We asked the ECB: What are they doing about BDB supervision?

Bulgaria has been a member of the Banking Union for 9 months now. A key element of the BS is the so-called Single Supervisory Mechanism, which was promised by the supporters of the eurozone to correct problems in local banking supervision.

With the letter below, we from the EKIP asked the ECB – what they have done, what they are doing and what they are thinking of doing regarding the BDB case. The big questions should not be directed only to the previous government or the BNB, the ECB also has responsibilities. It is precisely because of this commitment from Frankfurt that Bulgaria had to give up its sovereignty and enter the Banking Union before the eurozone, opening itself up to a number of dangers.

Let's see if it was worth it.

To the President of the European Central Bank

To the Chair of the Supervisory Board of the European Central Bank

With this letter, we would like to draw your attention to the recent public revelations, including those announced by the Minister of Economy of the Republic of Bulgaria, regarding the credit portfolio and credit policy of the Bulgarian Development Bank AD (BDB). The information disclosed about BDB's large and concentrated credit exposures to certain recipients caused a huge public response in the country and abroad, recalling similar information commented on in previous years.

The information indicates a possible violation of prudential restrictions and the bank's internal regulations. We would also like to recall that BDB was allowed to participate in the recapitalization of First Investment Bank (FIB) as a prerequisite for Bulgaria's participation in the Single Supervisory Mechanism.

The information presented and the accompanying discussions also raise questions related to the quality and effectiveness of banking supervision exercised in Bulgaria by both the Bulgarian National Bank (BNB) as the national competent authority (NCA) and the European Central Bank (ECB).

We draw your attention to the fact that the ECB is entrusted with the responsibility for the effective and consistent functioning of the Single Supervisory Mechanism (SSM) in view of Article 6 of Regulation No 1024/2013.

Also, in the light of the case-law of the Court of Justice of the EU (see judgment in Case C-450/17 of 8 May 2019, paragraphs 36-41), the national competent authorities assist the ECB in carrying out the tasks conferred on it by Regulation No 1024/2013 by decentralising the exercise of some of those tasks in relation to less significant credit institutions within the meaning of the first subparagraph of Article 6(4) of that regulation. Regulation No 1024/2013 also reminds us that the ECB may at any time, on its own initiative after consulting the NCAs or at the request of the NCAs, decide to exercise directly all of its prudential powers in relation to one or more credit institutions.

In connection with the above, in the context of Bulgaria's membership in the SSM and the established close cooperation of the ECB with the BNB, with this letter we request that you inform us of:

• the ECB's fulfillment of its supervisory oversight responsibilities over BDB as a less significant institution;
• the alignment of the supervisory actions of the BNB, as the national competent authority, with respect to the Bulgarian National Bank in the spirit of the highest supervisory standards;
• the compliance of BDB's credit policy and practice with prudential restrictions on size, concentration and connectivity, as well as with the bank's internal regulations.

We recall that, according to the SSM Supervisory Handbook, EU policy on the prudential supervision of credit institutions should be implemented in a consistent and efficient manner, so that the single financial services regulatory framework is adequately applied to all institutions in all Member States concerned and institutions are subject to supervision of the highest quality, free from non-prudential considerations.

The powers of the ECB and the high standards of prudential supervision apply with equal force to credit institutions that are supervised by the ECB or an NCA as a result of the establishment of close cooperation between a non-euro area Member State and the ECB, as is the case with Bulgaria (ECB Decision 2020/1015 of 24 June 2020 and Article 7 of Regulation No 1024/2013).

In order to obtain assurance from the ECB, which would bring more clarity to Bulgarian society as to whether the supervision of the banking system has not been undermined both before and after our accession to the Single Supervisory Mechanism, we also address the following questions to you:

• What was and is the current level of supervisory priority of BDB for the ECB - in the process following Bulgaria's application and preparation for membership in the Banking Union (including the ECB's selection of Bulgarian banks to conduct an asset quality review and stress test), and as a less significant credit institution after our de facto accession to the Single Supervisory Mechanism?
• Has DG Microprudential Supervision III or another department within the ECB carried out an assessment of the supervisory procedures relating to BDB?
• Does the ECB believe that the supervisory priority towards BDB realistically reflects the risk and impact of this bank on financial stability in Bulgaria?
• Does the ECB find grounds to decide to take over direct supervision of the BDB in accordance with Articles67-69of the SSM Framework Regulation to ensure the consistent application of high supervisory standards? We emphasize that the list of factors in Article 67 of the Framework Regulation is not exhaustive with regard to the grounds enabling the ECB to assume direct supervision of the BDB.

We count on a competent and timely response to the questions thus posed, on a particularly topical topic, related both to the legality and risks in the operations of the Bulgarian National Bank, and to the quality and effectiveness of banking supervision exercised in Bulgaria by the ECB and the Bulgarian National Bank.

With respect,

Stoyan Panchev

EKIP

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