Банкеръ Weekly



Should one use key words in order to define the banks' activities during the ending year 2004, those will probably be the words credit aggression and restrictions. It is not known yet if banks will keep their aggressive policy in 2005, but it is already certain that the restrictions will get tighter. The reason hides in the new Regulation N8 of the Bulgarian National Bank (BNB) on the capital adequacy which the BNB Governing Board is going to adopt by year-end.According to the regulation, banks will not only be forced to report an additional risk - the market one, but will also be obliged to further tighten the crediting restrictions. Moreover, mortgage credits which number is growing most will be subject to the strongest control. Forecasts show that they are going to report a 100% growth for 2004 and their total face value will exceed BGN1BN. It is easy to understand why the banks concentrate on this type of credit. According to the currently acting Regulation N8, these are the only loans that are assessed to bring a 50% risk, compared to the 100% risk of the other types. In that case, a bank may use the same amount of capital to launch twice as many home credits as consumer and corporate ones.According to some bankers, however, the new Regulation N8 will contain a text stipulating that home credits will be assessed with a 50% risk if only they amount to up to 70% of the valuation of the property used as collateral. Most banks credit the purchase of homes with 75 to 80% of the valuation of the mortgage. If the new regulation introduces the 70% restriction, it will lead to a lower level of the capital adequacy. In order to compensate that negative effect, banks will be forced to restrict the funds they allocate for crediting and invest part of the saved money in assets with a lower level of risk, government securities and deposits in other credit institutions.Banks that trade in securities totally exceeding BGN40MN every day will be reporting a higher risk, too, because the market risk will be added to the credit and the currency ones. That is why they will be forced to limit their crediting funds and turn to more liquid instruments, too.When discussing BNB's Regulation N8, representatives of the Association of Commercial Banks asked the central bank to reduce the lowest capital adequacy coefficient required from 12 to 8%, which is the level required in the European Union. One of the ACB motives is that in July 1997 BNB decided to introduce the higher level, 12%, explaining that Regulation N8 did not consider all types of risks (excluding the market one) regulated by the acting Basel I capital adequacy agreement. In a letter to BNB, the association indicated that since the new Regulation N8 introduces the reporting of the market risk, the lowest capital adequacy should be harmonized with the European standard which is 8 per cent.However, bankers themselves do not believe that BNB is going to consider their claim for a lower capital adequacy, because a decision of the kind would stimulate further crediting expansion. In accordance with the insistence of the International Monetary Fund, BNB is going to introduce more severe measures aiming at limiting the crediting growth. That's why the managers of most banks are already calculating how much they will be able to provide for crediting activities next year so that they would also meet the requirements of the amended Regulation N8 which is expected to become valid in the middle of 2005.

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