As the global economy continues to face a myriad of challenges, it is crucial for international bank creditors to understand the legal and regulatory frameworks governing bank failures in countries where they have invested. In Bulgaria, a growing concern for international bank creditors is the potential risk of losing money due to bank failures. The primary legislation governing the banking sector in Bulgaria is the Credit Institutions Act (CIA) and the Law on the Recovery and Resolution of Credit Institutions and Investment Firms (LRRCIIF). The CIA regulates the licensing, operation, and supervision of credit institutions, while the LRRCIIF provides the legal framework for the resolution of failed or failing banks. The Bulgarian National Bank (BNB) is the competent authority responsible for the supervision and regulation of the banking sector, including the enforcement of relevant laws.

Bank failure in Bulgaria is defined as the inability of a credit institution to meet its obligations to depositors, creditors, or other parties, or the likelihood that it will become unable to do so in the near future. The determination of bank failure involves a comprehensive assessment of a bank’s financial condition, capital adequacy, liquidity, and solvency. The BNB, as the supervisory authority, is responsible for conducting this assessment and deciding whether a bank is failing or likely to fail.

Legal Mandate of the Bank Supervisor in Bulgaria

The BNB’s legal mandate in determining bank failure is derived from the CIA and the LRRCIIF. The BNB has the authority to impose corrective measures on banks, including capital and liquidity requirements, and to initiate resolution proceedings if necessary. The BNB also has the power to appoint a special administrator to manage a failing bank, ensuring its orderly resolution and protecting the interests of depositors and other creditors.

Upon the conclusion of bank failure, the BNB initiates a series of actions, including recovery planning, resolution planning, and succession planning. Recovery planning involves the implementation of measures aimed at restoring the bank’s financial stability, while resolution planning entails the orderly restructuring or winding down of the institution. Succession planning ensures the continuity of critical functions and the smooth transition of management in the event of a bank’s resolution.

Bank Supervision and Resolution Planning in Bulgaria

The BNB’s supervisory and resolution planning activities are geared towards preserving critical banking functions and ensuring the continuation of viable institutions during times of financial distress. The BNB conducts regular stress tests and assessments of banks’ risk management frameworks, capital adequacy, and liquidity positions to identify potential vulnerabilities and mitigate risks.

When a bank within the BNB’s jurisdiction fails, the resolution authority initiates the resolution process, which may involve the use of resolution tools such as the sale of business, bridge institution, asset separation, and bail-in. These tools aim to reorganize, recapitalize, restructure, or dissolve the failed bank while minimizing the impact on financial stability and protecting taxpayers from bearing the cost of bank failures. The BNB has several options at its disposal to address a failed bank, including:

  • Sale of business: The transfer of assets, liabilities, and ownership to a third party or another credit institution
  • Bridge institution: The establishment of a temporary institution to take over and maintain critical functions and viable operations of the failed bank
  • Asset separation: The transfer of non-performing or impaired assets to an asset management vehicle, enabling the bank to focus on its core business
  • Bail-in: The conversion of debt instruments or other eligible liabilities into equity, effectively recapitalizing the bank.

Bank account deposits and creditor interests are protected by law through the Bulgarian Deposit Insurance Fund (BDIF), which guarantees deposits up to BGN 196,000 (approximately EUR 100,000) per individual per bank. In addition to deposit protection, the LRRCIIF also provides for the protection of secured creditors, ensuring that their claims are honored in the event of a bank’s resolution.

The BDIF is activated when the BNB determines that a bank has failed or is likely to fail and is unable to meet its obligations to depositors. The activation of the deposit guarantee scheme ensures that depositors can access their insured deposits within a short period, minimizing the potential for bank runs and maintaining public confidence in the banking system.

To ensure the orderly exit of non-viable firms from the market, the BNB relies on the legal framework provided by the LRRCIIF and its supervisory powers. The BNB may impose corrective measures, initiate resolution proceedings, or revoke a bank’s license if it deems the institution to be non-viable. These actions are designed to maintain financial stability, protect depositors and creditors, and prevent contagion risks in the banking sector.