On 12 June 2015, the Bulgarian Counsel of Ministers submitted a draft law on the recovery and resolution of credit institutions and investment firms (the “Draft Law”). If adopted by the Bulgarian Parliament, the Draft Law would implement the provisions of Directive 2014/59/EU, also known as the Bank Recovery and Resolution Directive (“BRRD” or the “Directive”). The deadline for the transposition of the Directive into national law was 31 December 2014. Due to the delay, on 28 May 2015 the European Commission issued a reasoned opinion requesting Bulgaria and 10 other countries to fully transpose the BRRD into their national law.
The new framework is expected to allow recovery or resolution of troubled banks and investment firms in less time compared to standard insolvency proceedings and to provide better allocation of losses between shareholders and creditors, while limiting the losses suffered by the taxpayers. The processes of recovery and resolution of credit institutions and investment firms will be regulated by resolution authorities (the “Resolution Authorities”), who will have substantial powers to affect the business and the rights thereof.
Recovery and resolution plans
As a result of the Draft Law, each credit institution and investment firm should have in place and update at least once per year a recovery plan and a resolution plan.
Recovery plans should be drawn by the institutions but assessed by the respective competent supervisory authority. These plans should contain measures and procedures to be undertaken in order to restore the financial position of a troubled bank or investment intermediary. The recovery plan should cover various scenarios of severe macroeconomic stress and stress specific to individual entities or groups. The European Banking Authority ("EBA") has already published guidelines and a consultation paper on the range of scenarios to be considered.
The recovery plan should also include quantitative and qualitative indicators that would serve to identify the points at which specific recovery actions should be taken.
Unlike the recovery plans, the resolution plans should be prepared by the respective Resolution Authority for each credit institution or investment intermediary, based on specified information provided by the companies. These plans would need to consider the relevant scenarios, including that the event of failure may be due to particular behaviour of the entity or may be the result of broader financial instability or system-wide events.
In case the Resolution Authority comes across any substantive impediments to the resolvability of an institution, it has to notify the bank or investment firm, which should propose measures to address or remove those impediments. If no appropriate measures are proposed, the Resolution Authority may, inter alia, require the institution to:
- revise any intragroup financing agreements or draw up service agreements;
- divest specific assets;
- limit or cease specific existing or proposed activities, business lines or products;
- make changes to its legal or operational structures.
The Draft Law also gives the competent authorities the power to apply simplified recovery and resolution planning obligations to less complex institutions, having regard to the impact that the failure of the institution could have.
The Draft Law would give the competent authorities the power to impose certain measures as early intervention in case of breach or anticipated breach of Regulation (EU) No 575/2013 (also known as the Capital Requirements Regulation) and the relevant Bulgarian regulations. In particular, the competent authority may require the institution to:
- implement one or more of the measures set out in the recovery plan;
- assess the situation and draw up an action programme to overcome those problems;
- convene a shareholder meeting with an agenda set by the authority;
- remove or replace members of the management body;
- draw up a plan for negotiation on restructuring of debt with some or all of its creditors;
- change its business strategy or its legal or operational structures.
In addition, if the above measures are found to be insufficient, the competent authority may appoint a temporary administrator who is intended to run the bank either alongside or instead of its management.
Resolution process and resolution tools
The Draft Law gives the Resolution Authorities the power to write down or convert relevant capital instruments into shares or other instruments of ownership before taking any resolution action, provided that the conditions for resolution are fulfilled and/or the write down or conversion is required to keep the institution viable and/or the institution has requested extraordinary public support.
The resolution process starts when all of the following conditions are met:
(a) the competent authority has determined that the institution is failing or is likely to fail, meaning that:
- it infringes or will infringe the requirements which may result in revocation of its license, including if the incurred losses will deplete its own funds; or
- its assets are or will be less than its liabilities; or
- it is or will be unable to pay its debts or other liabilities as they fall due; or
- extraordinary public financial support is required;
(b) it is unlikely any alternative private sector measures or supervisory action (such as early intervention measures or the write down or conversion of capital instruments) would prevent the failure; and
(c) a resolution action is necessary in the public interest.
The objectives of the resolution process are to preserve the critical functions of the institution, to avoid significant adverse effect on the financial system, and to protect public funds, funds of depositors and funds and assets of clients of the institution. These objectives should be achieved by one or more of the following resolution tools:
- Sale of business – subject to certain conditions, the Resolution Authority may sell the institution or part of its business without shareholder consent;
- Bridge institution – subject to certain conditions, the Resolution authority may transfer shares, assets or liabilities of the institution to a bridge institution, which is wholly owned by the Bulgarian Deposit Insurance Fund (“BDIF”), respectively the Bulgarian Investor Compensation Fund (“BICF”);
- Asset separation - subject to certain conditions, the Resolution authorities may transfer shares, assets or liabilities to an asset management vehicle which is wholly owned by BDIF, respectively the BICF;
- Bail-in (i.e. sharing of losses) – this tool is used to minimise the negative effect on taxpayers by allocating appropriate amount of loss on the shareholders and creditors of the failing institution. The sharing of losses is achieved by writing down, converting to equity or cancelling certain eligible liabilities or rights, which is done in a specific sequence. The Resolution Authority may cancel existing shares, transfer shares to bailed-in creditors or dilute the existing share capital by converting certain capital instruments or eligible liabilities into new shares.
Specific Bulgarian provisions of the Draft Law
Although the BRRD notes that combining the resolution and the supervisory powers in one body should be an exception, the Bulgarian National Bank and the Financial Regulation Commission will act both as competent supervisory authorities and as Resolution Authorities. For this purpose, independent recovery and resolution divisions will be created within the two regulators. In line with the discretion given under the Directive, the Draft Law limits the liability of the Resolution Authorities, the competent authorities and their respective staff, the temporary administrator, the bridge institution and the asset management vehicle and their respective management body or senior management for their acts or omissions in the course of discharge of their duties.
The Draft Law provides for the establishment of a Bank Resolution Fund to be administered by the BDIF and an Investment Firm Resolution Fund to be administered by the BICF. These funds will be used for the financing of the process of resolution of an institution. According to the Draft Law, by 31 December 2024, the Bank Resolution Fund should have accumulated funds equal to 2% of the guaranteed deposits of all Bulgarian licensed banks (which exceeds the target level of 1% set by the Directive), whereas the Investment Firm Resolution Fund should accumulate funds equal to 1% of the eligible amount of compensation claims of clients of the investment firms. Credit institutions and investment firms would have to make contributions to the newly established funds determined on the basis of that institution's liabilities and its risk profile.
The transitional provisions of the Draft Law impose on the Bulgarian National Bank and on the Financial Supervision Commission to carry out asset quality review of the banking system, respectively of the assets and balances of the pension funds and insurance companies. These reviews should be completed within 12 months following the entry in force of the Draft Law. Certain amendments to the Law on Credit Institutions, the Law on Markets in Financial Instruments, the Law on Bank Insolvency, the Law on the Bulgarian National Bank and the Law on the Financial Supervision Commission are proposed with the transitional provisions, mainly for consistency purposes.
The Draft Law remains to be discussed in the Bulgarian Parliament, and further changes are possible. It is expected, however, that the legislative act will be finalised and adopted in the near term in order to avoid any further actions by the European Commission.