Opinion of the European Central Bank of 9 December 2014 on amendments to the Law on the bank deposit guarantee (CON/2014/86)
Date: 2014-12-09
Institutions: European Central Bank
Subjects: Bulgaria, bank deposit, banking supervision, central bank, financial stability, guarantee, national law

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 9 December 2014 

on amendments to the Law on the bank deposit guarantee 

(CON/2014/86) 

Introduction and legal basis 

On 14 November 2014, the European Central Bank (ECB) received a request from Българска народна 

банка (the Bulgarian National Bank) (BNB) for an opinion on a draft law amending the Law on the bank 

deposit guarantee (hereinafter the ‘draft law’). 

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 

Functioning  of  the  European  Union  and  the  third  and  sixth  indents  of  Article 2(1)  of  Council 
Decision 98/415/EC1, as the draft law relates to  the BNB and to rules applicable to financial institutions 

insofar  as  they  materially  influence  the  stability  of  financial  institutions  and  markets.  In  accordance  with 

the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing 

Council has adopted this opinion. 

1.  

Purpose of the draft law 

1.1   The  draft  law  amends  the  Law  on  the  bank  deposit  guarantee  by  introducing  new  measures  to 

address  the  financing  of  a  shortfall  in  the  financial  resources  of  the  Bulgarian  Deposit  Guarantee 

Fund (hereinafter ‘the Fund’).  

1.2   Pursuant  to  the  Law  on  the  bank  deposit  guarantee,  each  bank  is  obliged  to  pay  an  annual 

premium to the Fund equal to 0.5 % of its total deposit base for the preceding year, as determined 

on  an  average  daily  basis.  If  there  is  a  shortfall  in  the  Fund’s  financial  resources,  its  board  of 

management  may  decide  to  establish  a  higher  annual  premium  of  up  to  1.5 %  of  a  bank’s  total 

deposit base.  

1.3   The draft law provides that in the event that the Fund’s financial resources are insufficient to cover 

its liabilities under the Law on the bank deposit guarantee, its board of management must, within 

three days of identifying the shortfall, take a decision to cover the shortfall by increasing the annual 

premium up to a limit of 2 % of each bank’s total deposit base, for a period of up to 3 years. The 

Fund’s  board  of  management  will  require  the  banks  to  make  such  annual  premium  payments  in 

advance, within a set period of time and at an increased rate. The amount payable in advance by 

each bank is to be deducted from the annual premium due for the following years. The amount that 

1  

Council  Decision  98/415/EC  of  29 June  1998  on  the  consultation  of  the  European  Central  Bank  by  national  authorities 
regarding draft legislative provisions (OJ L 189, 3.7.1998, p. 42). 

 
 
 
 
                                                 
ECB-PUBLIC 

has been overcharged will be refunded within the time limit set out in the Law on the bank deposit 

guarantee. 

1.4   The  draft  law  further  stipulates  that,  in  the  event  of  an  additional  shortfall  after  the  measure 

described  in  paragraph  1.3  above  has  been  applied,  the  BNB  must  cover  the  additional  shortfall 

within 10 days. The BNB is obliged to provide a loan to the Fund in the amount required to cover 

this additional shortfall, at the basic interest rate applicable at that time. The loan will be provided 

out of the financial resources of the BNB’s Banking Department and from the BNB’s ‘reserve’. 

1.5   Pursuant  to  the  draft  law,  the  Fund  is  also  authorised  to  obtain  loans  from  Bulgarian  and  foreign 

banks  in  accordance  with  the  terms  and  conditions  set  out  by  its  board  of  management.  Loans 

obtained  by  the  Fund  may  be  secured  on  its  assets,  including  future  claims  on  banks  for  annual 

premiums. 

2. 

Prohibition on monetary financing 

2.1  The ECB underlines the  importance of safeguarding compliance  with the prohibition  on monetary 

financing  laid  down  in  Article  123(1)  of  the  Treaty.  This  prohibits  central  banks  from  providing 

overdraft facilities or any other type of credit facility to the public sector, including any financing of 

the public sector’s obligations vis-à-vis third parties. 

2.2  The ECB has consistently emphasised that the only compatible forms of central bank financing of a 

national  deposit  guarantee  scheme  for  credit  institutions  are:  (a)  intraday  credit  in  line  with  the 

general rules on provision of such credit by the central bank; and (b) short-term emergency liquidity 

financing under strict conditions established in the ECB’s convergence reports, i.e. if such funding 

is short term, addresses urgent situations, systemic stability aspects are at stake and decisions are 
at the central bank’s discretion2. Provisions to this effect need to be inserted into the draft law3. The 

draft law does not contain such conditions and makes no reference to the maximum duration of a 

loan  provided  by  the  BNB  to  the  Fund.  Therefore,  the  BNB’s  obligation  to  provide  a  loan  to  the 

Fund  in  an  amount  required  to  cover  the  additional  shortfall  in  the  Fund’s  financial  resources  is 

incompatible with the prohibition on monetary financing. 

3. 

Central bank independence 

3.1  The  draft  law  provides  that  the  loan  that  the  BNB  is  obliged  to  provide  to  the  Fund  should  be 

granted from the financial resources of the BNB’s Banking Department and from the ‘reserve’. The 

draft law does not provide any indication as to what this ‘reserve’ contains. Furthermore, the draft 

law does not provide for an upper limit on the value of the loan and does not provide the BNB with 

the discretion to decide whether or not to grant the loan. 

2  

3  

See  the  ECB’s  Convergence  Report  2014,  p.  31,  and  in  particular  paragraph  3.1.3  of  Opinion  CON/2011/76.  All  ECB 
Opinions are available on the ECB’s website at www.ecb.europa.eu. 
See paragraphs 2.2 to 2.8 of Opinion CON/2008/5. 

2 

 
 
                                                 
ECB-PUBLIC 

3.2  The draft law impairs the institutional and financial independence of the BNB and may also impair 

its functional independence. In this respect, the following elements are relevant.  First, it interferes 

with the investment, management and reporting of reserves, which is a task of the BNB under the 

Law  on  the  BNB  in  order  to  guarantee  the  soundness  of  the  national  currency  and  the  fixed 
exchange rate in Bulgaria4. Second, depending on the amount of the loan and the period of time 

for  which  it  is  granted,  which  remain  unspecified  in  the  draft  law,  granting  such  a  loan  may 

considerably limit the financial resources available to the BNB and its reserves, posing a threat to 

the  performance of its tasks relating to the  European  System of Central  Banks, as  well  as to the 

stability of the currency board in Bulgaria and thus to the BNB’s price stability mandate. Third, the 

provision specifying the exact source within the BNB’s financial resources to be used by the BNB to 

grant a loan to the Fund interferes with the BNB’s powers to administer its own financial resources. 

4. 

Financing by credit institutions of a shortfall in the financial resources of the Fund 

4.1  The  draft  law  provides  for  ex-post  contributions  by  member  banks  to  be  paid  in  advance  in  the 
event  that  the  Fund’s  resources  are  insufficient  to  cover  its  liabilities 5.  In  this  respect,  an 

adequately  funded  deposit  guarantee  scheme  provides  protection  for  smaller  depositors,  while 

enhancing  financial  stability.  Sound  funding  arrangements  ensure  an  effective  deposit  guarantee 

and foster the maintenance of public confidence. 

4.2  The  ECB  supports  the  requirement  that  banks  pay  increased  annual  premiums  and  make  such 

payments  in  advance  where  the  Fund’s  available  financial  resources  are  insufficient  to  repay 
depositors.  Indeed,  as  stated  in  earlier  ECB  opinions 6,  an  ex-ante  funding  scheme  should  also 

include the possibility to call on the private sector for additional financial support, as pre-collected 

funds from the industry may be insufficient in a crisis situation. The ECB notes that the principle of 

ex-post financing from the private sector should promote additional market discipline and address 

the risk of moral hazard. 

4.3  Nevertheless, the ECB recommends that the measures described in paragraph  1.3 above should 

be carefully assessed as they have the potential to influence the stability of credit institutions and 

the banking sector. In particular, too high ex-post funding requirements might become procyclical, if 

required  during  an  economic  downturn.  In  this  vein,  Directive  2014/49/EU  of  the  European 
Parliament  and  of  the  Council7,  scheduled  for  transposition  into  national  law  by  mid-2015, 

envisages extraordinary contributions by credit institutions of up to 0.5 % of covered deposits per 

calendar year, unless higher contributions are warranted due to exceptional circumstances with the 
consent  of  the  competent  authority8.  Furthermore,  it  contains  a  provision  according  to  which  the 

competent  authority  may  defer,  in  whole  or  in  part,  a  credit  institution’s  payment  of  extraordinary 

4  
5  
6  
7  

8  

See Chapters II and V of the Law on the BNB. 
See paragraph 1.3 above. 
See paragraph 3.2.2 of ECB Opinion CON/2011/76 and CON/2011/12. 
Directive  2014/49/EU  of  the  European  Parliament  and  of  the  Council  of  16 April  2014  on  deposit  guarantee  schemes 
(OJ L 173, 12.6.2014, p. 149). 
See Article 10(8) of Directive 2014/49/EU. 

3 

 
                                                 
ECB-PUBLIC 

ex-post contributions if such contributions would jeopardise its liquidity or solvency9. In accordance 

with these observations, the ECB recommends that the powers under the draft law be exercised in 

a  manner  ensuring  a  well-funded  deposit  guarantee  scheme,  while  preserving  credit  institutions’ 

ability to maintain sufficient liquidity and regulatory capital. 

4.4  The ECB notes that additional temporary financing going beyond the ex-post contributions by the 

member  credit  institutions  may  be  needed  in  a  severe  crisis  requiring,  for  example,  activation  of 
deposit  guarantees  for  a  major  credit  institution 10. While  the  primary  responsibility  for  adequately 
funding the deposit guarantee scheme should lie with the banks11, opportunities for backup funding 

for liquidity purposes may be available, e.g. market borrowing by the Fund (possibly supported by a 

government  guarantee)  or  a  line  of  credit  from  the  Government.  The  ECB  understands  that  the 

authorities are currently taking steps to make available to the Fund a significant line of credit from 

the central budget that is secured on assets of the Fund, including future claims against banks for 
annual premiums12. 

This opinion will be published on the ECB’s website.  

Done at Frankfurt am Main, 9 December 2014. 

[signed] 

The President of the ECB 

Mario DRAGHI 

9  

10  
11  

12  

(EU)  No 1093/2010  and 

See Article 10(8) of Directive 2014/49/EU. This principle is also applied in related areas of Union law (see Article 104(3) of 
Directive  2014/59/EU  of  the  European  Parliament  and  of  the  Council  of  15 May  2014  establishing  a  framework  for  the 
recovery  and  resolution  of  credit  institutions  and  investment  firms  and  amending  Council  Directive  82/891/EEC,  and 
Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and 
Regulations 
the  Council 
(OJ L 173, 12.6.2014, p. 190). 
See paragraph 3.2.2 of ECB Opinion CON/2011/76. 
See  Essential  Criterion  no.  3  of  Principle  11  of  the  Basel  Committee  on  Banking  Supervision/International  Association  of 
Deposit Insurers, ‘Core Principles for Effective Deposit Insurance Systems’, December 2010. 
See  paragraph  5  of  the  draft  law  amending  and  supplementing  the  Law  on  the  state  budget  of  the  Republic  of  Bulgaria 
2014, available on the Bulgarian National Assembly’s website at www.parliament.bg. 

the  European  Parliament  and  of 

(EU)  No 648/2012,  of 

4