Download Speech by Mr. Ivan Iskrov, Governor of the BNB, Delivered before

Speech by Mr. Ivan Iskrov, Governor of the BNB, Delivered before the
Association of Commercial Banks' Annual Meeting, 3 December 2003
I have often met and had discussions with the banking community, both as a banker, and as the
Chairman of the Budget and Finance Committee in the XXXIX National Assembly. Today, for the first
time, I have the honour and the pleasure, too, to address the banking community as the Governor of the
Bulgarian National Bank. In this first speech of mine before the Bulgarian bankers' community, I will
briefly outline both the medium-term policy of the BNB (i.e. the strategic issues) and the current issues
relating to the operation of the central bank, which may be of interest to the society, and the banking
community in particular.
Strategic Issues
The issue what policy the society as a whole, and the banking community in particular, can expect
from the BNB to pursue in a short-term perspective comes naturally. There is the unconditional
commitment that the policy pursued by the Central Bank should be within the currency board regime
set in the BNB Law. The medium-term policy as regards Bulgaria's accession to the EU, and the EMU,
will be one of the priorities in the operation of the Central Bank. At the same time, however, the BNB
will not involve in any preliminary and speculative discussions on the EMU membership of the
country, and of the ESCB membership of the central bank. In the process of accession of the
country to the Economic and Monetary Union, and of the central bank to the European System of
Central Banks, the BNB clearly recognizes the interests of the Bulgarian society, and will consistently
protect these interests.
It is important that the society understands the central bank's policy and activities not only from the
perspective of their legitimacy, in view of the institution's high degree of independence, but also from
the perspective of this policy's efficiency. The more understandable the principles underlying this
central bank policy are, the more effective this policy would be. It is no coincidence that since the
beginning of the '90-ies central banking has been more and more discussed as the policy of
management of economic agents' and financial markets' expectations. Starting from this philosophy as
a basis, the BNB will pursue a consistent and transparent policy. In formulating and
implementing a set policy, the BNB will clearly and unequivocally explain the rationale behind it,
and the principles and expected effects of this policy. I can give as an example the issue of the
possible revocation of the 0.5 per cent deviation (as provided for in the BNB Law, Article 30) from the
officially fixed exchange rate of the Lev to the Euro, provided for in Article 29 of the BNB Law. Any
decision on this issue would be made after an in-depth analysis by the central bank of any potential
effects ensuing from this step, and after considering the stance taken by the financial community.
The communication policy of the Central Bank will be further developed so that it is understandable
for the largest possible part of the society. Special attention will be paid to the communications
between the BNB and the banking community as a whole. The central bank will implement a
uniform policy towards commercial banks without any discriminatory approach in terms of
equity size and ownership. As you are well aware, the efficient communication requires an effort by
all parties involved in this process. For the Central Bank to be able to adequately take into account the
commercial banks' interests in formulating its policy, the Bulgarian Association of Commercial
Banks (BACB) should be able to generate and present to the BNB a uniform and consistent
position articulating the preferences of the banking community.
Improvement of the co-ordination between the Government's fiscal policy and the management of its
liquidity, and the BNB's policy is another important priority, which should be expected in 2004 and
will be further developed in the medium-term. Undoubtedly, better coordination between the BNB and
the Ministry of Finance will improve liquidity management in the system and will reduce interest rate
fluctuations at the inter-bank market. As I have already noted before the XXXIX National Assembly at
the time of my election as Governor, the BNB will be a constructive and well-meaning opponent of
the government administration and a reliable financial agent of the Government.
The experience gained through the development and the implementation (in the middle of this year)
of the Real Time Gross Settlement System - RINGS indicates that the lower level of development of
our country, and particularly of our financial system has two dimensions - the problems caused by this
lagging behind, and the opportunities for further development it provides. The dimension we have to
focus our efforts on is the development potential offered by this peculiarity of our country. In the
decision-making on the technological overhaul of the financial sector and in adopting the policies for
its development, we can and should make decisions conforming to the best practices in these areas, thus
considerably increasing the domestic financial sector's competitiveness. The BNB should not and will
not retreat from its achievements in the recent ten years in terms of banking infrastructure by
opting for more avant-garde solutions, even if these are proposed by first-class international
institutions. In its policy in the process of accession to the ESCB, the Central Bank will take into
consideration first and foremost the interests of the Bulgarian financial system and its clients.
The operation of the RTGS system enhanced the effectiveness and reduced the risk within the
national payment system. In the short run, the BNB is to restructure the ownership of the system
operator for bank card payments - BORICA. The BNB's policy in this area will be guided by the
following principles:
1. The development of the company and of the bank card business should be performed taking into
account the interests of all participants in this banking services segment, and
2. The BNB will seek to have no direct involvement in the bank card operation, focusing on the
regulations providing for the payment system security and effectiveness.
In a medium-term perspective, the level of and the principles governing setting of the minimum
reserve requirements will be getting closer to the Euro area ones. Presently, however, the current
dynamics of commercial bank lending does not allow the BNB to contemplate any reduction in the
minimum required reserves in the short run.
In the recent years, the BNB invested considerable resources in the development and improvement of
banking supervision, as a main central bank function. Today, I can strongly assure you that the BNB's
supervision policy is on a par with the best practices in the world. In the future, we will seek greater
flexibility in the implementation of the supervision policy, paying special attention to the specifics of
each bank. In addition to the formal provisions set forth in the BNB regulations, the Central Bank will
increasingly resort to discussions with the commercial banks' management and to on-site inspections as
supervision policy instruments.
Current Issues
In spite of the uncertain development of global economy, our national economy marks stable and
comparatively high rates of economic growth while sustaining low inflation rates. This is
complemented by increasing employment and cutting down unemployment. The economic policy, and
in particular the prudent fiscal policy, pursued maintains the macroeconomic stability and ensures a
sustainable economic growth.
The sale of DSK Bank, successfully completed by the BCC, marks the completion of bank
privatization and the restructuring of the banking system. Thus, in practice 98% of the assets in the
banking sector are held by private entities, 80% of which are dominated by foreign capital. The
financial sector is one of the most dynamically developing sectors of the national economy. This
provides access of an increasing number of households to the credit market. A growing number of
investment projects are financed by the banking system, and a growing number of households are able
to purchase housing and consumer goods through commercial bank financing.
If the Governor of the Central Bank had to address the banking community three or four years ago, a
great part of his speech would have dealt with the explanation of the low rates of growth of lending to
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companies and households, and the factors determining this development. Now, four years later, as the
result of the successfully implemented banking system restructuring, the efforts and funds invested by
banks in the improvement of their credit risk evaluation models, and the continuously improved
banking supervision exercised by the BNB, the central bank Governor is expected to comment on the
sustainability of the relatively high growth rates of lending to the private sector, and its potential
effects on the national economy.
It is very difficult, if not impossible, to determine the optimum rate of growth of lending to the
private sector, Multiple factors, great part of which specific for the particular economy, determine the
optimum level of credit expansion. The experience of our own and of other countries indicates that
maybe lending to the private sector is increasing at rates exceeding the long-term sustainable rate
of growth.
The Central Bank acknowledges that the credit policy pursued by commercial banks is rational from
the perspective of each individual bank. At the same time, we know that the accumulation of micro
effects may result in macro effects, whose dynamics may have ambiguous impacts on the national
economy. As the Central Bank is responsible for both the stability of individual banking institutions
(through its supervision policy) and the overall economic and financial stability (through maintaining
the fixed exchange rate) the BNB also analyses the effect of commercial banks' lending policy on the
main macroeconomic indicators - inflation, GDP growth rate, fiscal policy, and balance of payments.
The increasingly better performance of the country's financial system facilitates economic growth
through the more efficient distribution of savings in the economy and the increased potential for
attracting foreign capital. At the same time, a relatively large part of the rapidly increasing loans to
households is channelled into a demand for import consumer goods, which impacts negatively the
country's trade balance and current account. The present level of current account deficit has no
destabilizing effect. The Central Bank expects the growing trend of current account deficit increase will
turn around in the next year. Certainly, the dynamics of this variable is impacted by many factors, most
of which outside the control of the Central Bank and the Government. The BNB, by means of its
instruments and the Government through its fiscal policy strive to minimise the risk of adverse
developments in the balance of payments dynamics and the international reserves of the country.
The good level of liquidity and capital adequacy (23% capital adequacy) of the banking system,
and the high quality of loan portfolios (92% standard loans) of commercial banks give grounds to
believe that their lending policy is based on sound grounds and principles. Nevertheless, taking
into account the fact that the indicators of portfolio quality deterioration manifest with a certain lag in
time, the Central Bank adopted a policy aimed at bringing such a delay to the minimum. As from the
second quarter of 2004, by amending BNB Regulation 9 the timing for reclassification of a risk
exposure as a loss in cases of overdue payment on principal and interest will be reduced from 120 to 90
days. This change will also result in redefining the groups of risk exposures as laid down in BNB
Regulation 9. Furthermore, with a view to improving the ability of commercial banks to assess their
credit risk, the BNB will introduce amendments to BNB Regulation 22 by removing the BGN 10
thousand threshold for registration of loans in the banks' Central Credit Register. In this way, all loans
extended by commercial banks will be registered in this Register. Having in mind the existing
dynamics of consumer lending, I believe that this measure will greatly improve the banks' informed
decision making with regard to this particular segment of loans.
Sustaining the good quality of the commercial banks' portfolios requires that the expanded lending
activity be supported by an enhanced capacity of banks to manage their credit risk and other major
risks, as well as more robust internal controls of wider coverage.
The review of the medium-term challenges faced by the BNB and the discussion on current issues
could be further elaborated. I will stop here, as I would not like to see this meeting of the banking
community, which is dedicated to the forthcoming bankers' day, entirely dominated by discussions of
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business matters. I believe that the good practice of the extended off-site meetings held in the past by
the Association of Commercial Banks could be resumed, so that the banking community could have
more in-depth formal and informal discussions touching on broader range of issues.
Before I finish, allow me to wish all my colleagues much success in the coming 2004. I am sure that
the trend of increasing profits in the banking sector will continue in the next year while preserving the
portfolio quality and the stable level of capital adequacy.
I wish you much heath and success.
Thank you for your attention.
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