Contributed by CMS.
1. LEGAL FRAMEWORK
1.1. Which main legislative and regulatory provisions govern the banking sector in your jurisdiction?
Credit institutions in Bulgaria are subject to the requirements of the common financial regulatory framework (the so-called Single Rulebook) and have to implement the harmonized prudential rules under EU law. The Single Rulebook includes the EU legislation implementing Basel III (Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR) and Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (CRD IV)), 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 (BRRD) and Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes (recast) (DGSD).
The CRR and other EU regulations are directly applicable in Bulgaria. The EU directives have to be transposed into local law, usually in the form of an Act of the Bulgarian Parliament. CRD IV has been transposed mainly through the provisions of the CIA, BRRD – through the BRRD Act, and the DGSD – through the DG Act (please see below for detailed descriptions of the relevant Bulgarian Acts). The primary legal framework set out by the EU regulations and the Bulgarian Acts of Parliament is further developed and detailed by secondary legislation (in the banking legislation context, these are mainly ordinances of the Bulgarian National Bank – BNB).
We have set out below a list of the key local Acts and secondary legislation comprising the regulatory framework applicable to banks in Bulgaria (but this list is by no means exhaustive):
- the Credit Institutions Act (published in State Gazette issue 59 dated 21 July 2006, in effect from 1 January 2007, as amended) (Credit Institutions Act; CIA);
- the Recovery and Resolution of Credit Institutions and Investment Firms Act (published in State Gazette issue 62 dated 14 August 2015, in effect from 14 August 2015, as amended) (BRRD Act);
- the Bank Deposit Guarantee Act (published in State Gazette issue 62 dated 14 August 2015, in effect from 14 August 2015, as amended) (DG Act);
- the Banking Bankruptcy Act (published in State Gazette issue 92 dated 27 September 2002, in effect from 28 December 2002, as amended);
- the Bulgarian National Bank Act (published in State Gazette issue 46 dated 10 June 1997, in effect from 10 June 1997, as amended) (BNB Act);
- Ordinance No 2 of the BNB of 22 December 2006 on the licenses, approvals, and permissions granted by the Bulgarian National Bank according to the Credit Institutions Act (title amended State Gazette issue 36/3009) (published in State Gazette issue 6 of 19 January 2007, as amended) (BNB Ordinance No 2 (Licenses and Approvals));
- Ordinance No 7 of the BNB of 24 April 2014 on organization and risk management of banks (published in State Gazette issue 40 dated 13 May 2014, as amended) (BNB Ordinance No 7 (Bank Risk Management));
- Ordinance No 8 of the BNB of 27 April 2021 on Banks’ Capital Buffers (published in State Gazette issue 40 dated 14 May 2021) (BNB Ordinance No 8 (Capital Buffers));
- Ordinance No 10 of the BNB of 24 April 2019 on the Internal Control in Banks (published in State Gazette issue 40 dated 17 May 2019);
- Ordinance No 11 of the BNB of 1 March 2007 on Bank Liquidity Management and Supervision (published in State Gazette issue 22 dated 13 March 2007, as amended) (BNB Ordinance No 11 (Liquidity Management));
- Ordinance No 20 of the BNB of 24 April 2019 on the Requirements to the Members of the Management and Controlling Bodies of a Credit Institution and on the Assessment of the Suitability of Their Members and Key Function Holders (published in State Gazette issue 40 dated 17 May 2019, as amended) (BNB Ordinance No 20 (Board Members));
- Ordinance No 22 of the BNB of 16 July 2009 on the Central Credit Register (published in State Gazette issue 22 dated 16 July 2009, as amended) (BNB Ordinance No 22 (CCR));
- Ordinance No 37 of the BNB of 16 July 2018 on the internal exposures of banks (published in State Gazette issue 61 dated 24 July 2018) (BNB Ordinance 37 (Internal Exposures);
- the Payment Services and Payment Systems Act (published in State Gazette issue 20 dated 6 March 2018, as amended) (PSPSA);
- Ordinance No 16 of the BNB of 29 March 2018 on granting licenses and approvals, entry into the Register under Article 19 of the Payment Services and Payment Systems Act, and requirements for the activity of operators of payment systems with settlement finality (published in State Gazette 32 dated 13 April 2018, as amended) (BNB Ordinance No 16 (PSPSA Licenses and Approvals)).
1.2. Which bodies are responsible for enforcing the applicable laws and regulations? What are their main competencies?
The Bulgarian National Bank (BNB) is the Central Bank of Bulgaria and the national competent authority within the meaning of Article 4(1)(40) of the CRR designated and empowered by national law, among others, to carry out banking supervision in Bulgaria.
The role and powers of the BNB are set out in the BNB Act.
According to the BNB Act, the BNB among others:
- maintains price stability by ensuring the stability of the national currency;
- acts as the sole issuing institution with the exclusive authority to issue banknotes and coins in Bulgaria;
- supports the creation and functioning of efficient payment systems and exercises oversight of the payment systems; supervises the activity of operators of payment systems, payment services providers, and e-money institutions; and
- regulates and supervises the activity of other banks in Bulgaria with a view to maintaining the stability of the banking system and protecting depositors’ interests.
The BNB is also the regulator for the non-bank financial sector in Bulgaria.
In October 2020, Bulgaria joined the European Banking Union and the Single Supervisory Mechanism (SSM) through a process known as “close cooperation” established by the Council Regulation (EU) No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions (SSM Regulation). As part of the SSM, the European Central Bank (ECB) has the leading supervisory role and carries out supervision over banks in Bulgaria in cooperation with the BNB. Under the SSM Regulation, the ECB is exclusively competent to authorize and to withdraw authorizations of credit institutions established in the Member States participating in the Single Supervisory Mechanism, as well as to assess the notifications for the acquisition and disposal of qualifying holdings in credit institutions, and in these instances, the BNB issues the relevant national acts based on an instruction by the ECB.
In accordance with the cooperation within the SSM, the so-called “significant institutions” are supervised directly by the ECB (currently these include UniCredit Bulbank AD (a subsidiary of UniCredit S.p.A.), DSK Bank AD (a subsidiary of Hungarian OTP Bank Nyrt), United Bulgarian Bank AD (a subsidiary of KBC Group N.V.) and Eurobank Bulgaria AD (a subsidiary of Greek Eurobank Ergasias Services and Holdings S.A.)). The BNB is supervising smaller banks (the so-called “less significant institutions”), with ECB having indirect supervisory oversight and the authority to take over the direct supervision of any bank at any time.
Regulated investment activities and markets in financial instruments
The BNB collaborates with the Financial Supervision Commission (FSC) which is the competent authority with respect to regulated investment activities. A bank can carry out regulated investment activities under the Markets in Financial Services Act (published in State Gazette issue 15 dated 16 February 2018, as amended) or crowdfunding services, if its license permits such investment activities. Before issuing a license that allows for such activities, the FSC has to be formally consulted and if its response is not affirmative, the BNB has to decline a license for the relevant investment activities. The FSC is also to be consulted in instances where an investment intermediary has to be reclassified and licensed as a bank (please see Section 2.1.).
Resolution of banks
The BRRD Act designates the BNB as the national resolution authority for any credit institutions supervised by the BNB.
With effect from October 1, 2020, following Bulgaria’s accession to the Banking Union and the Single Resolution Mechanism, the function of the resolution of credit institutions is shared between the BNB and the Single Resolution Board (SRB). The SRB is responsible for the banks that are subject to direct supervision by the ECB, whereas the BNB’s resolution powers cover all other credit institutions operating in Bulgaria.
In its role of a resolution authority, the BNB acts through its Governing Council which is assisted by a special directorate (the Resolution of Credit Institutions Directorate) which is structurally separate and independent from the banking supervision function and the other functions of the BNB.
Other relevant authorities
Other authorities which are competent to enforce specific laws and regulations applicable to banks in Bulgaria include the State Agency for National Security (SANS, in respect of AML rules), the Personal Data Protection Commission (in respect of data protection legislation), the Consumer Protection Commission and the Competition Protection Commission, to name but a few.
1.3. What are the current priorities of regulators and how does the regulator engage with the banking sector?
One of the key priorities before the Bulgarian National Bank is getting Bulgaria ready to join the Eurozone. This is the final stage of integration processes that have been ongoing for many years now (including, more recently, joining the Exchange Rate Mechanism II (ERM II) in July 2020 and the establishing of “close cooperation” under the SSM Regulation (please see Section 1.2.) with effect from October 1, 2020). To be able to finally complete its accession to the Eurozone, Bulgaria still has quite of few tasks ahead which range from meeting all euro convergence criteria (specifically with respect to inflation where we currently fall short) to further adapting Bulgaria’s relevant legislative framework and the overall logistics for adopting the Euro. In terms of required legislative changes, the BNB works closely with the Ministry of Finance and other authorities on the new legislation necessary for Bulgaria to be ready to accede to the Eurozone (such as the proposed bill for the Euro Adoption Act, and a pending bill to amend the BNB Act). The BNB also has a key role in the various logistical and technical aspects of the adoption of the Euro, together with Bulgarian commercial banks (including a range of tasks from the technical standard for minting Bulgarian euro coins, to making sure cashier points across the country are up to the task, to adapting payment and core banking systems).
2.1. What licenses are required to provide banking services in your jurisdiction? What activities do they cover?
According to the CIA, the banking activities in Bulgaria fall into two categories: exclusive banking activities and non-exclusive banking activities (please see below as to what services fall within each category).
The “exclusive” banking activities can only be carried out on the territory of Bulgaria by:
- banks incorporated, and licensed to operate, in Bulgaria (this category includes local subsidiaries of foreign (EU and non-EU) banks);
- branches of foreign (non-EU) banks licensed to operate in Bulgaria; or
- EU credit institutions that have passported their authorization in Bulgaria which enables them to provide services through a branch or directly in Bulgaria.
The “non-exclusive” banking activities may be carried out by banks (if included in their authorization) or by other regulated entities (such as non-bank financial institutions which are registered with, and supervised by, the BNB).
A bank license issued by the BNB entitles the licensee to perform the banking activities specified in the license on the territory of Bulgaria and, subject to the EU passporting regime, on the territory of the other Member-States. A license for a branch of a foreign (non-EU) bank entitles the licensee to perform the banking activities specified in the license only on the territory of Bulgaria; such license cannot be passported outside of Bulgaria.
“Exclusive” banking activities include:
- accepting deposits or other repayable funds from the public;
- accepting valuables on deposit; and
- acting as a depository or trustee institution.
“Non-exclusive” banking activities include:
- provision of payment services within the meaning of the Payment Services and Payment Systems Act;
- issue and administration of other means of payments (travelers’ cheques and letters of credit) outside of the scope of the payment services above;
- financial leasing;
- guarantee transactions;
- trading for own account or for the account of clients in foreign currency and precious metals but excluding derivative financial instruments on foreign currency and precious metals;
- investment services and activities as well as ancillary services provided by investment intermediaries under the Markets in Financial Instruments Act;
- money brokerage;
- acquisition of receivables under loans and another type of financing (factoring, forfeiting, etc.);
- issuance of electronic money;
- acquisition and management of participating interests;
- safe custody services;
- collection, provision of information, and reference on customer creditworthiness;
- providing crowdfunding services within the meaning of Regulation (EU) 2020/1503 of the European Parliament and of the Council on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937; and
- any other activities as may be specified by an ordinance of the BNB.
An investment intermediary can be reclassified and will have to be authorized as a credit institution if it meets the following conditions (in accordance with the regime under Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms, and the corresponding changes in the CRR):
- its business includes dealing on its own account or underwriting or placing financial instruments on a firm commitment basis (or both);
- it is not a commodity and emission allowance dealer, a collective investment undertaking, or an insurance undertaking; and
- the total value of its consolidated assets is equal to or exceeds the BGN equivalent of EUR 30 billion (or, if less, it is part of a group and other applicable thresholds at the group level have been met).
According to the CIA, a bank may register a representative office in Bulgaria with the Bulgarian Chamber of Commerce and Industry (BCCI) for marketing, profile raising, promotional, information gathering or other similar auxiliary functions provided that such representative office shall not carry out any commercial activity. Under the CIA, such representative office of a foreign bank is not subject to licensing but the BNB has to be notified within 14 days from its registration with the BCCI.
2.2. What is the procedure for obtaining a banking license? How long does this typically take?
The licensing procedure follows the following main phases:
- preparation phase – the applicant prepares the business case and collects the various documents that have to accompany the application in each case;
- preliminary consultations – according to the CIA, an applicant shall hold preliminary consultations with the Deputy Governor of the BNB in charge of the Banking Supervision Department, prior to filing any application for any license, permission, or approval;
- filing the application and all required documents;
- various consultations including consultations with the competent supervisory authorities of other Member States;
- decision on the issuing of a license;
- satisfying any conditions for the issuing of a license and confirmation of commencement of activity by the Deputy Governor in charge of the Bank Supervision Department of the BNB.
The documents required of the applicant depend on the type of applicant and the relevant license.
Licensing of a bank
The applicant for a banking license must file a written application accompanied by a number of documents as set out in the CIA and the BNB Ordinance No 2 (Licenses and Approvals), including the following:
- the constitutional documents of the applicant and relevant corporate authorizations;
- documents evidencing the subscribed shares and the paid contributions;
- a detailed business plan, including a comprehensive description of the proposed banking activities for which the license is required, client and product structure, the objectives, policies, and strategy of the applicant as well as financial forecast over a three-year period;
- description of the management and organizational structure including the proposed activity of the different organizational units, the sharing of responsibilities between the executive directors and the various other administrators, the information system of the bank including data security protocols; if the applicant is part of a group, all relevant information with respect to the organization structure of the group;
- description of the internal control system, and description of the risk management system;
- information regarding the members of the supervisory board and the management board of the applicant;
- information and documentation regarding all persons/entities that have subscribed 3% or more of the voting shares, as well as information regarding the 20 biggest shareholders;
- information regarding the beneficial owner of the persons who have direct or indirect qualifying holding in the applicant;
- any further information or evidence that may be required for the assessment of the application.
The BNB shall hold preliminary consultations with the competent supervision authorities of another Member State before granting a license to (i) a bank that will be a subsidiary of a bank, insurer, or investment firm that has been granted authorization in another Member State; (ii) a bank which will be a subsidiary of a parent undertaking of another bank, the insurer of an investment firm which has been granted authorization in another Member State; (iii) a bank which is controlled by persons exercising control over another bank, insurer or investment firm which has been granted authorization in another Member State. The consultations shall encompass issues concerning the shareholders, reputation, and experience of the management, evaluation of compliance with supervisory requirements as well as any other information as may be necessary for the granting of the license. Further, the BNB Ordinance No 2 (Licenses and Approvals) requires consultations with the competent authorities of any third (non-EU) country if a person who has subscribed 25% or more of the shares of the applicant is a bank with a seat in that country or a holding company of, or under common control with, a bank with a seat in that country.
Licensing of a branch
The applicant for a license for a branch of a foreign (non-EU) bank must file a written application accompanied by a number of documents as set out in the CIA and the BNB Ordinance No 2 (Licenses and Approvals), including the following:
- a certified copy of the registration extract containing information about the registered address, the registered scope of business, the amount of the capital, the management system, and the persons representing the bank;
- a certified copy of the relevant authorization for the conduct of banking business in the home country;
- certified copies of the bank’s constitutive documents and relevant corporate authorizations;
- a business plan for the operations of the branch, including a description of the banking activities which it intends to carry out;
- the organizational structure of the branch;
- the annual financial statements for the last three years;
- the authorization for the opening of a branch from the banking supervision authority of the bank’s home country;
- a written statement from the banking supervision authority of the bank’s home country containing information about the financial position of the bank and a commitment to cooperation with the BNB;
- information about the persons entrusted with the management of the branch (including their qualifications and professional experience).
Further, the licensing of a branch is subject to the following requirements:
- the competent home banking supervision authority exercises effective supervision over the bank and its branches abroad;
- there is an agreement on supervisory cooperation between the BNB and the competent supervisory authority;
- the bank is renowned in the international financial market and its financial position is reliable and stable;
- the organizational structure of the bank is appropriate for the activities it intends to carry out;
- the managers of the branch comply with the requirements under Bulgarian law and have the required reputation;
- the law of the third country does not create obstacles to the exercise of effective supervision on a consolidated basis or to the provision of the necessary information;
The license of a branch cannot include activities that the bank is not entitled to carry out in its home country.
Review period and overall timeframe
The regulator has to make a decision on any application for the issuance of a license within three months from receipt of a complete set of documents but, in any event, within no more than 12 months from receipt of the application.
Within the review period (i.e., within the three-month period from submitting a complete application), the applicant should provide further evidence that it has satisfied the statutory requirements under the CIA, including that any minimum capital requirements have been met, the necessary premises and technical equipment for starting the activity are in place, the applicant has set up risk management, compliance, and internal audit functions and has appointed management and administrators with the necessary qualification and experience. The Deputy Governor in charge of the Bank Supervision Department of the BNB issues a confirmation permitting the licensee to commence the licensed activity upon receipt of evidence that the conditions above have all been satisfied.
If a license has been refused, a new application could be filed not earlier than 12 months after the refusal has entered into force. A license shall be canceled if the licensee failed to commence activity within 12 months.
2.3. Can a foreign bank operate in your jurisdiction on the basis of its domestic license?
A bank authorized in another Member State may passport its existing authorization and carry out regulated activities for which it is authorized under its existing authorization, either directly or through a branch in Bulgaria, subject to a notification to the BNB by its home Member State competent authority.
A bank that has passported its authorization can commence its activity in Bulgaria upon notification by the BNB or, if earlier, upon expiry of two months from the date on which the passporting notification has been received by the BNB from the home Member State competent authority. The BNB may impose conditions on the activity of the bank in Bulgaria if, at its discretion, this is required to ensure compliance with any applicable law aimed at protecting the public interest.
2.4. What are the restrictions on ownership, including foreign ownership of banks?
Companies registered in tax haven jurisdictions and persons controlled by them, directly or indirectly, are prohibited from applying for a banking license under the CIA or having participated in a credit institution in Bulgaria that constitutes a qualifying holding within the meaning of the CIA (the relevant legislation setting out this prohibition is the Act on the Economic and Financial Relations with Companies Registered in Preferential Tax Treatment Jurisdictions, the Persons Controlled by Them and their Beneficial Owners (title amended, State Gazette issue 48/2006, effective 1 July 2017) (published in State Gazette 1 dated 3 January 2014, with effect from 1 January 2014, as amended) (Tax Haven Companies Act)). There are applicable exemptions under the Tax Haven Companies Act including, among others, with respect to publicly traded companies or where the parent of the tax haven company is resident for tax purposes in a jurisdiction with which Bulgaria has a double taxation treaty or similar and its beneficial owners have been registered in the Bulgarian Commercial Register and Register of NPLE.
The assessment of the applicant’s shareholders is an important part of the overall assessment of the regulator in granting a banking license. A banking license may be refused, among others, if:
- the BNB decides, at its discretion, that the shareholders controlling more than 3% of the votes may, with their acts or influence on the decision-making, harm the reliability or security of the bank or its operations; or
- the persons who have subscribed for 10% or more of the shares, do not meet the requirements for the acquisition of a qualifying holding or a higher shareholding in compliance with the CIA or, at BNB’s discretion, the assets of such persons and the scale and financial results of the business carried out by them do not correspond to the proposed acquisition of a shareholding in the bank or raise doubts as to the reliability and capability of such persons, where necessary, to provide capital support to the bank; or
- the origin of the funds used capital contributions by the persons who have subscribed for 3% or more of the shares is not clear and legitimate.
2.5. What are the requirements for a proposed acquisition and acquirer of a qualified holding in a bank? Would the same requirements apply in the case of an increase of a qualifying holding?
The prior approval of the BNB is required for the acquisition by any person (natural or legal) or persons acting in concert, directly or indirectly, of shares or voting rights related to shares in a bank licensed in Bulgaria if as a result of the acquisition their shareholding becomes qualified (10% or more) or reaches or exceeds a relevant threshold of 20%, 33%, or 50% of the total shareholding or voting rights or the bank becomes a subsidiary. This also applies if the relevant transaction has been concluded on the stock exchange or other regulated market.
If the relevant acquisition occurs as a result of circumstances outside of the control of the acquirer, the acquirer has to apply for authorization within one month thereafter and, prior to obtaining such authorization, the voting rights attached to the shares so acquired shall be suspended and such shares shall be not counted against any relevant quorum requirements.
The BNB shall hold preliminary consultations and cooperate with the competent supervising authority of another Member State in instances where the applicant is or controls a regulated entity in that other Member State.
The following factors, among others, are considered by the regulator in its assessment of the application for approval: (i) the reputation of the applicant, (iii) the reputation, knowledge, skills, and experience of the members of the management board (board of directors) and supervisory board who will direct the bank’s activities upon completion of the proposed acquisition, (iv) the financial stability of the applicant with a view to the specific nature of the current or proposed activity of the bank, (v) compliance with any applicable supervisory requirements, and (vi) no grounds to suspect or increased risk of money laundering or financing of terrorism.
III. REGULATORY CAPITAL AND LIQUIDITY
3.1. How are banks typically funded in your jurisdiction?
According to a report conducted by the IMF on the Assessment of the Financial Stability from 2017, the banking system in Bulgaria is deposit funded (with 83% of bank liabilities as of the date of the report being a deposit). Wholesale funding has been used sparingly since the Great Recession of 2008/9 but could increase its importance given the inflation and rise of interest rates (see Section 5.2.) and the search for higher yield by depositors (especially non-retail).
As a matter of regulatory law and prudential requirements, any financial institution holding a banking license in Bulgaria must:
- adopt funding and liquidity plans;
- maintain liquid funds to cater for mismatches between cash inflows and cash outflows;
- maintain a system for interest rate risk monitoring in all operations;
- adjust promptly the maturity structure of assets and liabilities upon a change in market conditions;
- maintain the necessary information about the calculation of its liquidity position at any moment.
This said, liquidity requirements are uniform across the EU as set out in CRR, which outlines the key provisions and definitions regarding liquidity coverage requirements (the amount of minimum liquid assets that must be held to meet assets outflows) for financial institutions as well as liquidity reporting requirements.
Additionally, BNB Ordinance No 11 (Liquidity Management) provides detailed provisions on the definition of liquid assets for the purposes of liquidity management, maturity structure of assets, liabilities, and off-balance-sheet items as well as requirements for the provision of monthly liquidity reports to BNB as part of its supervision over credit institutions. Banks should maintain internal liquidity management rules and adequate liquidity management systems (including management information systems enabling the monitoring, tracking, and control of liquidity risk).
According to the CIA, liquidity in respect of branches of EU credit institutions is supervised by the BNB in cooperation with the home Member State authority. Bulgarian law liquidity requirements do apply to branches of EU credit institutions that have passported their license to Bulgaria.
Branches of third (non-EU) country credit institutions licensed in Bulgaria are generally subject to more intense supervision by the BNB compared to the branches of EU credit institutions, and Bulgarian law liquidity requirements apply to them as well.
3.2. What capital and own funds requirements apply to banks in your jurisdiction?
Minimum registered capital
A bank is to be registered in the form of a joint stock company with a minimum capital requirement under the CIA at the time of incorporation of BGN 10 million (approximately EUR 5 million). It is a mandatory requirement that the shareholders participate in the capital by cash installments (monetary contributions) only. This requirement is valid for the initial raising of the minimum required capital upon incorporation of the bank. Any subsequent capital increase may be accomplished by contributions in kind provided that authorization from the BNB has been obtained first. The capital cannot fall below the minimum of BGN 10 million at any time. Another mandatory requirement is that the payments against subscribed shares have to be effected with the own funds of the shareholders.
Capital adequacy requirements under Bulgarian law follow EU law provisions, specifically the own funds’ requirement under the CRR, including definitions of the qualifying instruments for Common Equity Tier 1 capital, Tier 1 capital, and Tier 2 instruments and their minimal ratios. Additionally, CRR provides capital requirements for specific types of risk like credit risk, market risk, operational risk, and possible risk-reducing techniques. Pursuant to the CIA the BNB is required the implement the technical standards of the European Banking Authority (EBA) regarding capital adequacy.
Pursuant to CRD IV, the BNB has the discretion to determine the amount of capital buffers, however, within the ranges set out in CRD IV, which must be maintained by all credit institutions in Bulgaria. BNB Ordinance No 8 (Capital Buffers) sets forth the capital buffers levels. Currently, the countercyclical capital buffer rate applicable to credit risk exposures in Bulgaria is 1.5% with an uptick to 2% for the period Q3 2023 to Q2 2024.
3.3. Has your jurisdiction implemented the Basel III framework? Are there any major deviations?
Credit institutions in Bulgaria are subject to the requirements of the Single Rulebook, including the EU legislation implementing Basel III (CRR and CRD IV).
IV. REPORTING, ORGANISATIONAL REQUIREMENTS, INTERNAL GOVERNANCE, AND RISK MANAGEMENT
4.1. What key reporting and disclosure requirements apply to banks in your jurisdiction?
4.1.1. Supervisory Reporting
Commission Implementing Regulation (EU) 2021/451 outlines the reporting requirements for credit institutions and lays down uniform reporting formats and templates, instructions on and a methodology for how to use those templates, the frequency, and dates of reporting, as well as IT solutions for the reporting. The reporting framework covers the following areas:
- Own funds and own funds requirements – COREP;
- Financial reporting – FINREP;
- Losses stemming from lending collateralized by immovable property;
- Large exposures and concentration risk;
- Leverage ratio;
- Liquidity Coverage;
- Net stable funding ratio;
- Additional liquidity monitoring metrics;
- Counterbalancing capacity;
- Maturity ladder; and
- Asset encumbrance.
4.1.2. Reporting on remunerations
The EBA has issued guidelines outlining the reporting requirements for remuneration in credit institutions, such guidelines being applicable to Bulgarian credit institutions:
- Guidelines on remuneration practices, the gender pay gap, and approved higher ratios;
- Guidelines on the data collection exercises regarding high earners; and
- Guidelines on disclosure of non-performing and forborne exposures.
4.1.3. Reporting of funding plans by credit institutions
Pursuant to a recommendation of the European Systemic Risk Board (ESRB) of December 20, 2012 on funding of credit institutions the EBA has published guidelines and reporting templates for funding plans of credit institutions. Pursuant to the recommendation such reporting must be done semi-annually.
4.1.4. Internal Exposures
Pursuant to the CIA and BNB Ordinance No 37 (Internal Exposures) banks should submit quarterly reports in relation to internal exposures (i.e., exposures to related parties – see Section 4.3.).
4.1.5. Minimal Reserves
Credit institutions must hold with the BNB minimal reserves in BGN and any other foreign currency used by them in their day-to-day business. In order to establish the amount of minimal reserves, banks must provide weekly reports to the BNB for the available amount on hand.
4.1.6. Register Bank accounts and Vaults with the BNB
Credit institutions must submit information to the Register of Bank Accounts and Vaults with the BNB regarding the bank accounts opened by physical persons and entities.
4.1.7. Central Credit Register
Credit institutions must submit information on a monthly basis regarding the indebtedness and credits of their clients under loans to the Central Credit Register (CCR) in accordance with BNB Ordinance No 22 (CCR).
4.1.8. Payment Statistics
Credit institutions must report their receivables from and liabilities to non-residents, as well as transactions with non-residents related to services, remunerations, receipts, and other payments in relation to the payment statistics. The information provided must be on a monthly and quarterly basis.
4.1.9. Other reporting obligations include the following:
- quarterly reporting under BNB Ordinance No 16 (PSPSA Licenses and Approvals) and the PSPSA with respect to participants in payment systems (including in respect of payment services provided by the branch and completed transfer orders to payment systems with settlement finality); and
- daily reporting of transactions on the local financial markets (interbank money market and forex market).
4.1.10. Albeit not a reporting obligation, credit institutions have to become participants in RINGS (the system for real-time gross settlement operated by the BNB). The requirements for becoming a participant in RINGS and the corresponding obligations, including reporting requirements, are set out in rules published by BNB.
4.2. What are the organizational requirements for banks, including with respect to corporate governance? Please briefly describe the requirements and the procedure of assessment of the suitability of the members of the management body and key function holders.
The organizational requirements for banks are set out in the CIA and the Bulgarian Commerce Act. Banks with a seat in Bulgaria must be incorporated in the form of a joint stock company. There are two possible types of management systems of a Bulgarian joint stock company: (i) a one-tier management system whereby the board of directors is appointed by the general meeting of shareholders, and (ii) a two-tier management system consisting of a managing board appointed by the supervisory board and a supervisory board appointed by the general meeting of shareholders.
The board of directors or the management board appoints one or more executive director(s) of the company from among its members to represent the company in a way determined by the general meeting of shareholders. The representative powers of the company’s executive directors can be restricted by a resolution of the general meeting of the shareholders, however, any such restrictions are not opposable to third parties.
According to the CIA, a bank shall be managed and represented by at least two persons (executive directors) acting jointly. The executive directors may not sub-delegate the overall management and representation of the bank to one of them but may delegate specific rights only to third parties. The executive directors shall be physically present at the management address of the bank and at least one of the representatives should comprehend Bulgarian language.
The members of the management board (the board of directors) and of the supervisory board of a bank, as well as the procurators of banks, are subject to fit and proper assessment by the regulator for their qualification and professional experience and must be approved prior to their appointment. There are also restrictions for the members of the management board (the board of directors) and of the supervisory board for participating in the management or controlling bodies of other companies (not applicable for participation in the management bodies of companies within the same group) which are set out in detail in BNB Ordinance No 20 (Board Members).
At least one of the members of the supervisory board or the non-executive members of the board of directors of a bank shall be independent (or, if the bank qualifies as “significant” or its shares are admitted to trading on a regulated market, no less than one-third of the members of its supervisory board or the non-executive members of its board of directors shall be independent).
4.3. What are the local rules for loans to the management body and their related parties?
According to CIA, the unanimous decision of the managing body of a credit institution (and the approval by the supervisory board if applicable) is required for the credit institution to form exposures (in excess of certain de minimis thresholds) towards related parties, notably:
- administrators of the bank;
- persons or entities which hold directly or indirectly more than 10% of the votes in the general meeting of the shareholders;
- any shareholder, which has appointed a member of the managing or the supervisory board of the credit institution;
- bank officers;
- spouses, brothers, sisters, and lineal relatives up to and including the third degree of consanguinity to a person covered in the previous items; and
- persons controlled directly or indirectly by the credit institution.
Such exposures must be on arms’ length terms.
4.4. What are the main legal provisions governing risk management in the banking sector in your jurisdiction?
According to BNB Ordinance No 7 (Bank Risk Management), banks have to maintain a robust risk management structure. The managing body of a bank shall approve and periodically review all risk management strategies and policies. Credit institutions are required to establish and maintain an independent risk management structure with sufficient internal resources and adequate access to the managing body of the bank. The risk management of a bank shall include systems, processes, organizational units, and designated officers whose main purpose will be to independently identify, monitor, report, and manage risks taken by the bank. The head of the risk management division of the credit institution shall be an independent senior manager (i.e., he/she should not combine operational and risk management functions) with clear responsibilities that can be removed from his position only with the prior approval of the managing body of the bank. Additionally, the managing body of the bank is required to establish a risk committee consisting of members of the managing body that shall be responsible for the determination of the overall current and future risk appetite and strategy of the credit institution.
4.5. What are the legal requirements applicable to banks in combating money laundering and terrorist financing area?
The AML and CFT requirements in Bulgaria are regulated by the Anti-Money Laundering Measures Act (published in Stage Gazette issue 27 dated 27 March 2018, as amended) (AMLA), and the Combating Terrorism Financing Measures Act (published in Stage Gazette issue 16 dated 18 February 2003, as amended), which have incorporated the basic provisions of the IV and V AML Directives. According to the AMLA and the implementation of the AML Directive IV and V, AML rules apply to the banks licensed or carrying out activities in Bulgaria including through a branch or directly based on the freedom to provide services. Additionally, branches of non-EU banks registered in Bulgaria are also subject to local AML requirements. Based on the above, banks carrying out activities in Bulgaria (including through branches) as obliged entities under AMLA, are required to adopt internal rules for control and prevention of money laundering within a 4-month term from their registration. Further, the internal rules should be sent to the director of the SANS (see Section 1.2.) which is the competent supervisory authority in respect of compliance with the AML rules, within a 14-day term from their adoption for approval. Once approved by SANS, the rules are compulsory for the relevant obliged entities. The BNB also has the competency to scrutinize the implementation of adequate AML policies and procedures, including strict KYC requirements which are outlined in several guidelines published by the BNB and SANS.
4.6. Are there any legal provisions regulating banking secrecy in your jurisdiction?
The CIA defines banking secrecy as “facts and circumstances concerning the balances and transactions on accounts and deposits of the bank’s customers” and requires that such information remains confidential. There are circumstances when confidential information may be disclosed to third parties, namely some examples include (i) judicial authorities (i.e where criminal proceedings have been initiated), (ii) the court, (iii) the financial supervision authorities in the Republic of Bulgaria, the Bulgarian Deposit Insurance Fund and SANS. The list of applicable exceptions, when confidential information can be disclosed, is set out in the CIA.
5.1. What are the main trends in the banking sector in your jurisdiction?
The process of banking sector consolidation is expected to continue. There have been several large acquisitions in the banking sector in recent years, including the acquisition of Société Générale Expressbank by DSK Bank AD which closed in 2019, and their subsequent merger, the acquisition of Raiffeisenbank (Bulgaria) EAD by KBC Bank N.V. (Belgium) in the second half of 2022 and its subsequent merger into United Bulgarian Bank AD (the other subsidiary of KBC Bank in Bulgaria) and the announced acquisition of BNP Paribas Personal Finance by Eurobank Bulgaria AD which is expected to close in the first half of 2023.
One of the effects of consolidation is widening the gap between the so-called “first group of banks” (i.e., the top five banks according to the classification of the Banking Supervision Department at the BNB) from the second group of smaller local banks. As of the end of 2022, the banks in the first group held 67.2% of the assets in the banking system. The expectations are that banks in both groups (large and small) will continue to look for opportunities for consolidation in an effort to protect their market share.
Digital transformation is another trend in the sector that will undoubtedly continue. Many banks have placed digitalization on top of their agendas even before the global pandemic, but COVID-19 catalyzed digital transformation even further.
5.2. What are the biggest challenges in the banking sector at the moment?
As with the rest of the world, the main challenge of the banking sector is the inflationary pressure from the rise of commodity prices, the decoupling of the world economy, and the monetary policy of central banks in the last 15 years. Given the significant exposure of the banking sector to the retail housing market there is fear that the rate increases by central banks could lead to higher default rates and an increase of bad loans.
Another challenge is the gap between the “big five” and the smaller banks and their capacity to withstand the increasing operational costs of doing business in an age where digitalization and compliance costs are rising and challenger solutions such as fully digital banks and payment services providers are taking market share.
5.3. What’s new in fintech?
TARGET 2 migration
In late March 2023, the migration to the new platform for TARGET services was completed, with the BNB, commercial banks, and payment systems – participants in the Bulgarian national component system (TARGET2-BNB) of the TARGET2 system for large-value payments in euro joining the new consolidated TARGET Services platform. The platform combines on a technical and functional level the TARGET2 payment system, the securities settlement platform TARGET2-Securities (T2S), and the service for instant transfers in euro TIPS. The new consolidated platform is expected to improve the overall efficiency and security of the existing systems and services.
As a result of the implementation of the project, it is envisaged that from July 2023 all credit transfers in the country, including those in the public sector, will be carried out in accordance with the requirements of the SEPA credit transfer schemes of the European Payments Council. In this way, a comprehensive change in the payment infrastructure aimed at its full alignment with SEPA standards will be completed.
Central Bank Digital Currencies
According to statements by executive officers and Governors of the BNB, the BNB is closely following the actions of the ECB which is going through an investigation phase in relation to CBDC (which explores technical and regulatory aspects of a digital euro), such process expected to be completed in the second half of 2023. The Eurosystem is considering a digital euro app/ wallet with pan-European reach. Given Bulgaria’s ambition to access the Eurozone in the near future the results of the investigation phase could have a transformative effect on the fintech and payment system of Bulgaria in the upcoming years.
Preparation for PSD 3
The Second Payment Services Directive facilitated the development of the EU fintech sector, including the Bulgarian fintech ecosystem. The changes to PSD, referred to as PSD 3, are expected to include improvement to strong customer authentication as well as further standardization of dedicated interfaces used to facilitate open banking activities.