WILL BULGARIAN BANKS BECOME BRANCHES?
The EU officials do not talk to their hats when they warn the Bulgarian Government that there is much more work to be done for the harmonization of our legislation with the European one before the country's accession to the community. A proof of that is the list of requirements to the bank sector, which can be explained briefly in less than 200 lines. Their fulfilment (the BNB is responsible for the greater part) will lead to a fundamental change in the pattern of our bank system. Generally speaking, the requirements which our country should observe are under at least two of the pre-negotiation chapters: Freedom to Provide Services and Free Movement of Capitals. But it is known that the details are important, and there a plenty of them in the above-mentioned chapters. The most essential one is the future change in the licensing regimefor banks and branches of foreign credit institutions. As the BANKER weekly has already written several times, Directive 2000/12/ЕО of the European Parliament requires from each EU member to acknowledge the bank licences, issued in the other EU countries. The directive introduces the rule that any bank, no matter in which EU country is licensed, may open its branches in all other EU member states without having to apply for an additional permission to do that. Currently, if a foreign credit institution wants to have a branch in Bulgaria, it needs to get an explicit permission from our central bank. After Bulgaria joins the EU that requirement will be eliminated and foreign institutions will be able to open branches in our country quickly and without any problems. The introduction of that rule may result in a radical change of the domestic financial market. Pitifully, those changes won't be of use either to our banks or to the banks, owned by Bulgarian capital. Why so? All our banks will be able to open branches in any EU country. What could be better than that? It's curious, however, how many clients and what incomes could a Bulgarian bank get from its branch abroad. Who will give it such an opportunity, having in mind that the EU markets are much more developed and distributed than ours?At the same time foreign analysts already admit that the Bulgarian market has a big potential for making business and profits just because it is undeveloped. After our country becomes a member of the EU all big European credit institutions will be able to profit by it. And they have more capitals, more up-to-date programmes, and more innovative services than the Bulgarian banks. It's true they do not know so well the peculiarities of our market, but they may always hire consultants and managers who are experts in that sphere. In other words, the application of Directive 2000/12/ЕО gives better opportunities for a successful business of western capitals in Bulgaria, than of Bulgarian capitals in the EU. We should not ignore the danger that big Bulgarian banks, such as DSK Bank, BULBANK, HVB Bank Biochim and SG EXPRESSBANK, which are owned by foreign capitals, could be turned into branches. Such a move seems only logical and justified from an economic point of view for the owners of these credit institutions. There are several reasons for that. Unlike a bank, a branch is not obliged to satisfy the requirements for a minimum equity capital and a capital-to-assets ratio. So, it does not come under the restrictions for extending big and internal credits and for the increase of the credit portfolio, which are a function of the size of equity capital. Moreover, a branch does not pay a profit tax as its entire positive result is accumulated in the profit of the bank which is its owner. For instance, if the French Societe Generale transforms its subsidiary SG EXPRESSBANK into a branch, it will be able to release in Bulgaria a loan without any limits to its size, and could to increase its credit portfolio without any restrictions. And that is a considerable advantage, considering that BGN35.53MN is the maximum amount of the credit which SG EXPRESSBANK can launch now, while the ceiling for Societe Generale is EUR4BN. The French owner will save several millions from taxes which SG EXPRESSBANK pays on its profit. Moreover, they will not have to worry about the amount of the profit they would have to keep in the credit institution's equity capital and the money they would distribute in dividends. They will simply collect everything. These are the unarguable advantages of a bank having a branch and not a subsidiary. Of course, they could be reduced to zero if the Government follows the right policy, e.g. servicing of state orders, governmental and municipal accounts, to be undertaken only by banks, registered in Bulgaria and not by branches of foreign credit institutions. Such a condition would make any investor think before restructuring a subsidiary bank into a branch, as several billions of euro will be coming to Bulgaria as financial assistance after the country joins the European Union (EU). Electronic moneyis a subject of several EU directives, whose requirements Bulgaria should fully introduce in its legislation prior our accession to the community. Directive 2000/46/ЕО ensures mutual acknowledgement of licences which the central banks of EU countries will be granting to firms, issuing electronic money. The idea is that each country amends its legislative regulations is such a way that the licence for issuing electronic money is valid in the entire EU, no matter in which member state it has been granted. According to Directive 2000/12/ЕО, the companies issuing electronic money are included in the differentiation of credit institutions. Another Directive of the European Parliament - 97/5/ЕО - concerns the rules for transborder transfers of money. It enables the person whose transfer has been foiled by a bank to get a quick and full compensation. The directive explicitly stipulates that each EU country should establish respective procedures and institutions for solving quickly and out of court the arguments regarding money transfers between banks and their clients. The requirements of these three directives were to a large extent fulfilled with the passing of the Money Transfers Act in the beginning of 2005. However, it will have to be amended in order to introduce the principle of automatic acknowledgement of the licences of firms, issuing electronic money, obtained in other EU member states. Supervision of financial conglomeratesis among the most important commitments to the EU, to be honoured not only by the BNB, but also by the Commission for Financial Supervision and the Finance Ministry. According to the requirements of Directive 2002/87/ЕО of the European Parliament, as of December 16, 2002, each EU member should set up standards for supervision of financial conglomerates, including banks, insurance companies, and investment underwriters. In other words, a regulatory document should be drafted, stipulating requirements for the solvency of the financial group and ways to calculate it, mechanisms for tracing financial transactions between members of the group, for assessing the management of risk, and for evaluating its concentration in the group as a whole. The directive expressly underlines that it is necessary to nominate an unified competent body to exercise control over financial conglomerates. The fulfilment of the directive's requirements has been entrusted to a special interdepartmental group, including representatives of BNB's Bank Supervision department, of the Commission for Financial Supervision, and of the Finance Ministry. It is led by Tihomir Timnev, head of the Bank Supervision legal department. According to some of its members, the drafting of legislative regulations for exerting that supervision is quite difficult as it concerns companies with various activities, liable to different regulations. People acquainted with the debates in the expert panel claim that it is not likely to establish a separate supervision body to control financial conglomerates. It's far more probable when the heart of such a conglomerate is a credit institution like DSK Bank, the general supervision to be effected by the BNB, and when it is an insurance company like DZI - by the Commission for Financial Supervision. Serious changes are to be made as well in the regime of transborder transfers in euroAccording regulation 2560/2001 of the European Parliament, by the time Bulgarian enters the EU, our bank system should unify the fees it collects for money transfers in the country with those for transfers up to EUR50,000, effected to banks in EU countries. The requirements to declare transfers up to EUR12,500 from Bulgaria to foreign banks will be eliminated.The introduction of these requirements will considerably relieve banks' clients, at least because the costs they pay for transfers to other countries will be considerably reduced. That will be to the benefit of both citizens and small and medium-sized enterprises. For banks, however, the application of all EU requirements, mentioned so far, will mean a decrease of proceeds from the services offered so far and big future expenses, connected with the introduction of new info systems for calculation and management of financial groups' risks (most of the credit institutions in Bulgaria already have more than one subsidiary). According to some financial analysts, the Bulgarian financial and credit system is already approaching the time when the improvement of efficiency by optimization of expenses will become a foremost goal for the individual banks, rather than the expansion of market positions by all means. In such a situation, however, the usual survivors are only big credit institutions with sufficient own funds and financially powerful owners, ready to increase their equity capital at any time when necessary.