The Bulgarian National Bank (BNB) recently adopted Regulation 7 on the Large Exposures of Banks (Official Gazette 102, November 11 1999).
The regulation aims at limiting the risk that a bank may assume as a result of credit exposure. It seeks to achieve harmonization with EU law, particularly with Directives 92/121/EEC and 89/647/EEC.
Exposure is established in proportion to a bank's own capital. Any exposure equal to or exceeding 10% of the bank's own capital must first be approved by the board of directors. Where the exposure level exceeds 15%, the board's decision should be adopted unanimously. The regulation also applies if the large exposure occurs as a result of clients' restructuring (eg, a merger) or a decrease in the bank's own capital.
When loans are granted on a syndicated basis or when banks are joint underwriters of a security, the credit exposure is established by referring to each bank's share in the credit facility or joint underwriting.
Banks must prepare and adhere to their own administrative, accounting and supervisory rules with regard to the establishment and registration of large exposures. The banks' rules on credit activity should determine cases of exposure-related risks and restrict exposure concentrations in certain economic sectors or geographical regions. Copies of the rules should be submitted to the BNB.
The regulation limits exposure in connection with mutual guarantees, inter-company crediting, or mutual indebtedness that may not be promptly recovered. In the event of a single exposure, the limit is set at 25% of the bank's own capital. The total amount of exposure may not exceed eight times the bank's own capital. These restrictions do not apply to certain categories of exposure, including the following:
- exposure secured by pledge of accounts receivable;
- exposure secured by an escrow account of accounts receivable with the bank; and
- exposure secured by government securities or guaranteed by the BNB.
With respect to branches of foreign banks, exposure is determined in proportion to the foreign bank's own capital.
Exposure of Bulgarian subsidiaries of foreign banks is determined in proportion to the foreign bank's aggregate own capital. However, this only applies if one of the following conditions are met:
- The foreign bank is licensed in a jurisdiction with a high credit rating;
- The foreign bank has an issued unconditional and perpetual guarantee securing all the obligations of the subsidiary;
- The foreign bank is subject to consolidated supervision in the jurisdiction where it is licensed; or
- There is a bilateral treaty for exchange of information concluded between the bank supervision authorities of both countries.
For more information on this topic please contact Nikolai Gouginski at Djingov, Gouginski, Kyutchukov & Velichkov by telephone (+359 2 980 1358) or by fax (+359 2 980 3586) or by e-mail ([email protected]).
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