INVESTMENT BANKS HAVE A FUTURE IN BULGARIA
Apostol Apostolov, Chairman of the Financial Supervision Commission, to the BANKER weeklyJust a week ago Apostol Apostolov, Chairman of the Financial Supervision Commission, challenged the bankers who attended the banks meeting in Plovdiv by launching an idea to establish investment banks in Bulgaria. He explained that these institutions are meant to act as underwriters who implement the full set of services offered by an investment bank - from investment accounts management, trustee services, and issue underwriting (preliminary subscription for the whole issue as a guarantee that all shares will be sold), to the preparation of corporate mergers and acquisitions. Mr. Apostolov explained that such rights could only be delegated to institutions with capital ranging from BGN7MN to BGN10MN.The proposal made by the Chairman of the Financial Supervision Commission provoked an emotional reaction on the part of Ivan Iskrov, Governor of the Bulgarian National Bank (BNB). Iskrov declared immediately that dividing the banks into commercial and investment ones is typical for the Anglo-Saxon model, whereas Bulgaria is adapting to European legislation.Mr. Apostolov, it seems that your idea for establishing investment banks in Bulgaria was not quite well understood. Would you explain how the services offered by these institutions would differ from those provided by universal commercial banks?- Let's talk about investment underwriters and not about investment banks, in order to avoid a collision with the Banks Act which does not allow any other type of institution to be called a bank.The idea is to impose high capital requirements on the intermediaries that will undertake that kind of transactions and to describe their specific operations. If a commercial bank is willing to effect such transactions within its own structure, it will make them a priori in case that it has been registered as an investment intermediary by the Financial Supervision Commission. If the bank decides that the legislation and the regulations do not allow it to carry out the entire scope of investment banking, then it could establish a subsidiary and let it engage is such activities. Maybe this opportunity is exactly what the bankers failed to understand during the meeting in Plovdiv. Why do you think BNB's regulations restrict investment banking?- Generally, investment bankers become partners or co-shareholders to the person they will do business with. Later, they quit the project by selling their stakes, most frequently at a profit. Right now, however, the Banks Act stipulates that a commercial bank cannot hold a stake bigger than 10% in the capital of a non-financial enterprise. Otherwise, if it holds a bigger stake, there is a 24-month period after which it is obliged to get rid of its stake. Of course, the banks evade the law by launching credits to their own subsidiaries or related entities and participate in enterprises through them. You know, it's important that they stick to the law.Which laws should be amended in order to carry out the idea launched by you?- I propose an amendment to the Public Offering of Securities Act and possibly in the relevant ordinances.What would you reply to statements that investment banking is not developed in Bulgaria as there has been no necessity of such services so far?- I would not like to explain what will happen when such a need emerges and we begin running after the events. Therefore, I am posing the issue as early as now. This is a long process that cannot be completed overnight. But middle class entrepreneurs have begun to appear and they seek financing. For example, they have started a production af some kind and they need another BGN100,000 to modernize it. The niche that opens between the crediting of big corporate clients and the microcrediting could be filled in thanks to investment banking. At the present stage, the fixed expenses of a bank for servicing a BGN100,000 loan is in most cases as big as those for a credit of BGN1MN. At the same time, its proceeds from a BGN100,000 loan are ten times lower and often do not even cover its fixes expenses. That is why, this medium niche in the European countries is occupied by investment bankers. It is up to the respective commercial bank to decide if they will be part of it or its subsidiaries. We'll only give the financial institution one more opportunity. Does anything hamper the currently operating investment intermediaries to carry out most of these services, the underwriting of issues included?- The underwriting of issues is a dead provision in the law. I have not seen anybody doing that. Have you held talks with non-banking institutions which are interested in investment banking?- Yes, I have. And their stances are contradictory. But if we want to set up a structure as a binding link between bank operations and non-banking financial intermediation, high requirements should be set to it. In case the opposition turns out stronger, it would be senseless to make something that will not work. But I believe there is business in investment banks. And I am sure there are underwriters in Bulgaria who have attracted and are trust-managing more than BGN10-15MN. They could lay the beginnings of investment banks.