Banks are one of the main pillars of economy in ordinary circumstances and even more so – in the crisis caused by the measures undertaken by the State for limiting and slowing down the spread of COVID-19. The emergency measures have the banks facing new challenges. They will have to achieve ambitious results under the new conditions – to offer the State the necessary support by protecting the threatened economy from collapse, to undertake the necessary actions to protect their clients – depositors and borrowers, and at the same time to meet the capital adequacy and risk management requirements. Therefore, the existing opportunities for commercial banks to protect their rights in the conditions of state of emergency should be considered.
Following the 2008 crisis, capital adequacy requirements were increased. Banks are required to have contingency plans and business continuity plans that ensure the ability to maintain operations and limit losses in the event of a major disruption. The stress tests conducted so far prove the stability of the banking system in Bulgaria.
According to the Measures and Actions during the State of Emergency Declared with a Decision of the National Assembly from 13 March 2020 Act, until the state of emergency is lifted, the consequences of late payment of the obligations of private persons shall not arise, including interest and penalties for delay, as well as non-monetary consequences such as the right to demand early repayment, termination of contract and seizure of property. These provisions were supplemented by the amendment of the law promulgated on 9 April 2020 in State Gazette No. 34, stating that in the event of late payment of obligations of private entities, debtors under credit agreements and other forms of financing (factoring, forfeiting and others), provided by banks and financial institutions under Art. 3 of the Credit Institutions Act, including when the receivables are obtained from other banks, financial institutions or third parties, and under leasing contracts, no interest and penalty interest shall be charged, the obligation cannot be declared due early, the contract cannot to be cancelled due to default, and no items can be seized.
The law also regulates the suspension of all announced public sales under the Civil Procedure Code, as well as entries into possession. No attachments to the bank accounts of natural persons and medical establishments may be imposed, and no inventories of movable and immovable property of natural persons may be taken, except for maintenance obligations, for damages and for claims against wages and salaries. There are no specific provisions suspending or cancelling sales in bankruptcy proceedings. In order to follow the requirements of the quarantine measures, in practice the scheduling of upcoming sales before the end of the state of emergency should be avoided.
The consideration of civil and commercial cases is postponed, and a number of procedural time limits and limitations periods are suspended.
The provisions listed above impact the banks’ abilities to collect their claims. What is more, the collection of claims is postponed indefinitely.
In the current situation banks are evidently facing real challenges, one of which is the expected rise in non-performing loans and the slowdown in collection. Against this background, governments and central and commercial banks are taking joint actions to preserve the stability of the economy and of the banking system and to protect the borrowers from ruin. Banks remain open for business and continue to provide all services they usually provide, while complying with safety and security regulations. There are discussions to suspend or postpone bank loan payments and to introduce a moratorium on loans.
On 25 March 2020 the European Banking Authority (EBA) published a statement, available on its website, regarding the measures taken by governments to limit the spread of the pandemic, including trough a potential moratorium on loan payments. The EBA called for flexibility and pragmatism in the prudential framework and in the application of supervisory approaches to capital adequacy requirements. According to the EBA, when announcing a possible moratorium on payments, loans should not be automatically classified as overdue and the adverse effects of overdue payments should not automatically occur. It is recommended that in each case an adequate risk assessment should be done and it should be evaluated whether the borrower can continue to make payments. Consumer protection remains a priority and financial institutions should ensure full disclosure and act in the interest of customers, with no hidden charges or automatic impact on credit ratings. The EBA recommends that loans should be renegotiated in such a way that banks’ financial standing is not impaired.
On 31 March 2020 the EBA published a new statement on the activity of banking systems in the face of the measures for containing COVID-19. The EBA clarified its expectations regarding dividend and remuneration policies. It notes that measures taken should guarantee that banks maintain a sound capital base and provide the needed support to the economy. The EBA emphasized that any capital relief resulting from the measures taken by the competent authorities in response to the COVID-19 crisis should be used to finance the corporate sector and households, not to increase distribution of dividends or share buybacks. The Authority also stressed the need for an efficient and reasonable allocation of capital to banking groups. According to the EBA, the allocation of capital within a banking group should serve the need to support local and wider European economies, as well as ensure the proper functioning of the European single market, which is particularly important in the current crisis period.
EBA underlined that banks should review their remuneration policies and practices to ensure that they are consistent and to promote sound and effective risk management in the current economic situation. It stated that remunerations, especially in their variable part, should be set conservatively and that the payment of most of these remunerations could be deferred for a longer period and that a larger portion could be paid in the form of equity instruments.
The EBA reiterated its support for all the measures taken so far to ensure the sound capital base of banks, which is necessary to support the economy. It reiterated and expanded the call to abstain from dividend distribution or share buybacks for the purpose of remunerating shareholders. It called for remuneration policies to be assessed in line with the risks posed by the economic situation. Similar calls have been made by other banking supervisors, including the European Central Bank, which in its bailout program has lifted restrictions on the purchase of bonds.
The EBA indicated that efforts should be focused on monitoring and assessing the impact of the COVID-19 epidemic, as well as ensuring business continuity. It pointed out that, given the situation, the submission of the necessary reports and data to the supervisory authorities should be extended over time, taking the necessary measures to prevent unauthorized persons from accessing crucial information.
The EBA also provided further guidance on how to use flexibility in supervisory reporting and recalled the necessary measures to be taken by banks to prevent money laundering and terrorist financing. It stressed the importance of building and maintaining effective systems and controls to ensure that the European Union’s financial system is not used for money laundering and terrorist financing.
The EBA indicated that it is important to have key prudential information on capital, risks, liquidity and financial standing.
In connection with its statement from 25 March 2020 and in coordination with the Basel Committee on Banking Supervision, the EBA decided to cancel the quantitative impact study based on the June 2020 data.
These guidelines need to be taken into account when implementing measures at the national level. The Bulgarian National Bank has repeatedly stated that the financial system in the country is stable and that efforts are being made to upgrade and implement measures in response to the new situation. Short- and long-term measures are being developed, as the sector prepares to face the coming economic crisis and be part of the solution. The Bulgarian National Bank has taken a package of measures to curb the negative effects of the crisis. These measures should ensure the smooth functioning of the monetary regime, strengthen the capital and liquidity base of commercial banks and ensure that there are regulatory measures in place that give greater flexibility to commercial banks in alleviating the negative effects of the crisis on their business and household customers.
The measures taken by the Bulgarian National Bank complement the measures taken by the government – not charging penalties for delay and increasing the capital of the Bulgarian Development Bank by BGN 700 million, of which BGN 500 million is intended for bank loan portfolio guarantees, and 200 million – for interest-free consumer loans for citizens on unpaid leave.
In this situation, commercial banks in Bulgaria coordinate measures to protect businesses and citizens. They are in constant contact with all public authorities, the Bulgarian National Bank and the Ministry of Finance in order to reach the most appropriate national solution and to develop a common procedure for deferring credit payments.