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The second wave of Covid-19 could carry out the scenario of worsening economic crisis and thus deterioration of banks’ loan portfolios, writes BNB Governor Dimitar Radev.
It is adamant that banks must prepare to operate under the conditions of capital buffers and a clear plan for their recovery after the crisis.
Radev highlights the good position in which the Bulgarian banking sector has entered the crisis, as well as the appropriate supervisory measures that will ensure the passage through this difficult period.
The governor also touches on the issue of the possible new loan moratorium, which will provide an opportunity for a total of 9 months, that is. the new term and those already in force of the first moratorium, to have a partial or total temporary suspension of the loan service.
There may be an increase in delinquent loans, warns the governor.
Here is the full text of his post:
Dear colleagues,
We celebrate Bankers’ Day in a year that has presented us with unprecedented challenges: first, the consequences of the COVID-19 pandemic; and secondly, with the completion of the strategic project for the inclusion of the Bulgarian lev in the European Monetary Mechanism (ERM II), simultaneously with the country’s accession to the European Banking Union, including the Single Supervisory Mechanism and the Single Mechanism for Restructuring.
From the point of view of the banking sector, the main questions are twofold: how have we done it so far and what awaits us?
Our objective, defined at the beginning of the crisis, was for the banking sector to generate solutions, not problems. As a result of what has been done in recent years, we have positioned ourselves well to achieve this goal.
The banking sector “entered” the crisis with more than 19% capital adequacy of core Tier 1 capital and with a liquidity ratio greater than 260%, or many times above regulatory requirements.
Despite the good initial position, we were aware that, as a result of the sharp deterioration of the environment in which banks operate, further measures are needed to further strengthen their capital and liquidity position.
To do this in March of this year. We adopt such measures with a total effect of more than 8% of GDP. These included: capitalization of all the benefits of the sector; significant reduction in higher risk exposures abroad and cancellation of the two increases foreseen in the countercyclical capital buffer.
The desired effect of these new measures was in two main areas: maintaining lending activity and relieving borrowers from banks, businesses, and households, by passing an industry-proposed private moratorium on loan payments. The results confirm that this effect has been achieved so far.
Towards the end of October this year Not only are we not witnessing a stagnation in loans, but loans to businesses and households are increasing annually by 2.5 and 7.3 percent, respectively.
At the same time, approved requests for deferral of payments under the private moratorium reached about 109 thousand at their peak in August this year. with a gross book value of deferred loans of more than BGN 9 billion, which is a significant financial relief for affected businesses and households.
COVID-19 mitigation efforts for banks and their customers have involved an important part of our efforts. However, we managed to create an organization and make an important contribution to finalize the strategic task of including the lev in ERM II and the country’s accession to the Single Supervisory Mechanism by establishing close cooperation of the Bulgarian National Bank with the Bank Central European.
As a consequence of joining the Unified Supervisory Mechanism, the country also joined the Unified Restructuring Mechanism. Since October 1, 2020, the European Central Bank has been directly supervising five major Bulgarian credit institutions, and the Single Restructuring Board has assumed the role of restructuring body for these institutions and for all cross-border groups.
As a result of good preparation, the transition to the new supervisory regime went smoothly, without any disruption for the banks and their clients.
Therefore, the answer to the first question is that so far we are successfully dealing with the implementation of both the extraordinary consequences of the pandemic and the strategic tasks facing the banking sector.
Bankers’ Day is a good occasion to report on the contribution and give credit to all colleagues for the fact that we still have strong support for businesses, households and the economy as a whole from the banking sector, while we maintain the general financial stability in the country.
The most important question facing us right now is what does the future hold? This question does not have an easy answer due to the development of the crisis, which makes it much more uncertain in terms of parameters compared to previous historical periods of economic and financial difficulties.
The second wave of intensive proliferation of COVID-19 and the new phase of restrictive measures put a number of sectors to the test again. The condition of banks acting as financial intermediaries is crucial for the entire economy.
Hence the enormous responsibility of the National Bank of Bulgaria in the implementation of our legally defined mandate and especially for the purpose of maintaining the stability of the banking system.
This requires us to maintain the traditional focus on high capital and liquidity requirements at banks. These requirements are not an end in themselves, but stem from the need for banks to have reserves.
On the one hand, reserves allow the assumption of costs and losses derived from the deterioration of the quality of assets in an unfavorable macroeconomic environment. On the other hand, they maintain the creditworthiness of the banks.
Therefore, it is logical to expect that we will continue to implement the measures of the anti-crisis package adopted in March this year. Furthermore, we are currently analyzing the situation and, as macroprudential supervisor, taking into account the possible scenario of worsening of the economic crisis and associated with this significant deterioration in loan portfolios.
In this scenario, banks may need to temporarily operate below the combined capital buffer requirement and must be prepared to develop and implement recovery plans.
The prospect of a continued negative evolution of the economy is reason to expect the materialization of credit risk and the deterioration of the quality of assets in the balance sheets of banks. There is a high probability of reversing the downward trend in the size and proportion of NPLs observed in recent years.
The expiration of the moratorium on deferral of bank loans may also be followed by an increase in bad exposures.
This moratorium was made possible on the basis of a pan-European framework established by the European Banking Authority (EBA) through its Guidelines on Legislative and Private Moratoriums on Credit Payments in relation to COVID-19.
The implementation of this framework has allowed banks flexibility and alleviated tens of thousands of their clients, individuals and legal entities that were experiencing difficulties during the crisis.
In September this year, the EBA decided to end the moratorium on bank loan payments, but the resurgence of the pandemic and the new restrictive measures led to an updated analysis and the extension of the moratorium on restrictive conditions.
The Bulgarian National Bank, together with the other national supervisory authorities, actively participated in the EBA discussions on this issue.
We are ready to quickly implement the necessary decisions in Bulgaria, subject to the conditions approved by the EBA: extension until March 31, 2021 of the deadline for the submission of requests for deferral of liabilities and their approval by banks, with a maximum allowed deferment of 9 months, inclusive and the period of deferral already approved on the respective exhibition.
Outside the scope of the moratorium, banks have the opportunity to individually renegotiate loans to their clients, an opportunity they currently use. In these cases, the current general prudential framework requires banks to reclassify exposures as restructured or defaulted in a timely and appropriate manner.
Banks’ actions in this regard will also involve the supervisory process, as important input into the supervisory review and evaluations of the National Bank of Bulgaria.
This describes the short-term framework for action.
The pillars of this framework are: maintaining previously adopted anti-crisis measures for as long as necessary, including with respect to dividends, risk exposures and countercyclical capital buffer; maintain high capital and liquidity requirements, and we are ready to respond to a scenario in which banks may need to temporarily operate under the combined capital buffer requirement; and implementation of the recently adopted EBA framework for a moratorium on credit payments.
We are ready to activate additional measures if the development of the situation requires it.
It is very important in the difficult environment we find ourselves in, and strongly committed to anti-crisis measures, not to lose our strategic focus, and it is aimed at continuing and successfully completing the project that we started a few years ago to enter the eurozone.
The Bulgarian National Bank has serious responsibilities in this process and has not suspended work on its implementation. To date, the BNB Governing Council has adopted concepts for work in the main areas of activity; a package of changes in internal rules and regulations; as well as specific measures for the provision of resources and the improvement of capacity.
Our full and full participation in the institutions of the Banking Union plays an important role in the consolidation of the integration process. Obviously, this is an issue that will be on the agenda for the next few years and that we will have many occasions to discuss.
Meanwhile, maintaining the banking sector’s capacity for business continuity will be our joint contribution to supporting each individual banking customer and the country’s economy.
As in the most difficult phases of the crisis, the banking sector should be able to assume the supporting role as a source of credit resources in the subsequent period of recovery and growth.
Despite the current crisis outlook, that period may occur relatively soon. The challenges arising from COVID-19 appeared unexpectedly and the negative results in the economy manifested quickly, but the overcoming of the crisis can occur in the foreseeable future, if solutions are found to effectively stop the pandemic.
Let’s celebrate Bankers’ Day with such a touch of hope and optimism in the difficult and unprecedented 2020!
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