Ivan Iskrov: Review of 2014 as a starting point of reflection on the
challenges ahead in Bulgaria
Speech by Mr Ivan Iskrov, Governor of the Bulgarian National Bank, before the Association
of Banks in Bulgaria on the occasion of the Banker's Day, Sofia, 4 December 2014.
* * *
Ladies and Gentlemen,
I'm happy that we are together again on our professional holiday - on the celebration of the
Banker's Day, Saint Nicholas Day. Keeping the tradition, this year again, with the BNB
Governing Council members we are marking the occasion with you - the management
representatives of the banks in Bulgaria. Please accept our presence here as an expression
of acknowledgement of your work and professional attitude in running your entrusted
institutions. Also, today we would like to underscore our appreciation of the efforts and
contribution of many of you here for safekeeping the financial stability in our country.
The banks deserve congratulations for the positive results the sector has achieved amid a
very unfavourable market, media and political backdrop in 2014. At the same time, let us use
the recapitulation of this year as a starting point of reflection about the challenges that may
lie ahead.
The passing year has proved one of the toughest for the banking system in Bulgaria since
the time of the big crisis in 1996-1997. The reasons for this have been several and I would
conditionally divide them into two groups.
Within the first group fall all those challenges in 2014 that were not at all unexpected. We
have commented these challenges in previous years.
Thus, for instance, the forecasts that this year also the economic growth would not
accelerate, have materialised. That has held back the quality of bank assets from improving
more tangibly. Accordingly, loan demand from enterprises and households has stayed weak.
As a result, for yet another year, the banks' profitability has been subdued and their
possibilities for income from lending, i.e. their core activity, have remained limited.
Also expected were the tasks related to the transposition into the Bulgarian legislation of the
Capital Requirements Directive and the Capital Requirements Regulation adopted in 2013 by
the European Parliament and the Council of EU. This time last year in my statement before
you I qualified this as a kind of a "supervisory revolution" and the largest one-off change to
have occurred in our supervisory framework over the last more than 15 years. Earlier this
year, amendments were adopted in the Law on Credit Institutions and in the regulatory
framework, including by dropping out a few key BNB ordinances, Ordinance No 9 being one
of them which governed the specific provisions for credit risk. In place of the specific
provisions allocated until then, the banks made additional accounting provisions under the
International Financial Reporting Standards (IFRS), thus reducing the book value of loans
past-due by more than 90 days.
The second group of challenges, with which 2014 will undoubtedly be remembered, includes
those events that put the very resilience of the banking system to the test. A point was even
reached where questions were raised in the public space about the BNB effectiveness, in
particular the banking supervision thus far exercised.
The events in question started with the severe liquidity attack against several banks in the
middle of the year. 2014 will go down in history also with the huge misappropriations of
depositors' money, malpractices of governance and breach of regulations revealed in the
second half of the year in the fourth largest bank in the country - "Corporate Commercial
Bank" AD (KTB).
The KTB case was finally resolved with the effective application of the statutory guarantee on
deposits. By coincidence, exactly today, 4 of December 2014, the long-awaited payment of
guaranteed deposits with KTB has started. The depositors in this bank had no access to their
deposits for a very long time. The central bank truly wished to see the KTB issues resolved in
the shortest time possible. Unfortunately, as it is well known, with a large part of the
documentation missing and the absence of legal means for quick restructuring of KTB,
voluminous actions were needed to restore the credit files in KTB. Gathering this information
was a necessary condition for the independent auditors to perform a complete analysis and
assessment of KTB assets. Without such analysis and assessment, the actual status of
KTB's capital position could not be determined and, respectively, the BNB Governing Council
could not have the legal grounds to adopt the necessary decisions.
On 12 December, CB Victoria will also open for business and its depositors will have access
to all their deposits there.
The very scale and power of manifestation of the problems in 2014 were unprecedented and
unpredictable. The banking sector in Bulgaria, however, had the huge advantage of meeting
the critical times prepared and in excellent condition - just as it coped to meet the global
crisis several years before. Our banks had managed to accumulate high liquidity and capital
buffers owing to their sound governance and the BNB's focused conservative policy over the
years. The available buffers plus the measures taken since June by both the BNB and the
government, as well as by the banks, helped safeguard the banking and the overall financial
stability in the country. This way, the KTB crisis remained an isolated case and did not affect
the operation of the rest of the banking sector.
A proof of this is the depositors' behaviour who continued to entrust their savings to the
banks despite the occasionally irresponsible public speaking against the banking sector and
the incessant public attacks on the BNB. Only household deposits picked up by
BGN 2.8 billion (7.8%) annually to October, exceeding the stock of deposits in May (the last
month before placing KTB and CB Victoria under special supervision). This clearly indicates
restored confidence in the system.
Besides, the banking system is about to end the year with excellent capital adequacy and
liquidity indicators. I say the banking system, meaning all banks, excluding KTB and
CB Victoria. As at September, the total capital adequacy ratio stood at 22.16%, and only
Tier 1 capital ratio was 19.91% (just to remind you that the EU provisions in the New Basel
Capital Accord, also known as "Basel III", require 8% total capital adequacy and 6% tier 1
capital ratio, respectively). The liquid assets-to-liabilities ratio in the banking system as at
October reached 29.75%.
In 2014 the share of non-performing exposures past-due for more than 90 days has
continued to stabilise. At the end of October this year, at system level, their book value was
10.62% of the system's loan portfolio book value (i.e. practically the same as at the end of
2013 when their share was 10.28%). The balance-sheet share of non-performing exposures
reflects the already provisioned risk through the impairments already made. The provisioning
level itself is high, with a total of BGN 5-6 billion provisions in the form of impairments
allocated by the banking sector under IFRS until October.
The banking system continues to generate profit, which is a source of additional
capitalisation and is thus a reserve for maintaining stability. We expect the sector to end
2014 at a positive financial result of circa BGN 700 million (i.e. above last year's result). This
performance applies to the whole system without the bank whose license was revoked and
CB Victoria which is still under special supervision.
All these indicators and results are especially rewarding because they have been achieved in
a very harsh year!
At the same time, however, nobody entertains the illusions that the hardships and trials to the
banks in our country are over. Because most likely in 2015 as well the banking community
will work in a testing business environment, where I do not rule out the possibility of new
attempts to deliver blows against the sector, motivated by the intertwining economic, political
and media interests, such as those we saw against the Bulgarian banking system right after
KTB and CB Victoria were placed under special supervision.
The passing 2014 year has shown how dangerous to society, as well as useless for their
authors, such attacks can actually be. Remember how, right here before you, a year ago I
called your attention to the fact that we could expect political tension to rise and the topic of
banks to be turned into an object of pre-election campaign and party bickering. Regrettably,
this unpleasant prediction has come true. Throughout the past year we were not spared
statements by party representatives who administered negative public judgments and
pronounced the gloomiest of predictions about the banks in the country. The air of political
insecurity bred all sorts of populist acts, including irrational legislative proposals with regard
to both the banks and the BNB.
Could it be, however, that in 2015 we would witness a radical change in the thinking and
actions of the political representatives and media circles towards more prudence and better
awareness of the key role the banking sector has for the financial stability, economic growth
and welfare of society? I don't know. But I do hope very much it would be so.
Dear Colleagues,
Outside the issues related to the national specifics of the environment the banks operate in, I
would take the opportunity to note some forthcoming amendments in the regulatory
framework in 2015 relating to the introduction of new uniform European norms and practices
with a direct impact on the work of credit institutions in Bulgaria.
In 2015 the Bank Recovery and Resolution Directive in the EU will come into effect, aiming to
introduce EU-wide rules and tools for the Member States to deal with banks in trouble and to
take timely and adequate measures to rescue viable institutions. This directive is going to be
transposed in the Bulgarian law 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). Strategic decisions need to be made on establishing relevant
competent authorities tasked with the responsibility of resolving banks and investment firms,
on setting up resolution funds, and on the drawing up by the supervised entities of adequate
plans for recovery or controlled restoration of their viability by restructuring.
In connection with the new EU capital framework CRD4, in 2014 the BNB began to
implement the new reporting framework for supervisory purposes (the so-called FINREP and
COREP), consisting of over 100 separate reporting forms. The additional supervisory
reporting will meet the accumulated information needs of the Banking Supervision
Department and will tackle the most sensitive sources of risk in banks' portfolios.
In 2015 it is expected that the EU-wide banking supervision rules will become more and
more common in banking practices. Numerous technical standards, developed by the
European Banking Authority (EBA) and adopted by the European Commission, are going to
be put in place. In supervising the subsidiaries of euro area banks, the BNB is going to
cooperate actively with the Single Supervisory Mechanism (SSM) which started in November
2014.
Last but not least is the BNB's intention to initiate an asset quality review of the entire
banking system, which will cover all banks operating in Bulgaria. This will also be a key
requirement if the government should decide, at some point, to start talks with the ECB for
joining the SSM. The methodology of this review will be based on the highest standards
already developed and applied by the ECB in the recently completed asset quality review in
the euro area largest banks prior to their transition to the SSM. This review will be carried out
with the help of an independent external consultant. It should start not later than the end of
next year, depending on how the implementation of the new Bank Recovery and Resolution
Directive advances, including the creation of the respective resolution fund. I assure you that
the BNB is going to get commercial banks familiar, at an early enough stage, with the main
elements of the methodology of the forthcoming asset quality review, so that each bank
could budget the relevant costs (by analogy with the euro area where banks have borne the
costs of their asset quality review).
Dear friends,
The passing 2014 will regrettably be remembered for the vicious public pressure on the BNB.
The central bank was under systematic and orchestrated attacks behind which one could see
narrow corporate interests and political dependencies. Such focused, fierce and continuous
attacks against the central bank are unheard of in today's advanced societies, and are
certainly far from the European norms. Information about who paid for these attacks and
whose money was spent on them is already becoming public knowledge. Even more
interesting details may continue to come out in the months ahead. Then, I hope, it will
become quite clear even to the public at large who has in fact defended the public interest
and who has acted against it.
This multi-month campaign against the central bank (which by the way is still going on) has
consumed impressively large financial, media and political resources. All of you have also
observed the biased attempt of nationally representative organisations to misrepresent the
BNB's actions and, ostensibly by accident, to divert the attention of the Bulgarian public from
those who has abused people's trust and deposits. But all along while it was solving the case
of KTB and CB Victoria, the BNB did not allow to be misled and deviate from the letter and
spirit of the law. If somebody believed that by using Jimmy Hoffa's1 methods they would force
a strong institution like the BNB, with an earned reputation nationally and internationally, to
circumvent the law or to obey personal or group interests, they were obviously mistaken.
In this regard please let me share a few general observations relating to the topic of frauds in
KTB, the responsibility of the banking supervision, and the role of the central bank.
The KTB case can be compared with a series of cases in other countries. Over the last years
alone in the EU and USA there were dozens of failed banks and banks in which frauds for
billions of euros were discovered.
However, it should be noted that in all those cases no central bank was pressurised to take
the full responsibility and to be scapegoated, unlike the continual public attacks here against
the BNB. In other countries the responsible institutions and politicians have always held the
understanding that the central bank's authority is of paramount importance for the calm of
depositors and the stability of the banking system as a whole. All across the world that
authority, and the independence of the central bank, are considered to be a long-term asset
of the country. Consequently, central banks' actions have not been compromised under the
pressure of temporary economic or political emotions.
All said so far does not mean that the BNB has no intention to draw conclusions for
improving the efficiency of the banking supervision. Quite the opposite, the BNB has already
undertaken serious steps in this direction.
Back in the summer we publicly announced a number of measures and actions for reviewing
the supervisory framework and practices. I wish to remind you that as early as in July we
sent an official letter to the EBA inviting them to carry out an independent review of the
quality, capacity, practices and procedures of the BNB's Banking Supervision Department. In
August we sent another letter to the International Monetary Fund (IMF) requesting them to
organise a mission of the IMF and World Bank in Bulgaria under the Financial Sector
Assessment Program (FSAP). On recommendation of the IMF, World Bank and EBA, the
Banking Supervision Department is now already working to assess the compliance of the
supervisory practices in Bulgaria with the "Basel Core Principles"2 for effective banking
supervision as a first stage of the FSAP.
In addition, the BNB has already drawn up and proposed to the Members of Parliament a
draft of amendments to the Law on the BNB and the Law on Credit Institutions, designed to
rectify some weaknesses in the legal framework and to allow the BNB Governing Council to
have more control over the banking supervision functions.
Because all of you here are well aware of the facts, but they were cunningly ignored and
avoided by those who were attacking the BNB. Since June 1997 by law the BNB Governing
Council has been the body that adopts all banking regulations (i.e. the ordinances defining
the norms and requirements for banks' activities). However, supervision is exclusively
entrusted to the deputy governor in charge of the Banking Supervision Department (no
matter what his or her name is), who acts separately and independently. The crisis with KTB,
and not only that one, clearly demonstrated that such immense concentration of power and
responsibility in one official is a mistake of legislation. And we want to change this. Because
bearing responsibility is not possible without having the relevant powers.
Whatever happens ahead, the events in 2014 will not rewrite the BNB's history of proven
success in recent years. It is a fact that, thanks to the consistent efficient work of the central
bank, including the banking supervision, during the global financial crisis not a single bank
went bankrupt in Bulgaria. In other countries, even in the EU, problems with banks led to
public costs running into hundreds of billions of euros. The Bulgarian citizens and taxpayers
were saved from all that. The long-standing achievements of the BNB, and BNB's banking
supervision in particular, should not be forgotten or erased easily - even if it turns out that
some omissions may have been made in the KTB case.
It is also a fact that since June to date the BNB, the government and the commercial banks
(under the strong leadership of the BNB) have successfully confined the negative effects on
the rest of the banking sector after placing KTB and CB Victoria under special supervision.
Making huge efforts, we continue to safeguard the financial stability in Bulgaria. In an
extremely unfavourable situation of unprecedented public pressure, ferocious criticisms and
direct attacks against the central bank, the BNB has once again managed to do its best.
The good news is that this year the BNB has practically stood a real and very heavy stress
test. We have passed an exceptionally serious stress test of our independence. We have
proved how our country, business and society have a strong institution they can rely on as a
pillar of stability and for protecting the long-term public interest, an institution that does not
give in to pressure and opportunistic interests.
On a day like this, when we normally weigh up past events, our thoughts could go further
back in time, long before the worries of this passing year. Some events can often be more
wisely judged when looked at from a longer historical perspective. If we take such a look
back into the 135-year history of the BNB, we would see many examples demonstrating the
strength of our central bank and its insusceptibility to coteries' intrigues and shallow trivial
debates (which only absorb energy from the public creative resource, before vanishing in
time).
But our history has witnessed obscurantist episodes too, when the BNB was suppressed to
obey political or other temporary interests. The implications of such interventions have
always been tragic for the country. Here is one brief example. On the famed date of
9 September 1944 the BNB Governing Council set a "buying" rate for the Soviet rouble
(15 levs for 1 rouble) after being instructed on the telephone by the then Minister of Finance.
Two days later, on 11 September 1944, the government ordered the BNB to stop buying the
roubles, and instead the BNB was obliged to pay out to the Soviet armed forces passing
through our country "the amounts they needed at their request" and those amounts were to
be accounted for as a debt of the country.3
We do hope such times would never again return in Bulgaria. Bolshevik enthusiasm and
decisions made under street pressure are the most dangerous approach when it comes to
public policies regarding the monetary regime, banking supervision or financial stability.
Today, once again we are called to stand up for the professionalism and independence of
the central bank - with responsibility and concrete actions.
The public interest requires that the reputation of the central bank be respected and its
institutional independence and continuity in its work be safeguarded. The strength of
institutions in a country is a pre-condition for stability and economic growth, while the
weakness of institutions is the first sign of forthcoming economic or financial failure of a
country. It is not a coincidence that in the countries which usually serve us as an example of
democracy and prosperity, the strong public institutions by rule outlive the individuals and the
political parties too.
Dear Colleagues,
Finally, please allow me to convey the best wishes on behalf of the BNB Governing Council
and me for success of the banks run by you and for professional and personal achievements
of all of you in the coming year of 2015. Happy Banker's Day, dear colleagues!
Thank you for your attention!