Bulgarian and EU financial market measures

23.03.2020

On 19 March, in the context of the comprehensive measures to limit the spread of COVID-19, and with the view of reducing their negative economic impact, coupled with the potential financial stagnation and expected increase in non-performing loans, the Bulgarian National Bank (BNB) announced a package of measures directed towards the  banks it supervises.

The announced package amounts to BGN 9.3 billion and its aim is to both maintain the sustainability and flexibility of the banking system, as well as to reduce any negative economic effects over it. To achieve these goals, the BNB intends to strengthen each bank’s liquidity and capitalization through the following measures:

  • Capitalization of the 2019 total profit of the banking system, amounting to BGN 1.6 billion – subsequently some of the banks would not be able to distribute dividends to their shareholders, but would have to reinvest all of their profits instead;
  • Cancellation of the 2020 and 2021 scheduled increases in the level of the required countercyclical capital buffer  with the effect of BGN 0.7 billion – i.e. the banks will need to maintain the current buffer levels without having to accumulate new capital when the cyclical systemic risk of the financial system increases;
  • Increasing the liquidity of the banking system by BGN 7 billion by reducing the foreign exposures of Bulgarian banks – this measure will result in the potential revision of the Bulgarian banks’ foreign currency exposures abroad including loans and deposits (e.g. in their parent banks), as well as the potential transfer of deposits from their foreign accounts.

At the present time it is assumed that the above measures’ duration is unlimited, but that they could be eased or canceled should the current situation with the spread of COVID-19 improve.

Without specifying what they are, the BNB has also stated that it has implemented a number of additional measures to ensure the smooth functioning of the currency board, the cash circulation, the payment systems and the banking supervision.

It is important to note that the banking sector can also expect additional measures to be implemented, instead of or alongside the BNB’s ones. This is likely to happen in the context of the ongoing coordination between the BNB, other national competent authorities and the European Banking Authority (EBA), in order to adapt and apply the EU Single Rulebook.

For example, as early as 12 March, the EBA announced that it had decided to postpone its fifth EU-wide stress test, assessing the adverse effects that a financial turmoil could have on the major European banks, until 2021. The goal of this postponement is to allow banks to focus on their core business and clients. It is important to note, however, that the EBA plans to carry out an additional EU-wide transparency review of the banking sector instead, in order to provide updated information on the banks’ exposures to other market participants and their asset quality.

In addition, the EBA recommends to all national competent authorities, including the BNB, to be pragmatic and flexible in their plans, for example by postponing all non-essential activities, including on-site inspections and audits already planned, as well as to ease some of the deadlines related to the reporting requirements applicable to all banks. The EBA also encouraged all banking supervisors to make use of the various measures that the European legal framework already provide for with regard to situations of economic stagnation (e.g. related to capital buffers).

In line with EBA’s recommendations, the European Central Bank (ECB) announced that it will launch a new temporary asset purchase programme of private and public sector securities. The new programme, called the Pandemic Emergency Purchase Programme (PEPP), will have a budget of  EUR 750 billion and is anticipated to last until the end of 2020. The ECB also pointed out that the PEPP will be conducted in a flexible manner and will encompasses all asset types that have been deemed eligible for the ECB asset purchase programmes so far, as well as some new asset classes, where the  Eurosystem collateral framework standards have been eased.

The European Securities and Markets Authority (ESMA) announced that it has a similar approach to that of the EBA and accordingly issued a decision relating to its supervisory expectations with regard to the Regulation 2015/2365 on transparency of securities financing transactions and of reuse (SFTR)  and Regulation 600/2014 on markets in financial instruments requirements (MiFIR). Consequently, the securities financing transactions reporting obligations, applicable to credit institutions, investment firms, central counterparties (CCPs), central securities depositories (CSDs), as well as third-country entities,  will be applied as of 13 July 2020 (instead of 13 April as originally envisaged for some of them). 

Prior to this date, the national competent authorities, including the Financial Supervision Commission (FSC), are urged not to prioritize their supervisory actions towards the parties that fall within the scope of Regulation 2015/2365. ESMA will also not register the trade repositories ahead of  13 April, giving them extra time to cope with the current situation, as well as to be able to meet their obligations under Regulation 2015/2365 at a later point in time.

The FSC also published ESMA’s decision on its website, noting that it is not only relevant for the investment firms and credit institutions in Bulgaria, but also for the parties to the securities financing transactions, namely parties to:

  1. repurchase transactions;
  2. lending of securities or commodities and borrowing of securities or commodities;
  3. buy-sell back transactions or sell-buy back transactions;
  4. margin lending transactions.

At present, FSC has not announced additional emergency measures, but – given that it is involved in ESMA’s decision-making – such measures could be expected should ESMA introduces new ones.

It is also important to note that all of the European Supervisory Authorities have expressed their willingness to revise the measures already taken, which will inevitably affect any future measures taken by the BNB and FSC.

Should you wish to learn more or require additional information please reach out to:

Nikolay Bebov, Managing Partner, Attorney-at-Law
nikolay.bebov@tbk.bg

Damyan Leshev, Managing Associate, Attorney-at-Law
damyan.leshev@tbk.bg

Kristina Dimitrova, Associate, Attorney-at-Law
kristina.dimitrova@tbk.bg