Банкеръ Weekly



The proverb God takes what he has given has a new interpretation in the Bulgarian banking system. Now it says IMF takes what Basel II has given. The Fund's Mission which visited Bulgaria a month ago persuaded the Government to limit the growth of individual lending. Moreover, the method it used was not quite praiseworthy - it forced the Cabinet to make banks allocate minimum required reserves even on deposits longer than two years. The amount of these reserves will be equal to 4% of all the money banks have attracted as long-term deposits, credit lines, or revenues from selling their own bond issues. This is one of the requirements that the State, represented by the Bulgarian National Bank (BNB), has to meet in order to sign a two-year precautionary agreement with the IMF in June 2004.However, the Fund's willingness to restrict the growth of credits launched by banks to the population contradicts the requirements of the currently prepared new capital accord of the member countries of the Bank for International Settlements based in Basel, Switzerland. The accord became popular as Basel II and as soon as it is signed, its regulations will become obligatory to all countries of the European Union (EU) which Bulgaria is about to join as well.According to the Basel II rules, the risk weights for consumer credits will go down from 100% to 75%, and the weight for housing credits - from 50% to 35%, as of January 1, 2007. On the other hand, the risk weights for investment in Bulgarian government securities (which are currently bearing zero risk) as well as the weights for bank deposits (with a 20% risk weight) will be raised to 100 per cent. The reason is that the country's credit rating which is BB+, according to Standard Poor's, is three levels below the elite A(-) to AAA rating group. At the same time, all the three most powerful agencies in the world - Moody's, Standard Poor's, and FITCH Ratings do not allow any bank to be awarded a more favourable risk assessment than the one awarded to the respective state.It all sounds rather complicated at first, but it actually means that as of 2007 Basel II will provide better conditions for the loans to individuals. In order to be prepared for its requirements, Bulgarian banks will have to restructure their assets by reducing their investment in government securities and increasing the amount of consumer and housing credits (which have a lower risk component). And this trend is exactly what the IMF opposes.It's true that the two-year precautionary agreement with the Fund will probably begin to operate from 2004 and it will have expired when the 55 member states of the Bank for International Settlements start to apply the Basel II requirements (in 2007). But in order to meet the challenges of the new capital agreement, Bulgarian banks will have to start preparing now. It's not accidental that back in 2002 almost all credit institutions in the country began to feverishly develop their individual services - all types of consumer credits, housing and mortgage loans, etc.As it is well known, each market has its own sound reasoning and no restrictions imposed by the IMF would force the banks to operate against their interests and to limit the credits to the population. This is proved by the results they reported for the first quarter of 2004. During that period the total amount of launched credits went up 10% - from BGN9BN to BGN9.9BN. The same 10% growth was registered in the total amount of all loans in the first three months of 2003, when the credits increased from BGN6BN to BGN6.6BN.The Basel II accord requires banks to make significant investments in both the establishment of information modules that help for preparing company ratings and the integration of these modules in their information networks. A few banks have already created such modules - the so called scoring systems. But they had to pay a lot of money for them. For example, for the renovation of its information system BULBANK spent EUR30MN and United Bulgaarian Bank (UBB) - more than USD10MN. Despite these investments, the banks will have to invest additional resources in the adjustment of their rating modules to the Basel II requirements. Banks that don't have such systems to assess the level of risk of their customers will obviously have to spend a few millions to create them.Large investments will also be needed for training of the personnel that will apply the Basel II requirements. It includes credit inspectors, risk assessment officers, experts in liquidity, information technologies, internal control, as well as people who will process the statistical data for potential borrowers. In fact, it's almost the whole bank's staff that will need to go through a number of educational courses. And these courses are not cheap. It turns out, therefore, that the integration of the Basel II requirements will force the banks to make significant expenses and they can find the money only by raising their operational revenues. Their most profitable source of money are the credits and mainly those to individuals. That's why the IMF intentions to limit the crediting growth will probably turn out unsuccessful. One reason for that is the forthcoming operation of the Basel II accord.

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