Securities Market

Corporate Issues
Internal Rules and Record-Keeping
Capital Adequacy Requirements
Large Exposures
Loan Restrictions
Risk Exposures
Restrictions on Investments
Deposit Guarantee System


The Bulgarian banking regulatory framework has developed intensively in recent years. This has largely resulted from the harmonization of Bulgarian banking legislation with European law standards. The recent Law on Banks (Official Gazette #52 of 1997), Bulgaria's primary statutory source of banking law, will eventually be supplemented by an extensive body of secondary legislation. These regulations are being drafted by the Bulgarian banking regulatory authority, the Bulgarian National Bank (BNB).


Bulgarian banking law is based on the principle of universal banking. Therefore, banks may carry out a broad range of banking activities on the basis of one licence, which is issued by the BNB. These activities include:

  • retail banking;

  • deposit taking; and

  • investment banking.

Foreign banks may operate in Bulgaria through a branch, which must be registered and licensed in Bulgaria in accordance with a specific procedure set forth in the Law on Banks. Branches of a foreign bank are subject to the supervision of both the BNB and the banking regulatory authority of the foreign bank's domestic jurisdiction. Foreign banks may also open representative offices, although they may not perform banking activities through these.

Securities Market

Banks may also participate on the securities market as investment intermediaries, but a separate licence must first be obtained from the BNB. This licence relates to the following activities:

  • the underwriting of securities offerings;

  • securities transactions made on both the bank's behalf and on the behalf of third parties;

  • the management of individual portfolios of securities or money, except for portfolios of investment companies and pension funds; and

  • the safekeeping of securities and money in custody accounts.

Banks that wish to engage in these activities must also be entered in the Register of Investment Intermediaries, which is maintained by the State Securities Committee.

Corporate Issues

Bulgarian banks should be incorporated as joint stock companies. All licences issued by the BNB are subject to the condition that bank's subscribed and fully paid capital is at least Lev10 million. Since the bank's capital has security purposes, the capital base must remain above the threshold of Lev10 million at all times.

Banks may only issue ordinary registered shares. Investment in a bank's equity is subject to specific restrictions. The direct or indirect acquisition of 10% or more of a bank's shares is subject to the issuance of a permit by the BNB. A purchase of shares made without prior approval is null and void. The acquisition of shares on the stock exchange or other organized security market are subject to the subsequent issue of a permit. Until this is issued, the shareholder may not exercise its right to vote on the shares. Shares acquired in violation of the permit requirements are subject to re-transfer.

Any subscription of the bank's equity or increase of the bank's capital is also subject to specific restrictions. Shares may be subscribed only against cash payment. In-kind contributions to a bank's capital are prohibited. Subscribed capital should be fully paid up within six months of the bank's registration. Subscribed shares which are not fully paid up are subject to cancellation. The bank's capital should be decreased accordingly.

Internal Rules and Record-Keeping

The Law on Banks, as supplemented by BNB regulations, requires that banks adopt the following internal acts:

  • Rules on the Credit Activity of the Bank;

  • Rules on the Organization and Activity of the Internal Control Department;

  • Rules on the Order for Disclosure of Conflicts of Interests and for Safeguarding of Confidentiality;

  • Rules for Business Activity in Respect of Granting of Credits;

  • Rules on the Management of the Liquidity of Banks;

  • Rules on the Management of Foreign Currency Positions;

  • Conditions for Deposits Taking; and

  • Rules For Control and Prevention of Money Laundering.

Banks must also create and maintain an information system, which contains:

  • all internal rules and regulations;

  • corporate documents;

  • accounting information;

  • information on the clients of the bank and data on transactions concluded with these clients or on their behalf;

  • information on the credit and debit positions of the clients; and

  • any other information that is required by the law or by BNB regulations.

Banks are also obliged to create and maintain credit files for loans. These files should contain the following information:

  • data on the client;

  • the grounds, conditions and amount of the credit and the security;

  • the decision of the competent organ for its issuance; and

  • all other data that is related to the conclusion and performance of the loan agreement.

Capital Adequacy Requirements

In accordance with its undertakings as a member of the Bank for International Settlements, the BNB has established a Regulation on the Capital Adequacy of Banks (Regulation 8, Official Gazette #62 of 1997). This implements capital policies recommended by the Basle Committee on Banking Regulations and Supervisory Practices. The capital base of banks consists of primary capital and supplementary capital. When calculating its capital base, a bank may not include any provision for covering risks against losses.

Primary capital includes the bank's paid-in capital and the bank's reserve fund.

For the purpose of formation of their reserve funds, banks must set aside at least one-fifth of their after-tax profits before the payment of dividends. Banks should maintain reserve funds at no less than 1.25% of the total balance sheet assets and off-balance sheet liabilities of the bank.

The amount of supplementary capital may not exceed the total amount of the primary capital.

Bulgarian law requires that banks must establish a total capital adequacy ratio of over 12%. The primary adequacy ratio must not be lower than 6%.

Large Exposures

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.

Loan Restrictions

There are certain statutory restrictions on the grant of loans to insiders. Loans to the following persons may be granted only by an unanimous resolution of the bank's managing body:

  • managers or executive officers of the bank and their relatives;

  • shareholders controlling more than 5% of the votes in the shareholders' meeting;

  • persons exercising supervisory functions in respect of the bank's activity; and

  • the head of the internal control department.

The head of the internal control office should also approve the resolution.

The total amount of internal loans granted may not exceed 10% of the bank's own capital. This threshold is set at 3% for unsecured loans to bank employees. A single unsecured loan to an employee may not exceed 24 times the employee's gross monthly salary.

Risk Exposures

Pursuant to criteria established by Regulation 9 on the Evaluation of Risk Exposures of Banks (Official Gazette #73 of 1997, last amended in the Official Gazette #101 of 1999), banks must periodically assess loans and other risk assets, including off balance sheet liabilities. They must also allocate resources to cover the risk of losses. Pursuant to Regulation 9, risk-weighted assets are all assets and certain off balance sheet liabilities of the bank, multiplied by the relevant risk-weighting factor. A risk-weighting factor is assigned to an individual group of assets or off balance sheet liabilities depending on the assessed risk profile of the assets.


Regulation 11 on the Management and Supervision of the Liquidity of Banks (Official Gazette #125 of 1997) establishes a centralized control of the liquidity of banks. Each bank must establish an internal organ for liquidity management, which includes:

  • ongoing monitoring and assessment of future cash flow and the sufficiency of the bank's liquid assets;

  • diversification of deposits and other financial sources; and

  • adequate planning for extraordinary or force majeure circumstances.

Restrictions on Investments

The Law on Banks provides a number of restrictions with regard to the investment activity of banks.

  • A bank may not acquire equity of a non-banking institution, alone or with an economically related person and directly or indirectly, without the permission of the BNB, if (i) the shareholding is a qualified shareholding or (ii) the value of the shareholding exceeds 15% of the bank's own capital. An exception to this restriction is when the shareholdings are acquired in lieu of repayment of credits.

  • Banks may not become partners in unlimited liability companies.

  • Banks are also restricted with respect to investments in immovable property. The aggregate amount of the bank's investments in immovable property and other long-term assets cannot exceed 50% of the bank's own capital. This restriction does not apply to immovable property and other long-term assets which the bank has acquired as a result of foreclosure on pledged or mortgaged collateral, as long as the acquired collateral is transferred within two years of its acquisition.

  • The total amount of a bank's investment in long-term tangible assets (excluding assets acquired upon foreclosure on collateral) and equity is limited to the amount of the bank's own capital.

Deposit Guarantee System

The Law on Guaranteeing Deposits in Banks (Official Gazette #49 of 1998) established a mandatory deposit guarantee system in respect of deposits in Bulgarian banks. Pursuant to the law, bank deposits are guaranteed by a centralized Deposit Guarantee Fund, which is primarily designed to guarantee small deposits of less than Lev5,000 or its equivalent in foreign currency.

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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