The new Recovery and Resolution of Credit Institutions and Investment Intermediaries Act (the “Act”) was published in the State Gazette on 14 August 2015, with most provisions entering into force on the same date (certain provisions will become effective in 2017 and 2025). The Act implements EU Bank Recovery and Resolution Directive 2014/59/EU (the “Directive”).
The Act will seriously impact credit institutions and investment intermediaries. The new requirements to produce a recovery plan and to cooperate with the competent resolution authority on a resolution plan will consume time and resources, including senior level staff in each institution. The Act will also affect creditors and other counterparties of an institution who, in a resolution scenario, may have their debt reduced or converted to equity (if unsecured) or be subject to a stay or other restrictions on enforcement of security or exercising rights to terminate contracts with the institution.
Of note, the Act:
- Designates the Bulgarian National Bank (the “BNB”) as the resolution authority for banks and the Financial Supervision Commission (the “FSC”) as the resolution authority for investment intermediaries.
- Requires all institutions to produce a recovery plan (on a group or individual basis) and update it annually and as needed. Recovery plans must outline the recovery measures the institution will take to restore its financial condition in the event of significant financial difficulties. Recovery plans are subject to review by the resolution authority.
- Requires the resolution authority to prepare individual resolution plans for each institution. Resolution plans are intended to kick in when recovery is no longer possible. They must set out the resolution actions the resolution authority may take and identify any material impediments to resolution and possible actions to remove them.
- Empowers the resolution authorities to intervene early in the operations of an institution and impose measures whenever an institution infringes or is imminently likely to infringe, due to a rapidly deteriorating financial condition, the requirements of EU Regulation 575/2013 on prudential requirements for credit institutions and investment firms or applicable Bulgarian legislation.
- Sets out four resolution tools for the resolution authority: (i) sale of the business, (ii) bridge institution, (iii) asset separation and (iv) bail-in. Two additional financial stabilisation tools are available to provide financial support to a bank under resolution due to a systematic crisis: (i) public equity support and (ii) temporary public ownership.
- Creates the legislative basis to establish a Banks Resolution Fund (the “BRF”) and an Investment Intermediaries Resolution Fund (the “IFRF”) which can be used to finance the implementation of resolution tools and the activities of the resolution authorities.
- The annual individual contribution to the BRF/IFRF for each institution will be determined by the BNB/FSC respectively by 1 May each year. The BNB will set out the annual contributions for 2015 by 14 November 2015. Investment intermediaries are not required to pay annual contributions before 31 March 2017.
- Extraordinary contributions may also be required under the Act.
- The target level of the BRF is 2% of the amount of guaranteed deposits in the banks which is twice as high as the target level set out by the Directive. The target level of the funds in the IFRF is 1% of the amount of the cash subject to compensation of clients of the investment intermediaries.