At the end of 2017, the Bulgarian Parliament adopted changes to the Credit Institutions Act (the “Act”), which aim to improve the banking supervision in the country. The changes are motivated by findings that resulted from the Financial Sector Assessment Program and the undertakings of the Bulgarian National Bank (the “BNB”) to implement them.

Amendments to the Act include requiring credit institutions to provide information on the ultimate owner of the persons who possess qualified participation in the respective bank. The legislation does not differentiate between direct or indirect participation.

Other amendments to the Act regard perfecting the regime for risk management, resulting from the exposures that the banks form with related parties. According to the Act:

  • internal exposure can only be formed with the unanimous resolution of the bank’s management. Such exposure should be pre-approved by the supervisory board / the non-executive members of the board of directors. In this way, conformity with the control functions of the supervisory board, and further minimization of risks will be achieved. The same procedure shall be valid for subsequent amendments in the exposures themselves (e.g.negotiating interest, providing a grace period, writing them off, taking actions under enforcement proceedings, etc.);
  • the scope of internal exposures is also widened by broadening the number of individuals who can be considered connected to a bank by including holders of indirect qualified shareholdings therein, and any entity in which the bank or individuals hold qualified shares or wield control over them. Connected individuals also include persons controlling the bank or its shareholders. Those measures will hinder the possibility of bypassing the legislation that defines the maximum amount of exposures, thus ensuring that the credit activity of the banks is carried out without a conflict of interests, and in compliance with the principles of equality and independence;
  • the definition of exposure and the types of agreements leading to it are clarified. Details on how to report exposures and identify connectivity will be included in future legislation;
  • in an effort to improve risk assessment, banks are now obliged to adopt internal regulation on how an exposure is formed, monitored, and reported. Future legislation will provide further guidance on this matter

Lastly, the Act introduces a new legal mechanism to implement the guidelines and recommendations of the European Banking Authority (the “EBO”). The aim is to help banks comply with these guidelines and adhere to EU legislation to the fullest extent. In addition, the BNB can now pass ordinances and even mandatory regulations on EBO guidelines. By following the policies, methods, guidelines and measures of the EBO, the BNB will enable banks to interpret and execute EU legislation in a consistent manner.