On October 21st, 2020 AmCham Bulgaria welcomed Dimitar Radev, Governor of the Bulgarian National Bank to a special webinar for its members. The event was attended by more than 70 people, and it was moderated by Bojidar Neytchev, AmCham Bulgaria Board Member and South East Europe Deals Leader, PwC.
“AmCham raises voice when something is wrong, but we also raise awareness when something is achieved. Being in ERM II is such achievement. The credit goes to the National Bank, but also to the commercial banks, many of them are AmCham members too,” opened the event the moderator.
Then, Olivier Marquette, AmCham Bulgaria President, addressed the audience with few words of compassion to the audience and their relatives are safe. “The second wave is coming, and we hope that we all be able to manage it so that everyone to be save. Despite these circumstances, AmCham Bulgaria was extremely active with webinars and institutional relations. This event with Governor Radev is another example of our reputation.”
Introductory Remarks by Dimitar Radev
Then the floor went to the key-note speaker. “It is a privilege to speak before you today. I am glad to speak about the ERM II and its impact on the Bulgarian economy and business,” said Dimitar Radev.
“The ERM II is a critical milestone towards joining to the euro area and adopting the euro. It is a convergence criterion for entry into the euro area. It has two main purposes. First, to ensure that exchange rate fluctuations between the euro and the national currencies do not disturb economic stability within the Single Market. Second, to help the non-euro area countries prepare themselves for the participation in the euro area.
By design the ERM II is not a complicated mechanism. It is based on an agreement between the Finance Ministers of the euro area member states, the ECB and the Finance Ministers and the central bank Governors of the non-euro area countries. First, they agree on the central exchange rate between the euro and the respective national currency. Then the national currency is allowed to fluctuate by up to 15% above or below this central rate. The currency is supported, if needed, by interventions coordinated by the ECB and the national central bank in order to keep this fluctuation within this band. However, a country can adopt a narrower fluctuation band, including a zero band. For example, Denmark (whose Danish Krone is part of the ERM II since 1999 but Denmark is not in the euro area) maintains a fluctuation band of +/- 2.25%.
The ERM II is monitored and administered by the General Council of the ECB which includes the Governors of the central banks of the EU member states, including the Governor of the Bulgarian National Bank.
On July 10th the ERM parties agreed to keep the current euro-lev Exchange rate, namely 1.95583, as a central rate between the euro and the lev. Also, based on unilateral commitment by the Bulgarian authorities, the ERM parties agreed that Bulgaria will continue to follow its currency board arrangements including a zero fluctuation band during the ERM II period. This ended speculations that the ERM exchange rate will somehow differ from the fixed rate that has being in place in Bulgaria for over 23 years. Therefore, the participation of the Lev in the ERM II does not require any changes to the regime of the fixed exchange rate of the currency board arrangements. So, we are not concerned whatsoever presently and also in the horizon of the ERM II period about the stability of our exchange rate.
I would like to illustrate this by the indicator of the so-called coverage ratio of the currency board. It shows how much of our high-quality of FX reserves stand behind the monetary liabilities of the BNB. The coverage ratio is calculated by dividing the total assets of the BNB’s Issue Department by the sum of banknotes and coins in circulation, liabilities to banks, to the government and to budget institutions. For example, the last weeks’ balance sheet indicates that the coverage ratio is 160%.
The ERM II implications on the broader economy are more important. Radev illustrated it with three events. First, it was the establishment of the swap line between the ECB and the Bulgarian National Bank. The ECB’s website shows that swap lines with such favorable conditions are extended to only the three ERM II countries – Bulgaria, Croatia, and Denmark. This presents very strong signaling to the markets. Second, BNB issued BGN 5 billion debt on the international market. The interest by the investors was unprecedented, not only for Bulgaria but for the current market conditions. Our participation at the ERM II played an important role for this outcome. Third, the very recent upgrade of our rating by Moody’s in an environment in which the opposite is more common – for example, a few days ago Moody’s downgraded the UK.
To sum up: the ERM II developments led to better financing conditions. That is something very important in the difficult times we are in.
The next question is the ERM II timeframe. This is different from country to country. For example, Denmark is in the ERM II for more than 20 years, but it is the only country in the EU, after the UK is already out, with an opt-out clause regarding euro adoption. For the remaining countries the Lithuanian litas stayed the longest in the ERM II – more than 10 years. Bulgaria’s aim is to stay there for as short a time as possible. Realistically, it could mean that in 2024 we access the euro area.
The most important question is what needs to be done to get there while we are in the ERM II. We should be fully compliant with the convergence criteria (the so-called Mastering criteria). They require to control the inflation, public debt, public deficit, exchange rate stability and the domestic interest rates. It means that we should maintain inflation not more than 1.5 percentage points higher than the average of the three best performing member states; to keep the budget deficit less than 3%, and the gross government debt less than 60% of GDP; to keep the exchange rate stable within the ERM II framework, and to keep the nominal long-term interest rates no more than 2 percentage points higher than in the three members states with the lowest inflation. As of today, we meet broadly the convergence criteria and have good chances to keep it that way if we maintain the sound fiscal and monetary stance regardless of the current crisis.
As of today, we meet broadly the convergence criteria and have good chances to keep it that way if we maintain the sound fiscal and monetary stance regardless of the current crisis.
In addition to the Maastricht criteria the entire process includes commitments prior to joining the ERM II, and post-ERM II commitments. Before ERM II, we engaged to implement prior commitments in six policy areas: Banking Union, Macroprudential supervision, both within the mandate of the BNB, and four areas under the mandate of the government, Non-banking supervision, Insolvency framework, Anti-money laundering framework, and State-owned enterprises. The post-ERM II commitments include further measures in these four areas under the government’s mandate. The government already adopted an action plan for implementing these measures.
In fact, there are no commitments regarding the banking sector, which is another recognition for the significant progress in this area. So, I will join what the Chair said during the opening that it is a recognition for the commercial banks, too,” Radev emphasized.
Bojidar Neytchev started the Q&A session by asking if the ERM II period will be till 2024 or shorter.
To this question Governor Radev answered that this is realistic if we maintain the fiscal and monetary stance.
At the same time, it is a little bit ambitious having in mind that we need to comply with the Maastricht criteria, to fulfil the post-ERM II commitments and to address the complex logistical and administrative issues.
Stanislava Taneva, AmCham Bulgaria First Vice President, and Country Chair of Citibank in Bulgaria, asked a couple of questions on the payment infrastructure until the entry in the Eurozone.
“The RING and BISERA will seize functioning when we join the euro. The RINGs payments will migrate to the TARGET platform for euro payments. And the bank clients’ payments through BISERA will migrate to SEPA euro payments. The national payments traffic will be entirely transformed. Presently together with BORICA we are implementing a project for instant Leva payments to up to 100,000 leva. These payments will comply with the pan-European SEPA credit transfer framework. I don’t expect any major challenges. From November 2022 there will be a new consolidated TARGET platform unifying TARGET2, TARGET2-Securities, and TIPS. And now the BNB, 18 commercial banks, BORICA, and the central depositories are preparing for this new consolidated platform.
The second question for the AmCham VP Stanislava Taneva is related to the COVID-19 pandemic and the response and the measures. She asked for more details on that matter, especially about the increased liquidity on the local market. She also asked if there are any changes to be expected.
“It was recognized that the BNB reacted swiftly and decisively to the crisis. We introduced a sizeable package of measures accounting to over 8% of the GDP. They were announced publicly. Among these measures were the full capitalization of the 2019 profit of the commercial banks, increase in liquidity, reducing the riskier foreign exposures of the banks, and the cancellation of the increase of the counter-cyclical capital buffer planned for this and next year. We then approved the private moratorium of bank loan repayments proposed by the banking industry. The ECB swap line I referred to in my introductory remarks can be added to this list, too,” – pointed out Mr. Radev. It is another safeguard for the financial and monetary stability. These measures secured further stability of the banks, already strong even before the crisis. This created the proper environment for the banks to mitigate the impact of the COVID-19 crisis for their clients.
With regard the liquidity before and after the COVID-19 crisis, the banks were in a very strong position when the crisis broke out, said Governor Radev. Preparing for the ERM II we introduced measures that benefited the health of the sector. Lending remains stable so far. This is a matter of both supply and demand. In times like present, banks want to seek good “bankable” projects. However, banks should remain cautious in identifying and pricing the risks they take when they lend. Banks should not increase lending at any cost or at any risk, even if tempting to do so.
“We do not plan to further extend the moratorium. We are ready to apply additional measures – most of them related to the capital requirements. I want to assure you that we are monitoring the situation carefully and we will be ready to deploy additional measures,” said Mr. Radev.
Teodora Petkova, CEO of UniCredit Bulbank asked about the Banking Union and the impact on the banks, emphasizing the fact that Bulgaria is in the Banking Union but not in the euro area yet.
“Indeed, the Banking Union is a broad topic and it goes along with the ERM II. We joined both simultaneously as our path to euro adoption. We are already a full-fledged member of the Banking Union, including in its various bodies. The direct implications relate to supervision and resolution. In fact, the BNB is the first Bulgarian institution that is already a member of institutions of the euro area. I see advantages for us to join the Banking Union before joining the euro area. One of them is that there is no post-commitment that we need to implement in this area before adopting the euro. Another direct consequence is that the banks will pay less. As we know the Banking Union consists of two mechanisms – the Single Supervisory Mechanism and the Single Resolution Mechanism. The new supervisory fees for the banks will be relatively insignificant. At the same time the resolution fees will be zero for the next few years due to the high level of funds already accumulated in our national Bank Resolution Fund,” explained Dimitar Radev. “I don’t expect any dramatic changes for the banks with regard how the supervisory process is conducted but we are adding more capacity, expertise, and access to information, and this is a good thing ” he said also to this matter.
Martin Pytlik, Executive Director, Raiffeisen Bank Bulgaria: “How do you see the cooperation between the ECB and BNB with regard the supervision of 5 Bulgarian banks? And do you expect that if there is any supervision ruling, it can be automatically adopted to the banks that are not under direct supervision?”
“The cooperation between the Bulgarian National Bank and the ECB was and remains excellent. As for the supervision, we are applying an integrated model, not two separate models. To put it differently, the final sanctions will be made in Frankfurt but Sofia will be very closely involved in the decision-making process. We should not forget that the administrative acts will be issued by the Bulgarian National Bank during the ERM II. Moreover, the banking sector is very well regulated and the strict application of the regulations may not lead to different decisions regardless of the administrative processes” said Mr. Radev. Nevertheless, participation in the Banking Union marks a qualitative new stage of our European integration. “Other things equal, we may expect intensifying competition, efficiency pressure, and perhaps – consolidation,” said also Mr. Radev.
“Are you preparing for more negative scenarios,” asked again Teodora Petkova, CEO, UniCredit Bank. Can a prediction one year ahead from now will look like. “We are more conservative compared to other institutions about the macroeconomic developments and their implications on the banks. For example, we applied severe negative scenarios in the stress tests during the last couple of years. Now we are in a situation when the negative scenarios are materializing, but the banking sector is ready,” explained Mr. Radev. “Looking forward, our latest forecast remains a bit more conservative compared to some other macroeconomic projections. However, the uncertainty increases, and it is getting more difficult to assess the parameters of the possible worst scenario. I expect the banking sector will remain resilient regardless of any negative developments.”
“We are confident in the stability of our banking sector but how strong is it compared to other EU countries?” – asked Bojidar Netchev. “We were welcomed to the Banking Union in 2020 because our banking sector is strong enough. Our indicators, including capital adequacy, liquidity ratio, and profitability are better than the EU average. The only exemption is the level of the non-performing loans which, following a very steady decline in recent years, have reached around 6% while the EU average is 3%”, Mr. Radev pointed out.
Valentin Galabov, Chairman of the Executive Board, TBI Bank asked which are the areas for implementing “sandboxes” to allow the more “Fintech-prone” banks to experiment.“ Sandboxes represent a secure regulatory environment where companies will test their products while regulators will be monitoring them. Therefore the very concept of “sandboxes” aims to allow banks to experiment in the Fintech areas.
The Minister of Finance announced earlier this year intention to promote the setting-up of a regulatory sandbox in Bulgaria. The Bulgarian National Bank has been involved in these talks though things are at an early stage,” Mr. Radev explained.
Georgi Drenski, Senior Associate, Boyanov & CO., asked if the Governor thinks the consolidations in the banking sector from the past years will continue. “The short answer is yes. One, because of the pressure on the profitability of the banks and two, because of our participation in the Banking Union which creates the appropriate environment for such developments,” said Mr. Radev.
Jock Nunan, Partner, PwC, asked if there is a scenario if the BNB will not be able to foresee the exchange rate fixed. “There is no such scenario. As noted, the coverage ratio of the currency board remains well above the minimum level for the smooth operation of our exchange rate regime. We don’t see any pressure from the fiscal policy now despite the current accommodation of the fiscal space. We should also refer to our track record. The existing fixed exchange rate arrangements have never been compromised – neither in bad times, such as the Global Financial Crisis of 2008-2009, nor in good economic times. The monetary regime is rock solid and will remain like this during the ERM II,” the Governor answered
Maria Janeva, CEO, AGRI Bulgaria, asked if the Governor has any concerns about the political situation in Bulgaria and could it affect negatively in the long-term =. “The political tensions generally don’t help. However, the political cycle does not necessarily translate into an economic cycle. I don’t expect any impact on the banking stability coming from the political environment. The political class should focus and agree, to the extent possible, on the management of the current dramatic transition from protection from the pandemic, through the economic recovery, to transformation of the economy.
Boyan Petkov, Head of Capital Markets Division, Raiffeisen Bank Bulgaria, asked if the BNB plans some educational or communication campaign on the conversion to the euro to counteract the negative publicity and conspiracy theories. “Such a campaign should be led by politicians. And the professional institutions, including the Bulgarian National Bank, should actively participate. It requires adequate resources and capacity, which we are providing under our mandate. For example, almost every day there are media publications based on information and data provided by the Bulgarian National Bank,” answered Mr. Radev.