Ivan Iskrov: Association of Banks in Bulgaria - 20 years
Congratulatory address by Mr Ivan Iskrov, Governor of the Bulgarian National Bank, to the
Association of Banks in Bulgaria on the occasion of the 20th Anniversary of the Association's
Foundation, Sofia, 3 April 2012.
* * *
Mr. President,
Ladies and gentlemen,
Dear colleagues and friends,
It is a great honour and a pleasure for me to be here today commemorating with you the
20th Anniversary of the guild of the banking profession - the Association of Banks in Bulgaria.
This is a perfect opportunity to congratulate the Association for the long way it successfully
traversed, and along which it established itself as one of the most reputed trade associations
in the Republic of Bulgaria. All these years the Association consistently assisted its members
in pursuing their banking business and protecting their interests, all the while standing as a
stable and constructive partner of the central bank, as the banking regulatory authority, of
other government authorities, and of the representatives of the business.
Therefore, we the members of the BNB Governing Council are all pleased to attend this
occasion as a proof of the respect cherished by the central bank's management for your
work and professional achievements!
Behind the ABB's history stands the individual road of achievements, but also of challenges,
of each one of the Association's members. As an anniversary usually brings up both a tally of
what was done in the past, and wishes for the future, I will try to have some measure of both
in my congratulatory address to you.
Practicing our profession involves our capability to serve society and help the Bulgarian
economy. Because, as we are all very well aware, banks have high responsibilities in a
market economy - the ongoing technological innovation, developing and offering new
products and services, as well as the predictability and stability of banks are a mandatory
prerequisite for economic prosperity. From my first day as a BNB Governor to this very day, I
have never stopped reiterating and instilling the idea that this responsibility requires the
individual efforts of each one of us to be governed by a long-term goal - let's call it a sense
of mission - which goes beyond the specific financial or market considerations of the current
day. It is exactly a jubilee like today's that reminds us of the historic horizons behind the daily
statistics, balance sheets or income statements, which ultimately mark the road of new and
democratic Bulgaria.
Speaking of history, exactly the current crisis stirs the need to examine the past. It is often
said about this crisis that it has been the biggest one globally in the recent decades.
Although we are in the fourth year after the collapse of Lehman Brothers, which triggered the
turmoil on the global financial markets, the ripples of which we still evidence, the Bulgarian
banking sector continues to stand out with its stability and predictability.
Irrespective of the unfavourable general economic situation, the banks in this country
demonstrated flexibility and operational efficiency, enabling them to preserve significant
capital and liquidity buffers. Although loan portfolio quality deteriorated (as of end-2011 the
share of bad loans was 14.93%), the banking sector continues to have at its disposal
adequate degree of provisioning and capital protection. The sum of loan impairment
according to the International Financial Reporting Standards, specific provisions for credit
risk and capital surplus (i.e. the capital in the system in excess of the required regulatory
minimum) amounts to 103% of the gross amount of bad loans. Notwithstanding the
considerable increase of provisioning costs in the recent three years, the banking system has
never stopped generating positive financial results which increase the capital buffer. And in
the cases of shortage or lack of profit in an institution, the BNB exercised supervisory
pressure on shareholders to invest additional capital. Today our banking sector enjoys
extremely high indicators (including compared to international practices) of liquidity
(25.87% as of February this year) and capital adequacy (17.53% as of December last year,
including 15.74% Tier 1 capital adequacy), without counting a single lev of public funds in
calculating these ratios, at that.
Bulgaria remained one of the few EU member states, where not a single credit institution
needed to be rescued with taxpayers' money. Banks in this country not only could never be
blamed for the economic downturn and have not been a source of systemic risks but just the
opposite - they continue to be one of the main pillars of the macroeconomic and financial
stability in the country.
As a logical outcome, the stability of the banks in Bulgaria has won the confidence of
domestic depositors - by the end of February the deposits of households increased year on
year by 13.2%. Owing to this, an important structural trend is noticeably confirmed -
gradually and with no significant upward pressure on the interest rates on deposits, the
dependence on attracted resources from external sources has been reduced to an
acceptable minimum. For example, at the end of February around 12% of total attracted
resources were from foreign parent banks, compared to almost one fourth at the end of
2008).
When we look back we realise that the current state of the banking system in Bulgaria is
largely due to what was done over the years immediately preceding the global crisis. Instilling
a prudent behaviour in the banks in that period through BNB's conservative and anti-cyclical
supervisory policies, regardless of the pursuit of market shares and profits, equipped the
banks for the ensuing crisis with solid liquid and capital buffers.
This prudent behaviour of the banks and the BNB during the economic boom, however, also
had its origins further back in history. It followed the well-learnt lessons from a still earlier
period - the great financial and banking crisis in the mid-1990s.
We will leave it to researchers into Bulgaria's modern economic history to mark out the
different stages - such as for instance the initial point at the onset of transition characterized
by a huge state ownership in the banks and the hectic emergence of a great number of
private banks amidst a just-forming banking supervision and regulations; the state's
interference in the credit processes and banks' decapitalisation in the mid-1990s; the sector
gradually freeing itself from political dependence; the privatisation and foreign capital inflow
(mainly from EU countries); the development of modern regulations and the building up of
supervisory experience. However, even now we could sum up, and it would not at all be
far-fetched, that the history of modern banking is the best part of Bulgaria's history of
socioeconomic transition after the changes that took place in 1989.
Today Bulgaria has a modern and sound banking system.
Still, a responsible behaviour implies the need of not only recognising what has been
achieved, but preserving it too. Because the banking sector in Bulgaria has played a major
role for the overall economic growth after the stabilisation and the introduction of the
currency board regime in 1997. The average annual real rate of GDP growth in Bulgaria in
the period 1998-2011 stood at 4% and the real cumulative growth in the same period was
63.5%. At the same time, the added value posted by the sector, classified by the national
statistics as "finance and insurance", boasted an average annual real growth of 13.3%, and
cumulatively for the same period - a notable 384.9%. All that time, around 1/6 of the
country's GDP growth was contributed by this sector, which is largely dominated and
represented by the banks.
Besides being a factor of economic growth, the banking system has played a significant role
for attracting foreign direct investments to Bulgaria. A total of BGN 76.6 billion in foreign
direct investments inflow was registered over the period from 1998 to 2011, of which over
1/6 (BGN 11.9 billion) were direct investments in the banking sector in particular.
Not lastly, the banking sector accounts for a large part of the "brightest" share in Bulgaria's
economy. The role of banks in Bulgaria should not be considered in isolation from the fact
that they are among the biggest and most immaculate employers. In 2011 the number of
full-time employees in the banking system reached 33 677 at year-end. With the BGN
77.6 million in tax costs and BGN 722.8 million in personnel costs paid in 2011 only, for
example, the banking sector ranks among the largest taxpayers and contributors to the social
security system in Bulgaria. Please note that these numbers do not even take into account
the contribution by the central bank.
Therefore, all that is good for the banking system and allows it to perform its traditional
functions, is also good for the Bulgarian economy. Our country can ill afford to do without the
banks' considerable positive contribution to economic growth - which will be the effect,
unfortunately, if the policymakers succumbed to certain populist sentiments that have been
promoted recently by some figures who would use every occasion to come onto the media
stage. There is no reason for the banks in Bulgaria to be additionally burdened by
ill-considered administrative regulations and the related costs. Quite the contrary, the weight
of such additional burden would turn back as a boomerang against the interests of our
society and the Bulgarian economy in general.
The nihilistic attitudes to our own achievements in the past hold back enterprise and the
ability to plan for the future. That slows down the economy. Simply not knowing one's own
economic history, however, could lead to making decisions with very adverse implications.
Therefore, the best we could wish ourselves for the future with regard to the sector and the
economy as a whole is that in the future the public interference in the banking area in
Bulgaria continues mainly within the confines of prudential and conservative regulations and
supervisory practices.
Undermining the good name of the sector is a no-win strategy as this would limit and make
the services offered by banks costlier, which would eventually harm customers and thwart
economic growth. In this context, please allow me to also quote the call of the Head of State
who, following his meeting with the BNB Governing Council in February, summed up the
situation in a fine and very pragmatic way: "The State should continue to work for the good
reputation of our banking system, which is a precondition for more favourable lending and is
of benefit to people".
Looking ahead now, we need to stress that coping well in these times of crisis so far does
not mean that we can afford to be less watchful or less precise in our next steps. This year,
too, will be rich in new challenges. Based on the current projections for a recession in the
euro area, we expect that the growth rate of the Bulgarian economy would slow down to
about 0.7% in 2012, and this would have a direct impact on the potential of banks in Bulgaria
to generate incomes from sources of their own. The weak demand for new loans is facing
banks with a double challenge. On the one hand, it will be difficult for them to accumulate
new buffers from profits; and on the other hand, the existing classified assets will go on
putting pressure on the available reserves. While seeking new business opportunities, you
should very carefully approach the question of capital planning. Because you are well aware
that the BNB makes no compromises with safety.
The President of the Republic of Bulgaria is present today, so I am tempted to take
advantage and draw the attention of the responsible State institutions to some significant
gaps in the commercial legislation. Legal and subjective obstacles get in the way of reducing
the share of non-performing loans. Bulgaria is no exception among the countries of Central
and Eastern Europe where the winding-up and insolvency proceedings, as well as the sale of
the collateral, are relatively more sluggish. Regretfully, in Bulgaria the cases of unethical
debtors taking advantage of some weaknesses of the existing insolvency proceedings, which
allow them to manipulate the initial date of insolvency and nullify the pieces of collateral
pledged after that date, are becoming more and more frequent. The problems with the
insolvency and winding-up court proceedings in the corporate sector inhibit the rehabilitation
of banks' books (i.e. that part of banks' balance sheet assets which has been hit the hardest
during the crisis). This prolongs the procedures and increases the costs for managing the
so-called "bad loans", which negatively affects banks' capacity to take new credit risk at an
acceptable cost. Hampering the lending processes in turn impedes the economic growth in
the country, and hence - employment and people's living standards.
Since one of the banks' major tasks still is to strengthen their loan portfolios, the slower
growth rate of the economy and the slower improvement in the economic profile of some
categories of clients would force banks to look for new niches for business. This may lead to
greater specialisation in certain types of services and to more intense competition for every
new client. I would like to point out that the increased competition does not exclude the need
for you to keep up a high level of correctness in your relations with one another and with your
clients.
While the bank services market is getting saturated, consumers' awareness is being raised.
The stronger competition in the banking sector also promotes new approaches in the
dealings with clients1. One possible room for competition between credit institutions is, for
instance, the transparency and predictability of structuring, and especially of pricing, their
products and services. One should work more for the benefit of clients, adopting a more
individual approach to those facing difficulties, summing up and analysing the experience
gained and drawing conclusions that could be put to good use in new and better banking
practices. The happy client is the cheapest advertising for the bank.
The work done in each of the above problematic areas allows for a more active presence
- at an expert level and in the public area - both of the individual banks' representatives and
of the ABB as their legitimate and highly reputable association. With its twenty years of
experience the ABB is now mature enough to stop looking on itself only as an intra-branch
organisation and to "open up" so as to actively and publicly uphold the views of the
Association members and their loyal clients.
I will finish by assuring you that we at the BNB will also continue to work invariably for the
financial stability of Bulgaria and to enable the banking system to support the growth of the
Bulgarian economy. You know that a considerable part of our activity is done in a way that is
invisible to the public, including outside the country where the BNB participates in numerous
bodies and working initiatives of the EU and the ECB. An example of this is the issue of
financial transaction tax - an ill-advised concept which has turned out to suit politicians with
populist leanings in Europe. For over two years the BNB has been defending with firmness
and argumentation the position that this tax would be detrimental to both the EU economy
and the Bulgarian economy. Luckily, just a few days ago (at the informal ECOFIN meeting in
Copenhagen on 30 and 31 March) some of the biggest EU countries, like Germany, which
had most ardently insisted on introducing a financial transaction tax, practically gave up on
that idea because reaching an agreement in the entire EU proved impossible. This is an
example of how Bulgaria can and should stand up for its own national economic interests,
opposing (and even forming situational "coalitions"), if necessary, the large countries in the
EU which as a rule pass their own interests as interests of the entire EU. The BNB is also a
constructive opponent of the Bulgarian institutions when it sees that rash proposals are being
put forward that may have an adverse effect on the stability and economic growth in the
country.
Thus, what has been achieved so far gives us confidence in ourselves and optimism about
the future of the banking sector in Bulgaria. Despite all the difficulties, the banks in Bulgaria
bear responsibility not only for going forward as sustainable and successful business
enterprises, but also for taking their clients and the whole economy through the times of
crises. We do hope that in the coming years the banking community's voice of common
sense will be heard by the State institutions, businesses and society at large. Because we
have learnt from experience that a well-functioning banking system is a necessary
pre-condition for the economic prosperity of our home country.
Dear colleagues, happy anniversary!