Download Speech by Tsvetan Manchev, BNB Deputy Governor, Member of the

Speech by Tsvetan Manchev, BNB Deputy Governor, Member of the
Governing Council of the Bulgarian Macroeconomic Association and
Professor of European Economic and Monetary Integration at the
‘Financial Sector in the EU Accession Process’, Conference within the
Second International Financial Exhibition ‘Banks, Investments, Money’,
Plovdiv, February 9-11 2005
Dear Minister Velchev,
Your Excellency,
Ladies and Gentlemen,
First of all, allow me to express my thanks to the organizers of this Conference on the financial
sector issues in the EU accession process for the opportunity to share my personal views and the
position of the institution I represent on the important and topical issue of the role of financial markets
regulation and supervision for the financial stability and our accession to the European Economic and
Monetary Union.
To be more precise, my colleagues and I as members of the BNB Governing Council have repeatedly
expressed the BNB position on the issues of Bulgaria’s membership in the EMU. This is, maybe, one
of the subjects on which the BNB management has always had a most clear and explicit position. It
confirms the European orientation of the Bank as an issuing institution and main financial sector
regulator in this country, and can be best seen in a synthesized, and yet comprehensive, form in the
Strategy for the BNB Development between 2004 and 2009 and in the Agreement between the Council
of Ministers of the Republic of Bulgaria and the Bulgarian National Bank on the Adoption of the Euro
in the Republic of Bulgaria. Although I am sure most of the audience is aware of the main message,
contained in the two documents just mentioned, I will allow myself to reiterate on what is most
important in the BNB’s position on our country’s accession to the Economic and Monetary Union:

The BNB confirms its will to act within the existing currency board arrangement to the time of
full-fledged membership in the European System of Central Banks (ESCB) and the euro area;

The currency board in Bulgaria is compatible with our country’s membership in ERM II, which
is a kind of transitional phase before our full-fledged EMU membership;

BNB’s position is that Bulgaria should join ERM II immediately after its EU accession, with an
unilateral commitment to maintain the currency board arrangement until its euro area membership
preserving the exchange rate of BGN 1.95583 to an euro;

The BNB will comply with the framework set forth by the European Commission and ECB,
which excluded the possibility of unilateral euroization by any acceding country.
The BNB’s position on joining the euro area enjoys the full support of the government and the
National Assembly. In addition to the above-mentioned agreement between the Bank and the
government, this is also confirmed by the Law on the amendments to the BNB Law, recently adopted
unanimously.
This act comes in fulfillment of this country’s commitments on negotiation chapter 11 “Economic
and Monetary Union” in relation to the independence of the Bulgarian National Bank (in all its four
aspects – institutional, functional, financial, and personal) and the proscription against direct financing
of the government by the central bank.
To comply with the provision prohibiting the BNB to provide direct financing to the government, it
was agreed that the presently applied scheme for the loans extended by the International Monetary
Fund (Art.. 45, paras. 3 and 4), which allows for onlending by the BNB to the government of loans
against purchases of SDR from the Fund, will be applicable until Bulgaria joins the European Union.
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The main goal of the Bank was redefined to fully meet the provisions of the Treaty establishing the
European Community and the Statute of the European System of Central Banks and the European
Central Bank. After the effectiveness of the amendments to the BNB Law, Art. 2 defines the main goal
of the Bulgarian National Bank as “maintaining the price stability by ensuring the stability of the
national currency and pursuing a monetary policy in accord with the provisions of this law”. This new
definition of the main goal is not in contradiction with maintaining the currency board regime until
Bulgaria joins the euro area.
Through the Law on the Amendments to the BNB Law, some amendments were introduced, which
though not directly ensuing from the negotiations on Chapter 11 “Economic and Monetary Union”
would contribute to the future integration of the BNB into the European System of Central Banks and
the Eurosystem. It is a question of the provisions regulating the powers of the central bank for
preventing currency counterfeiting (Art. 27 of the BNB Law). Designating the BNB as the competent
authority for verification and expert authentication of Bulgarian and foreign currency causing any
suspicions that they may be counterfeit or forged has two significant consequences:

Signing, in January 2005, of a Cooperation Agreement between the BNB and the European
Central Bank in the area of preventing counterfeiting of euro;

Speeding up the process of detailing of the Currency Circulation Strategy for the period 2005 –
2009 adopted by the BNB.
As the above strategy is of particular interest for the representatives of commercial banks attending
this event, I will draw a little the curtain and acquaint you with the process of preparation of such
documents, by describing briefly the main goals and priorities of the BNB in adopting it, as follows:

Achieving high quality of currency circulation and maintaining the credibility of the Lev and
the Euro as legal tender;

Reliable, efficient, and flexible system for the domestic issuance function, allowing for easy
integration into the ECB system and the euro area in 2009 – 2010;

Developing and maintaining an adequate currency circulation regulation and control system.
I would like to underline that the fulfilment of the above objectives and priorities is associated with
BNB's gradual departure from cash activities, such as distribution, cash collection and processing of
banknotes and coins, which are untypical for a modern European issuing institution, and with its
establishment as a currency regulator.
That would involve more responsibilities on part of the commercial banks related to the cash
activities on the territory of the country. Compliance with the ECB requirements for the quality of
currency circulation and the quality and security of the overall issue and cash process could only be
achieved if they become a common goal of the banking community. I am confident that the bank
managers, who are here today, do not regard this important scheme, which is proposed in the strategy,
as a superfluous idea of the BNB that would lead to additional costs for their institutions, but as
necessary efforts for and investments in the successful integration of the Bulgarian banking system into
the European one.
I allowed myself to shed light on BNB's future actions in the area of regulating currency circulation
because I know that at forums such as this Conference, the representatives of the Governing Council of
BNB, as an authority largely responsible for setting the rules of the game in the banking sector of the
economy, are expected to suggest as topics of discussion their intentions regarding the future policy.
Besides, in this way I make a transition to the next pivotal point in my statement, namely the policy
BNB pursues regarding the banking sector. Which are the major elements of the Bank's policy as a
regulator of the currently domineering portion of the financial sector?
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First, the BNB will continue to support enhanced financial mediation while trying to interfere in the
processes of deposit multiplication and credit expansion only where it finds a threat to the stability of
the financial system.
Second, in its policy as a financial regulator, the Bank will make sure that the banking community is
informed in advance of the actions applied. A telling example in this respect are the meetings held in
January with the management bodies of the largest commercial banks, which account for 70% of the
credit portfolios of the banking system in the country. Through these meetings the BNB got an idea
about the level of adequacy of the risk management systems of the leaders in bank lending and had a
feedback on the possible attitude of the banks to some of the actions applied for reducing credit growth.
Third, the BNB gives a positive assessment to the increased competition and the consolidation
already commenced in the banking sector, which will lead to more efficient and deeper financial
market. It will encourage a "healthy" competition in the sector.
In conclusion, I would like to resort to the "trite" reminder of the theoretical formulation, which has
been practice-proven many a time, that under a currency board arrangement the stability of the
financial sector depends not only on the behaviour of the central bank as a major financial regulator,
but even more on the overall macroeconomic policy of the government, of which the fiscal policy
weighs highest. The financial stability of the country is a function of the fiscal stability.
The BNB is hopeful of a sound fiscal policy that would condition a normal functioning of the
currency board and would not trigger increased inflationary expectations.
Thank you for your attention!
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