This country-specific Q&A provides an overview of the legal framework and key issues surrounding banking and finance law in Bulgaria including national authorities, regulation, licenses, organisational requirements, supervision and assets.
This Q&A is part of the global guide to Banking & Finance.
For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/banking-finance/
What are the national authorities for banking regulation, supervision and resolution in the jurisdiction?
The Bulgarian National Bank (BNB) is the competent authority in the Republic of Bulgaria for exercising control and supervision on banks in the meaning of Regulation 575/2013 of the European Parliament and the Council of 26 June 2013 on prudential requirements to credit institutions and investment firms and amending Regulation (EU) No.648/2012 (“Regulation 575/2013”).
Which type of activities trigger the requirement of a banking licence?
Publicly attracting deposits, accepting deposits of valuables, and acting as depository or custodian institution, each trigger the requirement of a banking license. These are activities that could be performed only by a bank – either licensed by BNB, or by the competent authorities of a Member State, or a bank having a seat in a non-Member State (a Third Country) that is licensed by BNB to operate on the Bulgarian market through a branch.
Does the regulatory regime know different licenses for different banking services?
Bulgarian Law follows the provisions of Directive 2013/36/EC of the European Parliament and the Council of 26 June 2013 on access to the activity of credit institutions and prudential institutions of credit institutions and investment firms amending Directive 2002/87/EC and repealing Directive 2006/48/EC and 2006/49/EC (“CRD IV Directive”), which regulates the different banking services that a bank can perform.
The banking license entitles the bank to attract deposits or other payable funds from the public, and to extend credits or other financing on its own account and at its own risk. Apart from that, the bank can perform only the banking activities included in its license.
A bank may not perform any other activity, unless this is required for the performance of its activity or in the course of debt collection process on outstanding receivables. Banks are allowed to incorporate or acquire companies for carrying out ancillary activities.
Does a banking license automatically permit certain other activities, e.g., broker dealer activities, payment services, issuance of e-money?
There is no automatic permission of any of the banking services and activities. A bank is authorized to carry out activities as long as they are expressly included in its banking license. In case of breach of this rule, there is a risk of legal nullity of the transactions.
A bank may perform broker dealer activities only after it is duly and additionally licensed by the Financial Supervision Commission (FSC).
What is the general application process for bank licenses and what is the average timing?
The application process includes the followings steps:
- Submission of an application to BNB along with the statutory required documents and information.
- BNB completes assessment on compliance with the licensing requirements.
- BNB should take its decision within three months as of receipt of the application by either approving issuance of the license or rejecting it. In case of rejection, the applicant is entitled to file another application after the expiry of twelve months as of entry into force of the decision for rejection.
- Issuance of a license.
After issuance of a license, the applicant has to comply with additional requirements within three months.
The average timing for issuance of a banking license is six months as of receipt of the application. BNB is expected to approve or reject issuance of a license within maximum twelve months as of receipt of the application.
Is mere cross-border activity permissible? If yes, what are the requirements?
Yes, cross-border activity is permissible, subject to the following specifics:
A. A bank licensed in an EU Member State is entitled to perform banking activity in Bulgaria either through a branch or directly. Such bank can perform any of the banking activities if they are included in its license and after BNB has been notified by the competent authority that originally issued the license.
Similarly, a bank licensed in Bulgaria may perform activities in another EU Member State through a branch if such activities are included in its banking license, following a notification to BNB. If BNB finds that the activity planned is compliant with the organizational structure and financial status of the bank, BNB notifies the competent authority within three months as of receipt of the notification from the bank.
B. A bank licensed in a Third Country is entitled to perform banking activity in Bulgaria through a branch, following the issuance of a license by BNB. The license may not entitle the branch to perform activities which the bank may not perform in the Third Country.
A bank licensed in the Republic of Bulgaria can perform banking activity in a Third Country, following a written permission by BNB.
What legal entities can operate as banks? What legal forms are generally used to operate as banks?
Only Bulgarian joint-stock companies in process of incorporation and branches of foreign banks (as discussed above) may apply for a banking license.
What are the organisational requirements for banks, including with respect to corporate governance?
The corporate bodies of banks are (i) general meeting of shareholders (GMS) and (ii) board of directors (in case of one-tier system) or supervisory board and management board (in case of two-tier system).
A bank is required to be managed and represented jointly by at least two individuals of whom at least one speaks Bulgarian. They are to manage and represent the bank by personally attending its management address. These representatives may not entrust the full management and representation of the bank to one of them, but may authorize third parties to perform separate actions.
A legal entity may not be a member of the board of directors or of the management board of a bank.
There are specific requirements to the education, qualification and professional experience of the banks’ board members and procurators. Specific requirements apply also to their clear criminal record, non-participation in insolvent companies, their family or other similar relations with another board member, to their reliability, to the lack of conflict of interest, etc.
A bank’s board members and procurators can be elected only following the prior approval of BNB.
Do any restrictions on remuneration policies apply?
Ordinance No.4 of the BNB of 21 December 2010 on Requirements to Remunerations in Banks transposes provisions of CRD IV Directive. It requires that each bank has its internal policy on all forms of remuneration of its senior managers, risk takers, staff performing control functions, and any employees whose remuneration is in the same remuneration brackets and whose professional activity has a material impact on the bank’s risk profile.
Their remuneration should have two components: (i) fixed remuneration depending on the professional experience and responsibilities; and (ii) variable remuneration depending on the sustainable, effective and risk adjusted performance. Generally, the amount of the variant component may not exceed the amount of the fixed component of the total remuneration. As an exception, the GMS by a special qualified majority may decide on a variable component that is not higher than the double amount of the fixed component. Such decision is subject to preliminary notification to BNB, which further notifies the European Banking Authority (EBA).
There are special rules to the limits, structure, and deferral of variable components of remunerations.
It is mandatory for banks with one tier management system to set up remuneration committees while the rest are only encouraged to.
Has the jurisdiction implemented the Basel III framework with respect to regulatory capital? Are there any major deviations, e.g., with respect to certain categories of banks?
Yes, the Basel III legal framework is implemented in Bulgaria with respect to regulatory capital.
- Capital conservation buffer level: banks are required to maintain Common Equity Tier 1 (CET1), equal to 2.5% of the total amount of their overall risk exposure.
- Bank-specific countercyclical capital buffer: due to the lack of cyclical systemic risk in Bulgarian economy, the rate of this buffer is currently 0%.
- Systemic risk buffer is at the level of 3% of the risk-weighted exposures formed by Bulgarian banks.
- Buffer for global systemically important institutions - G-SII buffer is not applicable in Bulgaria.
- Buffer for other systemically important institutions (O-SII) - it is addressed below when replying to question No. 18.
Are there any requirements with respect to the leverage ratio?
BNB applies the applicable requirements of Regulation 575/2013.
What liquidity requirements apply? Has the jurisdiction implemented the Basel III liquidity requirements, including regarding LCR and NSFR?
Ordinance No. 11 on Bank Liquidity Management and Supervision (Ordinance No.11) and in the Credit Institutions Act (CIA) set forth the liquidity requirements. Banks are to manage their liquidity in a manner that ensures regular and prompt fulfilment of their daily obligations, both in a normal banking environment and in a crisis situation.
Bulgarian banks are required to apply robust policies, strategies, processes and systems for identification, measurement, management, and monitoring of liquidity risk. The liquidity management system includes:
- rules and procedures for identification, measurement, management and supervision of liquidity;
- liquidity management body directly subordinated to the bank’s management body; and
- effective management information system.
Banks submit to BNB monthly liquidity reports showing projected cash flows. If BNB finds out that a bank has a significant liquidity problem requiring immediate measures, BNB may require the bank to submit weekly or daily reports, based on a liquidity crisis scenario, reflecting the bank’s plan for survival. BNB is also entitled to conduct on-site inspections in order to establish the efficiency of the liquidity management system.
The LCR (Liquidity Coverage Ratio) is already in force in Bulgaria as of 2015.
As regards NSFR (Net Stable Funding Ratio), it is expected to be implemented in Bulgaria after its adoption at EU level.
Do banks have to publish their financial statements?
Yes, banks are obliged to publish in one central daily newspaper its balance sheet and a profit and loss account at least every six months.
Banks have to publish annually their financial statements for the whole financial year at the Commercial Register by 30 June of the following year.
A bank licensed in another Member State or a Third Country operating in Bulgaria through a branch is required to publish its financial statements in Bulgarian language on a stand-alone and consolidated basis, along with its auditor’s report.
Does consolidated supervision of a bank exist in the jurisdiction? If so, what are the consequences?
BNB exercises consolidated supervision on activities of banks and financial holdings (FHs) and financial holdings with mixed activity (FHMAs) to ensure their reliable and trustworthy management. BNB exercises prudential supervision on banks for maintenance of the stability of the banking system and prevention and reduction of systemic risks resulting from banking activities. The activities of a FH, FHMA or of a holding with mixed activity, which has a subsidiary that is a bank, is subject to consolidated supervision by BNB.
While exercising its supervising functions vis-à-vis a Bulgarian bank operating in another Member State(s), or vis-à-vis a bank licensed in a Member State and operating in Bulgaria through a branch, BNB takes into account the potential impact of its decisions on the financial stability of the respective Members State(s), especially in emergency situations. The regularity and intensity of the supervision and assessment are determined by the size of the respective bank, by its systemic importance, and the nature, scale and complexity of its activity. The supervision is done at least once a year. In case of finding that a bank may cause systemic risk, BNB notifies the EBA immediately of the results of the assessment.
BNB has the power to require from banks, from FHs and FHMAs, from their shareholders, from parent companies and subsidiaries, to present any accounting and other documents, as well as information on their activity, to inspect them on site and to freely access their offices and information systems.
When BNB finds that a bank licensed in another Member State having a branch or operating in the country directly, does not observe or has a material likelihood not to observe applicable law, BNB notifies the competent authority of the sending Member State. If it fails to undertake the necessary measures, BNB may take the issue to the EBA. BNB has the power to undertake measures and protect public interest in case of (threatened) violations of local law, including to forbid transactions on the territory of the country.
What reporting and/or approval requirements apply to the acquisition of shareholdings in, or control of, banks?
Any person, as well as persons acting in concert, need the prior approval of BNB, in order to acquire shares/voting rights in a bank licensed in Bulgaria, if as a result of such acquisition its/their participation becomes qualifying (i.e. direct or indirect holding in an undertaking representing 10 per cent or more of the capital/voting rights or which makes it possible to exercise significant influence over the bank’s management) or if this participation reaches or exceeds the thresholds of 20, 33 or 50 per cent of the shares/voting rights. The rule is also applicable to share acquisition on the stock exchange/another regulated market of securities or as a result of capital increase.
Preliminary BNB approval is also required in case a bank becomes a subsidiary.
In case that the above thresholds are reached as a result of objective circumstances, voting rights may not be exercised and are not calculated for quorum purposes before receiving BNB approval.
Any transactions, resolutions and actions, which are performed in breach of the above requirement for prior approval of BNB, are void.
Does the regulatory regime impose conditions for eligible owners of banks (e.g., with respect to major participations)?
An applicant who intends to acquire qualifying holding or participation reaching/exceeding the thresholds of 20, 33 or 50 per cent of the shares/voting rights in a bank licensed in Bulgaria has to comply with the following requirements:
- To have high integrity and professional competence;
- The reputation, knowledge, skills and experience of each individual intended to be elected as a board member and/or a high management position should comply with the statutory requirements;
- The applicant should be able to finance the acquisition, has financial stability and can maintain it for not less than three years, including if needed, to provide financial support to the bank;
- There should not be any obstacles to the banking supervision;
- The documents and data do not raise reasonable doubts for money laundering and financing of terrorism.
BNB completes its assessment by taking into consideration the potential influence of the applicant over the bank, in view of guaranteeing the bank’s future stable and reasonable management.
Are there specific restrictions on foreign shareholdings in banks?
In case a bank shareholder is a foreign person, BNB may require submission of information on the applicable foreign legal regulations about its legal status and activity, as well as details about the functions and powers of the competent supervisory body, if applicable.
There are specific requirements for foreign shareholding in banks:
- Any legal entity seated in a Third Country, which has subscribed 10 and more than 10 per cent of the shares with voting rights in a bank, in addition to the standard documents submits a credit rating document from a credit rating agency registered in accordance with Regulation No 1060/2009.
- If a person that subscribed 25 and more than 25 per cent of the shares with voting rights is a bank seated in a Third Country; or is a company having a subsidiary bank seated in a Third Country or is controlled by a person, that controls also a bank seated in a Third Country, BNB completes additional steps on consulting the competent banking supervision authority and requires submission of permission by the applicant, if there is such under its domestic legislation.
A special Bulgarian law forbids legal entities registered in a list of jurisdictions with preferential tax regime (currently 26 in number) and the persons directly or indirectly controlled by them to:
- participate in a procedure for obtaining a banking license; or
- participate in a bank in case the participation becomes qualifying holding as discussed in the answer to Question 15 above.
The above prohibition applies ipso jure.
Is there a special regime for domestic and/or globally systemically important banks?
The G-SII buffer is not applicable to subsidiaries of banks licensed within the EU, so the buffer has not been applied in Bulgaria, so far. BNB has applied O-SII buffer to strengthen the capacity of important Bulgarian banks for covering losses and limiting the risk of transfer of potentially stressful situations to other banks or the banking system as a whole.
Upon determining the rate of the O-SII buffer, BNB follows the instructions of the EBA and the European experience, while simultaneously considering additional indicators for the importance of banks for the national economy.
From the beginning of 2018, eleven Bulgarian banks are required to apply the initial O-SII rates as fixed by BNB.
What are the sanctions the regulator(s) can order in the case of a violation of banking regulations?
In case of violation of the CIA, Regulation 575/2013, acts on their application, the monetary sanctions for individuals reach up to BGN 4,000, for legal entities – up to BGN 20,000, and for banks/financial holdings – up to BGN 200,000. Higher sanctions apply in case of repeated violation.
In case of specific violations, such as for example:
- failure to obtain preliminary approval by BNB when a person intends to acquire qualifying participation in a bank or when reaching/exceeding 20, 33 or 50 per cent participation (as discussed in the answer to Question 15 above);
- failure to notify BNB when a shareholder intends to reduce its participation below the thresholds per (1) above;
- failure to notify BNB when a bank ceases to be a subsidiary of another legal entity;
- failure to notify/provide timely specific information to BNB, incl. about intra-group financial support;
- money laundering;
- provision of false or incomplete or inaccurate accountancy and financial information to BNB;
- non-compliance by a bank with the LCR requirement under Art. 412 of Regulation 575/2013;
- failure to prepare, maintain and update banking recovery and resolution plans;
- failure to notify BNB when a bank is (likely to become) problematic;
and in other cases as provided by law, monetary sanctions could reach the amount of up to €5,000,000 for an individual, and up to 10 per cent of the annual turnover, including gross income, for a legal entity.
Apart from the above, BNB may withdraw a banking license on different grounds – e.g. in case a bank has not started operating within twelve months, or provided false information/used other illegal means for the issuance of its license, etc.
What is the resolution regime for banks?
There is a special Recovery and Resolution of Credit Institutions and Investment Firms Act (RRCIIFA), transposing Directive 2014/59/EC of the European Parliament and the Council of 15 May 2014 on establishing a framework on recovery and resolution of credit institutions and investment firms (Directive 2014/59/EC). The RRCIIFA provides the statutory national framework to recovery and resolution of banks licensed by BNB and banks licensed in a Member State but subject to consolidated supervision by BNB.
The Bulgarian competent authority for the purposes of banks’ resolution regime is BNB. A special Resolution of Banks Fund is created to assist banks’ resolution. The objective is that the funds there reach 2% of the total amount of secured deposits within 10 years, which exceeds the required minimum amount of 1% of the total amount of secured deposits by Directive 2014/59/EC.
The RRCIIFA outlines the following resolution objectives:
- ensuring sustainability of critical functions;
- avoiding material unfavourable consequences for financial stability;
- protection of public funds and minimising dependability on use of extraordinary public financial support;
- protection of covered depositors;
- protection of clients’ funds and assets.
The RRCIIFA arranges the governing principles of bank resolution following Article 34 of Directive 2014/59/EC, providing that a banks’ shareholders and creditors first bear the losses in resolution regime. In case shareholders and creditors bear higher losses that the ones they would have otherwise borne in case of the bank’s winding up, such shareholder or creditor has the right of compensation of the difference from the Restructuring of Banks Fund.
The RRCIIFA follows Directive 2014/59/EC by providing for four resolution tools applicable to banks in resolution regime, independently or in combination: (i) sale of business tool; (ii) bridge institution tool; (iii) asset separation tool; and (iv) bail-in tool. As an exception, (iii) above is applied only in combination with any of the other tools.
How are client’s assets and cash deposits protected?
The objective of the Guaranteeing of Deposits in Banks Fund is to contribute to the stability and credibility of the Bulgarian financial system by protection of deposits and payment of covered deposits, effective resolution of banks and investment firms, and optimal protection of creditors' interests in insolvency proceedings.
The fund guarantees full repayment of the amounts of one person's deposits in one bank regardless of their number and amount, up to the amount of BGN 196,000.
Does your jurisdiction know a bail-in tool in bank resolution and which liabilities are covered?
Yes, this tool is used for recapitalization of a bank to restore its ability to comply with the licensing terms and credibility or to turn debt into equity or reduce a principal amount of claims/debt instruments.
A bail-in tool is applicable to any obligations of a bank under resolution regime, except the ones that are expressly excluded by law in Art. 66, para.2 and Art. 67 of the RRCIIFA. These statutory exceptions correspond to the exceptions listed in Article 44(2) of Directive 2014/59/EC, and exclude obligations such as covered deposits, mortgage bonds, liabilities arising out of fiduciary relationship, liabilities to institutions, excluding entities belonging to the same group, with original maturity of less than seven days, remuneration and pension benefits to employees, excluding variable remunerations, tax and social security liabilities, if they are preferred by law, etc.
In exceptional circumstances, and under expressly enumerated statutory conditions, BNB has the power to further exclude additionally entirely or partially other obligations from the scope of the bail-in tool. BNB can exercise this power only in case of availability of financing opportunities at the Resolution of Banks Fund and after notification to the European Commission. If the exclusion provides for financing from the Resolution of Banks Fund or from an alternative fund, BNB can exercise it if the European Commission does not forbid or require amendments to the scope of the suggested exclusion within 24 hours or a longer period, which BNB consented to.
Is there a requirement for banks to hold gone concern capital (TLAC)?
There are no global systemically important banks (G-SIBs) operating in Bulgaria, so TLAC requirements are not directly applicable currently. The RRCIIFA transposes the Minimum Requirements on Eligible Liabilities (MREL) as provided in Directive 2014/59/EC. Under the MREL requirements of Bulgarian law, BNB fixes the minimum own capital and eligible liabilities for each bank licensed in Bulgaria.
Though TLAC and MREL differ in scope and parameters, both aim at ensuring that banks in resolution have sufficient resources to cover losses and recapitalization needs. Following the proposal of the European Commission for introduction of TLAC requirements at EU level, it is to be expected that such requirements will be implemented on national level in the future, too.
In your view, what are the recent trends in bank regulation?
Following the Asset Quality Review (AQR) and stress test (ST) of all 22 Bulgarian banks in 2016, BNB announced that Bulgarian banks have passed these tests successfully. According to the BNB report, the banking system remains well capitalized, with a CET1 capital ratio after the AQR of 18.9%, well above the 4.5% regulatory minimum. The individual bank results indicate that the capital adequacy of all banks remains above the required regulatory minimum.
The trend of discipline and reforms in the banking sector is confirmed by BNB to continue, with primary core focus on successful meeting the future challenges related to maintenance of financial stability in the country and its full integration into the European financial infrastructure.
Bulgarian banking system is in good condition – it has high capital adequacy and liquidity, there is growth in crediting, which is continuing. The country is benefitting from the opportunities of global economic cycle and growth. The clear indications and timeline for joining the Eurozone also contributes to such good prospects for the economy and the image of the country as a whole.
From regulation perspective, the banking sector is anxiously taking measures for the implementation of the General Data Protection Regulation (GDPR), Payment Services Directive 2 (PSD 2), International Accounting Standard 9 (IAS 9), and Markets in Financial Instrument Directive 2 (MiFID 2) and the related acts in Bulgarian legislation.
What do you believe to be the biggest threat to the success of the financial sector ?
With the expected transposing of PSD2, the recent unquestionable domination of banks in services such as cash transfers and collection of deposits will soon appear to be undermined by new technological companies and mobile platforms. Banks will need to re-consider all their processes in their aspiration to maintain their current clients and attract new ones. Digitalization of banking services and responsiveness to client expectations are expected to be essential for remaining on the market.
In response to higher capital requirements and related strict banking regulation, and the need of introduction of expensive and complex IT solutions, the economy of scale would be more and more relevant. We are in the course of expected consolidation on the market, which could be beneficial for the economy as a whole.