On 14.05.2021, by virtue of a decision of its Governing Board, the Bulgarian National Bank (“BNB”) introduced a few important amendments to the Bulgarian banking legislation.
BNB introduced an entirely new legislative act - Ordinance No. 8 of 27 April 2021, on capital buffers, combined requirement for a buffer, limitations on distributions and recommendation for additional own funds. The ordinance also defines the limits on dividend or interest payments in relation to own funds, the conditions for mandatory recovery of loss on behalf of shareholders and bearers of own funds instruments of the bank before the recovery of losses using other sources. In addition, the act defines other limitations for banks to comply within the event of established non-fulfilment or for prevention of non-fulfilment of the requirements for capital buffers. The ordinance defines the limitations applicable in the event of established non-fulfilment or prevention of non-fulfilment of the requirement for buffer of the leverage ratio, as well as the order and conditions for application of the recommendation for additional private capital.
Pursuant to Ordinance N. 8 of 27 April 2021, the capital buffers are:
✓ Safety capital buffer
✓ An anti-cyclical buffer specific for each bank
✓ A global systemically important institution buffer
✓ A buffer for other systemically important institution
✓ Systemic risk buffer
BNB also regulated the proceedings for issuing a permit for financial holdings, including holdings with mixed activity. An applicant must submit a written application to BNB, which must include:
✓ description of the organisational structure of the group, of which the financial holding is part
✓ identification data for at least two persons, who manage and represent the financial holding
✓ the required documents for members of the managerial and supervisory bodies
✓ the required documents for shareholders and partners, who own qualified shareholdings in the financial holding company or the mixed financial holding company, and in the event there are no such shareholders - for 20 of the largest shareholders or partners
✓ description of the internal organisation and task distribution within the group, including strategies and policies for taking, managing, supervision and reduction of risks
These legislative amendments come in the form of Amending and Supplementing Ordinance of Ordinance No. 2 from 2006 on licenses, approvals and permits, granted by the Bulgarian National Bank under the Credit Institutions Act.
Another legislative amendment, pursuant to Ordinance amending and supplementing Ordinance № 4 of 2010, concerns the remuneration requirements for banking institutions. Credit institutions must adopt and apply policies, which concern all forms of remuneration such as salary and other financial stimuli, including benefits related to retirement for the following categories of persons:
✓ members of managerial board/ board of directors and supervisory council of the bank
✓ high level managerial staff
✓ staff, responsible for managing independent departments for risk management, compliance and internal audit, or essential business units of the bank
✓ staff, which has received for the past year considerable remuneration and satisfies the following conditions
(i) their remuneration is at least equal to the BGN value of EUR 500k and is no less than the average remuneration, which the persons under item 1 and 2 receive.
(ii) the employee exercises their professional activity in an essential business unit and the activity reflects considerable influence on the risk profile of this department
Remuneration requirements for banking institutions are applied on an individual and consolidated basis. The regulatory provisions are not applied on a consolidated basis for:
✓ subsidiaries with registered office in the Republic of Bulgaria or another Member State of a bank, when specific remuneration requirements apply to them according to legal acts of the European Union
✓ subsidiaries with a registered office in a third country of a bank, for which, if they were established in the Republic of Bulgaria or another Member State, specific requirements for remuneration would be applied according to legal acts of the European Union
Additionally, BNB’s legal authority over risk management becomes more detailed. Under the new requirements, banks must use a standardized methodology, a simplified standardized methodology or apply internal systems to identify, assess, manage, and limit risks arising from potential changes in interest rates affecting the economic value of capital and net interest income from their activities in the banking portfolio. Credit institutions must also implement systems for assessing and monitoring risks arising from potential changes in credit spreads that affect the economic value of capital and the net interest income from their operations in the banking portfolio. BNB may require a bank to use the standardized methodology when internal risk assessment systems prove unsatisfactory. A bank, which is a small and non-complex institution, may also be required to use the standardized methodology when BNB considers that the simplified standardized methodology is not appropriate to reflect the interest rate risk arising from its activities in the banking portfolio. These innovations will enter in force as of 28 June 2021. The requirements for drawing up recovery plans are deleted from the scope of Ordinance № 7 of BNB of 24 April 2014 on the organisation and management of risks in banks. The Ordinance amending and supplementing Ordinance No. 7 from 2014 entered in force on the day of its promulgation, but also contains other amendments scheduled for 26 and 28 June 2021.
Finally, the scope of the rules on approval of managerial staff of credit institutions is extended, pursuant to the Ordinance amending and supplementing Ordinance No. 20 of 2019 on the issuance of approvals for members of the Management Board (Board of Directors) and the Supervisory Board of a credit institution and requirements related to the performance of their functions. BNB introduces a rule in the current regulatory regime, according to which the existing regime for approval of members of the Management Board/ Board of Directors and the Supervisory Board of a credit institution applies to both a financial holding company and a mixed financial holding company. The same applies to the granting of approvals for members of their management and control bodies or persons managing the activity. The extension of the scope is not absolute and certain exceptions apply.
Alternatively, persons seeking approval to serve on a bank's managerial body may be permitted by BNB to hold one additional position as a non-executive member of the Management Board/ Board of Directors, or of a member of the Supervisory Board, provided that this will not lead to non-fulfilment of their main obligations to the bank. Certain annexes must be submitted to the application for a permit. It is envisaged that the possession of a shareholding in related companies is not necessarily assessed as an obstacle to the independent performance of the main functions of the person.