improvement of macro-prudential policies in the country, the FSAC has the responsibility for discussing any proposals arising from recommendations or warnings of the European Systemic Risk Board (ESRB). The Council also has the responsibility for approving a national action plan in the event of crisis. The FSAC meets quarterly, though can meet more often as needed and is supported by a standing committee at the expert level. The BNB also cooperates with the FSC and the Ministry of Finance in the context of international work connected with the ECB’s Financial Stability Committee and the European Systemic Risk Board (ESRB).
EC5	The supervisor, in conjunction with other relevant authorities, identifies monitors and assesses the build-up of risks, trends and concentrations within and across the banking system as a whole. This includes, among other things, banks’ problem assets and sources of liquidity (such as domestic and foreign currency funding conditions, and costs). The supervisor incorporates this analysis into its assessment of banks and banking groups and addresses proactively any serious threat to the stability of the banking system. The supervisor communicates any significant trends or emerging risks identified to banks and to other relevant authorities with responsibilities for financial system stability.
Description and findings re EC5	The monitoring and assessment of risks, trends and concentrations within and across the banking system as a whole is carried out by the Macorprudential Supervision and Financial Stability Directorate, part of the Banking Supervision Department described above. The assessors saw extensive analysis performed by this directorate. In order to effectively perform its tasks and objectives the directorate monitors and analyses a range of indicators for the separate banks and the banking system as a whole. Examples include: Analysis of asset quality: monitoring of different categories of classified loans, accumulated impairment and coverage with provisions, including by economic sectors, etc. Profitability: the department follows the dynamics of indicators such as ROE, ROA, net interest margin, return on interest-bearing assets, price of interest-bearing liabilities, funding cost, analysis of income sources, price strategies according to banks and instruments, analysis of core v.s. non-core activities. Capital adequacy: analysis naturally covers the total and common equity tier I capital adequacy, leverage, excess capital, capital composition, tendencies and sources of capital formation and support, etc. Liquidity: examples of liquidity monitoring indicators encompass liquidity ratios by maturity brackets, share of liquid assets to attracted funds, currency composition, matching liquidity flows based on scenarios, etc. FX lending (loans in non-euro currencies)/US dollar funding: the BNB has implemented a framework for continuous monitoring and control of FX positions of all banks ever since the early 1990s. Reporting requirements have adapted to developments in the banking system and now includes reporting on the net FX position as a percentage of own funds, liquidity reporting for inflows and outflow in foreign currency (e.g., according to Ordinance No. 11 by currency. Currently for the purposes of monitoring FX lending and funding in foreign currencies the BNB Banking Supervision Department has separate reporting templates on monthly and quarterly basis. In addition to supervisory reporting, the BSD analyses data from the credit register and monetary statistics, broken down by currency. A special reporting form encompasses indicators on FX funding, FX swaps, currency and maturity mismatch for the major foreign currencies. US dollar exposures are also monitored. This reporting allows the BNB to follow the ESRB recommendation on FX lending although the reporting requirements pre-date the recommendation. The directorate further incorporates all the analytical work in “its assessment of banks and banking groups” by: Preparing periodical and ad hoc analyses of the tendencies and major risks facing the banking system; Developing and timely updating the stress-testing methodology, measuring the sensitivity of banks and the banking system to changing risk factors within their activities; In order to “address proactively any serious threat to the stability of the banking system,” the MPSFS directorate also carries out: Analysis of the effectiveness of different macroprudential instruments, applied by other supervisory authorities; When necessary the directorate develops macroprudential instruments and proposes approaches for their introduction with the purpose of minimizing the risks for the banking system stability in the country; The Deputy governor in charge of the BNB Banking Supervision Department, when necessary, issues letters to specific banks or the system as a whole to address certain risks or vulnerabilities. Legally binding measures are also applied. For example in 2014, the BNB implemented a capital conservation buffer of 2.5 percent and a systemic risk buffer of 3 percent effective as of October to be applied to all banks in the banking system. As noted in the previous response, in discharging its obligations the BNB regularly communicates with the FSC (the supervisor of the non-bank financial sector) and exchanges information at an expert level. The BNB and FSC also cooperate in terms of on-site inspection of banks for whom the FSC also has regulatory responsibility, such as when the bank is also a custodian bank. Furthermore, and as noted in EC4, the official framework for communication and cooperation between the two supervisory authorities is covered by the FSAC.
EC6	Drawing on information provided by the bank and other national supervisors, the supervisor, in conjunction with the resolution authority, assesses the bank’s resolvability where appropriate, having regard to the bank’s risk profile and systemic importance. When bank-specific barriers to orderly resolution are identified, the supervisor requires, where necessary, banks to adopt appropriate measures, such as changes to business strategies, managerial, operational and ownership structures, and internal procedures. Any such measures take into account their effect on the soundness and stability of ongoing business.
Description and findings re EC6	The BNB is required, under, the LCI (Art 121a) to prepare a plan for orderly resolution of each bank, licensed in the Republic of Bulgaria, which might be applied if the bank is in financial difficulties. These resolution plans should be updated regularly and banks are required to provide the BNB with all the requisite information to prepare such plans. Banks were required to submit their recovery plans to the BNB by end November 2014. Not all banks met the deadline and the BNB has also sought information as necessary from the relevant EU home state supervisors – both bilaterally and through supervisory colleges. The BNB has set internal deadlines to conduct its resolution analysis and prepare the resolution plans. At the time of the BCP assessment this project had not been completed. The deadline for implementing the EU Bank Recovery and Resolution Directive (BRRD, 2014/59/EU) in Bulgarian law was the end of 2014, but at the time of the assessment the directive had not yet been transposed. Technically, therefore “resolvability assessment” does not currently exist as a concept in Bulgarian banking law. It is informally anticipated that the BNB will be the competent authority to be vested with resolution powers for banks but final confirmation was still awaited and there is no formal political assurance on this point. It was hoped, at the time of assessment, that the legal transposition could be made by July 2015, but slippage of the timetable was possible. Notwithstanding the lack of transposition of the BRRD, the LCI already provides significant powers to the BNB to address business strategy, managerial, operational, ownership structures and internal procedures. Hence, where bank-specific barriers to orderly resolution are identified, the BNB may impose a comprehensive suite of measures provided in the LCI, Article 103 (2).
EC7	The supervisor has a clear framework or process for handling banks in times of stress, such that any decisions to require or undertake recovery or resolution actions are made in a timely manner.
Description and findings re EC7	Although the BRRD has not been implemented yet, the BNB has a number of important powers should a bank experience stress, including the right to require a bank to submit a rehabilitation plan, to appoint conservators or to place the bank under special supervision (Art 103(2)(21),(23) and (24)). In terms of the BNB’s own framework for handing banks at periods of stress, the BNB indicated that there is a formal written framework for crisis situations. Nevertheless, in the context of a small institution and well established working relationships, it is possible to be highly responsive to a crisis situation without recourse to heavily formalized procedures. Records and documentation of decisions and follow-up activity are fully maintained. The assessors discussed some concrete examples with the BNB. It must be noted that the BCP assessment is not a specific assessment or analysis of the circumstances surrounding the handling of the KTB crisis.
EC8	Where the supervisor becomes aware of bank-like activities being performed fully or partially outside the regulatory perimeter, the supervisor takes appropriate steps to draw the matter to the attention of the responsible authority. Where the supervisor becomes aware of banks restructuring their activities to avoid the regulatory perimeter, the supervisor takes appropriate steps to address this.
Description and findings re EC8	The BNB has powers to act should it identify bank like activities outside the regulatory perimeter, through the LCI (Art 79(9)) and this provision permits the gathering of information and on-site inspections by the BNB. The BNB has investigated a few cases each year related to unlicensed banking activity. It is also worth noting that the LCI (Art 3a) requires an entity to be registered as a financial institution if it carries out lending activities, granting guarantee or acquisition of bank loan portfolios. Ordinance 26, based on the LCI Article 3a, establishes the financial information and the procedures which must be regularly presented to the BNB by a registered financial institution. These financial institutions must also submit data to the Central Credit Register. The financial register therefore provides the BNB with an additional tool to monitor the potential for bank-like entities to emerge. While the BNB has never identified banks attempting to re-organise or restructure for purposes of regulatory arbitrage or avoidance, the LCI again provides strong powers under Article 103 in the event of an attempt to “bypass” the banking laws.
Assessment of Principle 8	Largely Compliant
Comments	The BNB employs sound methodologies for the analysis and assessment of individual banks and banking groups. This work is strongly enriched by the efforts of the macro-prudential and financial stability directorate which has worked intensively to provide a spectrum of data and analysis to provide differing perspectives and angles through which to assess the strengths and weaknesses of the banking system. The assessors saw full sets of reports for a range of banks, including the regular quarterly analyses, inspection reports and planning tools. More details are discussed in the individual risk CPs but as a general comment, the methodology and supporting internal guidelines has resulted in consistently detailed and nuanced reports on individual credit institutions. The formality, in the sense of advance planning and documentation, of crisis management is relatively light but this is mitigated by the fact that the banking supervision department of the BNB is sufficiently small and streamlined not to require an elaborate system to be in place. The experience of bank stress in June 2014 demonstrated that the BNB was able to identify relevant data, take decisions, coordinate with other authorities - domestically and internationally - and put effective measures into place to contain the potential for contagion. Nevertheless, despite quick actions in the KTB case there may be scope for improvement of forward planning to deal effectively with crisis scenarios. Work on resolvability is lagging. The existing laws provide almost complete powers for the BNB to carry out the necessary assessments and any required remedial action on resolvability, but factors including the 2014 banking crisis, limited resources and the failure to transpose the BRRD on time, have led to delay. It is welcome that the banking supervision department has progressed as far as it has in these specific circumstances but criteria cannot be seen as fully met.
Principle 9	Supervisory techniques and tools. The supervisor uses an appropriate range of techniques and tools to implement the supervisory approach and deploys supervisory resources on a proportionate basis, taking into account the risk profile and systemic importance of banks.
Essential criteria
EC1	The supervisor employs an appropriate mix of on-site31 and off-site32 supervision to evaluate the condition of banks and banking groups, their risk profile, internal control environment and the corrective measures necessary to address supervisory concerns. The specific mix between on-site and off-site supervision may be determined by the particular conditions and circumstances of the country and the bank. The supervisor regularly assesses the quality, effectiveness and integration of its on-site and off-site functions, and amends its approach, as needed.
Description and findings re EC1	The on-site and off-site supervision functions have been integrated into a single directorate in the banking supervision department of the BNB – the Credit Institutions Supervision Directorate - since 2009. The supervisory process therefore includes both on and off-site analysis. Off-site analysis is performed according to a regular quarterly timetable based on quarterly (and monthly) returns, supplemented with additional analysis as necessary – which may be required when a bank is subject to enhanced supervision for example. The duration and type of onsite inspections depend on the size, complexity, systemic importance, risk profile and any identified problems and weaknesses in the course of the supervisory review of the credit institutions. In principle the BNB seeks to operate an on-site supervisory inspection cycle of 18 to 24 months, though due to the stress in the banking system, particularly in 2014 and the demands of implementing regulatory changes driven by the EU, this cycle has not been maintained for all banks. The credit institution supervision directorate monitors all banks to ensure that priority risks are taken into consideration and the inspection planning adjusted accordingly. An inspection team, under its chief, is responsible for both on and off-site examination and analysis. Each of the five inspection teams (where each team has approximately 5 staff), has the responsibility for a portfolio of banks. The composition of the inspection teams is not subject to any formal rotation requirements and can be static for extended periods, but the portfolio of banks is rotated approximately every 3 years. The onsite examination for one of the larger and more complex banks will typically be carried out by more than one inspection team. The BNB has policy experts (in the supervisory policy directorate) who support the inspection teams but other than the team dedicated to models analysis does not have internal risk specialists. The duration of an on-site examination reflects the scoping of the particular inspection, whether focused on a particular dimension of the bank (eg one of the CAMELOS risks) or whether it is full scope. An examination could take between 3 weeks to a more extended 15 program. It was noted that where the examination takes place over an extended period, the inspection team will interrupt the examination to return to the BNB to perform the quarterly off-site analyses. The BNB does not differentiate between domestic from foreign-owned institutions when defining the frequency or setting the scope of on-site inspections. There are two types of onsite inspections: Complete supervisory inspection – the entire CAMELOS risk profile is assessed. The Special Supervision Directorate also performs on-site inspections including a review of AML risks and outsourcing activities. Targeted supervisory inspection –topics for review may be identified via trend analysis (supported by the work of the Macro Prudential and Financial Stability Directorate), as a result of off-site analysis in the supervisory process and may also be identified as a result of information derived from other sources, such as customer complaints or information from prosecutor’s office. Targeted inspections can be undertaken by more than one directorate, for example CISD and the Special Supervision Directorate.
EC2	The supervisor has a coherent process for planning and executing on-site and off-site activities. There are policies and processes to ensure that such activities are conducted on a thorough and consistent basis with clear responsibilities, objectives and outputs, and that there is effective coordination and information sharing between the on-site and off-site functions.
Description and findings re EC2	Under Art 80a of the LCI, the BNB is required to prepare, annually, a supervisory examination program. This program must take into account the supervisory review and evaluation process. The plan must indicate how the BNB intends to carry out its tasks and allocate its resources, identify the banks to be examined, as well as the banks subject to enhanced examination. For banks that are subject to enhanced supervision – the banks which have the weaker ratings - the plan will be likely to reflect increased numbers of on-site inspection, and enhanced reporting requirements, more frequent review of the operational, strategic or business plans of the institution and officials of the BNB may be placed permanently on site. The off-site organization of activities is supported by the internal supervisory manual and the on-site examination is guided by the Risk Assessment (RAS) manual. The supervisory manual is largely procedural but it ensures clarity of roles and responsibilities, particularly with respect to coordination and cooperation. The RAS manual provides a detailed structure to support analysis of risk. The assessors were able to view and discuss the supervisory plan with the BNB and were able to confirm that the intensity of planned supervisory activity reflected the current known risk profile of the institutions as identified by the BNB in its supervisory processes. As noted in EC1, the responsibility for both on and off-site activity belongs to the same team for any given bank. In terms of ensuring effective supervisory follow up and also planning for the year ahead, the chief inspector of each of the CISD teams submits a memo to the director setting out the proposed priorities and inspection plans for the following year. It is for the director to review the memos, make adjustments as necessary and submit the plan to the Deputy Governor for approval. The plan is not formally sent to the Governing Council by the banking supervision department. While there is no formal internal process to set and monitor a maximum period of time between onsite examinations, the annual planning cycle provides the opportunity for an annual check as to whether the inspection cycle for any bank has become too extended.
EC3	The supervisor uses a variety of information to regularly review and assess the safety and soundness of banks, the evaluation of material risks, and the identification of necessary corrective actions and supervisory actions. This includes information, such as prudential reports, statistical returns, information on a bank’s related entities, and publicly available information. The supervisor determines that information provided by banks is reliable33 and obtains, as necessary, additional information on the banks and their related entities.
Description and findings re EC3	The main sources of information used during the off-site supervision include: Monthly, quarterly and annual financial statements of commercial banks (acc. the requirements of the Law on Credit Institutions, BNB Ordinances, CRR (Regulation 575/2013); Additional supervisory reporting related to ad-hoc data requests which in some cases are synchronized with the recommendations of EBA, ECB, ESRB, etc. BNB Credit Register database (minimum threshold for reporting is 1000 Bulgarian Leva). Public financial statements (eg Annual Reports); Responses to surveys and questionnaires, including ICAAP policies; Information from other supervisory authorities or supervisory colleges; The Central Credit Register, Monetary Statistics; Rating agency reports; Monitoring of the financial press; and Dialogue with banks. When on-site, the BNB examines the banks’ internal documentation, including its rules, procedures and internal guidelines; strategy and budget; management information packages, bespoke information that has been requested from the bank and interviews with bank staff – whether CEO or senior executive, heads of department, heads of internal audit/control. In addition, the BNB’s supervisory function makes use of the research notes of the Macroprudential Supervision and Financial Stability Directorate. A number of data sources feed into these research notes, including: indicators of market stress such as the VIX and its sub-indices, the Bloomberg EU Financial Conditions Index, sovereign and corporate credit default swaps, bond prices and yields. The process of monitoring and analyzing market sensitive information is primarily through Bloomberg. Other information sources and databases include those of ECB, Eurostat, Amadeus, Local Trade Registry, national statistical agencies, etc.
EC4	The supervisor uses a variety of tools to regularly review and assess the safety and soundness of banks and the banking system, such as: (a) analysis of financial statements and accounts; (b) business model analysis; (c) horizontal peer reviews; (d) review of the outcome of stress tests undertaken by the bank; and (e) analysis of corporate governance, including risk management and internal control systems. The supervisor communicates its findings to the bank as appropriate and requires the bank to take action to mitigate any particular vulnerabilities that have the potential to affect its safety and soundness. The supervisor uses its analysis to determine follow-up work required, if any.
Description and findings re EC4	The BNB carries out a monthly review of financial statements (prudential returns) through the off-site assessment and also during the on-site inspection where inspectors analyze the most recent available balance sheet and P&L statements. When on-site the inspectors on banking supervision perform business model analysis as part of the bank’s earnings and profitability review, which forms one of the component ratings of the CAMELOS risk assessment system. The business model analysis includes examination of business line projections and past performance against previous projections. Overall, the business model of banking in Bulgaria is relatively homogenous. The financial system is predominantly banking and the banking system is deposit taking and credit extension. There is limited specialization although different banks might serve different segments of the population. Peer group analysis is more typically undertaken in the context of the macro prudential/financial stability trend analysis. However, there have been occasional horizontal peer reviews, such as on operational risk. Stress tests analysis is carried out during on-site inspections and the Pillar 2 processes require banks to undertake stress tests as part of their ICAAP and under the SREP the BNB reviews the stress tests and overall process taking into consideration the internal framework, assumptions and results of the stress test as part of the relevant risk assessment. The results of the supervisory review and evaluation process are communicated to the banks. Please see EC8 below for more detail.
EC5	The supervisor, in conjunction with other relevant authorities, seeks to identify, assess and mitigate any emerging risks across banks and to the banking system as a whole, potentially including conducting supervisory stress tests (on individual banks or system-wide). The supervisor communicates its findings as appropriate to either banks or the industry and requires banks to take action to mitigate any particular vulnerabilities that have the potential to affect the stability of the banking system, where appropriate. The supervisor uses its analysis to determine follow-up work required, if any.
Description and findings re EC5	The Macro-prudential Supervision and Financial Stability Directorate (MPSFS) employs surveys and stress tests to investigate and address emerging risks across banks. Annual surveys have been undertaken since 2008 to gather industry views and sector-wide information on specific topics. Generally the template has three elements, one part dedicated to the expected dynamics of main balance sheet positions/structure; one to the credit risk parameters (PD, LGD) and indicators (the key risk in the Bulgarian banking system), and the third, occasionally, to seek views on prominent trends or emerging risks. For example, in the past three years topics have included credit products with fixed interest rates; banks business models; impairment and write-off policies; mortgage loan portfolios, focusing on defaulted loans and planned steps to handle such risks; and bank exposures to the Ukraine and Russia. The findings are reported to the Governing Council and summaries of some surveys are shared with the industry. The MPSFS conducts stress testing. Top down stress tests have been performed quarterly since 2002 capturing credit risk and some features of market risk. In 2009 an additional credit risk stress test was introduced, which combines the banks’ credit portfolio quality at the end of the previous year with the macro-economic forecasts for the coming year (baseline and adverse scenario). For this test, an IMF methodology is applied on the correlation between the growth of GDP and the adversely classified loans. In line with the European-wide stress-tests conducted in 2010 by CEBS, and since then by the EBA, the Macro-Prudential Analysis and Strategy Directorate has carried out stress tests using the parameters, modeled by the ECB (PDs, LGDs for Bulgaria by type of credit) to test the banks on solo basis. As a one off stress test in the second half of 2014 MPSFS conducted a stress test using the ECB and EBA scenarios and combining top-down and bottom up approaches over a three year horizon. Under the baseline scenario credit and market risk were tested while for the adverse scenario the sovereign risk and funding risks were added. The emphasis was on credit risk as it is a key inherent risk for Bulgarian banks’ business profile. MPSFS engaged with the banks during the process and made the results available to the supervisory teams, presenting the full analysis and results to the Governing Council. Liquidity stress testing is also performed, and more frequently since 2011, to enhance analysis of the deleveraging processes. The MPSFS performs two types of test. First a 5-day shock, and also a test to measure the sufficiency of liquid assets to cover a substantial outflow of funds in a bank. The aggregated results feed into the quarterly analyses of the risks and vulnerabilities of the banking sector which are presented to the Governing Council and the individual bank’s results are shared with the relevant supervisory team. Additionally, the BNB has been developing specialized reporting dedicated to macroprudential monitoring of the banking system. Forms have been in development since 2014 – given that previous forms had to be amended as a result of the CRR changes - and are steadily coming on stream. To date three forms have been created. The first, introduced in January 2015 on a monthly reporting frequency, covers currency and residential status and volumes and types of exposures to parent banks. The second and third macroprudential forms will focus on credit activity in the banking sector. The second will be a quarterly report of- LTV, LTI, PTI, and flow of newly granted/renegotiated loans and the third will be an annual submission on credit migration between the categories of past-due status.
EC6	The supervisor evaluates the work of the bank’s internal audit function, and determines whether, and to what extent, it may rely on the internal auditors’ work to identify areas of potential risk.
Description and findings re EC6	The evaluation of the banks’ internal audit functions take place through on-site inspection and assess whether the bank has met the standards set out in Ordinance 10 of the BNB on internal controls. The inspectors seek to be satisfied that the effective controls and audits are in place and that appropriate actions are taken in response to deficiencies. The elements that inspectors consider when assessing the Internal Audit unit are noted below. However, the BNB uses the findings, conclusions and reports provided by the internal audit unit only for reference, and does not rely on them for completing its supervisory duties/judgment and cannot outsource its supervisory responsibility by using the findings, conclusion and reports of the internal auditors. Assessment of the Internal Audit unit is expected to establish the following: The quality and comprehensiveness of the internal rules governing the Internal Audit unit; Degree of independence of the unit (incl. on the level of each individual employee); Sufficient staffing –number of employees and specialized expertise (incl. at least one IT specialist, specialist operational risk, market risk, etc.); Quality of reports, the reporting hierarchy and procedure for addressing the identified weaknesses; To what extent the audits of the unit are risk-oriented and to what - focused on the daily activities of the bank; Audit plan for the current reporting period and the state of implementation of this plan; Annual activity report – audits carried out during the previous reporting period: major findings (review the follow-up checks in connection with the most important recommendations); Major violations – for a period at the discretion of the inspection; Whether the requirements of Regulation № 10 on the frequency of the checks are observed; and Whether participation of the Head of the Internal Audit Unit in the operational work of the bank is permitted and if so to what extent – eg participation in meetings of committees / councils (e.g., the risk committee).
EC7	The supervisor maintains sufficiently frequent contacts as appropriate with the bank’s Board, nonexecutive Board members and senior and middle management (including heads of individual business units and control functions) to develop an understanding of and assess matters such as strategy, group structure, corporate governance, performance, capital adequacy, liquidity, asset quality, risk management systems and internal controls. Where necessary, the supervisor challenges the bank’s Board and senior management on the assumptions made in setting strategies and business models.
Description and findings re EC7	The SREP provides the governing structure for the communication between the BNB and the banks. The BNB indicated that the major findings of the off-site analyses are communicated to the bank’s management board where there is such a need (e.g., if the management board should take timely corrective measures). The BNB explained cases in which it had challenged banks and denied the development of certain business plans.
EC8	The supervisor communicates to the bank the findings of its on- and off-site supervisory analyses in a timely manner by means of written reports or through discussions or meetings with the bank’s management. The supervisor meets with the bank’s senior management and the Board to discuss the results of supervisory examinations and the external audits, as appropriate. The supervisor also meets separately with the bank’s independent Board members, as necessary.
Description and findings re EC8	The BNB explained that re is a constant dialogue between teams of CISD and representatives throughout hierarchy levels within the banks and the intensity of this dialogue depends on the risk profile, size and systematic importance of the different credit institutions. Each bank in the Bulgarian banking system is allocated a primary contact within the BNB banking supervision department, the supervisory teams and supervisory policy staff are in frequent day to day contact with the banks. Much communication is driven by the banks, particularly at the period of the assessment, as there have been many queries related to the introduction of the CRR and other EU regulatory changes. At the inspection end an wrap up meeting is held at the bank’s premises with appropriate bank’s officials for communication the inspections findings, and conclusions and proposed corrective actions. The bank is given 7 working days to reply, explain or lodge objections. The findings and conclusions of the regular on-site inspections performed by the SSD are submitted in written reports to the banks’ executives in the context of a formal meeting held at the bank’s premises. The main findings, conclusions and recommendations are discussed with the CEOs and bank personnel from the relevant areas. The bank is given 14 days reply, explain or lodge objections. For complex cases a separate period is appointed for the bank to present an action plan for the remedial measures to be undertaken. The BNB has the legal right to meet with the members of the supervisory board without executive management being present and does on occasion do so. It is not a systematic practice.
EC9	The supervisor undertakes appropriate and timely follow-up to check that banks have addressed supervisory concerns or implemented requirements communicated to them. This includes early escalation to the appropriate level of the supervisory authority and to the bank’s Board if action points are not addressed in an adequate or timely manner.
Description and findings re EC9	Monitoring the follow up of supervisory requirements reflects the priority of the issues in question. If the bank has to undertake urgent measures the supervisory authority maintains intensive communication with the responsible representatives. Follow-up checks of the non-major requirements from on-site inspections are usually conducted at the next on-site inspection. If action points are not addressed in an adequate or timely manner they are brought to the attention of the Deputy Governor responsible for Banking Supervision, who is empowered to undertake compulsory action based on the nature of the particular supervisory requirement. The assessors were able to review inspection findings and follow up monitoring of banks’ actions as well as the escalation of issues within the BNB when recommendations had not been followed.
EC10	The supervisor requires banks to notify it in advance of any substantive changes in their activities, structure and overall condition, or as soon as they become aware of any material adverse developments, including breach of legal or prudential requirements.
Description and findings re EC10	The LCI provides some safeguards that the BNB will be notified in the event of a substantive change in the condition of a bank, including any material adverse development. However, this criterion is not met in two respects. First, the requirements under Article 72 of the LCI for the bank to notify changes regarding for example, scope and procedures for conducting operations, the capital and internal organization, are retrospective as opposed to a requirement to be made in advance. Secondly, although Article 71 of the LCI addresses a number of adverse developments, there is a 10 day notification period and it is not clear that a breach of a prudential norm would automatically trigger notification. In the case of insolvency, however, Art 12(2) provides that notification should be “forthwith.”
EC11	The supervisor may make use of independent third parties, such as auditors, provided there is a clear and detailed mandate for the work. However, the supervisor cannot outsource its prudential responsibilities to third parties. When using third parties, the supervisor assesses whether the output can be relied upon to the degree intended and takes into consideration the biases that may influence third parties.
Description and findings re EC11	The LCI (Art 80(3) and (4)) provides authority for the BNB to appoint external experts if needed. The expert may be an “independent external expert” (where the law does not specify the purpose or expertise), or an external auditor to carry out a financial or other type of audit, or independent experts to evaluate a bank’s assets, and in this instance the BNB can require the bank to reflect the results of the evaluation in its financial statements or supervisory reports. The BNB has not made use of this power.
EC12	The supervisor has an adequate information system which facilitates the processing, monitoring and analysis of prudential information. The system aids the identification of areas requiring follow-up action.
Description and findings re EC12	At present the IT system is still undergoing a process to embed regulatory reporting changes. One of the most important automated outputs of the IT system is a comprehensive set of more than 70 predefined indicators focused on the asset quality, provisioning, profitability, capital adequacy and liquidity. The spreadsheet is available in time-series both on monthly and quarterly basis, for the individual banks and for the banking system as a whole. The analyses and conclusions of the banking supervision inspectors including the monthly and quarterly internal reports as well as the reports from on-site inspections are stored in an internal data storage drive with strictly defined rules for access authorization. As noted below not all supervisory information submitted by the banks is integrated within regulatory reporting. The IT Support Division is responsible for developing database queries and macros in order to automatically process and organize the information. There is a limited number of skilled IT staff who are able to create bespoke analytical reports at the request of the supervisory teams. However, the resources are not dedicated solely to this functions and must meet a range of other requests and demands from the BNB. In terms of technical background all reporting information from banks is processed through special dedicated IT platforms, in particular CIBS and VPN which guarantee the security of information flow. It is worth noting that it is the BNB Information Systems Directorate (functionally allocated outside the Banking Supervision Department) that is responsible for the BSD IT systems’ support, budget allocation, planning and implementation of upgrades. The Banking Supervision Department can propose upgrades and outline existing deficiencies of the IT systems, but their implementation is dependent on the available resources (time, budget, etc.) and the initiative of the BNB Information Systems Directorate. The core component of the IT infrastructure facilitating the supervisory process at various stages is a web-based application system called “CIBS.” The system is accessed by the banks, which submit the required supervisory reports through a virtual private network (VPN). The data is automatically processed by the information system based on defined templates according to the regulatory requirements and supervisory needs. The database is subject to a process of formal data checking. While formal (logical and mathematical) validations are automatic and performed by IT Support Division, the quality check of the data from analytical point of view is made by the inspectors of the CISD. The Macroprudential Supervision and Financial Stability Directorate further completes the process by monitoring of the data on a systemwide level. The BNB also uses the VPN as a channel for information-exchange with the credit institutions. This supports additional reporting requirements (daily or weekly reporting templates), external audit reports, or other inquiries on bank-specific issues, etc. After receiving the information via VPN, the latter is being on a common internal drive. In contrast to the CIBS platform, the VPN does not have the functionality for formal approval of the received data. Supervisory information submitted via the secure VPN connection is not integrated within the CIBS.
Additional criteria
AC1	The supervisor has a framework for periodic independent review, for example by an internal audit function or third party assessor, of the adequacy and effectiveness of the range of its available supervisory tools and their use, and makes changes as appropriate.
Description and findings re AC1	The internal audit unit of the BNB conducts reviews on the directorates of the banking supervision department. The annual plan of the internal audit function is approved by the Governor of the BNB. The Credit Institutions Supervision Directorate has been audited once in the last ten years and the Supervisory Policy Directorate is due to be audited in 2015. The review aims to enhance the quality and effectiveness of the supervisory process. The review covers the internal manuals of the CISD as well as the actual supervisory practices. The report, conclusions and recommendations of the internal audit unit is presented to the Governing Council of the BNB. The supervisory processes, tools and their use are also being reviewed by the Bulgarian National Audit Office which is an independent authority and reports directly to the National Assembly.
Assessment of Principle 9	Largely Compliant.
Comments	The current phase of introducing and embedding a significant agenda of EU regulatory and supervisory reforms is extremely demanding for all supervisory authorities, particularly those who have limited resources. The supervisory approach in the BNB relies to a very significant, though not inappropriate, extent on determinations and verifications performed by the on-site inspections. In this context it is particularly important that, within the limits of available resources, the BNB maximizes its risk based approach so that the more intense scrutiny is applied to the more significant risks within the system. As noted also in CP2, it is important that the BNB takes particular care to ensure that smaller banks, which taken as a whole are a significant cluster within the market and may have fewer skills and resources, are kept under sufficient frequency of observation. In the view of the assessors the BNB is not, at present, able to perform a sufficient frequency and depth of observation to provide assurance that weaknesses of practice and vulnerabilities may not emerge in some of these smaller entities in particular. Equally, however, it appears inadvisable for the BNB’ to reallocate its inspection resources away from its existing plans. In other words, the BNB is in the difficult position of needing to choose between least worst options. The assessors consider that the BNB has based its decisions on a meaningful and thoughtful risk based assessment of the banking sector, but the potential consequences arising from the BNB having made a wrong decision may be particularly high. The planned Asset Quality Review over the next year will provide some additional information for the BNB in making sure it can deploy its resources most effectively, but in the meanwhile the AQR itself will divert resources from other supervisory activities. Hence, and as indicated in CP2, additional resources are warranted to resolve this concern. The internal coordination and communication practices within the Banking Supervision Department of the BNB are not as developed as they need to be. Although there is a statement of internal policies and procedures which is useful, the assessors found that the individual directorates of the department were too easily able to operate in silos. It was particularly notable that the onsite findings of the special supervision department (which deals, inter alia, with Anti Money Laundering and transparency of products) would not systematically be shared and compared with the directorate for on and offsite supervision of banks. It would, in theory, be possible for the two directorates to evolve a very different view of the quality of management and controls in any given institution. It is also possible and is a concern, as noted below, for silos to exist within a single directorate. The BNB has certain policies and procedures for quality assurance through review of reports and memos before they are communicated upwards in the BNB but they are insufficient to ensure the consistency and quality of on-site inspection work. Given the important role played by the findings of the onsite inspection teams, including but not limited to considering the reliability of information submitted by the banks, and on which all the off-site analysis must depend, this is a very important concern. The inspection teams, at the time of the assessment, were not subject to frequent change or rotation. The portfolio of banks might be shuffled but the teams would remain constant. There are no procedures to ensure that the different inspection teams are using appropriately consistent practices or working to appropriately high standards. If used well, the details and prescriptions of the RAS manual ought to ensure that the quality of on-site inspection is thorough and insightful. The assessors were able to review pre-inspection documentation requests and were impressed by the scope and depth. Nevertheless, the assessors noted some inconsistency between documentation requests and more notably there was variability in the quality of some inspection reports. This variability may be an indication of different standards developing between the different teams. The experience of 2014 demonstrates that severe weaknesses in practice can exist and this points to the need for greater attention to be paid to consistency and quality of work across the department. The consistency and quality of off-site inspection work can be more easily monitored but it is noted by the inspectors that the quality of quarterly analysis was typically less developed than the on-site reports and there was more considered analysis supplied by the directorate on macro prudential and financial stability risks. The assessors noted that it was not good practice to remove an inspection team from its on-site work in order to perform the regular quarterly analyses. The supervision department and particularly the MPFSD makes good use of a range of sources of information. The BNB deploys a range of supervisory tools and the assessors noted that exposure to supervisory colleges was informing thinking in such areas as business model analysis. One tool that the BNB has rarely used is the horizontal review. In the context of limited resources and some key issues affecting the whole market—such as concerns surrounding the identification of related parties—this is a missed opportunity. As well as gathering a broad perspective of the variation in the market’s practices, such exercises can also support consistency of approach between and development of staff. It is also a useful technique target emerging risks or thematic concerns that have been identified and is a key supplement to a successful risk based approach. The BNB has a policy view that it does not wish to make extensive use of external experts. The assessors understand this preference and agree that there can be no question of outsourcing supervisory responsibility. In view of current resource limitations however, there may be scope for considering if effective—potentially targeted use—could be made of external expertise, not limited to investigations when in a post-crisis mode. In terms of quality and frequency of communication with the banks, it was clear that the BNB staff had a good knowledge of the banks and the banks had a clear understanding of the BNB’s supervisory concerns, priorities and requirements. The substantive quality of communication is good. However, the BNB does not have a systematic practice of direct contact with the boards of the banks though there may be some scope for enhancing the focus on key priorities to firms. It is essential that the gravity of the BNB’s supervisory concerns is impressed upon the executive management and directors of the banks, particularly in view of some persistent weaknesses identified in certain banks (please see CP11). Contact with the Supervisory Board is recommended practice and is common in advanced jurisdictions where authorities consider that this relationship is central not only to communicating their views effectively, but also ensuring that their messages are understood, and being able to form a view of the Board’s skill and capacity to direct the institution, its business, strategy, risk appetite and culture. In order to avoid double counting, this issue is not reflected in the grading of CP9 as it is also relevant to and considered under CP14. The BNB IT system is currently being updated to deal with the significant changes driven by the EU regulatory reforms. At the time of the assessment, staff did not have access to all information in the same formats as in the past, meaning that the system is not automatically generating key ratios, flagging significant changes or breaches. The system cannot, unlike as in best practice authorities, be interrogated or manipulated easily by the supervisory staff, although a wide and deep range of information is available to them and much additional analysis is provided by the MPFSD. This issue is also commented on (and graded) in CP2. In the context of the major regulatory changes that are in the process of being implemented and embedded as well as in view of thin resources it is difficult for the BNB to apply a systematic or even occasional review of the suitability and quality of its supervisory techniques. However, periodic review and refreshing of practices is an important discipline. Recommendations There needs to be an improved system for information sharing between the BNB banking supervision directorates, not limited to contact between the directors, but also based on a stocktake and review of common issues and information needs, so that all relevant information is shared in a timely manner and can inform the wider supervisory process. It is recommended that the BNB initiate a more intensive program of communication with the supervisory and management boards of the banks. One specific element of this communication should encompass ensuring that the Supervisory Board is fully aware of the priority issues identified in an inspection. As meetings with the management Board are already a mandatory part of the inspection process, this should be widened to include a presentation of key findings to the Supervisory Board. Please see CP14. The assessors recognize that the BNB is already considering some internal redesign of the banking supervision on and offsite directorate and encourage this process. It is recommended that any such redesign ensures that the composition of inspection teams do not remain static over time. Additional quality assurance procedures are needed to ensure that the underlying practices and quality of work carried out by the different inspection teams is of sufficiently high standard. The BNB should consider deploying horizontal reviews on key risks it has identified in the banking sector. The BNB should re-consider the current policy of not using external experts to ensure that opportunities are taken to support supervisory analysis and insight. It is recommended that the BNB dedicates the resources for a major upgrade to the systems available to the supervisory staff by having the BNB Information Systems Directorate prioritize its resource planning in this respect. The ability to interrogate supervisory data more effectively, and to integrate supervisory data automatically with other supervisory systems. It would be advisable if the BNB could follow the thinking of some other jurisdictions which have been seeking to develop “next generation score-carding” to take account of more analytical underpinning, better integration of macro and micro prudential data, and by integrating the various information sources, assist the supervisory teams in adopting more of a “through the cycle” view of an institution and updating and adapting the supervisory program of activities if emerging information suggests it is warranted. Because the BNB already takes a “through the cycle” view of banks (ie setting a “supervisory cycle” only as a backstop check for frequency of supervisory activity) this approach would be consistent with existing thinking. Please see CP2. It is recommended that the BNB establish a unit or committee mandated to review of supervisory processes and practices. It would be particularly beneficial if such an exercise could be carried out in tandem with an upgrade of the IT/data system. Please see CP2. BNB should require banks to notify it in advance of any substantive changes in their activities, structure and overall condition, or as soon as they become aware of any material adverse developments, including – and not limited to - breach of legal or prudential requirements
Principle 10	Supervisory reporting. The supervisor collects, reviews and analyses prudential reports and statistical returns34 from banks on both a solo and a consolidated basis, and independently verifies these reports through either on-site examinations or use of external experts.
Essential criteria
EC1	The supervisor has the power35 to require banks to submit information, on both a solo and a consolidated basis, on their financial condition, performance, and risks, on demand and at regular intervals. These reports provide information such as on- and off-balance sheet assets and liabilities, profit and loss, capital adequacy, liquidity, large exposures, risk concentrations (including by economic sector, geography and currency), asset quality, loan loss provisioning, related party transactions, interest rate risk, and market risk.
Description and findings re EC1	The LCI provides strong information gathering powers to the BNB, in particular under Article 80(1), (2) and (3). Further, banks and banking groups must submit financial statements to the BNB on both a solo and consolidated basis (Art 75(2)). Any bank that is a subsidiary in a banking group, a financial holding company, mixed financial holding company or mixed holding company must submit consolidated financial statements of the group or the holding company of which they are a part (Art 80 (1)LCI). Harmonised EU supervisory reporting covers solvency (capital adequacy), financial information, large exposures, leverage ratio, liquidity, asset encumbrance and supervisory benchmarking (ie use of benchmark portfolios for institutions approved to use internal models). The final implementing regulations for some of these areas of reporting have not yet been adopted by the European Commission and are not therefore all in force, e.g., leverage and LCR. All banks are obliged to prepare and submit information on their financial position and risk level. The major reports are financial reports (FINREP) and capital adequacy reports (COREP) under the ITS on supervisory reporting and Regulation (EU) 575/2013. Those reports provide information on such matters as capital adequacy, liquidity, Pillar 1 risks, balance sheet and P&L, off-balance sheet items, large exposures, asset quality, related party transactions, etc. The data are reported on both a solo and consolidated basis as required in the EU Implementing Technical Standard (ITS) on reporting. http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0680&from=EN The BNB requires banks to submit some of the FINREP IFRS templates on a solo level with monthly frequency (LCI, Article 80 (1)). The requirements for supervisory reporting are consistent across all banks in applying the reporting thresholds determined in ITS on reporting. In addition, the BNB requires ad-hoc data on particular issues related to the risk profile of respective banks as well as to capture trends in the banking system, which might affect the stability of individual banks or group of banks.
EC2	The supervisor provides reporting instructions that clearly describe the accounting standards to be used in preparing supervisory reports. Such standards are based on accounting principles and rules that are widely accepted internationally.
Description and findings re EC2	Under the Accountancy Act (Article 22a(2)), all banks in the Republic of Bulgaria prepare and present their annual financial statements on the basis of IFRS. According to the CRR (Article 99(2)), FINREP reporting templates for supervisory purposes have to be based on the IFRS. Hence all banks’ regulatory reporting is based on IFRS. Reporting instructions are provided by the ITS for the EU harmonized reporting and by the BNB for supplementary reporting in support of macro prudential purposes.
EC3	The supervisor requires banks to have sound governance structures and control processes for methodologies that produce valuations. The measurement of fair values maximizes the use of relevant and reliable inputs and is consistently applied for risk management and reporting purposes. The valuation framework and control procedures are subject to adequate independent validation and verification, either internally or by an external expert. The supervisor assesses whether the valuation used for regulatory purposes is reliable and prudent. Where the supervisor determines that valuations are not sufficiently prudent, the supervisor requires the bank to make adjustments to its reporting for capital adequacy or regulatory reporting purposes.
Description and findings re EC3	The LCI (notably Arts 73 and 76) and the a number of Ordinances, notably 7 on organization and risk management (based on CRD IV) and 10 on internal controls, provide a sound basis for the BNB to require sound governance and control of internal methodologies and on valuations. For example: Under Article 73(1) of LCI the BNB shall make recommendations and prescriptions for improving corporate governance in accordance with the best internationally recognized practices and monitor their implementation. Under Ordinance No7 on organization and risk management (based on CRD IV) the bank’s managing body shall be actively involved in and ensure that adequate resources are allocated to the management of all material risks in the valuation of assets, and the use of external credit ratings and internal models relating to these risks. Ordinance 10 (Art7) each bank shall maintain an adequate system of risk control which shall include monitoring and periodical assessment of consistency between the internal rules for risk management, market conditions and prudential banking. Under Article 76(7) of LCI the external auditors shall render an opinion whether the bank’s property and financial position, and its financial result have been truly presented. The auditor shall also review and express an opinion on the reliability of internal control systems. The external auditors express opinion about validation framework for the purpose of public annual financial reports of the banks. The measurement of fair values and valuation rules are also determined on the grounds of IFRS requirements (IAS 39, IFRS 13). More specifically, should the BNB not be satisfied with an internal model for market risk, it has powers under the LCI (Art 103(2)(5)) to require a bank to increase the level of its capital should (under Art 103(1)(11)) there be evidence that an internal model for market risk is not sufficiently accurate. The assessment of valuation for prudential purposes is carried out in the context of on-site inspection. This is an important issue in Bulgaria, as noted elsewhere, there are issues surrounding legal days, realization of collateral and a lack of an active market.
EC4	The supervisor collects and analyses information from banks at a frequency commensurate with the nature of the information requested, and the risk profile and systemic importance of the bank.
Description and findings re EC4	Collection and analysis of supervisory information is carried out with the same frequency for all banks in Bulgaria. As noted above much of the supervisory reporting in Bulgaria is now subject to EU harmonization except for data in response to macro prudential issues. Frequency of reporting and monitoring can be intensified to reflect a system wide or institution specific vulnerability. For example, the BNB can and, during the recent period of liquidity stress did, require additional information such as data collection relating to the European sovereign debt crisis. At this time subsidiaries of Greek banks in Bulgaria were subject to additional reporting requirements. Daily liquidity reporting, including intra-day, followed the liquidity stress in the banking system at the time of the KTB crisis.
EC5	In order to make meaningful comparisons between banks and banking groups, the supervisor collects data from all banks and all relevant entities covered by consolidated supervision on a comparable basis and related to the same dates (stock data) and periods (flow data).
Description and findings re EC5	Much prudential data is obtained through the use of the standardised FINREP and COREP templates. The reporting timeframe, the dates and periods do not differ among the banks. The supervisory reporting can be described as falling into either one of the following two categories: 1) Regulatory reports (ITS, etc…); 2) Statistical information for supervisory purposes (more volatile with respect to scope, details and period of reporting); Based on these reports, a number of analytical outputs are available (a set of analytical indicators with varying scope is used).
EC6	The supervisor has the power to request and receive any relevant information from banks, as well as any entities in the wider group, irrespective of their activities, where the supervisor believes that it is material to the condition of the bank or banking group, or to the assessment of the risks of the bank or banking group or is needed to support resolution planning. This includes internal management information.
Description and findings re EC6	The BNB has strong information gathering powers, both in relation to a solo institution and to its wider group. For example, under the LCI (Art 69) banks must submit reports in the format, content and time limits established by the BNB. As noted above, the LCI also provides the right to require banks and when applicable financial holding companies, mixed financial holding companies and their shareholders or partners to submit to it all the relevant documents and information on their activities, as well as conferring the right to conduct on-site inspections (Art 80). This same article also provides: (2)”For the consolidated supervision performance, the BNB may require parent companies and banks’ subsidiaries to provide all the relevant documents and information…”
EC7	The supervisor has the power to access36 all bank records for the furtherance of supervisory work. The supervisor also has similar access to the bank’s Board, management and staff, when required.
Description and findings re EC7	Again the LCI (Article 80(3)(1), (2), (6) and (7)) provide a sound basis for information access for the BNB. Pursuant to para 1, article 80 from the Law on credit institutions, the BNB has the power to request from the banks to provide all necessary accounting or other documentation and information on their activities, as well as to conduct on-site visits by inspectors from the Banking supervision department or other authorized persons and to collect evidence in order to identify violations of the supervisory regulations. Extensive rights of access to information are set out in Art 80(3). Inspectors are entitled to have free access to the business premises and the information systems of the bank, as well as to require documentation and collect information as related to the implementation of its supervisory activity and assignments. In the context of normal supervisory practice those powers are used when the BNB issues an official letter ahead of an on-site inspection requiring detailed information such as list of specified documents, MIS data, risk management, internal audit and other reports, internal rules, policies and procedures, registers, minutes from meetings of competent management bodies and committees, etc. is being requested. The assessors saw a number of examples of carefully specified and highly detailed information request letters. In addition, the provisions of point 6, of Art 80(3) LCI provide the BNB with the authority to attend the meetings of the management and supervisory bodies within the banks, as well as to express opinions that are being recorded in the minutes of the meetings. There are no specific limitations or restrictions in terms of communication with the bank’s Board, management and staff.
EC8	The supervisor has a means of enforcing compliance with the requirement that the information be submitted on a timely and accurate basis. The supervisor determines-the appropriate level of the bank’s senior management is responsible for the accuracy of supervisory returns, imposes sanctions for misreporting and persistent errors, and requires that inaccurate information be amended.
Description and findings re EC8	When a bank, financial holding company or mixed financial holding company is in violation of the banking laws, such as the LCI, the CRR, or Regulation (EU) No 1031/2010 (regarding energy derivatives), the BNB may apply a financial penalty from BGN 50,000 to BGN 200,000, and in case of repeated violation – from BGN 200,000 to BGN 500,000 (Art. 152, para. 2 LCI). There is no history of penalties having been applied for non-observance of reporting requirements. The BNB noted that the time period for reporting had extended from 15 days to 45 days with the introduction of the EU supervisory reporting regime. Lateness of returns has not been an issue. Currently, the BNB was still fielding many queries on how to comply with the new instructions but it is not permissible for the supervisory authority to interpret the ITS. In practice the BNB consults with the EBA, although this is not an immediate process as the EBA has its own procedures to fulfill before being able to post a response on its official website. It is possible therefore that there may be some issues concerning accuracy of reporting stemming from the learning curve presented by the new regime. The BNB supervisory department responds to all questions lodged by the banks, raised in relation to the CRR, ITSs and RTSs. In terms of consistency of the answers the BNB has put in place an internal Q&A platform which is organized by topic and provides cross references to the staff involved in responding and the contact/institution that lodged the question. The Supervisory Policy Derectoriate is responsible for maintaining this platform as well as being engaged in the responses.
EC9	The supervisor utilizes policies and procedures to determine the validity and integrity of supervisory information. This includes a programme for the periodic verification of supervisory returns by means either of the supervisor’s own staff or of external experts.37
Description and findings re EC9	The BNB applies – as it is required to do – a careful validation process on returns that are received to ensure the consistency and integrity of the data. The on-site examinations inspect the preparation of the supervisory reporting of the bank, and may also check the internal audit of the bank in this regard. The on-site process will also sample loan files and reconcile data back to the supervisory reports. There are additional checks to reconcile financial reporting validated by the external auditors with supervisory reports.
EC10	The supervisor clearly defines and documents the roles and responsibilities of external experts,38 including the scope of the work, when they are appointed to conduct supervisory tasks. The supervisor assesses the suitability of experts for the designated task(s) and the quality of the work and takes into consideration conflicts of interest that could influence the output/recommendations by external experts. External experts may be utilized for routine validation or to examine specific aspects of banks’ operations.
Description and findings re EC10	The LCI (Art 80(4, 5)) permits the appointment of external experts by the BNB. At the time of the assessment, the BNB had not exercised this power although it might do so in the future.
EC11	The supervisor requires that external experts bring to its attention promptly any material shortcomings identified during the course of any work undertaken by them for supervisory purposes.
Description and findings re EC11	The law requires external auditors to inform the BNB immediately about any circumstances that have become known to them during the audit and which are breaches of the law, might affect the bank or lead it to be unable to fulfill its obligations (etc.): (Art 77(1) LCI). The law does not impose a similar obligation on an external expert engaged by the BNB to undertake a task with a supervisory purpose.
EC12	The supervisor has a process in place to periodically review the information collected to determine that it satisfies a supervisory need.
Description and findings re EC12	For the purposes of macroprudential supervision and financial stability (since June 2014) a review of the adequacy of collected information is carried out regularly with respect to its format, content and frequency. As noted above, the BNB has been engaged in a careful process of assessing its data needs for its overall supervisory purposes.
Assessment re Principle 10	Compliant
Comments	The requirements associated with supervisory reporting are now predominantly governed by a harmonized EU regime. In this context, it is noted that the reporting regime is going through a transitional phase, placing heavy demands on the supervisors and the banks alike. However, the harmonized reporting reflects the fact that Bulgarian data plays a role in EU wide analysis. It is also important to recognize the strong – and valid – emphasis that the BNB puts on the quality and intensity of its analytical work. Therefore, in view of the EU and national significance, it is essential to ensure that the data that is being reported has integrity and can be relied upon. The supervisory teams of the BNB are fully aware of this importance, and place emphasis on this issue in the on-site inspections as well as through the technical validation of data (eg the formal, logical checks for internal consistency and coherence). However, the experience with the bank failure in 2014, indicates that more resources need to be dedicated to this task. While supervisors cannot be expected to detect fraud, an increased assurance on the validity of the data being received is particularly important in the post crisis period. Although the BNB does not, currently, make use of any external experts for supervisory purposes, it is important that laws or regulations are amended to ensure that external experts must bring to the BNB’s attention promptly any material shortcomings identified during the course of any work undertaken by them for supervisory purposes.
Principle 11	Corrective and sanctioning powers of supervisors. The supervisor acts at an early stage to address unsafe and unsound practices or activities that could pose risks to banks or to the banking system. The supervisor has at its disposal an adequate range of supervisory tools to bring about timely corrective actions. This includes the ability to revoke the banking license or to recommend its revocation.
Essential criteria
EC1	The supervisor raises supervisory concerns with the bank’s management or, where appropriate, the bank’s Board, at an early stage, and requires that these concerns be addressed in a timely manner. Where the supervisor requires the bank to take significant corrective actions, these are addressed in a written document to the bank’s Board. The supervisor requires the bank to submit regular written progress reports and checks that corrective actions are completed satisfactorily. The supervisor follows through conclusively and in a timely manner on matters that are identified.
Description and findings re EC1	There is a constant dialogue between teams of CISD (Credit Institutions Supervision Directorate) and representatives of the different hierarchy levels of every bank. The intensity of this dialogue depends on the risk profile, size and systematic importance of the different credit institutions. BNB raises its supervisory concerns with the Bank’s management at an early stage. This can take place during or at the end of the on-site visit, as well as in an official letter in the cases when the deficiency is ascertained during the off-site analysis. According to the BNB’s Banking Supervision Process Manual, a wrap up meeting is held at the bank’s premises with appropriate bank’s officials to present the on-site inspection findings and proposed corrective actions. Then the BNB’s team prepares a report which contains the main findings, areas of weaknesses and problems that warrant particular attention. The bank is given a 7 working days period for reply, objections and explanations, based on the conclusion of the report. These meetings provide an opportunity to discuss possible remedial measures, even before the inspection is finalized. It is noteworthy that BNB inspectors can receive technical support from their colleagues of the BNB legal department (Legal Services and Administration Directorate-LSA) during their on-site inspection. On the basis of a request submitted by the CISD Directorate, the LSA director will appoint a lawyer who will receive all inquiries from the inspection team. If necessary, particularly when the inspectors have detected possible violations, the lawyer will review any relevant documentation in the inspected bank before providing general legal opinion. The time limit for finalizing the inspection report is 10 working days from the date of the final meeting with the bank’s management. The responsibility for delivering these reports lies with team leaders. Each report shall be approved by the CISD director. Depending on the severity of findings, the director of the directorate may decide that the report also needs to be approved by the deputy governor. Once approved by the latter, the report containing corrective actions shall be handed over to the Bank’s executive directors. Thereupon, the bank’s management is given a short period of time to express its opinion and possible objection to the findings. In cases of serious deficiencies or breaches detected during the on-site visit, the Director of the CISD will prepare and communicate a Memo to the Deputy Governor, along with a copy of the inspection report. This Memo will describe the violations, qualify the facts and suggest possible action to be taken against the bank. Then, the Deputy Governor will make a final determination. In case the DG decides to pursue, depending on the severity of the deficiency/breach, either an official letter (written warning) signed by the latter is sent to the management board outlining the facts that led to the breach, or a written order (an individual administrative act subject to appeal) is issued. In principle, in both cases the bank may be required to respond to the concerns expressed by the BNB within a specific timeframe defined by the BNB and undertake a commitment to take the necessary remedial actions. In case of an official letter, if the deficiency is not addressed, the BNB may decide to issue a written order after determining which supervisory instrument, as set out in LCI art.103, para.2 is appropriate to redress the situation. In that regard, the BNB has set up a follow up mechanism to ensure bank’s performance against corrective measures. The monitoring of the fulfillment of remedial measures is ensured through regular written progress reports from the bank. Besides, every quarter, a report will be prepared by the CISD on each bank subject to scrutiny providing details on the status of measures being taken by management. These quarterly reports are sent to the DG for information. It should be noted that in each inspection report, violations with the regulation even minor, are systemically discussed.
EC2	The supervisor has available39 an appropriate range of supervisory tools for use when, in the supervisor’s judgment, a bank is not complying with laws, regulations or supervisory actions, is engaged in unsafe or unsound practices or in activities that could pose risks to the bank or the banking system, or when the interests of depositors are otherwise threatened.
Description and findings re EC2	The Bulgarian enforcement regime for banks is governed by the LCI, art. 103 (1) and (2). The BNB is empowered to impose measures (discussed right below) when a bank or any of its administrators or shareholders have committed certain offenses detailed in the law, consisting of, inter alia, violation of the banking law (the LCI) and other acts including AML law, the EU regulation (575/2013), and BNB guidelines. The same regime will apply wherever the bank is threatening depositor’s interest, providing or disclosing incomplete or inaccurate information, ignoring BNB orders or warnings, engaging in money laundering operations, and carrying out transactions outside the ambit of its license. The BNB has available a wide range of supervisory tools to address situations where banks do not comply with laws and regulations or where banks engage in unsound practices as indicated above. The relevant provisions can be found in LCI art. 103 (2) and art. 152 – 152 d. The BNB may, depending on its view of the seriousness and nature of detected shortcomings take one or more of a broad selection of supervisory measures, as deemed appropriate. These measures are of different nature and include administrative compulsory measures and administrative penalties. For example, in situations where the bank did not commit a violation per se or the violation is not material, but there are however evidences of unsafe and unsound practices, the BNB will issue a written warning to the bank. In case of serious problems, the BNB will send a written order asking the bank to cease a particular conduct or undertake “remedial actions.” In more serious scenarios, the BNB can (i) restrict or suspend any bank’s activity, including lending activities or to prohibit certain transactions, (ii) impose additional capital, (iii) prohibit payment of dividends and request a reduction in variable remuneration, (iv) force the bank to change its internal rules and procedures, (iv) instruct the bank to dismiss one or more members of the board of directors, (v) forbid the conduct of transactions with related parties, etc. In 2011, the BNB divested of their voting rights five companies holding shares in a bank. It is worthwhile noting that the BNB can combine administrative compulsory measures and administrative penalties where needed. When a bank displays signs of possible insolvency, the BNB can place the institution under a “Special Supervision” regime for a period of 6 months. For the purpose of rehabilitating the bank, the BNB will appoint one or several conservators whose power are to be determined by the DG and the Governor.40 This Special supervision regime has been utilized in 2014 when KTB bank started to exhibit major problems. Pursuant to a decision made on June 20th by the BNB Governing Council, KTB and its subsidiary CB Victoria were placed under special supervision for a period of 3 months; conservators were appointed at both banks, the execution of all banks’ obligations and banks activities were suspended, members of management and supervisory boards were dismissed from the office and voting rights of the shareholders holding more than 10 per cent of banks’ shares were revoked. Last but not least, in the most extreme scenarios (when the bank is no longer viable), the BNB can withdraw a bank’s license, as permitted under the LCI via a decision to be made by the governing council of the BNB based on a joint motion submitted by the Deputy Governor heading the Banking Supervision Department and the Governor. This was the case for KTB whose license was revoked on November 2014 prior to launching an insolvency proceeding.41 As indicated above, the BNB has also at its disposal other types of sanctions consisting in “administrative penalties.” The LCI contains several provision according to which financial institutions (legal and natural persons) can be subjected to fines ranging from BGN 1000 (approx. 566 $) to BGN 10 million (approx. US 5 millions). The amount of the administrative penalty is determined by the seriousness of the offense and depends on whether the breach has been committed by a legal person or an individual. In case of persistent breaches, the fine can be increased. The violations that carry the highest fines are, inter alia, actions in concert that have not been authorized by the BNB, undisclosed significant change in bank’s ownerships and provision of false information for licensing purposes. These fines seem to be deterrent enough. The vast majority of the corrective measures or sanctions are taken by the Deputy Governor alone who exercises full discretion in determining the nature, intensity and scope of the prudential response. In specific circumstances determined in the law (e.g revocation of a license and application of the special supervision regime), the decision is taken by the Governing council on a motion of the Governor and the Deputy Governor Heading the Banking Supervision Department (see also BNB law, art. 16); in all other cases, the decision belongs to the said Deputy Governor or by a BNB official authorized by him. There is therefore no “collegiality” when it comes to take any type of administrative compulsory measures and/or administrative penalties. Over the past years, the Deputies Governor’s approach for enforcing compliance has mainly consisted in issuing orders instructing banks to take corrective actions, even in the case of persistent offenders and one fine only (US 25K) was applied. Assessors are of the view that the DG in charge of banking supervision did not always use the full range of powers in situations that would have warranted more forceful reaction. Another feature of the Bulgarian regime is that sanctions can be made public. In consonance with the LCI, art. 152d, the BNB can publish on its official website without undue delay an information on all administrative penalty acts imposed for infringement of the banking law and other key regulations, including information on the type and nature of the breach and the identity of the natural or legal person on whom the penalty was imposed. However, the BNB can exercise some discretion in publishing only a summary of this information, for example if the publication is found to be disproportionate (in case of natural person) or could jeopardize the stability of the market. In the area of AML/CFT, the range of sanctions for infringements of provisions of the LMML that are available to the Financial Intelligence Unit (FID-SANS) include the power to: - impose fines applicable for administrative breaches for non-compliance up to a maximum fine of 50,000 BGN (€25,000); - compel the undertaking of concrete steps by the obligated persons in case of infringements; - issue written warnings and recommendations; - refuse endorsement of the internal rules of the reporting entities. Although the maximum level of fine does not appear sufficiently dissuasive, the Bulgarian authorities informed the evaluators that in practice every violation of the LMML or LMFT carries a separate sanction and that the total level of fines might be much higher in case of multiple breaches, which would ensure both effectiveness and proportionality. However, as discussed under CP 29, enforcement of AML/CFT regulations is not deterrent enough.
EC3	The supervisor has the power to act where a bank falls below established regulatory threshold requirements, including prescribed regulatory ratios or measurements. The supervisor also has the power to intervene at an early stage to require a bank to take action to prevent it from reaching its regulatory threshold requirements. The supervisor has a range of options to address such scenarios.
Description and findings re EC3	The BNB has a wide range of options to intervene at an early stage to require the bank to take actions allowing it to act even though a bank may fulfill minimum regulatory requirements. As indicated to the team, this is common practice for BNB to raise its supervisory concerns at an early stage with management –via on-going dialogue- and to require that these concerns will be addressed in a timely manner, following the EBA guidelines in Pillar II. In case a bank falls below established regulatory threshold requirements, the LCI provides clear power to the BNB; in particular, as laid out in art. 103 (2)[3,4,5], the BNB can issue a written order instructing the bank to hold additional capital or to improve banks’ financial position. Written orders do not emanate solely from the results of on-site examinations. The supervisor may deem them necessary as a result of the off-site analysis or the results of bottom-up stress tests of the institution, which would suggest that, for example, a capital inadequacy issue is looming. Over the past years, the BNB has requested banks to increase their capital in several instances. Further, when a bank exhibits signs of distress, the BNB can place the bank under special supervision. This conservatorship regime is endorsed by the Governing Council based on a motion presented by the Deputy Governor, together with the Governor, after forming the view that there is a risk of insolvency (e.g., CAR below the minimum threshold, insufficient bank’s liquid assets, etc.). Measures that can be taken by the conservator appointed in that occasion include, among others, capital increase, dismissal of members of the board, shareholders’ voting rights suspension, etc. (see EC 3 above).
EC4	The supervisor has available a broad range of possible measures to address, at an early stage, such scenarios as described in essential criterion 2 above. These measures include the ability to require a bank to take timely corrective action or to impose sanctions expeditiously. In practice, the range of measures is applied in accordance with the gravity of a situation. The supervisor provides clear prudential objectives or sets out the actions to be taken, which may include restricting the current activities of the bank, imposing more stringent prudential limits and requirements, withholding approval of new activities or acquisitions, restricting or suspending payments to shareholders or share repurchases, restricting asset transfers, barring individuals from the banking sector, replacing or restricting the powers of managers, Board members or controlling owners, facilitating a takeover by or merger with a healthier institution, providing for the interim management of the bank, and revoking or recommending the revocation of the banking license.
Description and findings re EC4	The LCI provides the BNB with a broad range of possible measures to address situations where, for example, (i) a bank or its management or shareholders have breached the banking law or any normative acts from the BNB, (ii) the conditions for getting a license are no longer met, (iii) the bank fails to comply with its AML/CFT obligations, (iv) the bank jeopardizes depositors’ interests, (v) the bank does not comply with its reporting obligations or reports erroneous data on banking prudential indicators, or (vi) the bank does not conform with remedial measures (e.g written orders). The LCI prescribes general and specific actions the BNB may take in this regard. Broadly speaking, in accordance with Art. 103 (2) of the LCI, the BNB is empowered to impose corrective actions on a bank. Certain specific actions include restrictions or suspension of banking activity, constraining the volume of certain types of activities, restricting, prohibiting payment of dividends as described under EC2. Over the past years, the BNB has employed some of these actions, including raising prudential limits on several banks, placing two banks under special supervision and withdrawing a bank license. The BNB also applied pecuniary sanctions in one case (fine of approx. US$ 25K) against a bank which did not observe BNB instructions to increase its capital. It is worthwhile mentioning that enforcement of prudential requirements by the BNB has mainly consisted in issuing written orders. There is almost no case over the past 5 years where the BNB took sanctions to deter recurrent violations from happening again. The mission analyzed all measures handed over since 2010 by the BNB and came to the conclusion that the response against persistent offenders has not been severe enough. The BNB considers more effective to exercise moral suasion rather than resorting to coercive measures. While the LCI determines the range of fines for specific violations, the law does not stipulate explicitly the application of a particular remedial measure for a certain type of violation. Supervisory measures and administrative sanctions that are deemed necessary by the BNB are determined by the DG on the basis of the gravity of violations and deficiencies and their recurrence, at the recommendation of the LSA Directorate and after consultation with the Supervision Directorate. The DG therefore has full discretion in determining the measures to be applied. Assessors are of the view that this situation may generate risks of potential arbitrariness in decisions, inconsistent application of supervisory measures, and unequal treatment. All supervisory measures taken by the BNB, including type of measure or sanction, short description of facts and corrective measures are recorded in a Central bank register.
EC5	The supervisor applies sanctions not only to the bank but, when and if necessary, also to management and/or the Board, or individuals therein.
Description and findings re EC5	According to the LCI, penalties and sanctions can be imposed not only to a bank as a legal entity (Article 152, paragraph 2 of the LCI), but also to bank’s managers and other administrators who have the power to represent it (Article 152, paragraph 1 of the LCI). In both cases, sanctions are issued by the Deputy Governor heading the Banking Supervision Department, or by an official authorized by him. Such sanctions however do not apply to other bank’s staff (e.g., compliance, AML, risk management officers).
EC6	The supervisor has the power to take corrective actions, including ring-fencing of the bank from the actions of parent companies, subsidiaries, parallel-owned banking structures and other related entities in matters that could impair the safety and soundness of the bank or the banking system.
Description and findings re EC6	The BNB has the power to ring-fence a bank from the actions of parent companies. Art. 103 (2) par. 18 stipulates that the BNB can forbid the conduct of transactions and operations with persons who have close links with the bank or who belong to the same consolidation group as that of the bank, or who are members of the bank’s managing bodies, or who control the bank or have a qualifying holding or take part in the management of the persons controlling the bank. In one recent occasion, the BNB asked a parent company (a Greek bank) of a subsidiary located in Bulgaria to stop certain actions that may have otherwise compromised the stability of the local branch. It was not a ringfencing per se as the BNB did not resort to ring-fencing type of measures but issued a recommendation only; however, the mission was told that the parent company followed BNB recommendations by putting an end to its deleveraging in its Bulgarian branch. In the same vein, in light of the economic and political situation in Greece, all Greek banks operating in Bulgaria have been ring-fenced since the beginning of the crisis. The BNB instructed to banks to a) maintain highly liquid assets at 30 percent of attracted funds from non-credit and non-financial institutions, enterprises, and individuals, in addition to minimum reserves of 20 percent with the BNB, b) not to maintain excessive balances with the parent bank and its group; c) not to invest in securities of issuers with non-investment grade rating; d) ensure functional independence from the parent bank; and e) submit daily reports to the BNB.
EC7	The supervisor cooperates and collaborates with relevant authorities in deciding when and how to effect the orderly resolution of a problem bank situation (which could include closure, or assisting in restructuring, or merger with a stronger institution).
Description and findings re EC7	Currently there is no local legal framework for the recovery and resolution of credit institutions. The BNB can address problem banks (in case of risk of insolvency) by subjecting the bank to a special supervision regime. The BNB Governing Council will appoint one or several conservators who will take, under the authority of the BNB, all measures to redress the bank. If the conservatorship of the bank proves to be ineffective (e.g the bank exhibits negative own funds), the BNB has legally the obligation to withdraw the license and petition to the competent court for initiation of bankruptcy proceedings. During the collapse of KTB, it has become obvious that the BNB did not have the proper tools to address the situation including, for example, the bad bank/good bank option. The initial idea of the authorities was to separate the assets which had been assessed as good as well as the liabilities of KTB, except those connected with the major shareholder42, and to transfer them to the balance sheet of CB Victoria, a solvent subsidiary acquired by KTB. This plan did not materialize due to the lack of legal basis. The difficulty to apply an orderly resolution has prompted the authorities to revisit its legal framework for the recovery and resolution of credit institutions. Such framework will be available after the implementation of the BRRD (EU Directive 2014/59/EC (Resolution and Recovery of Credit Institutions and Investment Firms)) in the Bulgarian legislation and the appointment of the resolution authority. This transposition into the national regime is in progress and it is expected to come in force by end of 2015.
Additional criteria
AC1	Laws or regulations guard against the supervisor unduly delaying appropriate corrective actions.
Description and findings re AC1	Formal and informal measures are imposed by the BNB on a timely manner in case of noncompliance with the laws, regulations and BNB guidelines, identified by the on-site or off- site inspectors. However, there is no specific law or internal processes that provide time lines under which a prospective corrective action must be approved by BNB authorities and imposed on a bank.
AC2	When taking formal corrective action in relation to a bank, the supervisor informs the supervisor of non-bank related financial entities of its actions and, where appropriate, coordinates its actions with them.
Description and findings re AC2	According to Article 99, paragraph 1 of LCI, where BNB exercises supervision on consolidated basis of banks, financial holdings or joint venture holdings, the subsidiaries of which are one or more than one insurance undertakings or investment intermediaries whose activities are subject to licensing, BNB cooperates and exchanges information with the competent authorities for supervision of insurance undertakings and/or investment intermediaries.
Assessment re principle 11	Materially Non-Compliant
Comments	The LCI contains a large range of tools, measures and powers to bring about timely corrective actions. In that respect, the BNB has been able to act even though the bank fulfills the regulatory capital requirements. However, the detailed analysis of the inspection outcomes and the prudential responses adopted the BNB, albeit recently enhanced, lead the assessors to conclude that enforcement of prudential regulations is not effective enough and should be strengthened going forward. Some flaws described below have been detected and would merit attention: In exercising its power, the Deputy Governor has full discretion to determine the scope, nature and type of measures to be taken. He is not obliged to apply the measures set out in art. 103 of the LCI in their consecutive order. He has the discretion to adopt the measures that is most appropriate and effective to the supervisory findings. As a result, the forcefulness of measures will very much reflect the personal approach of whoever is exercising the mandate of DG. Assessors are of the opinion that this regime has important flaws in particular as it does not guarantee a consistent approach. Bulgarian authorities should consider some mechanism to ensure more collegiality in the decision making process and provide the Governing Council with more oversight on the way enforcement is exercised. Further, there is no internal guideline that could assist the DG in determining the most adequate response in case of breach or violation. The BNB does not have in-house methods or criteria that could provide senior management minimum guidance on how to apply criteria for sanctions, particularly for setting the quantum for fines. The imposition of sanctions and determination of their amount is judged from the DG in accordance to the weight and seriousness of the violation and the whole behavior of the bank. The DG may also take into consideration certain criteria (defined in a written document) such as the desire for cooperation, honesty and commitment of the bank’s management. However, there is no link between certain violations and certain sanctions and no remedial action thresholds at which supervisory action is required. Assessors are of the opinion that the lack of clear guidelines does not ensure proportionate response and equality of treatment among banks. Besides, it may actually allow decisions on corrective actions to be unduly delayed. Formal guidelines for supervisory enforcement should therefore be issued, linking supervisory findings to specific remedial actions and establishing procedures for appropriate exceptions. In terms of enforcement approach, the BNB has considered so far more effective to exercise moral suasion, e.g., by offering banks a certain period of time to overcome a problem rather than resorting to more coercive measures. In that regard, the mission reviewed an exhaustive collection of supervisory measures taken by the BNB since 2010 and observed that the DG response is not increased in case of persistent breaches. There are multiples cases of recurrent deficiencies in the same institution that triggered the same response from the supervisor (e.g., repetitive written orders). The DG should apply a gradual response and increase the intensity of the sanctions when banks ignore BNB’s recommendations and written orders. This could be achieved through either a combination of sanctions or through higher pecuniary fines. Yet in July 2014, the DG took formal action against a persistent offender. The mission welcomes this initiative and encourages the authorities to increase the intensity of sanctions to address repetitive failures. The power to appoint a special supervision regime as described under EC 2 is limted as it applies only to situation where a bank displays signs of possible insolvency. In assessors’ opinion, this power should be broader. It should be a regime the bank can also recover from, for example in case of management fraud, major AML problem, etc. Under these circumenances too, it may be necessary to put the bank under special supervision. An adequate framework geared towards resolving banks, including the preparation of recovery and resolution plans is still an important missing element. KTB’s collapse in 2014 demonstrated that Bulgaria’s legal framework did not give the authorities adequate resolution tools. As such, timely transposition of the EU Bank Recovery and Resolution Directive (BRRD) into national law is critical to address the gaps in the resolution and crisis management toolkit, and to provide for coordinated and timely actions43 to deal with problematic banks. This process will require the designation of the resolution authority for banks and investment intermediaries as well as resolution funds and adequate resolution and recovery planning. Against this background, the authorities are encouraged to consider the following recommendations: Set internal guidelines to assist the Deputy Governor in determining the most adequate response in case of breach or violation Apply gradual response when a bank is not complying with BNB recommendations Take more forceful action against persistent offenders Consider broadening the circumstances uner which a bank can be placed under Special supervision regime.
Principle 12	Consolidated supervision. An essential element of banking supervision is that the supervisor supervises the banking group on a consolidated basis, adequately monitoring and, as appropriate, applying prudential standards to all aspects of the business conducted by the banking group worldwide.44
Essential criteria
EC1	The supervisor understands the overall structure of the banking group and is familiar with all the material activities (including non-banking activities) conducted by entities in the wider group, both domestic and cross-border. The supervisor understands and assesses how group-wide risks are managed and takes action when risks arising from the banking group and other entities in the wider group, in particular contagion and reputation risks, may jeopardize the safety and soundness of the bank and the banking system.
Description and findings re EC1	Ten banking groups are operating in Bulgaria which report financial statements on a consolidated basis. Each consists of one banking institution and several types of NBFIs mainly leasing companies located in Bulgaria. Banks are the principal entity in these financial groups, representing the preponderance of total assets at present. In addition, there is one holding company with mix activity but no financial conglomerate in the country. Two Bulgarian banks have branches in the EU (Romania and Cyprus); two banks have a branch in third countries (Macedonia and Albania) and two banks have two subsidiaries in Russia and Albania. Requirements for supervision on a consolidated basis are those prescribed in the CRR and CDRIV. Relevant provisions can also be found in the LCI. As a general principle, the BNB is responsible for exercising supervision on a consolidated basis over banks, banking groups, financial holding companies, mixed financial holding companies and mixed holding companies in accordance with the terms and procedure of the LCI (art. 89). Alternative investment fund managers and management companies are also included in the scope of consolidated supervision in the same manner and to the same extent as financial institutions. The LCI also empowers the BNB to require detailed information about the ownership structure of all the companies/organizations that participate in the capital of a bank. Any plan to modify the structure or the composition of the group must be previously submitted to the BNB which assesses whether the proposed changes would permit the effective exercise of supervision on a consolidated basis (see CP5). According to Article 97 of LCI where a mixed holding company is the parent undertaking of one or more banks licensed in the Republic of Bulgaria, the BNB may require from the holding company and its subsidiaries any information that would be relevant for the purposes of the consolidated supervision of the subsidiary banks. BNB collects information on the balance sheet, profit and loss and nature of the activities involved on an annual basis. To that end, the LCI covers a large number of reporting and submission requirements that allow the supervisor to judge the structure of an organization as a whole at the group level (LCI, Art.75 and Regulation No 680/2014 on supervisory reporting). When it comes to cross-border supervision for consolidated purposes, the LCI also contains several provisions establishing the mechanism of cooperation between the BNB and foreign supervisors (located in the EU or in a third country) for information sharing including for banking groups. The practical conditions for such cooperation can be found in the “Multilateral Cooperation and Coordination Agreements.” From an off-site perspective, the BNB performs its due diligence using information reported by banks via prudential reporting (COREP and FINREP). Capital adequacy, liquidity, large exposures limits, lending limits are analyzed at the group level. The evaluation of the organizational structure of a banking group and especially the evaluation of activities of each member of the group as well as the activities within the group (e.g., connected lending) are an essential part of the on-site inspections conducted by the BNB. For the purposes of the supervision on consolidated basis the BNB has powers to request from the mother company and from the bank subsidiaries all the necessary documentation and information as well as right to perform counter inspections at other bank and non-bank enterprises (e.g leasing companies). The division responsible for solo supervision of a parent financial undertaking is also responsible for the consolidated supervision of the group.
EC2	The supervisor imposes prudential standards and collects and analyses financial and other information on a consolidated basis for the banking group, covering areas such as capital adequacy, liquidity, large exposures, exposures to related parties, lending limits and group structure.
Description and findings re EC2	Financial groups are subject to the same prudential standards as the stand alone bank as set forth in the LCI. Art. 75 requires banks and banking groups to submit to the BNB financial statements which reflect their financial position both individually and on a consolidated basis. Moreover, groups are subject to regulations regarding capital adequacy, liquidity, large exposures, exposures to related parties, lending limits and group structure. Supervisory reports (FINREP and COREP) provide a wide range of information regarding on-and off- balance sheet assets and liabilities, profit and losses, capital adequacy, liquidity, large exposures, risk concentration (including by economic sector, geography and currency and towards related parties), asset quality, loan loss provisioning, interest rate risk, market risk, and also other information on the organizational structure. Intra-group transactions are also captured in the FINREP and COREP45 reporting (see ITS on supervisory reporting). For capital adequacy purposes in particular, the BNB manual on ICAAP sets the condition for application of the ICAAP by banking groups. Each credit institution shall develop and implement the ICAAP requirements individually. ICAAP also applies on a consolidated basis pursuant to the CRR/CRD. BNB Ordinance #14 on the content of the audit report for supervisory purposes stipulates in Art. 2. (1) that the auditor shall carry out an audit of the annual financial and supervisory reports of the bank and the reliability of the internal control system and then prepare a report for supervisory purposes. The report shall include a review of the bank financial position and major indicators of bank activity on an individual and consolidated basis, as well as the organization of the internal control system. The review of the financial position of the bank shall be based on the information of the consolidated FINREP on the basis of Regulation 680/2014 on the supervisory reporting and individual FINREP on the basis of Article 75, para. 2 of the LCI. Another legal provision relevant to this CP can be found in Art. 89(5) of LCI whereby a bank licensed by the BNB is part of the banking group, a financial holding company, mixed financial holding company or mixed-activity holding company, it shall present annually to the BNB information on the structure to which it belongs, including changes made within 30 business days after the calendar year end.
EC3	The supervisor reviews whether the oversight of a bank’s foreign operations by management (of the parent bank or head office and, where relevant, the holding company) is adequate having regard to their risk profile and systemic importance and there is no hindrance in host countries for the parent bank to have access to all the material information from their foreign branches and subsidiaries. The supervisor also determines that banks’ policies and processes require the local management of any cross-border operations to have the necessary expertise to manage those operations in a safe and sound manner, and in compliance with supervisory and regulatory requirements. The home supervisor takes into account the effectiveness of supervision conducted in the host countries in which its banks have material operations.
Description and findings re EC3	According to Article 89(3) of LCI, banking groups which are subject to consolidated supervision by the BNB shall implement arrangements, processes and mechanisms required by the LCI also in their subsidiaries, including those which are not subject to the LCI. These arrangements, processes and mechanisms shall also be consistent and well-integrated into the bank’s risk management framework and those subsidiaries above shall also be able to produce any data and information relevant to the purpose of supervision. If a bank wishes to establish foreign operations in a country outside the EU the BNB will, before the bank is given permission to start operations, ensure that the bank and the BNB can get access to all material information. The BNB will also ascertain, according to the law, that the host supervisor conducts an effective and adequate supervision of the foreign operation. For foreign operations located in the EU, there is no hindrance for the parent bank to get access to all material information from the foreign operations. Supervision of the parent bank and its foreign operations in the EU are discussed in the supervisory colleges. Bulgaria participates in 10 colleges, 9 for subsidiaries and 1 for a significant branch. As indicated under CP 3, BNB is involved in a number of bilateral MoUs with EU countries including Cyprus, Italy, Slovenia, France, Hungary, Greece, Germany, Austria, the Netherlands and third countries (Turkey, Macedonia, Albania) for the information that should be shared in order to facilitate effective consolidated supervision of financial institutions across national borders. In addition to supervisory colleges, the effectiveness of the parent company’s oversight on the whole group (including foreign operations) can be assessed via on-sites visits. After prior notice to the relevant competent authorities of the Member States, BNB staff is empowered to carry out on-site inspections in the respective country regarding the foreign activities of banks licensed in Bulgaria and performing activity on the territory of the Member State through a branch (Art. 87(11) of LCI). In practice however, this has not been the case over the past years due to limited resources (except in one occasion –in Cyprus- and with a limited scope on AML/CFT).
EC4	The home supervisor visits the foreign offices periodically, the location and frequency being determined by the risk profile and systemic importance of the foreign operation. The supervisor meets the host supervisors during these visits. The supervisor has a policy for assessing whether it needs to conduct on-site examinations of a bank’s foreign operations, or require additional reporting, and has the power and resources to take those steps as and when appropriate.
Description and findings re EC4	As discussed above, the BNB has the power to initiate and carry out on-site visits in EU countries where banks licensed on the territory of the Republic of Bulgaria are operating through a branch (LCI, Art. 87(11)). The BNB can also request the competent authorities of the host Member State to perform an on-site inspection of the activities of a branch of a bank licensed in the Republic of Bulgaria, which carries out activities on the territory of this host Member State. The BNB under his capacity of home supervisor has not visited the foreign offices of Bulgarian banks due to limited resources and because banks’ foreign operations are not material. On-site visits in Bulgaria from home supervisors have been done in a rare occasions, the last one was in 2007 by Austria.
EC5	The supervisor reviews the main activities of parent companies, and of companies affiliated with the parent companies, that have a material impact on the safety and soundness of the bank and the banking group, and takes appropriate supervisory action.
Description and findings re EC5	According to Article 97 of LCI where a mixed holding company is the parent undertaking of one or more banks licensed in the Republic of Bulgaria, the BNB may require from the holding company and its subsidiaries any information that would be relevant for the purposes of the consolidated supervision of the subsidiary banks. In practice, BNB’s oversight of the organization covers risk management framework and adequacy of internal audit functions, the organizational structure, strategic and operational risks, adequacy of management information systems, and implementation of internal processes. The BNB operates a “Special supervision” department which is competent in AML/CFT issues and in performing inspections in nonbanking business entities connected to credit institutions or the respective groups that they belong to. Indeed, for leasing and factoring companies and consumer finance companies, this constitutes a useful complements to BSD’s own inspection team. That said, there is a lack of proper consolidated supervision at Bulgarian level over these entities due to the legal structure of most of such entities (in general belonging to the bank’s parent company or another specialized group company abroad).
EC6	The supervisor limits the range of activities the consolidated group may conduct and the locations in which activities can be conducted (including the closing of foreign offices) if it determines that: the safety and soundness of the bank and banking group is compromised because the activities expose the bank or banking group to excessive risk and/or are not properly managed; the supervision by other supervisors is not adequate relative to the risks the activities present; and/or the exercise of effective supervision on a consolidated basis is hindered
Description and findings re EC6	According to Article 103 of LCI, the BNB may impose against a bank, including when a bank is a part of a banking group, measures such as: limitation on the bank’s activity; restriction in terms of volume of certain types of activities; imposition of additional requirements for the bank in connection with its activity; prohibition of transactions and operations with persons who have close links with the bank or who belong to the same consolidation group as that of the bank or who are members of the bank’s managing bodies or who control the bank or have a qualified holding or take part in the management of the persons controlling the bank.
EC7	In addition to supervising on a consolidated basis, the responsible supervisor supervises individual banks in the group. The responsible supervisor supervises each bank on a stand-alone basis and understands its relationship with other members of the group.46
Description and findings re EC7	In consonance with the LCI, each bank is supervised on a solo and consolidated basis, which includes the operations at foreign locations. In other words, the BNB supervises—on an individual basis—all banks and financial intermediaries, regardless of the fact that they may be part of a banking group. The division responsible for solo supervision of a parent financial undertaking is also responsible for the consolidated supervision of the group.
Additional criteria
AC1	For countries which allow corporate ownership of banks, the supervisor has the power to establish and enforce fit and proper standards for owners and senior management of parent companies.
Description and findings re AC1	There are provisions of the LCI that give the BNB substantial capacity to review owners and senior management of companies, seeking to acquire a bank or FHC. However, no authority exists to do fit and proper reviews on an ongoing basis of owners and senior management of non-financial holding companies.
Assessment of Principle 12	Largely Compliant
Comments	The regime for consolidated supervision was found globally adequate. Yet, three improvements must be made: - Perform more frequent visits in branches and subsidiaries of Bulgarian banks located in and outside the EU - Capture leasing, factoring companies and consumer finance companies into the perimeter of consolidation in case of mix holding companies - Identify the authority to do fit and proper reviews on an ongoing basis of owners and senior management of non-financial holding companies.
Principle 13	Home-host relationships. Home and host supervisors of cross-border banking groups share information and cooperate for effective supervision of the group and group entities, and effective handling of crisis situations. Supervisors require the local operations of foreign banks to be conducted to the same standards as those required of domestic banks.
Essential criteria
EC1	The home supervisor establishes bank-specific supervisory colleges for banking groups with material cross-border operations to enhance its effective oversight, taking into account the risk profile and systemic importance of the banking group and the corresponding needs of its supervisors. In its broadest sense, the host supervisor who has a relevant subsidiary or a significant branch in its jurisdiction and who, therefore, has a shared interest in the effective supervisory oversight of the banking group, is included in the college. The structure of the college reflects the nature of the banking group and the needs of its supervisors.
Description and findings re EC1	The BNB is predominantly a host country supervisor. As noted in CP12, three Bulgarian banks have branches in the EU (Romania and Cyprus) and two banks have subsidiaries in third countries (Russia, Albania and Macedonia) In the context of these banking structures it has not been necessary to establish a bank-specific supervisory college for which the BNB is the home country supervisory authority. Currently the BNB is a host supervisor of 9 subsidiaries and 1 significant EU branch of EU cross-border banking groups and as a result participates in 10 supervisory colleges.
EC2	Home and host supervisors share appropriate information on a timely basis in line with their respective roles and responsibilities, both bilaterally and through colleges. This includes information both on the material risks and risk management practices of the banking group47 and on the supervisors’ assessments of the safety and soundness of the relevant entity under their jurisdiction. Informal or formal arrangements (such as memoranda of understanding) are in place to enable the exchange of confidential information.
Description and findings re EC2	All the colleges in which the BNB participates in are established in the EU, which has extensive legislation governing the creation of colleges and expectations for information gathering and joint activity and decision making for banks established in the EU. In all the colleges the BNB participates in, memoranda of understanding have been established between the supervisors. When supervisory colleges are established the BNB is required under the LCI (Art 92e(4) and Art94) to sign written coordination and cooperation arrangements with the competent supervisory authorities of the respective Member States. Again, this is the national transposition of the EU framework as set out in CRDIV. Within the EU supervisory colleges all members exchange information on the assessment of the main elements of the Supervisory review and evaluation process as required by the EU legislative framework (CRDIV) and as referred to in Article 79c of the LCI. In general, in performing its supervisory functions, the BNB may conclude agreements with other central banks or supervisory authorities of third countries on cooperation and information exchange on a reciprocal basis, making the commitment to keep bank and professional secrecy. (Art 88 LCI) Information is exchanged both multilaterally and bilaterally with fellow college members. The BNB has signed 10 multilateral agreements, based on the EBA template, within the EU colleges where it participates and is also involved in bilateral MoUs with other EU member states, including Cyprus, Italy, Slovenia, France, Hungary, Greece, Austria, the Netherlands. In addition the BNB has signed MoUs with non-EU member states (“third countries”): Turkey, the FYROM, Albania. Where no formal agreements have been signed, the BNB has maintained a policy of cooperation with supervisory authorities through e-mails or letters on a best effort basis. Types of information which is customarily shared between supervisors include: Material from the bank, e.g., capital plans, risk reports; Proposed supervisory measures regarding the bank, provided they have been fully vetted internally; Inspection reports; and Internal models, assessment and documentation. The BNB has a public Policy statement that sets out its position on international supervisory home-host cooperation and this includes examples of essential information which can be exchanged between the consolidating and the host supervisory authorities. The EU framework, transposed into the LCI, provides an underpinning for the creation of colleges and exchange of information noted above. As reflected in the LCI, home state competent authorities shall provide information to the host supervisors for the banking group. Of course, as the BNB is not at present consolidating supervisor it does not, currently, need to have regard to this part of the law (EG Art 89a LCI). However, where the BNB needs information for supervising a bank controlled by an European Union parent credit institution licensed in another Member State, the EU framework (again transposed into the LCI) provides that the BNB shall contact the competent authority responsible for supervision on a consolidated basis in the respective Member State where the relevant information may already be available to that competent authority. (Art 95 (4) and (5) LCI). The BNB’s legal framework set out in the LCI, and which reflects the EU legislation, also provides that it shall cooperate and exchange information with the relevant competent authorities of the Member States where a bank licensed in the Republic of Bulgaria carries out activities through a branch in another Member State or where a bank from another Member State carries out activities through a branch in the Republic of Bulgaria. (Article 87 (1) and (2) of the LCI).
EC3	Home and host supervisors coordinate and plan supervisory activities or undertake collaborative work if common areas of interest are identified in order to improve the effectiveness and efficiency of supervision of cross-border banking groups.
Description and findings re EC3	As a host authority, the BNB has regularly participated and contributed to the planning of supervisory activities, the discussions and the information exchange, for the purpose of more effective and complete risk assessments. To date the BNB has been involved in an onsite inspection with the home supervisor of one of the EU subsidiaries based in Bulgaria – and it should be noted that the subsidiaries in Bulgaria are typically regarded as peripheral to the banking groups in question. The consolidating supervisor and the members of the college, including the BNB, participate in the joint risk assessment and joint decision process on capital and liquidity, exchange all quantitative and qualitative information, on a solo and consolidated basis, necessary for developing the joint risk assessment and for reaching joint decisions. Such quantitative and qualitative information covers the following elements, taking into account the size, structure, internal organisation, nature, scope and complexity of the group and each entity, as well as their activities: • Business model analysis, including the assessment of the viability of current business model and sustainability of institution’s forward-looking business strategy; • Internal governance arrangements and institution-wide controls, including ICAAP and ILAAP frameworks; • Individual risks to bank’s capital, covering the following elements: - assessment of inherent individual risks; - assessment of risks management and controls; - SREP capital assessment; - Advanced Measurement Approach Assessment – AMA - Internal Ratings Based Approach Assessment - IRB • Risks to bank’s liquidity and funding, covering the following elements: - assessment of liquidity risk and funding risk; - assessment of liquidity and funding risk management; - SREP liquidity assessment; • SREP results of the supervisory stress tests performed pursuant to Article 80b of the LCI; • Findings from on-site inspections and off-site monitoring that are relevant for the assessment of the risk profile of the group or any of its entities. The supervisory colleges facilitate a common and aligned work programme and coordinated supervisory decisions. Within the colleges, supervisory authorities are able to agree on voluntary entrustment of tasks and voluntary delegation of responsibility, and determine supervisory examination programmes, based on the group risk assessment report and the outcome of the capital and liquidity joint decision. (Article 92e (2) LCI). As noted in EC2, the legal basis for cooperating and coordinating supervisory activities is found in the LCI, reflecting the EU framework.
EC4	The home supervisor develops an agreed communication strategy with the relevant host supervisors. The scope and nature of the strategy reflects the risk profile and systemic importance of the cross-border operations of the bank or banking group. Home and host supervisors also agree on the communication of views and outcomes of joint activities and college meetings to banks, where appropriate, to ensure consistency of messages on group-wide issues.
Description and findings re EC4	Where the BNB is part of a supervisory college, MoUs are in place which provide for the exchange of information and an agreed communications strategy. The practical means of information exchanges are decided on the basis of a flexible framework and on a case-by-case basis. Where the BNB is the home supervisor, it has an obligation under the LCI (Art92(1)) to develop a communication strategy and coordinate the gathering and dissemination of relevant and essential information in going concern and in emergency situations. In relation to the non-EU/EEA subsidiaries, the BNB has not yet established a formal communication strategy but has funcational relationships with the respective supervisors that were discussed with the assessors.
EC5	Where appropriate, due to the bank’s risk profile and systemic importance, the home supervisor, working with its national resolution authorities, develops a framework for cross-border crisis cooperation and coordination among the relevant home and host authorities. The relevant authorities share information on crisis preparations from an early stage in a way that does not materially compromise the prospect of a successful resolution and subject to the application of rules on confidentiality.
Description and findings re EC5	A framework for cross-border crisis cooperation and coordination is contained in MOUs between the relevant supervisory authorities. As with ECs above, the LCI provides that in the event that the BNB is the consolidating home state supervisor (EU or non-EU), it has obligations to coordinate the gathering and dissemination of relevant and essential information in going concern and in emergency situations; plan and coordinate supervisory activities in cooperation with the competent authorities involved, and where necessary, with central banks in the preparation for and during emergency situations, including adverse developments in banks or in financial markets using, where possible, existing defined channels of communication for facilitating crisis management. This also includes the preparation of joint assessments, the implementation of contingency plans and communication to the public. (Art 92(1) and (2) LCI) The Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions (BRRD) had not been implemented at the time of the assessment. Some arrangements or analysis may need to be updated once the directive has been implemented.
EC6	Where appropriate, due to the bank’s risk profile and systemic importance, the home supervisor, working with its national resolution authorities and relevant host authorities, develops a group resolution plan. The relevant authorities share any information necessary for the development and maintenance of a credible resolution plan. Supervisors also alert and consult relevant authorities and supervisors (both home and host) promptly when taking any recovery and resolution measures.
Description and findings re EC6	As indicated in EC5, these issues are dealt with in MoUs. In accordance with Article 121a of the LCI the BNB shall prepare a plan for orderly resolution of each bank, licensed in the Republic of Bulgaria, which might be applied if the bank is in financial difficulties. In most colleges group recovery and recovery plans have been shared and discussed by the members and relevant information has been exchanged. The BRRD (Directive 2014/59/EU) establishing a framework for the recovery and resolution of credit institutions had not been implemented at the time of the assessment. Some arrangements or analysis may need to be updated once the directive has been implemented. For example, until the BNB is confirmed as the relevant resolution authority it will not be able to participate in resolution colleges, nor “coordinate” with the national resolution authority although approaches have already been made to it from other EU jurisdictions. To date, the BNB has shared information to the extent feasible.
EC7	The host supervisor’s national laws or regulations require that the cross-border operations of foreign banks are subject to prudential, inspection and regulatory reporting requirements similar to those for domestic banks.
Description and findings re EC7	Subsidiaries of foreign banks with banking licenses in Bulgaria must comply with the same regulatory and reporting requirements as local banks. Branches, as well as subsidiaries, must comply with the same requirements as local banks. The BNB policy is that all banks are subject to the same prudential standards. Banks licensed in a Member State, which operate on the territory of the Republic of Bulgaria through a branch, shall be supervised by the competent supervisory authorities of the home Member State who have responsibility for prudential, inspection and regulatory reporting requirements. The BNB retains several competencies, inter alia, regarding liquidity, reporting requirements, rights of access to data, and the power to carry out on-site inspection of the activities carried out by a branch. (Art 81 LCI) In regulating the activities and in exercising its supervisory powers, the BNB may not set requirements or restrictions which lead to a preferential treatment of the branches of credit institutions with seats in a third country over the branches of banks licensed in a Member State. (Art 86 LCI).
EC8	The home supervisor is given on-site access to local offices and subsidiaries of a banking group in order to facilitate their assessment of the group’s safety and soundness and compliance with customer due diligence requirements. The home supervisor informs host supervisors of intended visits to local offices and subsidiaries of banking groups.
Description and findings re EC8	The competent supervisory authorities of a Member State responsible for the supervision of banks with branches in Bulgaria, may carry out an on-site inspection subject to prior notification to the BNB. At the request of a competent supervisory authority of a Member State, the BNB shall verify particular information on a credit institution, financial holding company, mixed financial holding company, financial institution, ancillary services undertaking, mixed holding company or their subsidiaries, which carry out activities on the territory of the Republic of Bulgaria. The verification may be carried out by the BNB on its own, by the competent authority that requested the verification, with its participation or by an external auditor or expert. (Art 100 LCI) The BNB has experienced good cooperation with the home supervisors of EU banks with branches and subsidiaries in Bulgaria. To date inspections have been carried out with Greek and Austrian supervisors in respect of the AML/CFT compliance of banks whose parent banks are based in Greece and Austria. The process includes notification from the home authority, providing information to the home authority through questionnaires, on-site inspections through joint teams when requested by the home supervisor, drafting conclusions. There are requirements for the BNB, acting as home supervisor, to inform the host supervisor of intended visits to local branches of banks licensed on the territory of the Republic of Bulgaria but these only apply in relation to banks in Member States. (Art 87 LCI). In practice the BNB indicated that it would show the same courtesy to a non-EU host jurisdiction but given the – currently – small entities that are in non-EU countries it is not an issue that has yet arisen.
EC9	The host supervisor supervises booking offices in a manner consistent with internationally agreed standards. The supervisor does not permit shell banks or the continued operation of shell banks.
Description and findings re EC9	The Bulgarian legislation do not allow the establishment of booking offices and/or shell branches in Bulgaria. Likewise Bulgarian banks are not allowed to set up shell branches abroad.
EC10	A supervisor that takes consequential action on the basis of information received from another supervisor consults with that supervisor, to the extent possible, before taking such action.
Description and findings re EC10	The BNB has no practical experience of a foreign regulator passing on information that would require consequential action but believes that it would take such action. Where MOUs exist, a provision to this effect is usually included. In principle and under the law (Art 95 LCI, reflecting the CRDIV) the BNB would consult with another EU/EEA Member State competent authority before taking any supervisory action. Such supervisory action would include, for example, imposition of additional capital requirements or restrictions on the use of operational or credit risk internal models for the calculation of the own funds requirements for supervisory purposes. However, in cases of urgency or where consultation may hinder or jeopardise the effectiveness of the BNB’s supervisory action, the BNB is not obliged to notify in advance, but instead must notify without delay after the action is taken. (Art 95 LCI) Parallel obligations to notify the relevant EU home state supervisor, and exemptions in the case of urgency apply to the treatment of EU branches established in Bulgaria (Arts 82 and 83 LCI).
Assessment of Principle 13	Compliant
Comments	Due to the structure of the banking sector in Bulgaria, the BNB’s role is primarily that of a host state supervisory authority within the EU. This responsibility is taken very seriously and the BNB attends all colleges and participates in the joint decision making processes that are required under the EU framework. It was notable to the assessors that the BNB staff had established good relationships and networks of colleagues and contacts throughout the EU. While such relationships are, by definition, separate from the home-host working relationship, they are indicative of the ability to build trust and establish important connections, which is an essential foundation of supervisory colleges. The assessors, on numerous occasions, heard positive endorsement on the smoothness of supervisory coordination and decision making from counterparties who were external to the BNB. The assessors discussed the instances where the BNB is the home supervisor of a bank with small non-domestic presences and noted that contact and cooperation, including in instances where stress had emerged in the non-EU jurisdiction, had been close. It was also noted that equivalence of third country jurisdictions (with EU standards) has not been confirmed by the EU institutions for all relevant jurisdictions. Information exchange will be further facilitated when all equivalence assessments have been completed. It is noted that some arrangements, specifically coordination with the resolution authority of Bulgaria (not yet formally legislated but expected to be the BNB) may lead to revisions in terms of cross border crisis and resolution planning. This principle is marked as compliant for two reasons. Partly to avoid double counting with CP8, where deficiencies related to the late transposition of the BRRD were reflected, and also because the BNB has not, in practice impeded resolution planning but has been able to provide information and assistance to home state supervisors in the context of cross border resolution planning.

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Principle 1	Responsibilities, objectives and powers. An effective system of banking supervision has clear responsibilities and objectives for each authority involved in the supervision of banks and banking groups.6 A suitable legal framework for banking supervision is in place to provide each responsible authority with the necessary legal powers to authorize banks, conduct ongoing supervision, address compliance with laws and undertake timely corrective actions to address safety and soundness concerns.7
Essential criteria
EC1	The responsibilities and objectives of each of the authorities involved in banking supervision8 are clearly defined in legislation and publicly disclosed. Where more than one authority is responsible for supervising the banking system, a credible and publicly available framework is in place to avoid regulatory and supervisory gaps.
Description and findings re EC1	In Bulgaria, the provisions relating to responsibilities, objectives and powers can be found in two major legislations, (i) the Law on the BNB (hereafter LBNB) and (ii) the Law on Credit Institutions (hereafter LCI) that governs the activity of financial institutions. The BNB has sole responsibility for banking supervision in accordance with the laws mentioned above. The LBNB (art. 20, paragraph 3) explicitly empowers BNB to be the bank supervisor, with authority over banks and branches of foreign banks operating in Bulgaria, and branches of Bulgarian banks operating in other countries. Along the same lines, the LCI art. 1 (2) stipulates that the BNB “is empowered to supervise banks.” The BNB is also competent for the supervision of financial holding companies and mixed financial holding companies. The Law states that BNB has the power to supervise such institutions, and in doing so, is authorized to develop standards of safety and soundness. Both the LBNB and the LCI, through various articles therein, empower BNB with the authority to carry out virtually all supervisory functions, such as conducting on-site examinations, licensing banks, and collecting information for supervisory purposes. It is noteworthy that supervision and monitoring over the implementation of the AML/CFT requirements is placed under the oversight of both the BNB and the Financial Intelligence Directorate (FID) [the Financial Intelligence Unit located within the State Agency for National Security (SANS)]. The primary responsibility for the supervision of AML/CFT measures for banks (and all obliged persons) rests with FID-SANS. However, the BNB is also empowered to conduct on-site AML inspections either on its own – through its Special Supervision Directorate within the Banking Supervision Department (BSD)- or jointly with the FID. According to the BNB, this dual oversight arrangement does not create gaps or duplication and the delineation of duties between the two bodies are clear. The Internal Manual on Banking Supervision Process sets the governing structure of the Banking Supervision Department. This manual describes the banking supervision process and determines the responsibilities of the separate directorates as well as their interrelationship in executing their tasks. The BNB has no supervisory responsibilities over non-bank financial institutions. This functions lies with the Financial Securities commission (FSC) which regulates, licenses and oversees participants to the non-banking financial market (Insurance, Pension funds, Securities). The responsibilities and objectives as described above are defined in legislations and publicly disclosed, particularly on the BNB website. On the other hand, the normative acts of the BNB, which are compulsory for financial institutions, are also available on the BNB website.
EC 2	The primary objective of banking supervision is to promote the safety and soundness of banks and the banking system. If the banking supervisor is assigned broader responsibilities, these are subordinate to the primary objective and do not conflict with it.
Description and findings re EC2	There are several provisions either in the LBNB or the LCI stipulating that supervision related activities are performed with the goal of achieving banking system safety and soundness. Art. 1 (1) of the LCI stipulates that BNB’s activities particularly in relation tosupervision of “compliance with the prudential requirements” aim to ensure a “stable, reliable and sound banking system.” According to art. 2 (1) of the LBNB, the primary objective of the BNB is to maintain price stability. There are however several provisions that seem to satisfy the requirement under EC2. Art.2 of the LBNB, in paragraph (6), stipulates that the objectives of the BNB are also to “regulate and supervise other9banks’ activities in this country for the purpose of ensuring the stability of the banking system and protecting depositors’ interests.” Further, the LCI, in its art. 79 (2) indicates that the BNB “shall exercise also macro-prudential supervision of banks in order to maintain the stability of the banking system.” Lastly, pursuant to art 14 (3), subparagraph 4, the BNB should, before granting a banking license, determine whether the activities that the applicant intends to carry out “ensures the required soundness and financial stability.” On its website, the BNB has also made clear that a “strong and efficient banking supervision, together with an effective macroeconomic policy, is vital for the financial stability of a country. Supervising the credit institutions operating in Bulgaria is a major function of the BNB, and it aims to maintain the stability of the banking system and to protect the interests of depositors.” It is noteworthy however that the BNB exercises other functions, in particular with regards to transparency of products and monitoring of consumer trends. Within the Banking Supervision Department, the Special Supervision Directorate (SSD) has been assigned multiple activities that go beyond its primary objective of ensuring integrity in the banking sector. Originally, the directorate was established for AML/CFT supervision only but progressively, as the BNB mandate expanded, the directorate was assigned additional activities including transparency of products10 related issues and compliance with deposit insurance rules to be performed together with AML. It is also important to note that the employees of SSD are frequently asked to assist the law enforcement authorities and Bulgarian Courts in investigations of ML cases. Against this background, the assessors come to the conclusion that these activities should continue to be addressed efficicently by ensuring additional staff to be employed at SSD. It would be advisable to refocus the Special Supervision Directorate on its core AML mandate by assigning non-AML related activities to other relevant BNB departments.
EC3	Laws and regulations provide a framework for the supervisor to set and enforce minimum prudential standards for banks and banking groups. The supervisor has the power to increase the prudential requirements for individual banks and banking groups based on their risk profile11 and systemic importance.12
Description and findings re EC3	In Bulgaria, the LBNB and the LCI provide the main general framework for the supervisor to set and enforce prudential standards for banks and banking groups. The legal basis for the BNB to exercise pillar II types of measures are contemplated in the LCI art. 79 (c) as well as art. 103 (2). According to the latter (in subparagraph 5), the BNB can impose additional capital and/or liquidity requirement based on the risk to which the bank is exposed or the risks that the said bank pose to the financial system. Another provision can be found in art. 20 (3) of the LBNB whereby, in exercising his supervisory powers, the Deputy Governor is empowered to “apply, separately and at his own discretion, the actions and penalties as provided for by law” on Credit Institutions. One can infer from this statement that the DG in charge of supervision can subject banks to increased prudential obligations in light of their risk profile.
EC4	Banking laws, regulations and prudential standards are updated as necessary to ensure that they remain effective and relevant to changing industry and regulatory practices. These are subject to public consultation, as appropriate.
Description and findings re EC4	Since the last FSAP update (2008), the legal and regulatory framework for banking supervision has been updated several times, with several amendments over the last years in laws and subsequent regulations. The most prominent recent changes to the laws governing banking and banking supervision relates to supervisory requirements imposed on European banks as set forth in EU Regulations. In effect, the European framework for banking supervision including the EU Directive 2013/36, the EU Regulation №575/2013 that entered into force on January 1st, 2014 as well as the amendments in the Law on Credit Institutions (LCI) published in the State Gazette on March 25, 2014 led the BNB to issue new ordinances, such as the Ordinance №7 on the Organization and Risk management in Banks and Ordinance №8 on the Formation of Capital Buffers. Other recent amendments have included developing criteria relating to licensing, independence of Audit Committee members, among others. These new reforms also led the BNB to dropping off some of the existing ordinances as Ordinance №7 on the banks’ large exposures, Ordinance №8 on the capital adequacy of credit institutions and Ordinance №9 on the evaluation and classification of risk exposures of banks and the allocation of specific provisions for credit risk as well as for supplement to the existing ordinances. More significant are the amendments in Ordinance №20 on the issuance of approval under Art.11, para 3 of the LCI, Ordinance №4 on the requirements for remunerations in banks13 and in Ordinance №11 on bank liquidity management and supervision. The law on Bank Bankruptcy is also expected to undergo a major revision in the wake of the KTB crisis. While in practice the BNB generally consults on draft regulations (e.g ordinance), these drafts are always subject to “unofficial” consultation with the Bulgarian banking industry (the Association of Banks in Bulgaria); there is however no legal obligation on it to do so. As indicated by the authorities, the BNB is normally heavily involved in drafting new laws affecting banking activities or any amendments to existing laws. When it comes to transposing EU regulation for examples, the MoF set up an inter-institutional working group involving the BNB, the Banking Association, the FSC and all other relevant stakeholders.
EC5	The supervisor has the power to: (a) have full access to banks’ and banking groups’ Board, management, staff and records in order to review compliance with internal rules and limits as well as external laws and regulations; (b) review the overall activities of a banking group, both domestic and cross-border; and (c) supervise the activities of foreign banks incorporated in its jurisdiction.
Description and findings re EC5	a) The BNB has the power to have access to banks and banking group’s information for supervisory purposes. In effect, as stated in art. 4 (1) of the LBNB, the BNB is empowered to “demand from banks to submit any documents and information, and may also carry out the requisite examinations.” The LCI also provides similar broad powers to the BNB. As per art. 80 (1), the BNB “shall have the right to require banks and, when applicable financial holding companies, mixed financial holding companies and their shareholders or partners to submit to it all the relevant accounting and other documents, and any information on their activities, and to conduct on-site inspections […], and to investigate possible breaches of [regulations].” Further, art. 80 c of the same law stipulates that the BNB has the right to (i) have free access to the office premises and information systems of the bank, (ii) demand documents and collect information in relation to the performance of its tasks, (iii) attend the meetings of the managing and controlling bodies of banks and express opinions that are to be written down in the minutes of the meeting, etc. b) For banking groups, in virtue of LCI art. 89 (1), the BNB is empowered to carry out supervision on a consolidated basis over banks, banking groups, financial holding companies, mixed financial holding companies and mixed holding companies. These institutions are required to implement arrangements, processes and mechanisms required by the LCI also in their subsidiaries, including these which are not subject to this law. Those arrangements, processes and mechanisms shall also be consistent and well-integrated and those subsidiaries shall also be able to produce any data and information relevant to the purpose of supervision. Therefore, the BNB can require parent companies and banks’ subsidiaries to provide all the relevant documents and information, as well as right for free access to the information. c) Foreign banks incorporated in Bulgaria are subject to the same degree of regulation and supervision, and locally incorporated operations of foreign banks are treated as local banks.
EC6	When, in a supervisor’s judgment, a bank is not complying with laws or regulations, or it is or is likely to be engaging in unsafe or unsound practices or actions that have the potential to jeopardize the bank or the banking system, the supervisor has the power to: (a) take (and/or require a bank to take) timely corrective action; (b) impose a range of sanctions; (c) revoke the bank’s license; and (d) cooperate and collaborate with relevant authorities to achieve an orderly resolution of the bank, including triggering resolution where appropriate.
Description and findings re EC6	a), b) and c): The LCI and the LBNB grant powers to the BNB to take (and/or require a bank to take) corrective actions and impose sanctions. Art. 103 (1) of the LCI sets out a list of measures that can be taken by the BNB when banks do not comply with regulations or, for example, when they constitute a threat to depositors’ interest. Art. 103 (2) sets out the type of administrative sanctions available to the BNB. The list appears comprehensive with a very few exceptions, ranging from issuing wrtiien warnings to revoking the licence. The BNB, however, seems not to be able to dismiss other relevant staff beyond senior management. As indicated above, the BNB can dismiss one or more individuals authorized to manage and represent the bank as well as members of the management board, board of directors or supervisory board. If within the time limit set by the BNB the bank has not dismissed the respective person, the BNB may remove that person from office and appoint another person in his place. Nevertheless, this power does not seem to apply to other staff, particularly to risk officers and other relevant staff holding important functions in the bank (Compliance, RM, AML and credit Officers). The BNB is not empowered either to change bank’s internal structure. The LCI, Art. 103 (2)15 empowers the BNB to change bank’s internal rules and procedures but not its internal organization or structure. In assessors’ opinion, this is an important power to have, even though it should be used only in extremis. The LCI provides the BNB with other enforcement power under the so-called “Special Supervision” regime (art. 115) according to which the BNB may establish a special supervision procedure concerning a bank if it finds that the bank is “at risk of insolvency.” In such case, a “conservator” is appointed by the BNB for a period of 6 months. An example of this is the decisions taken in June 2014 by the BNB Governing Council to place Corporate Commercial Bank AD (‘KTB’) and Victoria Commercial Bank EAD (‘VCB’) under respectively conservatorships and special supervision due to a risk of insolvency, for a period of three months.14 Lastly, the BNB is also vested with the power to impose fines and pecuniary sanctions in the conditions established in art. 152 of the LCI. d) In consonance with art. Art. 121a of the LCI, the BNB has some resolution powers. The law empowers it to prepare a plan for “orderly resolution of each bank, licensed in the Republic of Bulgaria, which might be applied if the bank is in financial difficulties.” However in light of the collapse of KTB in 2014, the fourth bank in the country, the resolution regime for banks has exhibited major weaknesses (see CP 11 for more details). As indicated by the authorities, the country has not developed yet a single legal framework for the recovery and orderly resolution of credit institutions. Further, the Resolution authority is still to be established under the new regime. In fact, Bulgaria is currently in the process of transposing the EU Bank Recovery and Resolution Directive (BRRD) into its legal apparatus and the final transposition of the BRRD framework for banks is set to August 2015.15 As a result, the conditions for cooperation and collaboration with relevant authorities -as required under this EC- are still to be determined and implemented.
EC7	The supervisor has the power to review the activities of parent companies and of companies affiliated with parent companies to determine their impact on the safety and soundness of the bank and the banking group.
Description and findings re EC7	The BNB is empowered to carry out supervision on a consolidated basis over banks, banking groups, financial holding companies, mixed financial holding companies and mixed holding companies. The supervisor enjoys free access to all relevant information.
Assessment of Principle 1	Largely Compliant.
Comments	Primary objective of banking supervision (CP 1, EC 2) In addition to promoting the safety and soundness of banks and the banking system, the BNB exercises other functions in particular with regard to transparency of products. Within the Banking supervision Department, the Special Supervision Directorate (SSD) has been assigned multiple activities that go beyond its primary objective of ensuring integrity in the banking sector. Originally, the directorate was established for AML/CFT supervision only but progressively, as the BNB’s mandate expanded, the directorate has been given additional responsibilities including transparency of products and monitoring of consumer trends related issues (e.g., transparency of banking products and monitoring of existing complaints’ handling procedures) as well as oversight of compliance with deposit insurance rule. It is also noteworthy that in addition to their responsibilities, the employees of SSD are frequently asked to assist the law enforcement authorities and Bulgarian Courts in investigations of ML cases. Against this background, the authorities are recommended to find a way to permit the SSD to focus on its core objective. The transfer of non-core activities outside the Supervisory ambit could be an option. Another aspect, less essential tough, is the title of the SSD that may create some confusion with the “special supervision” regime contemplated in the LCI. It is advisable to rename the department. Supervisor’s power to impose a range of sanctions (CP1, EC 6(b)) The BNB has available a wide range of supervisory tools to address situations where banks do not comply with laws and regulations or where banks engage in unsound practices. Under the LCI Art. 103 (2), the BNB may, depending on its view of the seriousness and nature of detected shortcomings take one or more of a broad selection of supervisory measures, as deemed appropriate. These measures include both administrative compulsory measures and administrative penalties. In more serious scenarios, the BNB can force the bank to change its internal rules and procedures. However, the BNB is not empowered to require a bank to change its internal organization or structure. As indicated above, this is an important power to have, even though it should be used only in extremis. If a management fails, then it may be necessary for the BNB to ensure a new one can be put into place. It is of course of paramount importance to ensure that the BNB under its capacity of supervisor does not interfere in bank’s management. Cooperation and collaboration with relevant authorities for orderly resolution of banks(CP1 EC 6 (d)) The collapse of Corporate Commercial Bank AD (KTB) in 2014 revealed a series of major weaknesses in the domestic regime for dealing with problem banks, exacerbated by the lack of certain types of resolution powers. In the midst of the KTB crisis the BNB worked with the relevant authorities to draft a law that would have increased BNB powers to address KTB’s situation, including the creation of a good bank/bad bank option. The law was not passed but the incident illustrated that the current legal framework permitted the authorities insufficient scope to manage a crisis fully effectively. The eventual transposition and implementation of the EU Bank Recovery and Resolution Directive (BRRD) into national law is critical to address the gaps in the resolution and crisis management toolkit, and to provide for coordinated and timely remedial actions to deal with problematic banks. In considering this criterion it is important to make the distinction that the deficiency for the purposes of the BCP is that the BNB does not, at present, have sufficient options in order to cooperate and collaborate to achieve the orderly resolution of a bank. The lack of resolution powers is not a valid basis for a downgrade because the BCPs do not expect the supervisory authority necessarily to be the resolution authority. Once the BRRD is trasnsposed and implemented and the archtiectures for resolution is put into place, including designation of the resolution authority for banks and investment intermediaries as well as resolution funds and adequate resolution and recovery planning. Recommendations Refocus the Special Supervision Directorate on its core AML mandate by assigning non-AML related activities to other relevant BNB departments. Explore possible amendments to the LCI to provide the BNB with additional powers including the possibility to impose changes in banks’ internal organization and structure. Consider the possibility to rename the SSD in a way that does not introduce confusion with the “special supervision” regime.
Principle 2	Independence, accountability, resourcing and legal protection for supervisors. The supervisor possesses operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources, and is accountable for the discharge of its duties and use of its resources. The legal framework for banking supervision includes legal protection for the supervisor.
Essential criteria
EC1	The operational independence, accountability and governance of the supervisor are prescribed in legislation and publicly disclosed. There is no government or industry interference that compromises the operational independence of the supervisor. The supervisor has full discretion to take any supervisory actions or decisions on banks and banking groups under its supervision.
Description and findings re EC1	The BNB, as noted in CP1, is the institution with responsibility under the law for the regulation and supervision of banks (Law of the BNB 2(6)). The BNB itself is managed by its Governing Council which is composed of the Governor, three Deputy Governors and three non-executive members. Each of the three Deputy Governors is responsible for one of the three “basic” departments of the BNB as established in law (Law of the BNB Art 19). The three deputy governors of the BNB are proposed by the Governor and elected by the National Assembly for a term of 6 years. The remaining three members of the Governing Council are appointed by the President. (Art 12 Law on BNB). The Banking Supervision Department of the BNB is one of the three “basic” departments and the Deputy Governor heading the Banking Supervision Department exercises supervision over the banking system (Article 20(3) of the Law of the BNB). The Deputy Governor for the banking supervision department may organize, direct and is responsible for the activities of the department. (Article 19 (3) of the Law on BNB). In exercising his supervisory powers under the law, the Deputy applies, separately and at his own discretion, the actions and penalties as provided for by the law on Credit Institutions (LCI) (Article 20 (3) of the Law on BNB). As set out in Article 151 (1) of the LCI, there are three types of decision that the Governor and the Deputy Governor with responsibility for supervision present jointly to the Governing Council for a decision. These are decisions for license (or its rejection), revocation of authorization or appointing a conservator or placing a bank into special supervision measures when at risk of insolvency. The Governing Council also has responsibility for issuing regulations. In all other cases, the supervisory decision to issue an administrative act, meaning the use of the corrective and remedial powers of the supervisor (whether fines, restrictions or dismissals etc.), which are found in Article 103 of the LCI rests with the Deputy Governor. The Deputy Governor may delegate this authority. At the time of the assessment, the Deputy Governor with responsibility for supervision had been dismissed by the National Assembly and an Acting Deputy Governor was in place. The dismissal of the former Deputy Governor took place on 21 January 2015, two months prior to the assessment. The Deputy Governor had initially stepped down, taking leave from his office, in June 2014 as a result of the events surrounding the failure of Corporate Commercial Bank (KTB). When the Deputy Governor took leave of absence from the BNB, the supervisory powers were delegated by the Deputy Governor to the Acting Deputy Governor. The LBNB does not address the situation where the Deputy Governor is absent or unavailable due to unforeseen reasons (for example, sudden fatal illness).
EC2	The process for the appointment and removal of the head(s) of the supervisory authority and members of its governing body is transparent. The head(s) of the supervisory authority is (are) appointed for a minimum term and is removed from office during his/her term only for reasons specified in law or if (s)he is not physically or mentally capable of carrying out the role or has been found guilty of misconduct. The reason(s) for removal is publicly disclosed.
Description and findings re EC2	As noted above, the Deputy Governor for supervision is proposed by the Governor and is elected by the National Assembly (Art 12(1) LBNB). The BNB has no authority to suspend or dismiss any member of the Governing Council. Only the National Assembly has the authority to dismiss the appointees it has elected, which are the Governor and the three Deputy Governors of the BNB. The remaining three members of the Governing Council, who do not hold executive positions in the BNB are appointed by the President, who has the power of dismissal in respect of these positions. Under the LBNB (Art 11(3)) all Members of the Governing Council must be persons of the highest integrity and prominent qualifications in economics, finance or banking. The law further sets out a number of conditions that disqualify an individual from being appointed as a member of the Governing council. These conditions include, broadly, having served a custodial sentence, bankruptcy, conflicts of interests, or having a close relationship to another member of the Governing Council (Article 11(4) LBNB). The term of office of the Deputy Governor heading the Banking Supervision Department is six years (Art 12 (4) LBNB). Article 14 (1) of the LBNB establishes that a member of the Governing Council may only be relieved from office if that person meets any of the terms of disqualification as set out in Article 11(4)LBNB or for reasons of incapacity for more than six months or for serious misconduct. (Art 14(1) LBNB). The LBNB follows the statutes of the ECB with respect to this issue. There is no legal requirement for the reason for dismissal to be publicly disclosed within the LBNB but disclosure is required under the rules of procedure of the National Assembly itself. The decision to relieve the Governor from his or her post may be referred to the Court of Justice of the European Union by the Governor or the Governing Council of the ECB. (Art 14(3)). As also noted in EC1, the Deputy Governor for Supervision was dismissed in January 2015. At the time of the assessment, the Governor had made a proposal for a new candidate but the National Assembly had not taken any decision and no further actions could be taken to replace the Deputy Governor until the National Assembly had made its determination.
EC3	The supervisor publishes its objectives and is accountable through a transparent framework for the discharge of its duties in relation to those objectives.16
Description and findings re EC3	The objectives and responsibilities of the Banking Supervision Department are set in the BNB law and the LCI. The performance of the main tasks of BSD is reflected in the semi-annual and annual BNB reports to the Parliament. The BNB annual report, (published both in Bulgarian and in English), is adopted by the BNB Governing Council under LBNB (Art 1 (2) and Art 51), and is presented to the National Assembly for information. This report, against the background of the analysis of the macroeconomic development in Bulgaria and the global economic developments, reviews the Bank’s activities and functions over the year and the forthcoming tasks. The report includes the Bank’s consolidated financial statement for the respective year, as well as statistical appendices. With respect to supervision, the reports outline the condition of the banking sector, regulatory developments and any other developments, such as changes in the management of banks in Bulgaria, issuance of capital instruments, and notifications such as inward or outward use of EU “passporting” to provide services within the EU.
EC4	The supervisor has effective internal governance and communication processes that enable supervisory decisions to be taken at a level appropriate to the significance of the issue and timely decisions to be taken in the case of an emergency. The governing body is structured to avoid any real or perceived conflicts of interest.
Description and findings re EC4	The governance structure of the BNB as set out in the LCI and BNB provides that most supervisory decisions and actions must be taken by the Deputy Governor for supervision, unless powers have been delegated by the Deputy Governor. Decisions on licensing, revocation, special supervision (putting a bank into conservatorship) or issuance of regulations are made by the Governing Council on the basis of a joint proposal by the Governor and Deputy Governor. Prior to the stepping down of the Deputy Governor in 2014, powers of decision making had not been delegated. The internal document, “Manual for the banking supervision process,” (dated June 2010) sets out the roles and functions of the various directorates within the banking supervision department, including the relationship between the directorates. The manual confirms that there are processes to ensure the review of reports before they are submitted to the director. Also the manual indicates at which level of seniority which functions need to be carried out (whether identification of issues, or upward reporting). When supervisory measures or administrative penalties are initiated, time lines are set out for certain procedures. The manual does not, however, describe processes to scutinise key supervisory decisions that might need to be made (i.e., a “four eyes” process). Nor does the manual specify procedures for instances when a more rapid escalation of an issue might be required. Staff indicated that in such cases, such as occurred in 2014, the process was to increase the speed and intensity of supervisory engagement to ensure that information was provided to senior management as quickly as possible. In practice the Governing Council met on a daily basis as needed. It is permissible for a member of the Banking Supervision Department to hold shares in a bank that is authorized in Bulgaria but the interest must be declared (see EC5). The LBNB has extensive provisions seeking to prevent the possibility of conflicts of interest in the Governing Council of the BNB. The law excludes certain persons from eligibility to sit on the Governing Council. According to Article 11(4) of the LBNB no member of the Governing Council may have a close relationship with another member of the Governing Council (item 5) or be the owner or board member of a commercial company (including a cooperative) (item 4). Furthermore, there are restrictions on the activities in which the Members of the Governing Council may engage in order to prevent conflicts of interest from arising (Art 12(5) and (6) LBNB). Essentially these provisions state that the Members of the Governing Council may not engage in remunerative activities, including working for financial institutions (including banks and insurance companies). The Governor and the Deputy Governor are permitted to take teaching engagements and may perform unremunerated activities if there is a unanimous decision by the Governing Council and there is no conflict of interest. The law also states that Members of the Governing Council shall not participate in the deliberation and shall abstain from decision-making on issues in which they or members of their families may have interest. They must notify the Governing Council in advance of any such interests. (Art 17(4) LBNB). As public office holders the Members of the Governing Council and the staff of the Banking Supervision Department shall observe the requirements of the Conflict of Interest Prevention and Ascertainment Act (Article 3, items 13 and 25).
EC5	The supervisor and its staff have credibility based on their professionalism and integrity. There are rules on how to avoid conflicts of interest and on the appropriate use of information obtained through work, with sanctions in place if these are not followed.
Description and findings re EC5	The staff of the BNB working in the Banking Supervision Department is appointed by a transparent competition – vacancies are publicly advertised - and aims to promote principles of professionalism and ethics. Professional secrecy The LCI contains a range of provisions establishing professional secrecy requirements, and administrative sanctions (fines) for failure to maintain such restrictions. Employees of the BNB must observe professional secrecy regarding the banking activities and relationships of the BNB (Art 23(2)). Sanctions are applied under the LBNB (Art 61(2) unless the violation constitutes a criminal offence. The members of the Governing Council, employees, external auditors, experts and other persons working for the BNB are bound by professional secrecy even after the termination of their relations with the BNB. (Arts 63 and 64 LCI). Furthermore any violation under LCI, Regulation (EU) No 575/2013 (ie the CRR) or the regulatory acts governing their enforcement or Regulation (EU) No 1031/2010, provided the act does not constitute a crime shall be sanctioned by a fine, with escalating penalties. (Art 152(1) LCI). Conflicts of interest Safeguards put in place to prevent conflicts of interest for Members of the Governing Council are discussed in EC4 above. All employees are subject to the BNB Code of Conduct which also states (Art 9) that employees of the BNB must behave in such a way that conflicts of interests are avoided. Employees must also declare membership of the governing body of a political party. Employees of the BNB may hold shares in a credit institution but are required to make a written declaration. Also, under a decision of the Governing Council, (Decision № 155/20.12.1999 r.) relationships between employees are not permitted (eg spouse or relative). The Code of Conduct of the BNB Employee contains clear provisions to avoid conflict of interest, in addition to the provisions of Article 3 the Conflict of Interest Prevention and Ascertainment Act (LPACI) which are noted in EC4 and which indicate that neither members of the Governing Council, nor employees of the Banking Supervision Department, as public officials, shall participate in decisions in respect of issues in which they or their families may have an interest. Specifically, under the Code of Conduct affecting them or their affecting an institution: An employee of the Bulgarian National Bank shall behave in way through which any conflict of interest is avoided (Art. 9. (1)). An employee shall declare in writing to his/her line superior any election in a managerial or controlling body of a political party. (Art. 9. (2)). An employee, unless occupying a technical function, must file a declaration of incompatibility and for private interests pursuant to Art. 12 of the Law on Prevention and Ascertainment of Conflict of Interest (LPACI) according to a procedure determined by an order of the BNB Governor (Art. 9. (3)). An employee must resign from exercising the powers or obligations of office, when on a particular occasion there is a private interest. An employee may be removed in a particular occasion from exercising of his/her powers or obligations of office with a written act of the BNB Governor on a proposal by the relevant line manager, if the employee has declared a private interest. Under the law, a technical function is defined as a position that does not include any managerial and controlling functions, or any position that requires the participation in the preparation of decisions, orders, internal rules and acts of legislation, analyses, forecasts, concepts, assessments, expert opinions and correspondence in the BNB sphere of competence. The technical function includes roles such as secretary translator or archivist. Where an issue is not directly regulated by the Code of Conduct, the provisions of the LPACI apply.
EC6	The supervisor has adequate resources for the conduct of effective supervision and oversight. It is financed in a manner that does not undermine its autonomy or operational independence. This includes: (a) a budget that provides for staff in sufficient numbers and with skills commensurate with the risk profile and systemic importance of the banks and banking groups supervised; (b) salary scales that allow it to attract and retain qualified staff; (c) the ability to commission external experts with the necessary professional skills and independence, and subject to necessary confidentiality restrictions to conduct supervisory tasks; (d) a budget and program for the regular training of staff; (e) a technology budget sufficient to equip its staff with the tools needed to supervise the banking industry and assess individual banks and banking groups; and (f) a travel budget that allows appropriate on-site work, effective cross-border cooperation and participation in domestic and international meetings of significant relevance (e.g., supervisory colleges).
Description and findings re EC6	Source of funding and budget sufficiency The BNB is financed mainly by the revenues from its currency reserves operations. The annual budget of the BNB (including the BSD budget) is approved by its Governing Council and is published. The BNB has the full discretion on the internal re-distribution of it’s own budget and the ceiling of it’s expenditures. The Bulgarian National Bank, pursuant to the LBNB (Art 51) addresses the annual budget, approved by the Governing Council, to the National Assembly and officially reports twice a year on the progress of it’s activities and it’s consolidated financial statement. Salary scales and staff retention By law, the remunerations of the employees of the BNB shall be determined by the Governing Council but it cannot be lower than the average remunerations of employees with respective functions in other banks of the country. (Art 23(3) LBNB). The HR department takes into consideration the salary scales of the commercial banks in making this determination. The salary scales apply across the BNB and are not differentiated for supervisory staff. While the BNB enjoys status and a reputation for security its salary levels are not necessarily commensurate with the market and some skilled staff have been lost over the previous 5 years. Recruiting staff with experience, for example over 10 years, has not proved to be easy. Progression to senior positions within banking supervision has been through internal promotion rather than direct appointment of senior staff from outside the BNB – the position of the Deputy Governor for Banking Supervision has been an external appointment in the past. There were vacancies in the banking supervision department at the time of the assessment and there were very high numbers of applicants for each post. Use of external experts While in practice it has rarely happened, the BNB has the right to appoint external independent experts and to appoint an external auditor for a bank, to carry out a financial or other type of audit (Art 80(3)(3) and (4) LCI). Professional secrecy requirements apply to both external experts as well as to BNB staff, even after the termination of their relations with the BNB. (Art 63(3) LCI). Training budget The Banking Supervision Processes Manual requires the directorates of the banking supervision department to identify training needs and budget for them in each year’s planning process. In the legal department, staff are conscious for the need to maintain continuous professional development and, in terms of delivery, are conscious of the demands made upon them for provision of training by other banking supervision staff as a result of the wide raft of EU legislation in the banking field in recent years. The assessors understood that a general approach was for the HR department notify the banking supervision department of any external training opportunities, such as courses, conferences, lectures and seminars eg from other supervisory institutions or the Vienna Joint Institute so that staff can be given the opportunity to apply. There have been cases where permission had been granted to attend seminars but pressure of work had prevented attendance. Technology budget At the time of the assessment there was a project in train to enhance the IT tools available to supervisory staff. This project was to update the IT and data systems to take into account the changes driven by the introduction of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive IV (CRDIV). The generation of automatic indicators and integration with the ratings databases had been lost with the inception of the new regulatory framework. The project is aimed at replacing lost functionality that was a result of the regulatory changes but is not seeking to introduce new developments. Travel budget The General Director and the five subordinate Directors in the Banking supervision department draft plans and budgets for the operational needs of the department, including not only domestic supervisory activity such as on site inspections, training programs and participation in international meetings, whether international fora such as Basel working groups, supervisory colleges, or meetings and processes driven by the European Commission or European Banking Authority. It is not always possible for representatives from the BNB to attend all meetings related to the EU legislative process (ie preparation and negotiation of proposals), due to limited numbers. However, the BNB has met all its commitments in terms of supervisory cooperation and collaboration, including supervisory colleges, and attendance at (including leading working groups as necessary) meetings of the EBA. Reports are prepared on a semi-annual and annual reports basis to track targets and additional ad-hoc assignments, supervisory knowledge-sharing missions, educational training, etc.
EC7	As part of their annual resource planning exercise, supervisors regularly take stock of existing skills and projected requirements over the short- and medium-term, taking into account relevant emerging supervisory practices. Supervisors review and implement measures to bridge any gaps in numbers and/or skill-sets identified.
Description and findings re EC7	As noted in EC6, the Director General and the five subordinated Directors in the Banking supervision department draft programs of the yearly targets and prepares the Directorates’ corresponding budgets. This annual planning process is required to include the identification of training needs and skills developments. Although directorates are asked to propose training plans on an annual basis there is no formal process to identify the gaps in skills and the development needs for staff on an individual basis or for directorates or the department as a whole. In the context of a small department it is accepted that the directors and director general will have a general sense of department needs and gaps but at the time of the assessment there has been no opportunity for the BNB to make an effective assessment of current and future skills needs, or indeed to be able to protect time in the calendar for any relevant training.
EC8	In determining supervisory programs and allocating resources, supervisors take into account the risk profile and systemic importance of individual banks and banking groups, and the different mitigation approaches available.
Description and findings re EC8	The frequency and intensity of a bank inspection according to the supervisory programs depends on the size of the respective bank, the evaluation of its systemic importance and nature, the volume and complexity of its activities. The assessors were able to review the current annual plan for supervision. The plan is updated through an annual exercise but can be adapted to take account of emerging issues, as had happened during the course of 2014.
EC9	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.
Description and findings re EC9	The BNB, its bodies and the persons authorized by them are not liable for any damages caused in exercising their supervisory functions, unless they have acted with intent. (Art 79(8) LCI). It is in the competence of the BNB Governing Council to a decision to cover such costs case by case. The law contains no explicit reference to the BNB being required to cover such costs. There is a decision of the Governing Council to cover the costs of members of the Governing Council, including Deputy Governors. There is no such decision yet taken for other staff of the BNB but there would be a case by case decision made and the general presumption is that the precedent set by the decision covering costs of the Governing Council would lead to costs being covered for other staff.
Assessment of Principle 2	Materially Non Compliant.
Comments	Internal Governance of the BNB for banking supervision (CP2 EC1, EC4) Even though the legal framework currently in place reasonably provides the necessary powers to authorize banks, conduct ongoing supervision, address compliance with laws and undertake corrective actions, the current mission found that the governance structure of the BNB, particularly as it relates to the allocation of enforcement powers presents significant concerns. In presenting the arguments below, the assessors wish to stress that their comments are designed to be read solely in the context of banking supervision. It is not within the scope of the assessment of the BCPs to comment on the governance of the BNB in carrying out its other mandates. The structure of the internal governance in the BNB for banking supervision in relation to the distribution of powers and responsibilities regarding banking supervision which are described in preceding sections presents a significant concern. It is noted that this structure is established under the law, as opposed to the exercise of delegated powers. It is recognized that the concentration of power for supervisory action in a single individual, the Deputy Governor for supervision, was a conscious decision, designed to ensure responsibility and accountability. Some checks and balances have been put in place in the sense that not all powers are reserved to the Deputy Governor. Entry to, exit from the banking sector and handling the extreme distress of an bank (namely licensing, revocation, conservatorship) are decisions that must be made by the full Governing Council based on a joint motion by the Governor and Deputy Governor. Also the Governing Council has responsibility for issuing the regulations of the BNB, including those regulations pertaining to supervision. Nonetheless, there are no internal checks and balances in the majority of the supervisory decision making process. Neither the law nor the internal BNB procedures ensure the quality of due process in terms of transparency, scrutiny or challenge in reaching such decisions. One option would be for the Governing Council and Governor to be fully informed or consulted with in respect of decisions made by the Deputy Governor, or of the grounds for such decisions either before or after the fact. In principle the Governing Council can, of course, be informed but there is no obligation and notification is at the discretion of the Deputy Governor. The LBNB (Article 16 item 10) provides that reports on the activities of the Bank’s basic departments (including banking supervision) must be provided to the Governing Council but this is not equivalent to a timely transparency and consultation requirement on detailed decisions made by the Deputy Governor. The decision making structure exposes the decision making process to the consistency of approach, or otherwise, and appetite for enforcement or lack of enforcement of a single individual. Moreover, the individual holding the position of Deputy Governor of Supervision could become the subject of undue and intense pressures to act or not to act in any given case. In other words, the structure isolates the DG with responsibility for supervision and puts undue pressures on the individual holding the post. It appears to the assessors that the design of the structure is not conducive to supporting a vigorous and intrusive supervisory program. It is noted that the Deputy Governor could institute an internal framework by which to judge individual decisions, as well as to ensure that the Governing Council is both notified of decisions and has the opportunity to comment. Equally, it is recognized that even though a Deputy Governor would be well advised to take this course of action, as recommended in the 2008 FSAP, the Deputy Governor cannot be legally compelled to do so. At the time of the assessment, another unanticipated weakness of the current design had been revealed in that as the supervisory power to make enforcement actions is vested in one individual, then the absence of this individual could impair or cast doubt on the BNB’s supervisory enforcement powers. While the LBNB requires the Deputy Governor to delegate supervisor powers in his/her absence, there is no contingency arrangement foreseen in legislation to take into account a situation when the Deputy Governor might become suddenly and unexpectedly unavailable, for example in the case of a sudden fatal illness. Moreover, the appointment of a new Deputy Governor is not subject to any maximum time limit under law. It is essential for there to be full clarity and certainty with respect to the BNB’s powers to act in all circumstances in order to foster an assertive and confident supervisory process. In effect, therefore, the LBNB gives the Deputy Governor of Banking Supervision strong powers to act separately and independently, even though the Governing Council has a significant role and responsibilities over troubled banks in addition to its licensing and regulatory powers. The legal structure creates a situation whereby supervision and enforcement is dissociated from the Governing Council even though the Governing Council is responsible for issuing the regulations that articulate and establish the BNB’s supervisory standards and expectations. That is to say that the Governing Council is asked to issue regulations upon which supervisory practice depends while at the same time being at arms length from the supervisory process and key supervisory decisions. Taking all factors together, the assessors find that the internal governance structure considered both from the perspective of the effect on the individual role of the Deputy Governor for supervision and from the effect on the collective role and responsibility of the Governing Council to be unsatisfactory. In particular it is noted that supervision cannot be effective unless effective enforcement powers are in place. The legal structure that has been put into place is, in the view of the assessors, not conducive to timely, consistent, transparent and if necessary persistent and escalating enforcement decisions and actions. Skills and professionalism (CP2 EC5) The professionalism and skills of the BNB staff in banking supervision is impressive. The high reputation of the skill and dedication of the BNB staff was universally commented upon in the assessors’ range of meetings. It is to the significant credit of the banking supervision staff of the BNB that they have maintained their reputation despite resource constraints and heavy pressure of work, particularly over the last year where additional burdens have stemmed from external regulatory changes and domestic issues alike. Budget, training, IT resources, external experts (CP2 EC6(c), (d) and (e)) Resources are insufficient for the range and nature of the tasks the BNB must carry out for effective supervision. It is also noted that as a result of the changes introduced by the global regulatory reform agenda, and implemented largely through EU legislation, demands have increased significantly for all supervisory authorities. The basic investment any supervisory authority must make in order to be able to perform has increased notably in the past 5 years, during which time the budget envelope for the supervisory function of the BNB has remained largely static. This insufficiency adversely affects the numbers of staff as well as their continued training and the IT capabilities that are available to them. The assessors note that the BNB is already conscious that it has insufficient access to certain specialist skills, notably IT and quantitative skills, which are becoming ever more critical components in the supervisory arsenal, even in banking systems focused on credit such as Bulgaria. The supervisory approach of the BNB, not uniquely, depends heavily on the on-site inspection process so the availability of resource to carry out a suitable program of inspections is critical. Although an IT project was in progress at the time of the assessment its objective was primarily to re-instate the loss of functionality that had been triggered by the regulatory reporting changes. A more ambitious and forward looking project to integrate the different quantitative and qualitative data bases would be highly valuable so that staff time - which is at a premium - is spent in analysis rather than in compilation and calculations of data. Skill gaps assessment (CP2 EC7) There is currently no mapping of the skills that are needed in the evolving supervisory processes and assessing the skills of the staff against these needs and ensuring that a strategy is in place to remedy any such gaps. This is an important task to aid current and longer term planning and budgeting for resources. RBS approach (CP2 EC8) It is clear that the BNB carries out an analysis of the risk profile of the banking system, on an annual basis, and allocates its resources and targeted supervisory activity on this basis. There is a particular challenge for supervisors to identify how to distribute its supervisory attention when a banking sector is largely concentrated in a small number of banking institutions but the remainder of the sector is distributed among numerous much smaller entities which typically will have weaker risk profiles and practices. This is the situation in Bulgaria. It is welcome that the BNB undertakes close analysis, published in its regular reports, of the connections between the banks so has a database from which to assess potential for contagion and spillover effects. This analysis provides an important input into making decisions for supervisory activity. Legal protection (CP2 EC9) According to the LBNB (Art 3(4))only the Governor has the legal option to challenge the decision for his/her dismissal at the European court of justice. Such a possibility is not provided for the Deputy Governors. The BNB does have legal safeguards for protection of staff, but it is noted that it is at the discretion of the Governing Council as to whether legal costs incurred by staff, should they be subject to a lawsuit, will be covered by the BNB. A decision has been made in respect of members of the Governing Council and it is presumed that staff would, in practice be covered but no formal decision has yet been taken. Recommendations Revise the internal governance design of the BNB for banking supervision, through legal amendment as necessary, to ensure that significant powers are not vested in a single individual. Ensure that there are clear checks and balances in decision making processes, including transparency and challenge processes. Ensure that the absence or unavailability of any one individual will not prevent the full and effective use of all of the BNB’s supervisory powers. Ensure that the Governing Council is supplied with timely information in respect of major developing supervisory issues including advance information on any changes of control or corrective actions, so that it is well placed if becomes necessary to make major decisions at critical junctures – including licensing, revocation, conservatorship and issuance of prudential regulation. Increase resource allocation to banking supervision to: ensure sufficient skilled personnel available to conduct a full program of on-site inspections; ensure sufficient representation of skill-sets, including IT, quantitative and models analysis and IFRS - training and recruitment will both be needed. Upgrade the IT capability available to supervisory staff so that they can effectively and efficiently make use of the range of data and information that is submitted to the BNB. This upgrade should be more than replacing functionality that was lost due to the regulatory changes. Carry out a mapping of the skills that are needed in its supervisory process, taking into account the fact that the nature and volume of demands required in supervision are continuing to increase and evolve, not least as a result of the international regulatory reform agenda. Identify a clear current and projected assessment of any skills gaps and put in place a strategy to address such gaps. Ensure that the reasons for the dismissal of the Governor and the Deputy Governor are publicly disclosed, ie on a mandatory not discretionary basis. Ensure that the BNB will cover the legal costs faced by a staff member should a lawsuit be brought against the staff member.
Principle 3	Cooperation and collaboration. Laws, regulations or other arrangements provide a framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors. These arrangements reflect the need to protect confidential information.17
Essential criteria
EC1	Arrangements, formal or informal, are in place for cooperation, including analysis and sharing of information, and undertaking collaborative work, with all domestic authorities with responsibility for the safety and soundness of banks, other financial institutions and/or the stability of the financial system. There is evidence that these arrangements work in practice, where necessary.
Description and findings re EC1	The LCI contains several provisions governing the cooperation and collaboration among supervisors, particularly between the BNB and the Financial Supervision Commission (FSC), the State National Security Agency, the Public Prosecutor’s Office and the Ministry of Internal Affairs. Moreover, the modalities of cooperation have been established in the so-called “agreements on cooperation and collaboration” that were signed with the Bulgarian Deposit Insurance Fund (November 30, 1999), the Financial Supervision Commission (October 27, 2003), the FIU (2003) and the Prosecutor General’s Office (2006). These agreements formally arrange the conditions for information sharing, cooperation and joint actions to be undertaken by domestic supervisors and other relevant authorities. With the FSC, the BNB collaborates mainly on licensing and on-site inspection related issues. For example, prior to authorize a bank for providing other financial services under the Law on Markets in Financial Instruments, the BNB seeks FSC written opinion. If the opinion is negative, the BNB will not grant the license; otherwise, the BNB will send a copy of the license to the FSC (Art. 15, para. 6 LCI). Another area of cooperation concerns acquisition of significant ownership in banks. For direct or indirect acquisition of qualified holding in a licensed bank by a person licensed by the FSC, before granting the authorization, the BNB has to hold consultations in advance and cooperate with the Commission (Art. 28, para. 6). Joint on-site inspections involving staff from both the FSC and the BNB are also possible in virtue of art. 80 of the LCI. Consultation about draft legislations is another stream of cooperation. In the MoU reviewed by the mission, the BNB and the FSC conduct mutual coordination of draft regulatory acts in the financial market fields. One recent example is the draft law transposing CDR IV and the BRRD. In the area of money laundering, there is a high degree of cooperation between the BNB, and the competent authorities including the prosecutor’s office, national investigative authorities, police authorities and the FIU (FID-SANS). With respect to the latter, the cooperation is governed by a Memorandum of understanding signed between BNB and the SANS in 2003, which is in fact no longer valid due to the fact that the then Financial Intelligence Agency (FIA) was transformed in 2008 into the Financial Intelligence Directorate (FID) within the State Agency for National Security (SANS) pursuant to the Law on State Agency for National Security (LSANS). As indicated by the authorities, BNB is constantly involved in providing expertise and assistance for the analysis of sophisticated transactions and important cases involving embezzlement with EU funds, money laundering, financial fraud, and cross border complex financial transactions. Further, the FIU and the BNB can perform joint missions for assessing compliance with AML/CFT requirements; in that case, meeting are held between the FIU and the SSD (the Directorate responsible, inter alia, for AML matters within the Supervision department) to decide areas to inspect. The two bodies also arrange annual meetings to determine which banks will be subject to joint inspections to avoid duplication of efforts. The BNB also collaborates with the Bulgarian Deposit Insurance Fund (BDIF) by exchanging relevant information. In particular, the BNB Special Supervision Directorate (SSD) carries out inspections at the request of BDIF essentially to ascertain the correct level of contribution of banks to the Fund. Inspection questionnaires are used for checking-up compliance with the Law on Bank Deposit Guarantee (LBDG). However, the cooperation between BNB and the BDIF has been established in a MoU signed in 1999 and there is a need for updating it to broaden the scope of collaboration and information exchange. According to Art. 9 from the Law on Bank Deposit Guarantee, the Deputy Chairperson of the Bank Deposit Insurance Fund is designated by the Governing Council of the BNB. There are also other mechanisms for cooperation (though not formalized) with other relevant Government agencies, in particular the Ministry of Finance (MoF) for sharing relevant information on regular basis on banks (the ones acting as primary dealers of Government bonds) or in case of emergency. The BNB also assists the MoF in preparing national positions for relevant EU or other international fora, as well as in improving the domestic financial and regulatory framework. Interagency working groups for legislation drafting are also another work-stream of cooperation between the BNB, the MoF and other relevant stakeholders. The Governor of the BNB has also been participating since 2007 in the Financial Stability Advisory Council. It is an advisory body responsible for maintaining financial stability through the exchange of information and the assessment of the national financial system, as well as the monitoring of potential systemic risks. The Council comprises the Minister of Finance (chairing the Council), the Governor of BNB and the Chair of the FSC. According to the provisions in the Law on FSC (Art. 31), the BNB supports the CFS by providing, inter alia, supervisory reviews on developments in the banking sector and on cross-border related issues that may impact the financial stability. The most recent decisions made by the CFS concerned the KTB case and consisted in recommending the BNB to draft a bank resolution law and take appropriate measures to address the situation by involving all interested parties. A protocol was signed on July 7, 2014 to organize the functioning of this Council.
EC2	Arrangements, formal or informal, are in place for cooperation, including analysis and sharing of information, and undertaking collaborative work, with relevant foreign supervisors of banks and banking groups. There is evidence that these arrangements work in practice, where necessary.
Description and findings re EC2	The legal basis for the formal cooperation and for information sharing by the BNB with other supervisory authorities are to be found in several articles of the LCI, in particular the Articles 87-87d. These provisions provide powers to the BNB relative to engaging in collaborative arrangements with foreign bank supervisory authorities either within the EU or outside. General principles for cross-border cooperation Article 87 – 87 d of the LCI determine the condition of cooperation between Bulgaria and the EU States. In exercising its supervisory powers, the BNB is empowered to cooperate with the relevant competent authorities of the Member States where a bank licensed in the Republic of Bulgaria carries out activities through a branch in an other Member State or where a bank from another Member State carries out activities through a branch in the Republic of Bulgaria. In that context, the BNB can exchange with its Member States’ counterparts any information and documents relating to the (i) management of and ownership of credit institutions, (ii) as well as to the supervision of credit institutions on a solo or consolidated basis, including their liquidity, solvency, deposit insurance, large exposures restrictions, risk management, other factors that may affect the systemic risk arising from the bank’s activities, administrative and accounting procedures, and internal control mechanisms. The cooperation mechanism also covers situations that warrant immediate attention. For example, the BNB shall inform the competent authorities of all host Member States immediately where liquidity stress occurs or can reasonably be expected to occur in relation to a bank licensed in the Republic of Bulgaria which carries out activities in other Member States through a branch. That information should include details about planning and implementation of a recovery plan and about any prudential supervision measures taken in that context. Information sharing and undertaking of collaborative work arrangements are also expected for on-site supervision purposes. Art. 87 (9) stipulates that the competent supervisory authorities of a Member State which are responsible for the supervision of banks with branches on the territory of the Republic of Bulgaria, after a prior notice to the BNB, may carry out on-site inspection, on their own or with the assistance of duly authorized persons. In that case, the BNB provides assistance to the foreign supervisory authority. The same arrangement also exists when the BNB carries out (in very rare occasions though) on-site visits in Bulgarian branches operating in a Member country. Further, the BNB can, upon request from a Home supervisor, perform an on-site inspection. In that case, a representative of the home Member State supervisor (or an auditor authorized by it) may take part in these inspections. Conversely, the BNB can make the same request and ask the Host authority to conduct an inspection on its behalf. In practice however, there has been very rare occasions of such cooperation. Art. 88 of the LCI lays down the principles the cooperation with non-EU countries; the conditions for cooperation are established through MoUs, particularly in relation to the exchange of information covered by professional secrecy (see below). Cooperation in the context of consolidated supervision Consolidated supervision is another area where cooperation is key. To that end, the BNB is empowered to sign written coordination and cooperation arrangements with the competent supervisory authorities of the respective Member States (LCI, art. 87 and 92). The BNB may take responsibility for the performance of additional supervisory tasks, by agreement with the competent authorities of Member States. Conversely, where a bank licensed in Bulgaria is controlled by a credit institution in another Member State, the BNB may delegate to the parent supervisor the responsibility for supervising the subsidiary bank. For the purpose of consolidated supervision, the BNB has signed MOUs with the competent authorities of Austria, Cyprus, Greece, Italy, The Netherlands, Slovenia, France, Romania, and Hungary. Further aspects of cross-border cooperation with national competent authorities can also be found in the LCI, consistent with EC regulations and EBA technical standards. They mostly relate to the following aspects: (i) addressing situations of disagreement with measures taken by other NCAs, (ii) how to send alerts to other relevant NCAs regarding insufficient liquidity, (iii) how to undertake on-site inspections in the relevant country, (iv) how to determine fine with the home/host authority if a local foreign branch is significant, (v) how to exchange regular information or information on measures imposed on significant branches (See Art. 87, paragraphs 3 to 13, and articles 87a to 87d of LCI). The mission got a copy of a cooperation agreement signed with a foreign authority. It was observed that the arrangements include information in connection with the authorization and licensing process, the ongoing supervision of the cross-border establishments, on-site inspections, financial crime, exchange of information in emergency situations, corrective actions, confidentiality requirements, etc. Most of the agreements comprise provisions for requests for additional information and on-going coordination, including cooperation through visits for information purposes and exchange of expert staff. For the conduct of routine supervision or in the context of emergency situations, cooperation is further strengthened through supervisory colleges (SC). The LCI contains several provisions governing the participation of Bulgaria in these bodies. Bulgaria is the host authorities for 9 subsidiaries and one significant branch; as a result, the BNB has signed multilateral agreements, based on the EBA Template for a Multilateral Cooperation and Coordination Agreement on the Supervision and participates in 10 Supervisory Colleges. According to the authorities, participation has been very active and fruitful (especially with the Banca d’Italia) and there has not been any budgetary restriction for staff to attend the meetings. The SCs in which the BNB participates are an opportunity to collect information on groups’ structure and shareholdings. Also, the BNB has recently used the framework of SC for requesting the home supervisor to provide the recovery plans of two foreign banks which did not accommodate BNB requests. Regional cooperation and cooperation with non-EU countries The LCI also governs the condition for cooperation and information exchange with non-EU members. Article 88 stipulates that in performing its supervisory functions, the BNB may conclude agreements with other central banks or supervisory authorities of third countries on cooperation and information exchange on a reciprocal basis, making the commitment to keep bank and professional secrecy. To that end, the BNB has signed Memoranda of Understanding with third countries, e.g., Turkey, Kosovo, Macedonia, Albania, and other South Eastern Europe countries). Bulgaria is a member of the Group of Banking Supervisors from Central and Eastern Europe (BSCEE). The members of BSCEE consist of banking supervisory authorities from Albania, Austria, Belarus, Federation of Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Russia, Serbia, Slovak Republic, Slovenia, Ukraine, and Moldova. The BSCEE Group aims to, among other things, (i) promote and maintain close cooperation and communication among the Central and Eastern European banking supervisory units, (ii) facilitate the Central and Eastern European banking supervisory authorities for a better performance of their supervisory functions, (iii) provide possibility for exchange of supervisory techniques, experiences, information and know-how, and (iv) help with the integration to the European banking supervisory system. Bulgaria is also a member of the South Eastern Europe Initiative that comprises several supervisory authorities from South Eastern Europe (e.g., Albania, Armenia, Greece, the Federation of Bosnia and Herzegovina, Cyprus, Georgia, Moldova, Montenegro, Macedonia, Romania, Serbia). The Initiative promotes a more structured cooperation in the field of banking supervision in order to enhance financial stability in South Eastern Europe and improve the effectiveness and efficiency of supervisory measures. An MoU has been signed between members countries that includes provisions on information exchange, convergence of supervisory practices, monitoring banking groups’ systems and controls, crisis management, cooperation in the field of AML/CFT and confidentiality requirements.
EC3	The supervisor may provide confidential information to another domestic authority or foreign supervisor but must take reasonable steps to determine that any confidential information so released will be used only for bank-specific or system-wide supervisory purposes and will be treated as confidential by the receiving party.
Description and findings re EC3	The LCI contains several provisions on confidentiality and determines the condition under which professional secrecy can be lifted, including with foreign supervisors. As stipulated by Art. 63 (1), professional secrecy –as opposed to bank secrecy- (art. 62) applies to the information which the BNB obtains or generates for banking supervision purposes or in relation thereto, and whose disclosure could damage the commercial interest or reputation of a bank or its shareholders. The same article stipulates that this information covered by professional secrecy can be disclosed under certain circumstances strictly defined. BNB staff can share information with the Bulgarian Deposit Insurance Fund, the State National Security Agency (in particular for AML/CFT purposes) and other relevant counterparties, including but not limited to, liquidators of banks in case of bankruptcy proceedings, auditors of credit institutions, etc. In practice, the BNB has signed MoUs with domestic bodies that govern the conditions for information exchange (see EC1). The same LCI describes the conditions under which confidential information can be shared with foreign counterparties like Member States’s supervisors, and authorities responsible for the oversight of banks under bankruptcy, liquidation or other similar proceedings. The BNB can also exchange information with the authorities which administer deposit-guarantee schemes in Member States, the ECB as well as the European Systemic Risk Board (ESRB). The same law stipulates that the persons and bodies empowered to request and receive information covered by professional secrecy are obliged to keep it confidential and may use it only for the purpose for which they have requested it or for which it was provided to them, according to the law or the agreements concluded, and shall not provide it nor disclose it to third parties, unless otherwise stipulated by law. When it comes to non-EU jurisdictions’ supervisory authority, any information subject to professional secrecy may be provided as long as certain conditions are met: (i) the conditions for the exchange are stipulated in an agreement for cooperation; (ii) the recipient ensures at least the same level of protection of information as provided for in the LCI; (iii) the recipient is authorized and agrees to provide information of the same type to the BNB, where needed, (iv) the information exchange is intended for supervisory purposes; and (v) the recipient has justified the needs for the requested information (Article 66, items 1 - 4 and Article 88 - LCI). The members of the Governing Council, employees, external auditors, experts and other persons working for the BNB shall keep the professional secrecy even after the termination of their relations with the BNB.
EC4	The supervisor receiving confidential information from other supervisors uses the confidential information for bank-specific or system-wide supervisory purposes only. The supervisor does not disclose confidential information received to third parties without the permission of the supervisor providing the information and is able to deny any demand (other than a court order or mandate from a legislative body) for confidential information in its possession. In the event that the supervisor is legally compelled to disclose confidential information it has received from another supervisor, the supervisor promptly notifies the originating supervisor, indicating what information it is compelled to release and the circumstances surrounding the release. Where consent to passing on confidential information is not given, the supervisor uses all reasonable means to resist such a demand or protect the confidentiality of the information.
Description and findings re EC4	BNB staff is required to observe professional secrecy obligations that are intended to protect the confidentiality of supervisory information. These obligations can be found in Art. 65 of the LCI and stipulate that BNB staff (i.e members of the Governing Council, employees, external auditors, experts and other persons working for the BNB) shall use the information received from the Member States’ competent supervisory authorities only for the performance of the BNB supervisory responsibilities and only for the following purposes: (i) to check if the conditions for granting a bank license have been met, (ii) to facilitate the supervision on a consolidated or a solo basis, including for monitoring liquidity, solvency, large exposures, managerial and accounting procedures, and internal control mechanisms; (iii) to apply measures and sanctions in accordance with this Law or (iv) in proceedings for appeal against administrative acts of the BNB in an administrative or judicial procedure. Confidential information may be provided by the BNB to the Member States’ competent supervisory authorities, the European Systemic Risk Board, the European Banking Authority and the European Securities and Markets Authority as long as these authorities are also bound by professional secrecy. Also, as set forth in LCI Art. 65(3), when the information covered by professional secrecy comes from a foreign body, it may be disclosed or provided only with the express consent of the competent body which has provided the information and, where applicable, only for the purpose for which the consent has been given. In this regard, the MOU reviewed by the mission contains provision addressing the treatment of confidentiality information. The language is relatively standard and governs information acquired by BNB in the course of performing its duties and information received from other supervisors. Lastly, any information received by the BNB employees during on-site examinations carried out in a Member State may not be provided without the express written consent of the competent supervisory authority of the Member State where the examination took place.
EC5	Processes are in place for the supervisor to support resolution authorities (e.g., central banks and finance ministries as appropriate) to undertake recovery and resolution planning and actions.
Description and findings re EC5	Bulgaria has not developed yet a single legal framework for the recovery and resolution of credit institutions and has not established a Resolution authority. When the Bank Recovery and Resolution Directive (BRRD, 2014/59/EU) is transposed into the domestic legal regime, Bulgaria will have processes in place that will permit resolution authorities (likely the BNB) to undertake recovery and resolution planning and actions, as required by this EC.
Assessment of Principle 3	Largely Compliant.
Comments	BNB is in a position to exchange information and to cooperate effectively with home supervisors over Bulgaria-based subsidiaries of foreign banks through a number of bilateral MOUs. Adequate information sharing arrangements are also in place with all relevant domestic authorities. During interviews, assessors were told that the authorities are satisfied with the quality and effectiveness of existing cooperation arrangements. There are however a certain number of areas where some improvements would be needed. For AML/CFT purposes, the current MoU governing cooperation and information exchange between the BNB and the FIU is no longer valid. The Financial Intelligence Agency (FIA) was initially established as an administrative-type FIU within the Minister of Finance. In 2008, the FIU was transformed into the Financial Intelligence Directorate (FID) within the State Agency for National Security (SANS) pursuant to the Law on State Agency for National Security (LSANS). However, the MoU signed in 2003 with the then FIA has not been revised after the establishment of the new authority. A revised draft version has been in the making for three years and the authorities are encouraged to finalize it. With respect to the issue of safety net, a new draft law is being prepared to transpose into the Bulgarian regime the EU directive 2014/49 on deposit guarantee schemes. The current mechanisms for cooperation and information sharing between the BNB and BDIF was signed in November 1999 and is now outdated. In particular, there is a need to reflect the changes in powers and responsibilities stemming from the new law. Along the same lines, once the draft law transposing in Bulgaria the EU BRRD is enacted, the BDIF will exercise new responsibilities as Resolution Fund while the BNB will likely to be designated as the resolution authority.18 Here again, a thorough revision of the existing MoU between the two authorities will be warranted. In the area of external audit, the Commission for Public Oversight on Statutory Auditors (COPSA) was established following the amendments of the Independent Financial Audit law adopted by the National Assembly in June 2008. The law regulates the establishment and the functioning of the public oversight system of the statutory auditors in Bulgaria. Public oversight of this profession is exercised by CPOSA which is an independent body in charge of the oversight over acquisition of competence, registration of statutory auditors and audit firms, adopting and observing standards for professional ethics, internal quality control of auditors firms, audit quality assurance system, investigation and enforcement. Establishing mechanisms of cooperation and information sharing between the BNB and the CPOSA would be beneficial considering the complementarities of the two bodies. There is no formal mechanism of cooperation between the BNB and the MoF particularly for bank resolution. This would require the enactment of proper legal regime for bank resolution, the designation of an official resolution authority with adequate powers and the development of appropriate procedures to support the latter. With respect to crisis management, the Financial Stability Advisory Council (FSAC) approved in March 2011 the members of the Permanent National Standing Group on Financial Stability and following a proposal on behalf of the BNB Governor entrusted it with the responsibility to develop a National Financial Crisis Action Plan. In July 2011 the FSAC approved this plan. Its main purpose is to outline the institutions’ actions in times of crises so that the normal economic and financial sector processes are ensured and the confidence in public institutions is maintained. According the the BNB, during the KTB crisis in June 2014 the BSD’s actions, in particular the activation of the daily reporting framework and the continuous analysis of the situation, were in accordance with the main provisions of the plan mentioned above. The authorities may wish to consider the following recommendations: Establish mechanisms for cooperation between the BNB, the MoF and other financial institution regulators to undertake recovery and resolution planning; Speed up the revision of the MOU with the Bulgarian Deposit Insurance Fund; Finalize the new MoU between the BNB and the Financial Intelligence Unit; and Cooperate with the Commission for Public Oversight on Statutory Auditors (CPOSA), in particular on policy issues or information that is publicly available and sign an MoU in due course.
Principle 4	Permissible activities. The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined and the use of the word “bank” in names is controlled.
Essential criteria
EC1	The term “bank” is clearly defined in laws or regulations.
Description and findings re EC1	The LCI (art. 2) defines a bank as a legal entity accepting deposits or their equivalents (other repayable funds) and extending loans and other financing on its own account and risk. The BNB also uses alternatively the term credit institution for a bank, as opposed to financial institutions which include leasing companies, payment services providers, financial holding companies, payment institution, and asset management companies (LCI, art. 3).
EC2	The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined either by supervisors, or in laws or regulations.
Description and findings re EC2	Permissible activities of institutions that are licensed and subject to supervision as banks are defined under the LCI. In effect, art. 2, subparagraph2 lists in detail the financial activities permissible for banks, including those that are directly ancillary or supplemental. According to art. 5 of the LCI, a bank may not engage in financial activities that are not included in the authorization. According to the BNB Ordinance No2 on the Licences, Approvals and Permissions granted by the BNB, a license for a bank confers the right to conduct only the activities specified in the license. Within the BNB, the Special Supervision Directorate carries out specific thematic inspections including on-site checks in companies that could perform unauthorised banking activities. Such checks are usually initiated upon alerts submitted by other institutions or natural persons.
EC3	The use of the word “bank” and any derivations such as “banking” in a name, including domain names, is limited to licensed and supervised institutions in all circumstances where the general public might otherwise be misled.
Description and findings re EC3	As stated in the LCI, no one shall use the word ‘bank’ or any derivative thereof without having received a banking license pursuant to this law. In effect, according to Art. 6. (1), a person who does not have a license to conduct bank activity shall not use either in his name or in his advertising or other activity the word ‘bank’ or any of its derivatives in a foreign language. The same article, in its subparagraph (3) also stipulates that the name of a bank may not bear a resemblance to the name of another bank operating in the Republic of Bulgaria.
EC4	The taking of deposits from the public is reserved for institutions that are licensed and subject to supervision as banks.19
Description and findings re EC4	As stipulated by art. 2 (5) of the LCI, the taking of deposits from the public can be carried out only by: (i) a person who has been granted a bank license by the BNB; (ii) a bank with a seat in a third country, which has been granted a license by the BNB to conduct bank activities in the Republic of Bulgaria through a branch; and (iii) a bank authorized by the competent authorities of a Member State to carry out bank activities, which provides services on the territory of the Republic of Bulgaria either directly or via a branch. Along the same lines, art. 5 (2) states that the activity of taking deposits from the public is explicitly regulated by law and by the European Law and is subject to supervision aimed to protect depositors and investors. According to the authorities, there are a growing number of consumer credit companies currently operating in the country. The latter, which are registered at the BNB but not supervised, provide micro loans (below 200 euros) to individuals. The mission was told that none of them collect deposits.
EC5	The supervisor or licensing authority publishes or otherwise makes available a current list of licensed banks, including branches of foreign banks, operating within its jurisdiction in a way that is easily accessible to the public.
Description and findings re EC5	The licenses granted by the BNB are recorded in a register kept by it under Article 15, para 5 of the LCI. The BNB maintains a list of current licensees accessible on its website BNB http://www.bnb.bg).
Assessment of Principle 4	Compliant.
Comments
Principle 5	Licensing criteria. The licensing authority has the power to set criteria and reject applications for establishments that do not meet the criteria. At a minimum, the licensing process consists of an assessment of the ownership structure and governance (including the fitness and propriety of Board members and senior management)20 of the bank and its wider group, and its strategic and operating plan, internal controls, risk management and projected financial condition-(including capital base). Where the proposed owner or parent organization is a foreign bank, the prior consent of its home supervisor is obtained.
Essential criteria
EC1	The law identifies the authority responsible for granting and withdrawing a banking license. The licensing authority could be the banking supervisor or another competent authority. If the licensing authority and the supervisor are not the same, the supervisor has the right to have its views on each application considered, and its concerns addressed. In addition, the licensing authority provides the supervisor with any information that may be material to the supervision of the licensed bank. The supervisor imposes prudential conditions or limitations on the newly licensed bank, where appropriate.
Description and findings re EC1	The LCI (art. 13) provides the statutory requirements for the licensing of a bank. The BNB has the exclusive right for the issuance of bank licenses and no person shall engage in financial activities without a license issued by the BNB. Foreign banks wishing to establish a subsidiary on the territory of Bulgaria need also to receive a license from the central bank. The BNB has the right to reject an application if the criteria set in the law or in the BNB ordinance No 2 are not fulfilled or if the information provided is inadequate (art. 16). The law also grants the BNB power to set additional requirements and necessary information to be provided while applying for a banking license. The BNB can also issue a limited license (see EC 2). It is noteworthy that in practice, the initiative for granting a license is a joint competence shared between the Governor and the Deputy Governor. In effect, art. 151, para. 1 of the LCI stipulates that for any issuance, rejection or revocation of a license, a motion should be presented by the Deputy Governor in charge of Banking Supervision Department, jointly with the Governor, to the BNB Governing Council. The power of withdrawing the license also belongs to the Governing council of the BNB. The LCI, art. 36-38 set the conditions for the withdrawal, including when, for example, the bank becomes insolvent, the bank conducts unsound practices, the license has been obtained on the basis of false information, the bank has not commenced operations within twelve months after receiving the license, the bank no longer meets the conditions under which its license was granted or does not ensure the security of the assets entrusted to it. In November 2014, the BNB revoked the license of the troubled Corporate Commercial Bank on the ground that, as indicated by external audit reports, the institution had a negative own capital of 3.75 billion levs ($2.4 billion/1.9 billion euro) as of September 30, and no longer met the relevant capital requirements. In Bulgaria, all banks are following traditional universal banking model and are set up as Joint Stock Companies. There are no-other types of banks (e.g., cooperative banks, mutual saving companies) in the country.
EC2	Laws or regulations give the licensing authority the power to set criteria for licensing banks. If the criteria are not fulfilled or if the information provided is inadequate, the licensing authority has the power to reject an application. If the licensing authority or-supervisor determines that the license was based on false information, the license can be revoked.
Description and findings re EC2	Criteria for licensing banks are prescribed by the LCI. Art. 13, 14, 15 and 16 of the LCI set the requirements to be met in order to obtain authorization for banking business. The law also grants the BNB power to set additional requirements and necessary information to be provided while applying for a banking license. Other important provisions relevant to licensing can be found in the BNB Ordinance No2. The most relevant information to be provided by the applicants are: a) article of association; b) appropriate information about fitness and propriety of administrators; d) documents containing information on the paid in capital of the bank; e) information about the 20 largest shareholders (name, address and professional activity over the past 5 years); f) origin of funds for persons with subscription of 3 percent and above of the capital g) a business plan with exhaustive description of the activities to be performed, customer and product structure, objectives, policy and strategy of the bank, financial forecast of development over a three-year period; h) a description of the managing and organizational structure including the activities of individual organizational units, distribution of responsibilities among managing directors and other administrators, organization and management of the bank’s information system; i) a description of the internal control systems and the risk management systems, and a program of anti-money laundering measures; and j) the names and addresses of the members of the supervisory and management boards (board of directors) of the bank, and detailed written information concerning their qualifications and professional experience. Further, prior to deliver a license, the BNB is responsible for conducting a review of the valididity and accuracy of the materials provided by the applicant. In virtue of art. 14, the license will be issued if certain conditions are met (in addition to the criteria mentioned above). In particular, the BNB will check whether (i) the activities that the applicant intends to carry out ensure the required soundness and financial stability; (ii) the members of the management board and of the supervisory board are not subject to a legal injunction to hold such a position; (iii) in case of groups, the parent undertaking will not place obstacles to conducting consolidated supervision; and (iv) there is no evidence that the existence of close relations between the bank and other persons can hinder the efficient exercise of banking supervision. The above LCI allows the BNB to reject a bank’s business if the documents submitted by the applicant contained incomplete, contradictory or unreliable information. This happened once in 2008 due to the lack of key information in the application particularly in regard to criminal records and professionalism of prospective applicants. In the same vein, the BNB can revoke authorization for banking business if the authorization was based on false information or if the bank is no longer able to meet the conditions for performing its business (Art. 36 of the LCI). Over the past five years, one license has been revoked (decision of the GC dated November 6, 2014) due to the insolvency of the institution. The BNB can also issue a limited license if the applicant is not prepared to carry on all activities as planned. The BNB can limit the scope of these activities. There is no formal mechanism (at least written procedures) to subject the newly established bank to some sort of follow up inspection visit to ascertain that the bank is performing according to the terms and conditions of the license. It is the duty of the Legal Services and Administration Directorate (LSA) to carry out administrative activities in relation to issuing licenses, authorisations, and approvals, maintaining license files and data about the current status of banks and respective registers, and passportisation when the BNB is notified by a bank of an EU Member State. Three staff of the LSA are assigned to these activities. The latter cooperate with their colleagues from other directorates, especially those from the Credit Institution Supervision Directorate before formulating an opinion on the business plan of the prospective bank. The LSA will also consult the Special Supervision Directorate to perform checks on the shareholding structure of the applicant, including for the determination of the UBO of companies holding qualifying interests in the capital of the future bank.
EC3	The criteria for issuing licenses are consistent with those applied in ongoing supervision.
Description and findings re EC3	Necessary requirements to be met while applying for a banking license are broadly consistent with those applied in ongoing supervision. As detailed above, criteria include complying with shareholding limits, executives (which includes Board members) to meet fit and proper criteria, the entity to meet prudential standards, have adequate internal control and risk management systems in place, adequate human resources, etc.
EC4	The licensing authority determines that the proposed legal, managerial, operational and ownership structures of the bank and its wider group will not hinder effective supervision on both a solo and a consolidated basis.21 The licensing authority also determines, where appropriate, that these structures will not hinder effective implementation of corrective measures in the future.
Description and findings re EC4	The LCI read in conjunction with the BNB Ordinance No2 on Licenses, Approvals and Permissions granted by the BNB and Ordinance No20 on the Issuance of Approvals to the Members of Board of Directors and Supervisory Board of Credit institutions enable the BNB to determine that the proposed legal and managerial structures of the bank will not hinder effective supervision on a solo and consolidated basis. The organizational structure of the bank is vetted during the BNB licensing process both in terms of the management structure of the organization and the capacity of the structure to facilitate sound risk management and internal control systems. The applicant has to submit –and the BNB to review-all relevant data, comprising, inter alia, a description of the managing and organizational structure including the activities of individual organizational units, distribution of responsibilities among managing directors and other administrators, organization and management of the bank’s information system, etc. The BNB process also entails the analysis of a business plan of the bank with exhaustive description of the activities to be performed, customer and product structure, objectives, policy and strategy of the bank, financial forecast of development over a three-year period. Also, the suitability of shareholders (3 percent of sharing and above) as well as their possible links to related parties are also examined by the supervisors. In doing so, the BNB will pay particular attention to the following aspects: -persons having significant shareholdings cannot, either by their activities or through their influence, hamper bank’s safety and soundness; -the existence of close relations between the bank and other persons does not hinder the efficient exercise of banking supervision. With respect specifically to consolidated supervision the BNB will verify that: -the applicant’s charter does not contain provisions, which hinder the application of principles and the best practices of corporate management; -the parent undertaking (in case of a financial holding company, mixed financial holding company or mixed holding company) will not place obstacles to conducting consolidated supervision; -the requirements or difficulties in applying third country’s particular regulation or administrative acts regulating one or more legal or natural persons, with whom the bank has close links, will not impede the efficient conduct of banking supervision. The LCI also stipulates in art.24 on mutual recognition that when it comes to a bank with a seat in Bulgaria but which carries out activities in a member state either through a branch or directly if it is a subsidiary of a Bulgarian bank, or is jointly owned by two or more banks licensed in Bulgaria, the BNB shall exercise a consolidated supervision over the bank above and shall monitor its shareholders’ structure following a procedure defined by the BNB. The team found no indication according to which the BNB determines, where appropriate, that these structures will not hinder effective implementation of corrective measures in the future.
EC5	The licensing authority identifies and determines the suitability of the bank’s major shareholders, including the ultimate beneficial owners, and others that may exert significant influence. It also assesses the transparency of the ownership structure, the sources of initial capital and the ability of shareholders to provide additional financial support, where needed.
Description and findings re EC5	The legal basis for identifying and determining the suitability of the bank’s major shareholders, and others that may exert significant influence can be found in the LCI art. 13, (2) paragraph 7 and 8 as well as in the BNB Ordinances No 2 and 20. Bank’s shareholders with significant interest are subject to BNB scrutiny. As stipulated in the regulations above, the prospective bank should provide the name and address of the persons who have directly or indirectly subscribed for 3 percent and above of the voting shares. The same information is also required for all persons holding 10 percent or more of bank’s capital (the major shareholders) and specifically for the 20 largest shareholders (LCI art. 14 (3)). Further, the BNB will determine if the qualification, experience –during the past five years-, integrity of the shareholders with significant interest are appropriate, including their reliability to provide additional financial support, where needed. As indicated in the law, the BNB will have to be informed –in writing- about the origin of funds used by shareholder for acquiring 3 percent and above of the capital (to ascertain their transparency and legitimacy) and whether the shareholders have used their own resources to acquire their holdings. Moreover, the law stipulates that the BNB will have to assess whether major shareholders’ financial capacity is commensurate with the scale and activities of the bank (Art. 14, par. 3, p. 12 of the LCI). In case of a legal entity having 10 percent and more of voting rights in a bank, the Ordinance No2 subject the entity to provide, inter alia, the following data: -structure of the capital and its allocation between the shareholders (partners), -article of association -auditor’s reports and financial statement for the last three years -balance sheets, income statement, and -detailed information about the structure of the group in which the applicant participates. Moreover, in case of granting a license to a foreign bank, the BNB will hold consultation with the home supervisor with the view to obtain information about the shareholders (art. 13 (6)). Lastly, the BNB is empowered by law to request any additional information deemed necessary for making a judgment about the suitability of the bank’s shareholders with significant interest (art. 13, (2) 9). Regarding the concepts of indirect holding and beneficial ownership, the LCI does not provide a specific definition of UBO; art. 13 (2) subparagraph 8 stipulates that for licensing purposes, the application should contain “a document of registration and written data about the persons holding shares or equity in their capital or property, or controlling them – for legal persons under item 7 [i.e., shareholders holding 3 percent and above of voting rights]. There are two provisions however containing the concept of UBO. The first one can be found in the AML law (a customer acting on his own behalf and for his own account or on behalf and for the account of a third party). It is not clear however whether the obligation to disclose the true identity of the ultimate beneficial owner applies in case of a person applying for a license. The second one, contemplated in Ordinance #2, art 19 (4) seems to apply only in the case where the acquisition of bank shares is done by a trust.22 In practice it is the role of the Legal Services and Administration Directorate to perform the assessment of suitability, on the basis of the “fit and proper” criteria, concerning members of the managing bodies of credit institutions. It is noteworthy that the Special supervision directorate conducts detailed analysis in respect of banks’ ownership structures and control. The main objective of this work is to minimise risks related to the actions of banks’ major shareholders and to understand their influence on the operations at the level of individual banks. The mission was given access to SSD reports performed respectively in 2012 and 2014, one assessing the financial status of the shareholders of a few banks and another one analyzing shareholding structure and ownership in the context of the Act on the Economic and Financial Relations with Companies Registered in Preferential Tax Regime Jurisdictions, the Persons Related to Them and Their Beneficial Owners. In that respect, the SSD expressed concerns on several key aspects relating to (i) the poor financial conditions of major shareholders (some of them exhibiting important losses or having no real activity at all) and (ii) the absence of clarity on their ultimate owners some of whom with location in off-shore centers. According to the discussion with the BNB, most –if not all- of the missing information have been collected by the SSD.
EC6	A minimum initial capital amount is stipulated for all banks.
Description and findings re EC6	The LCI y stipulates that banks must have a minimum initial capital of at least BGN 10 million (EURO 5 million).
EC7	The licensing authority, at authorization, evaluates the bank’s proposed Board members and senior management as to expertise and integrity (fit and proper test), and any potential for conflicts of interest. The fit and proper criteria include: (i) skills and experience in relevant financial operations commensurate with the intended activities of the bank; and (ii) no record of criminal activities or adverse regulatory judgments that make a person unfit to uphold important positions in a bank.23 The licensing authority determines whether the bank’s Board has collective sound knowledge of the material activities the bank intends to pursue, and the associated risks.
Description and findings re EC7	The suitability, professionalism, qualification, fitness and propriety of board of directors and supervisory board members are assessed under the conditions set forth in the BNB Ordinance No20 (28 April 2009). Further, the Regulation on the requirements to Bank’s administrators, under LCI art. 11 establishes the fit and proper requirement, including the criteria on qualification, work experience, reputation and probity (absence of criminal background). When assessing the fitness criteria, the BNB due diligence includes determining whether the elected members of the Board and those of the Supervisory body have the relevant academic background and past professional experience (e.g., at least 5 years of professional experience as manager in a bank or in a company comparable to a bank). For assessing the “propriety” of prospective administrators, prospective administrators are required to fill a detailed questionnaire called “Fitness and Propriety Test Question Form) to prove their fitness and propriety. The form reviewed by the mission appears very detailed covering a wide range of issues including, but not limited to, professional background, former management positions, absence of criminal or administrative sanctions and conflict of interest. The form, however, does not require information about administrator’s income and assets. This due diligence also extends to legal entities managed by elected members of the Board. Regarding potential conflict of interest, the BNB will determine, based on information provided, the personal interests of the applicants, including possible existence of any relationship of the elected members of the Board with other persons in relation to the bank The LCI, Art. 11, (1), subparagraphs 7 and 9 states that a member of the Board of directors as well as a procurator should not be [married] to or a relative, in direct or lateral lineage up to the third degree, to another member of the managing or controlling body of the bank and is not in factual cohabitation with such a member. The Ordinance also requires applicant to submit a declaration in writing stating that own resources have been used for the subscribed shares and also stating the origin of funds used to make these contributions. However, the mission was told that there is no further due diligence to ascertain the reputable source of funds, beyond the analysis of financial statements and the terms of the written declaration. There is no specific requirement for the individual Board members or the Board collectively to have a sound knowledge of the material activities that the bank intends to pursue, and the associated risks.
EC8	The licensing authority reviews the proposed strategic and operating plans of the bank. This includes determining that an appropriate system of corporate governance, risk management and internal controls, including those related to the detection and prevention of criminal activities, as well as the oversight of proposed outsourced functions, will be in place. The operational structure is required to reflect the scope and degree of sophistication of the proposed activities of the bank.24
Description and findings re EC8	In the LCI, art. 14 (3) subparagraph 14, prospective banks should submit to the BNB a set of documents to support the request. This includes (i) a business plan with exhaustive description of the activities to be performed, customer and product structure, objectives, policy and strategy of the bank, financial forecast of development over a three-year period; (ii) the organizational structure; (iii) a description of the AML internal program and (iv) information on the internal audit function and risks management functions. Regarding the later, in consonance with art. 15, the license will be granted if –inter alia- the applicant has confirmed to the BNB that: -internal control rules have been drafted, including clear administrative and accounting procedures; -an internal control office is established and the recruited employees have the qualifications and professional experience required for that activity; -sound internal management rules have been drafted which include a clear organizational structure with well-defined, transparent and adequate levels of responsibilities and efficient procedures for identifying, managing, monitoring and reporting of the risks to which the bank might be exposed. Further, as stipulated in art. 15, the bank’s rules governing internal control systems and risk management should reflect the character, scale and complexity of the bank’s operations and be commensurate with the risks to which the bank may be exposed. The law however does not contain particular requirement on the oversight of proposed outsourced functions.
EC9	The licensing authority reviews pro forma financial statements and projections of the proposed bank. This includes an assessment of the adequacy of the financial strength to support the proposed strategic plan as well as financial information on the principal shareholders of the bank.
Description and findings re EC9	As contemplated in the LCI, art. 13 (2) subparagraph 3, the BNB collects the financial projections for the first three years of operations of the proposed bank. According to the authorities the materials are reviewed and analyzed with particular attention focused on the validity of the submitted documents, the applicant’s reliability and financial status. Qualifying shareholders (holding 10 percent and above of the capital) are assessed as to their financial capacity in terms of their financial strength at the time of the application, and prospective capacity to provide additional capital to the bank in the event it is needed (LCI, art. Art. 14, par. 3, p. 12). Each such prospective qualifying shareholder must provide financial information that demonstrates an appropriate level of financial capacity (BNB Ordinance 2).
EC10	In the case of foreign banks establishing a branch or subsidiary, before issuing a license, the host supervisor establishes that no objection (or a statement of no objection) from the home supervisor has been received. For cross-border banking operations in its country, the host supervisor determines whether the home supervisor practices global consolidated supervision.
Description and findings re EC10	Since Bulgaria is a member State of the European Union, the principle of the Mutual Recognition applies. As a result, the distinction should be made according to whether or not the prospective bank belongs to the EU. If the applicant is licensed in a Member State and is planning to conduct activities on the territory of the Republic of Bulgaria through a branch, a license is not needed provided that the projected activities are covered by its license and that the competent authority which has granted the license has notified the BNB (LCI, art. 20). If the applicant projects to establishing a bank on the territory of Bulgaria as a subsidiary of another bank from a Member State, a licensing procedure under Art. 13 – 15 of the LCI applies. In those cases, the BNB holds preliminary consultations with the competent home supervisory authority in accordance with Art. 13, par. 4 of the LCI. Consultations with the competent supervisory authorities cover issues related to shareholders, reputation and experience of the prospective managers, the assessment of compliance with supervisory requirements, as well as any other information of relevance to granting the license. A bank with headquarters in a non EU-Member country has to apply for a license before operating in Bulgaria through a branch. A written consent for opening of a branch issued by the respective bank supervision authority is a precondition for granting the license by the BNB. In accordance with Art. 17 of the LCI, several pre-requisites should be met. In particular, the third-country applicant bank shall submit an application with the following enclosures: -a verified copy of the registration certificate of the bank and a document issued by the registration authority containing current data on the seat and registered address, subject of ac