EUROPEAN RULES FOR BANKS ARE READY
Bulgaria's EU membership will be felt quickly in some spheres and more slowly in others, but nowhere else the consequences will be so immediate and radical as in the finance and credit sector. The draft bill on credit institutions which is currently being discussed in Parliament is a sufficient confirmation. It is already clear that the document which regulates the banks' operation in this country will place the players on the domestic financial market in quite a different situation. At that, pretty soon - its stipulations will enter into effect on the day of Bulgaria's EU accession and not a single day later.
The first important consequence is that
the Bulgarian financial market becomes completely open
to all financial institutions licensed in any EU country. Under the so-called principle of passportization, each bank licensed in an EU member will be able to open its branch in our country and operate on the domestic market without asking BNB's permission for that. Currently, that is impossible without the explicit blessing of the bank supervision. However, the services which the foreign bank's branch will be allowed to offer in Bulgaria should not exceed the scope of its licence in the country of its registration. For instance, if the licence does not include extension of guarantees the credit institution won't be able to carry out such activities in Bulgaria. The BNB will be obliged to set the terms for the operation of such a branch within 20 days after receiving a notice from the respective country about the intention of a certain bank to open a branch.
The same rules will hold true about the banks licensed in Bulgaria which want to open their branches in EU countries. They will have to notify the BNB in written about their intention and the central bank which will already be obliged to defend the financial markets of the EU from non-bankable players should assess if to move the process further. On the appraisal of its Supervision Department the BNB is entitled to refuse to send a notice to the competent bodies of the country where the respective Bulgarian bank intends to open a branch. In such a case, however, it has to present to the candidate its motivated refusal within three months.
The practical consequence of these changes will be that the big Westeuropean banks will be able to immediately begin operation on our market if it offers sufficiently good opportunities for profits. That will result in additional competition and it will be the clients to benefit from it the most.
The same procedures for passportization will be valid for Bulgarian
firms which issue e-money
which want to operate in EU countries, and for the European ones intending to offer their services in Bulgaria. The draft bill on credit institutions for the first time includes the terms for the operation of that kind of companies on the domestic market.
E-money is still fairly unknown in Bulgaria, although gathering speed in Europe. These are special cards with an electronic chip, containing a certain sum (something like the Bulphone telephone cards). They can be used for shopping in trade establishments and for paying for various kinds of services. When the limit in the card is spent the holder may deposit an additional amount in the firm to fill in the card. As this is practically a form of attracting money the respective firms are liable to licensing from the BNB. One of the required conditions will be that their share capital is at least BGN2MN.
Concerning credit institutions, the draft bill
maintains the presently stipulated requirements for licensing
- equity capital of at least BGN10MN, instalments in cash alone and effecting them by own funds on which taxes have been paid, and not by loans. As until now, all owners of more than 3% of a credit institution's capital will be obliged on BNB's demand to present information about their financial state, about the origin of their money and about paid taxes. A special permission form the central bank will be necessary for holding 10% of the capital. Such a permission will be also necessary when a shareholder or a group of connected persons acquire 20, 33, 50, 66, 75 or 100% of a certain bank's stocks. When a citizen or a firm buy through the stock exchange 10% or more from the shares of a credit institution, they may not vote with them at general meetings, nor can they invite such meetings without having received an explicit permission from the BNB. If the central bank refuses to give a permission, the owner will have to sell his share.
A novelty as compared to the currently effective Bank Act
is the mandatory condition not only the net worth, but also the share capital (which is a part of the net worth) to be at least BGN10MN.
Besides, at least one of the credit institution's executive directors should speak Bulgarian. The law does not explain the expression to speak Bulgarian, but that provision is obviously a way to oblige banks owned by foreigners to appoint at least one Bulgarian executive director.
The draft bill for the first time gives an exact explanation of the concept own funds by which instalments to the capital can be made. For citizens this is the difference between the money which they have on their bank accounts and their financial liabilities. It should be bigger than the size of their instalment in the bank's capital. For firms the instalment may not exceed the net worth of their capital, calculated as the difference between assets and liabilities. The second condition is that is should be lower than the disposable money in the bank accounts of the shareholder company for instance. The money in accounts blocked in connection with trade and financial commitments or legal claims are not regarded as disposable amounts.
Specification of those details is particularly important because after joining the EU the Bulgarian bank system will become very attractive to capitals outside the community, seeking positions for entering the single European market. No doubt, businessmen with dubious origin of their funds will have such appetites, too. One of BNB's commitments is to fend off such appetites in due time. This necessitates making the rules for the establishment of banks in Bulgaria or for transferring control on them extremely clear and unambiguous. The more so that on Brussels' insistence the new act
will deprive the BNB from one of its major privileges
- its right to refuse or revoke a licence. Moreover, the central bank's sanctions on banks violating the law could be already attacked in court. So far that legislative bonus was protecting the BNB from long court lawsuits which the owners of closed down or punished credit institutions could initiate against it. Such trials would delay the elimination of faults in the operation of the punished banks and would seriously endanger the interests of their depositors and creditors. And the eventual claim against a revocation of a licence hides a still more serious danger - it might block the lawsuit for the declaring a financially troubled bank insolvent and the encashing of its assets, which creates a possibility for draining it. Despite these arguments, however, the EU is adamant that the right to legal defence is sacred for everyone. That is why, the draft bill deprives the central bank of the court immunity it has enjoyed so far. On the other hand, for the first time it stipulates procedures for restructuring banks with problems.
That is practically
a revolution in financial legislation
in Bulgaria, which did not contain a single provision on the issue after 1989. A bank was considered doomed in case it suffered huge losses and its capital fell below BGN10MN or if had problems regarding payments. There are only three instances when credit institutions placed under special supervision have survived. These are: the Mollov Bank, which after three changes of ownership is currently called Piraeus Eurobank, the Yambol Commercial Bank, currently Allianz Bulgaria, and the St. Nickolas Bank, which is presently INVESTBANK. However, they were saved without special legislative provisions.
The draft bill that is to be considered by the parliamentary Budget and Finance Commission on second reading contains
a special Supervisory Measures chapter
It describes in quite a detail the techniques for pulling out to the surface a drowning credit institution. The BNB may oblige the bank to raise its equity capital. In such a case the general meeting of shareholders is invited by the BNB through a notice in the Official Gazette, published not later than 5 days after the decision has been made by the central bank. In case there is not a quorum the meeting is postponed for the following working day and a decision is made notwithstanding how many shareholders are present. If the BNB established that some of the shareholders of the bank in trouble have contributed to its poor financial state and they do not have sufficient own money they could be banned from participating in its capital increase. The central bank will even have the right to set the prices at which the shares for the capital raise shall be purchased.
If the credit institution's management is entrusted to curators, they could raise its capital by BNB's approval or make a decision for its merger with another credit institution.
A special procedure has been stipulated for rehabilitation of a bank in trouble. It is connected
with the participation of the Bank Deposit Insurance Fund
The procedure is applicable if there are no other candidate buyers for the troubled credit institution (either through a capital raise or a direct acquisition). In such a situation the curators have to undertake actions for reducing the share capital by the amount of losses, reported by the bank. Afterwards they invite a procedure for raising it to the size that will allow it to meet its current obligations problem-free and satisfy BNB's capital adequacy requirements. The entire increase is made by the Bank Deposit Insurance Fund with the aim that it becomes a majority owner. After the bank's rehabilitation the fund will be selling its package and practically the entire bank. According to experts, that scheme will protect it against losses, connected with the credit institution's failure. As of the date Bulgaria enters the EU the funds will be obliged to pay all deposits to citizens and firms up to BGN39,900 in case a bank is declared bankrupt. That might cost it dozens and even hundreds of million BG levs which would be afterwards difficult to get back from selling off the credit institutions' assets. But if it invests some BGN30-40MN in a troubled bank in order to stabilize it and sells it after that the fund will not lose and might even turn a profit. According to BNB's experts, the rehabilitation mechanisms, stipulated in the draft bill, will create possibilities for expedient reactions in case of crises in certain banks and will contribute to the improvement of trust to the entire domestic financial and credit system.