DOMESTIC BANKS WILL BE FREE TO OPEN BRANCHES IN THE COMMUNITY
Emilia Milanova, Deputy Governor of BNB and Head of Bank Supervision Department, to the BANKER WeeklyMs. Milanova, what amendments should be made to the documents regulating the bank sector by Bulgaria's accession to the European Union (EU)?- As of the date our country joins the EU the banking sector will be able to participate adequately in the single market of financial services. A number of European laws in that sphere should be approved and applied for the purpose. The Bulgarian bank sector is already preparing for the challenges of the EU membership, connected with the application of a number of new regulations that will help to preserve the clients' trust in the bank system and to strengthen its competitiveness within the framework of the single market. In the sphere of bank supervision Bulgaria has already achieved complete harmonization with all present requirements of the EU, regarding the access to bank activities, capital and capital-to-assets ratio, big expositions (the bank's receivables from one client), supervision on a consolidated basis, regulation of the amount of banks' deposits.European regulations for mutual acknowledgement of issued licences, for supervision on the part of the member state in which the credit institution is based, for additional supervision of financial conglomerates and the new European requirements on capital-to-assets ratio as per the Basel Capital Accord II, are to be included in Bulgarian legislation. There are several main draft bills for the operation of banks. First of all, a new Banks Act should be passed. We plan to prepare the draft for it by the end of 2005. This legislative act is intended to introduce in Bulgaria all regulations of the EU Directive 2000/12 on the operation of credit institutions. This concerns foremost the regulations for mutual acknowledgement of licences, issued by supervisory authorities of member states, the responsibilities of EU countries referring consolidated supervision, as well as the new regulations ensuing from Basel II.What will be the consequences of the introduction of regulations for mutual acknowledgement of issued licences? Does it mean that any European bank will be able to set up a subsidiary in this country or open a branch without the explicit permission of the BNB? - In compliance with the requirements and principles of mutual acknowledgement and supervision on the part of the member country in which the credit institution is based, the granted permissions (licences) in an EU state allow the same activities to be performed on the territory of the entire community by setting up branches without requiring an additional licence. A registration alone will be sufficient. The host EU member may demand observation of certain regulations of its national legislation, regarding activities for which the institution has not been licensed in the member country where it is based. The supervisory body from the country of the bank's origin shall be responsible for its financial stability, and partly - for its solvency. The competent authorities in the host country will be responsible for the supervision of the capital-to-assets ratio of the branches and the observation of the monetary policy. In some spheres, such as the supervision of the market risk, it will be effected in a close cooperation between the competent bodies of the EU member of origin and the host country. This principle is not applied to the subsidiaries of credit institutions, licensed in the EU member states, as they are local banks and are liable to licensing as such. Of course, the licensing of enterprises, when they are included in the consolidated supervision in the home country of the parent institution, cannot be considered a hindrance. Will Bulgarian banks be able to set up subsidiaries in the EU without asking for an additional permission from the local supervisory authorities?- Any credit institution, licensed in an EU member country, including Bulgaria after it joins the community, may open branches in any EU country and carry out financial operations without having to ask for additional permissions. Who and how will effect supervision on banks which are owned by EU credit institutions after Bulgaria joins the community?- There won't be any changes in that respect. At present, too, the EU member is responsible on an individual and consolidated basis for the supervision of credit institutions, licensed in the respective country. Local banks, registered and licensed as per local legislation, except the branches, are supervised by the institution which has licensed them. In other words, the BNB as a supervisory body of credit institutions on the territory of the Republic of Bulgaria is responsible for the supervision of the banks, licensed in this country and of their subsidiaries as well. The EU member where the parent credit institution is based is responsible for the overall supervision of the group. Directive 2002/87/ЕО, connected with the additional supervision of financial conglomerates, is to be introduced in Bulgaria as well. Who will be conducting that supervision and what will be BNB's role in it?- That directive regulates the additional supervision of credit institutions, insurance companies and investment intermediaries, which are a part of one financial conglomerate. It has to be introduced in Bulgarian legislation by the time Bulgaria becomes a full-fledged EU member (January 1, 2007). The directive is aimed to guarantee the stability of European financial markets and introduce common standards for reasonable supervision of the financial conglomerates in Europe. The directive sets common standards for reasonable supervision of structures, in which regulated institutions are included (banks, insurance companies, investment intermediaries).As per that directive the competent bodies assess on a consolidated basis the financial state of the conglomerate, regarding its solvency, concentration of risks and internal transactions for the group. The conglomerate's members should observe the rules, connected with the internal control and correct management, stipulated in the directive. The additional supervision of financial conglomerates on a consolidated basis is effected by a coordinator, chosen between the competent supervisory authorities of the respective EU members. The tasks of the supervision coordinator do not replace the obligations and responsibilities of the supervisory bodies, ensuing from the respective sector directives. A panel of experts from the BNB and the Commission for Financial Supervision has already been set, entrusted to draft a bill for the application of this directive's requirements in Bulgarian legislation. Who will be the body to exercise additional supervision on DZI Bank and Allianz Bulgaria Bank, for example, which are within the structure of financial conglomerates? - It will be probably the Commission for Financial Supervision, as insurance companies are the nuclear of both conglomerates in which DZI Bank and Allianz Bulgaria Bank participate. As you know, insurance companies are supervised by that commission. At what stage are the preparations for introduction in Bulgaria of the new capital-to-assets ratio requirements as per the Basel Capital Accord II?- It is already known that the final document of the Basel Committee - International Unification of Capital Measurement and Standards - was published in June 2004. Still the following month, in July, a draft bill on amendment and supplement of Directive 2000/12 for the operation of credit institutions, and of Directive 93/6 for the capital-to-assets-ratio, was moved to the European Parliament. The first directive has been basically revised within the context of Basel II, while the amendments to the second one are mainly connected with the formulations of International Standards for Financial Accountancy of public companies, including banks, in force within the EU as of 2005. These amendments are expected to become effective European legislation in the second half of this year. Preparations for application of the directives began concurrently with that process. This activity was entrusted to the Committee of European Bank Supervisors (CEBS), set up in 2004. Presently, the CEBS publishes (in order to be discussed) reports on capital-to-assets ratio and unified reports about banks in accordance with the International Standards for Financial Accountancy. These bills are aimed to unify the supervisory practice in the EU member countries and the info requirements to banks. It is only natural to introduce the requirements of this directive in Bulgaria by passing a Bulgarian legislative act, which means that a new ordinance for capital-to-assets ratio should be drafted. We project to enforce it as of January 1, 2007 and apply by it the new EU capital requirements, ensuing from Basel II. The regulations about the capital base and the market risk will remain relatively unchanged in the new ordinance. Entirely new sections will be those about the capital requirements to the credit risk, the cushioning of the credit risk, securitization, and the capital requirements to the operational risk. All applications of the redrafted and supplemented EU directives 2000/12 and 93/6 will be integrated in the ordinance, too.In order to fulfil that task we set up a panel of experts in the BNB in October 2004. In addition to preparing a draft for a new ordinance on the capital-to-assets ratio, the panel's task is to prepare other materials as well, which are necessary for its application. The drafting of the new ordinance is being done in modules according to the risk in the various sections, taking into consideration the amendments to the EU draft directive. Our aim is to have a ready initial draft for the ordinance, which has to be sent to the Association fo Commercial Banks, to be discussed by the organisation, as soon as the amendments to the directive are finally approved by the European Parliament.