Introduction
Supervision of Financial Holding Companies
Supervision of Bank Groups
Consolidated Reports
Consolidation Methods
Exceptions
Introduction
The secondary legislation which implemented the Law on Banks (Official Gazette 52, 1997) has recently been supplemented by the new Regulation 12 on Supervision on a Consolidated Basis (Official Gazette 62, 2000). The regulation sets out the terms and conditions for the consolidated supervision of banks, bank groups and financial holding companies incorporated and operating under Bulgarian banking legislation, based on financial and accounting reports and the supervising requirements on solvency.
Supervision of Financial Holding Companies
The supervision of financial holding companies covers holding and subsidiary bank companies on the basis of the company's consolidated accounting report prepared in compliance with the National Accounting Standards. (Bulgarian National Accounting Standards are consistent with the International Accounting Standards (IAS), but it is anticipated that the IAS will be introduced as part of the national accounting legislation in the near future.)
Supervision of Bank Groups
The supervision of bank groups, including banking and other financial institutions, is carried out on the basis of (i) consolidated financial and accounting reports, and (ii) the supervisory requirements on solvency. Any indirect equity participation of a parent bank held through its subsidiaries in other banks or financial institutions is also covered by the consolidated supervision. If a parent bank is a part of another bank group, the supervision shall apply to that other bank group as well.
The supervision regulations comprise of requirements regarding the capital base (own capital) and the capital base/risk-weighed assets ratio, as well as the large exposures of the group. The consolidated capital base of the bank group equals the sum of the capital (primary and supplementary capital reserves) of each company in the bank group, adjusted in a manner determined by the Central Bank. The risk-weighed balance-sheet and off-balance sheet items of the bank group equals the sum of the risk-weighed balance-sheet and off-balance sheet items of the companies included in the bank group after deduction of the inter-group items. The capital adequacy of the group is to be determined on a consolidated basis, taking into consideration the capital base/risk-weighed assets ratio (determined in line with Regulation 8 on the Capital Adequacy of Banks). The calculation of an exposure on a consolidated basis will include the amount of exposures of the parent bank and/or the exposures of each company in the group towards a particular client or related parties. The restrictions whereby an exposure cannot exceed 25% of the capital base and the total of all large exposures cannot exceed eight times the capital base apply in respect of the consolidated capital base of the group.
Consolidated Reports
Regulation 12 obliges parent banks to prepare and submit to the Central Bank the following reports by March 31 each year: (i) a consolidated financial and accounting report of the group, and (ii) annual and six-month supervisory reports, including reports on the group's capital adequacy and large exposures.
The reports of the consolidated group, and the reports of the parent bank and its subsidiary bank companies, must be audited by the same auditing company.
Consolidation Methods
A parent bank must comply with the following terms and conditions of consolidation when drafting consolidated reports:
- The full consolidation method applies where the direct or indirect participation of the parent bank in the capital of another bank or non-banking financial institution exceeds 50% and is controlled by the parent company;
- The net capital value method applies where the direct or indirect participation of the parent bank in the capital of another bank and/or non-banking financial institution is between 25 and 50%; and
- The pro rata consolidation method applies where a bank and/or non-banking financial institution is controlled jointly by two or more banks or non-banking financial institutions as partners.
Exceptions
The exception to the consolidated supervision requirements apply to specific instances, including instances where:
- the parent bank has acquired shares and stock with commercial interest or against repayment of loans during the period covered by the report, regardless of the size of participation;
- a company in which the parent company participates is non-financial, subject to a discretionary right of the Central Bank to require additional information on such non-financial company;
- the assets in the subsidiary in which the bank participates do not exceed 1% of the parent bank's assets; or
- the subsidiary is registered in another jurisdiction where it is subject to supervision regulations.
Along with the regular supervision, a bank is subject to consolidated supervision if its direct or indirect equity participation in non-financial companies exceeds 20%. Such a bank must draft a consolidated financial and accounting report on its participation in non-financial companies in accordance with the net capital value method, unless the bank has acquired shares or stock with a commercial interest or against repayment of loans, as outlined in the first point above.
For further 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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