Dimitar Radev: The Bulgarian banking sector in 2020 - how have
we coped and what is forthcoming
Publication by Mr Dimitar Radev, Governor of the Bulgarian National Bank, in the Bulletin of the
Association of Banks in Bulgaria, issue 64, December 2020.
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Dear Colleagues,
We are approaching the Banker's Day in a year of unprecedented challenges:
first, in relation to the consequences of the COVID-19 pandemic; and second, with the
completion of the strategic project of the entry of the Bulgarian Lev into the European Exchange
Rate Mechanism (ERM II), simultaneously with the accession of our country to the European
Banking Union, including to the Single Supervisory Mechanism and the Single Resolution
Mechanism.
From the banking sector's perspective, there are two key questions: how we have coped to date,
and what is forthcoming?
Our goal, defined as early as the start of the crisis, was for the banking sector to generate
solutions, rather than problems. As a result of our effort in the recent years, we were well
positioned for the attainment of this goal. The banking sector 'entered' into the crisis with a
Common Equity Tier 1 capital adequacy of over 19%, and with a liquidity coverage ratio of over
260%, i.e. times above the regulatory requirements.
Regardless of the good starting position, we were aware that, because of the abrupt deterioration
of the environment in which banks operated, there should be new measures for further
strengthening of their capital and liquidity positions. For the purpose, in March we adopted such
measures with a total effect of over 8% of GDP. They comprised full capitalization of the sector's
profit, significant reduction of riskier foreign exposures, and cancelling the two planned increases
of the countercyclical capital buffer.
The intended effect of these measures was along two key lines: maintaining lending activity and
relieving bank borrowers - companies and households, by enforcing a private moratorium,
proposed by the industry, on loan repayments. The results confirm that to date this effect has
been achieved. As of end-October, we not only evidence no stagnation in lending, but rather the
loans to companies and households have increased on an annual basis by 2.5 % and 7.3 %,
respectively. At the same time, the approved applications for deferral of payments under the
private moratorium reached nearly 109 thousand at their peak in August, with gross balance
sheet value of deferred loan payments of over BGN 9 billion, which is a significant financial relief
for the affected companies and households.
The tasks related to the mitigation of COVID-19 consequences for banks and their customers
involved a considerable effort on our part. Nevertheless, we managed to make arrangements and
provide a significant contribution for the completion of the strategic task of membership of the
Bulgarian lev in ERM II and accession of our country to the Single Supervisory Mechanism, by
establishing close cooperation of the Bulgarian National Bank with the European Central Bank.
As a result of joining the Single Supervisory Mechanism, our country also joined the Single
Resolution Mechanism. From 1 October 2020, the European Central Bank exercises direct
supervision over five Bulgarian significant credit institutions, and the Single Resolution Board
assumed the function of a resolution authority for these institutions and for all cross-border
groups. Owing to the good preparation effort, the transition to the new supervisory regime was
smooth, without any turbulence for the banks and their customers.
Therefore, the answer to the first question is that up to now we have been successfully
performing both the emergency tasks caused by the pandemic and the strategic tasks facing the
banking sector. The Banker's Day is a good opportunity for us to mention the contribution and to
commend on and give recognition to all our colleagues for having a banking sector that is just as
strong and supportive of companies, households and the entire economy, with a preserved
general financial stability in the country.
The more important question for us now is what lies ahead? There is no easy answer to this
question because of the development of the crisis which makes it much more uncertain in terms
of parameters as compared with previous historical periods of economic and financial turmoil.
The second wave of rapid spread of COVID-19 and the new phase of the restrictive measures
are once again challenging a number of sectors. The condition of the banks which perform the
financial intermediation function is of key importance for the whole economy. This accounts for
the Bulgarian National Bank's enormous responsibility for the fulfilment of the mandate entrusted
to us by law and specifically for maintaining the stability of the banking system.
This requires that we stay traditionally focused on the high capital and liquidity requirements for
banks. These requirements are not ends in themselves, but follow from the need for banks to
have reserves at hand. On the one hand, the reserves allow them to absorb costs and losses
arising from the worsened quality of assets in the adverse macroeconomic environment. On the
other hand, they support banks' lending capacity.
Consequently, it is logical to expect that we would continue to apply the measures of the
anticrisis package, approved in March this year. Furthermore, we analyse, on an ongoing basis, the
situation, and as a macroprudential supervisory authority we consider the likely scenario of a
worsening economic crisis and the related significant deterioration in loan portfolios. Under this
scenario, banks may need to temporarily operate under the combined capital buffers
requirement, being ready to draw up and implement plans for rebuilding them.
The prospect of continuing negative developments in the economy is a reason for us to expect
materialization of credit risk and deteriorated quality of assets on banks' balance sheets. It
seems very likely that the trend of decreasing amount and share of non-performing exposures,
seen over the last few years, may reverse. The expiry of the moratorium on deferral of loan
repayments could also give rise to an increase in non-performing exposures.
This moratorium was possible on the basis of the EU-wide regulatory framework established by
the European Banking Authority (EBA) in its Guidelines on legislative and non-legislative
moratoria on loan repayments applied in the light of the COVID-19 crisis. The application of this
framework has provided banks with flexibility and relieved tens of thousands of their customers,
natural and legal persons, experiencing difficulties in the crisis.
In September this year a decision was taken at the EBA to phase out the moratoria on bank loan
repayments; however the re-emergence of the pandemic and the new restrictive measures gave
rise to an up-to-date analysis and extension of the moratoria upon introducing restrictive
conditions. The Bulgarian National Bank, jointly with the other national supervisory authorities,
actively participated in the EBA discussions on this topic. We are ready to quickly implement the
necessary decisions in Bulgaria, subject to the conditions approved by EBA - extension until 31
March 2021 of the deadline for submission of applications for deferral of liabilities and their
approval by banks, with a maximum allowable 9-month deferral, including the term of an already
approved deferral on the relevant exposure.
Outside the scope of the moratorium, banks have the opportunity to individually renegotiate loans
of their customers - an opportunity they have already been using. In these cases, the existing
general prudential framework requires that banks reclassify exposures as restructured or in
default in a timely and adequate manner. The actions of the banks in this regard will also engage
the supervisory process as important input information in the supervisory review and evaluation
by the Bulgarian National Bank.
The above outlines the framework for action in the short term. The main points of this framework
are: continuing the previously adopted anti-crisis measures for as long as necessary, including
with regard to the dividends, the risk exposures and the countercyclical capital buffer; maintaining
the high capital and liquidity requirements, in this regard we are ready to respond to a scenario in
which the banks may have to operate temporarily under the combined capital buffers
requirement; and implementation of the newly adopted EBA framework for a moratorium on loan
repayments. We are ready to activate additional measures if the development of the situation so
requires.
It is very important in the difficult environment, in which we find ourselves, and strongly
committed to anti-crisis measures, not to lose our strategic focus, which is aimed at
successfully continuing and finalising the project we started a few years ago for joining the euro
area. The Bulgarian National Bank has serious responsibilities in this process and has been
ceaselessly pursuing them. So far, the BNB Governing Council has adopted concepts for the
work in the main areas of activity; a package of amendments to the internal rules and regulations,
as well as specific measures for resource and capacity improvement. Our full participation in the
institutions of the Banking Union plays an important role in consolidating the integration process.
Obviously, this is a topic that will be on the agenda in the next few years and one we will have
many occasions to discuss.
Meanwhile, maintaining the capacity of the banking sector for continuity of lending activities will
be our joint contribution to supporting each individual bank customer and the country's economy.
As during the most difficult phases of the crisis, the banking sector should be able to take on the
supportive role as a source of credit in the subsequent period of recovery and growth as well.
Despite today's crisis picture, such a period may occur relatively soon. The challenges arising
from COVID-19 appeared unexpectedly and the negative results in the economy manifested
themselves quickly; yet overcoming the crisis may just as likely occur in the foreseeable future, if
solutions are found to effectively restrict the pandemic.
Let us mark the Banker's Day in the difficult and unprecedented 2020 on such a note of hope and
optimism!