On 22 August 2018, the Bulgarian Council of Ministers approved an action plan on the measures, deadlines and responsible institutions in relation to the country's intentions of joining the European Exchange Rate Mechanism (“ERM II”) and participation in the EU's Single Supervisory Mechanism ("SSM") through close cooperation with ECB.

Prepared by Bulgaria’s Ministry of Finance the action plan is likely to be put into place in July 2019, when, Bulgaria is expected to will formally for close cooperation with ECB and entering into ERM II.

Building upon the main commitments outlined in a July 2018 letter by the Bulgarian Finance Minister and the Chairman of the Bulgarian National Bank to the presidents of the Eurogroup and the Ecofin council, the action plan is structured around the following key areas:

I. Changes to the legal framework and assessment of the asset quality of the banking sector prior to joining the SSM through close cooperation with ECB:

  • amendments to the existing primary legislation (e.g. the Credit Institutions Act, the Bulgarian National Bank Act, etc.) related to the powers of the European Central Bank to be implemented by December 2018, and changes to the secondary legislation to be implemented by March 2019;
  • asset quality reviews and stress tests on the banking sector to be performed and completed by July 2019. This will be the second comprehensive asset quality review in three years.

II. Adoption of macroprudential instruments in the Credit Institutions Act (e.g. leverage limits, LTV limits, sectoral ceilings), which will implement a macro level approach in relation to borrowers. III. Undertaking the "Non-Banking Supervision" measure by the Financial Supervision Commission, which includes:

  • implementation of the Non-Bank Financial Sector Supervision Action Plan (with respect to pension funds and insurers);
  • preparation of guidelines on asset valuation (illiquid assets) and liabilities in the non-banking financial sector, including drafting and implementing statutory regulations on pensions funds and insurers, and cooperation with the Institute of Certified Public Accountants in Bulgaria on the adoption of mandatory instructions to auditors;
  • development and implementation of a risk-based supervisory system in accordance with the

Solvency II Directive, which should result in:

  • a manual for risk-based surveillance;
  • an updated system of criteria for categorizing of insurance companies by their degree of risk and systemic significance; and
  • a full review of the Financial Supervision Commission's internal procedure for risk-based supervision of insurance companies.

IV. Review and amendments to the Bulgarian insolvency framework which includes:

  • comprehensive gap analysis of the stabilisation framework within the insolvency legislation;
  • development of a model for collection and its publication of insolvency-related data.

V. Strengthening the Bulgarian AML framework through the adoption of Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 (AMLD 5).

VI. Drawing a roadmap, together with an OECD-lead working group, for improving the legal framework for management of state-owned enterprises, leading to the adoption of a new act for the governance of state-owned enterprises by June 2019.

VII. Ratification of the Agreement on the Transfer and Mutualisation of Contributions to the Single Resolution Fund by the National Assembly. The ratification of the intergovernmental agreement is one of the key preconditions for the entering of Bulgaria into the single resolution mechanism (SRM) that will be responsible for the resolution of the Bulgarian banks, which are considered significant or in relation to which the ECB has decided to exercise directly all of the relevant supervisory powers.

It is important to note that the setting of the precondition for the entering of Bulgaria into ERM II upon the entering into close cooperation with ECB is a new approach for accepting of new members into the Eurozone. Such approach, as indicated by the statement of the finance ministers of the Eurozone countries and Denmark, will represent the blueprint for future Eurozone accession.