REPORT JANUARY – JUNE 2019 · Telex: 24090, 24091 Fax: (+359 2) 980 2425, 980 6493 Printed in the BNB Printing Centre ... Ecofin Economic and Financial Affairs Council of the European

REPORT . JANUARY – JUNE 2019

Report • January – June 2019

Bulgarian National Bank

Published by the Bulgarian National Bank1, Knyaz Alexander I Square, 1000 SofiaTel.: (+359 2) 9145 1351, 9145 1209, 9145 1806, 9145 1227Telex: 24090, 24091Fax: (+359 2) 980 2425, 980 6493Printed in the BNB Printing Centre

Website: www.bnb.bg

© Bulgarian National Bank, 2019

The BNB January–June 2019 Report employs data published prior to 30 September 2019.

The contents of the BNB Annual Report may be quoted or reproduced without further permission. Due acknowledgment is requested.

ISSN 1313-3454 (print)ISSN 2367-4946 (online)

Honourable Chair of the National Assembly,Honourable People’s Representatives,

Under the provisions of Article 1, paragraph 2 and Article 50 of the Law on the Bulgarian National Bank, I have the honour of presenting the January–June 2019 Report.

Dimitar RadevGovernor

of the Bulgarian National Bank

BNB Governing CouncilSitting from left to right: Lyudmila Elkova, Nina Stoyanova, Lena Roussenova, Elitsa Nikolova.Standing from left to right: Kalin Hristov, Dimitar Radev, Radoslav Milenkov.

BNB Governing Council

Dimitar RadevGovernor

Kalin HristovDeputy GovernorIssue Department

Nina StoyanovaDeputy GovernorBanking Department

Radoslav MilenkovDeputy GovernorBanking Supervision Department

Lena Roussenova

Elitsa Nikolova

Lyudmila Elkova

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Bulgarian N

ational Bank R

eport • January – June 2019

7

Contents

Summary _______________________________________________________________ 9

I. Economic Development in the First Half of 2019 ___________________________ 15

II. Gross International Reserves ___________________________________________ 31

III. Payment Systems and Payment Oversight ________________________________ 41

IV. Banks’ Reserves at the BNB ____________________________________________ 47

V. Currency in Circulation ______________________________________________ 49

VI. Maintaining Banking System Stability and Protecting Depositor Interests _______ 53

VII. BNB Work on Resolution of Credit Institutions ____________________________ 67

VIII. Participating in the ESCB and EU Bodies _________________________________ 70

IX. International Relations _______________________________________________ 75

X. Statistics __________________________________________________________ 76

XI. The Central Credit Register and the Register of Bank Accounts and Safe Deposit Boxes _______________________________________________ 78

XII. The Fiscal Agent and State Depository Function ___________________________ 82

XIII. Research __________________________________________________________ 87

XIV. Human Resource Management _________________________________________ 88

XV. BNB Internal Audit __________________________________________________ 91

XVI. BNB Budget Implementation in the First Half of 2019 _______________________ 92

XVII. Bulgarian National Bank Consolidated Financial Statements __________________ 95

Information under Article 17, Paragraph 5 of the Law on the BNB Concerning Resolutions Adopted by the BNB Governing Council in January–June 2019 ____________ 127

Statistical Appendices (CD)

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AbbreviationsABSPP ECB Asset-backed Securities Purchase Programme

AQR asset quality reviewAS ROAD Automated System for Registration and Servicing of External Debt

ATM Automated Teller MachineBIS Bank for International Settlements

BISERA Bank Integrated System for Electronic PaymentsBNB Bulgarian National Bank

BORICA Bank Organisation for Payments Initiated by Cards BRF Bank Resolution Fund

CBPP3 ECB’s Third Covered Bond Purchase ProgrammeCCR Central Credit RegisterCHF Swiss francEBA European Banking Authority

EC European CommissionECB European Central Bank

Ecofin Economic and Financial Affairs Council of the European Union comprising Member State economics and finance ministersEDIS European Deposit Insurance Scheme

EONIA Euro OverNight Index Average (registered trademark of the European Money Market Institute, EMMI)ESA 2010 European System of National and Regional Accounts

ESCB European System of Central BanksESRB European Systemic Risk Board

ESROT Electronic System for Registering and Servicing Government Securities TradingEU European Union

EUR euroEURIBOR Euro InterBank Offered Rate (EURIBOR, registered trademark of the European Money Market Institute, EMMI)

GDP Gross Domestic ProductGSAS System for Government Securities Sale and Repurchase AuctionsHICP Harmonized Index of Consumer Prices

IAS International Accounting StandardsIASB International Accounting Standards BoardIFRS International Financial Reporting StandardsIMF International Monetary Fund

IOBFR System for Budget and Fiscal Reserve Information ServicingKTB Corporate Commercial Bank AD

LBDG Law on Bank Deposit GuaranteeLBNB Law on the BNB

LCI Law on Credit InstitutionsLEONIA an interest rate on real transactions in unsecured overnight deposits in BGN offered at the interbank market

LPSPS Law on Payment Services and Payment SystemsLRRCIIF Law on the Recovery and Resolution of Credit Institutions and Investment Firms

LTROs Longer-term refinancing operationsMF Ministry of Finance

MFI Monetary Financial InstitutionsNPISH Non-profit Institutions Serving Households

NSI National Statistical InstituteOPEC Organization of Petroleum Exporting Countries

POS Point of sale/point of service: a retail trade terminal for credit and debit card transactionsPSPP Public Sector Purchase Programme

RINGS Real-time gross settlement systemROA Return on AssetsROE Return on EquitySDR Special Drawing Rights

SEPA Single Euro Payments Area SITC Standard International Trade Classification

SOFIBID (Sofia Interbank Bid Rate) is an index calculated as the average of the bid quotes for unsecured BGN depositsSOFIBOR (Sofia Interbank Offered Rate) is a fixing of the quotes for unsecured BGN deposits offered in the Bulgarian interbank market

SRB Single Resolution BoardSRF Single Resolution Fund

SRM Single Resolution MechanismSSM Single Supervisory Mechanism

TARGET2 Trans-European Automated Real-time Gross settlement Express Transfer system for the euroTARGET2-BNB Bulgarian system component of TARGET 2

USD US dollarVaR Value-at-RiskVAT Value Added TaxWB World Bank

XAU troy ounce goldXDR currency code for special drawing rights

Summ

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Summary

The Bulgarian National Bank conducts its policy taking into account the international situation and developments in the domestic economy. The BNB pursues its primary objective of price stability through maintaining national currency stability by adher-ing to the Law on the Bulgarian National Bank and applying its potential and capa-bilities effectively.

The BNB January-June 2019 Report covers the activities relating to the BNB’s legal functions and duties as well as other BNB business related to or supporting its func-tions and duties. The Report also includes BNB budget performance for the first half of 2019 and consolidated financial statements as of 30 June 2019 (unaudited). Infor-mation under Article 17, paragraph 5 of the Law on the Bulgarian National Bank concerning resolutions adopted by the BNB Governing Council in January–June 2019 is also published.

In the first half of 2019 the decrease in global PMI, which started in 2018, continued signalling a slowdown in global economic activity. The fall in global PMI was mainly driven by the industrial production index, which decreased under the neutral limit of 50 points at the end of the first half of the year. Global industrial output growth continued to slow down in the first half of 2019 to 1.2 per cent (3.6 per cent in the first half of 2018). The 2018 trend towards a slowdown in euro area economic activity continued. GDP growth moderated in almost all euro area countries: Italy reported a fall in economic activity on an annual basis and Germany’s real GDP posted a very slight increase. Real growth in the US economic activity also moderated, though slower than that in the euro area. In June 2019 global inflation was 1.9 per cent on an annual basis, its rate remaining almost unchanged from the end of 2018. At the end of the first half annual inflation in the euro area fall to 1.3 per cent (1.5 per cent in December 2018 ), and in US it decreased from 1.9 per cent to 1.6 per cent over the same period.

Taking into account increasing risks to global economic growth and deterioration of economic activity indicators and inflationary expectations, the European Central Bank and the US Federal Reserve System stated that they may launch monetary stim-ulus measures in the second half of the year. In the first six months of 2019 the ECB Governing Council left unchanged the interest rates, reiterating expectations that the period of maintaining them at current levels would be extended. Concurrently, it was announced that a new series of Targeted Longer-Term Refinancing Operations (TLTRO III) will be launched in September 2019. In the first half of 2019 the US Federal Reserve System retained its target range, undertaking additional measures to discontinue its balance sheet normalisation.

In the first six months of 2019 the real GDP growth rate in Bulgaria accelerated to 4.2 per centon an annual basis from 3.4 per cent in the first half of 2018. The strengthened economic activity in Bulgaria was ascribable mainly to the high positive contribution of net exports, while the annual growth rate of household consump-tion and fixed capital investment slowed down in the context of a certain deteriora-tion of consumer confidence and business climate. The high positive contribution of net exports was driven by the accelerated growth of exports reflecting primarily the discontinued effect of one-off supply side factors and the deceleration in imports growth. The slowdown in economic activity in some Bulgaria’s important trade partners continued to have a dampening effect on exports of goods over the period. Labour market conditions in Bulgaria remained favourable: the number of employees

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in the economy rose by 0.2 per cent on an annual basis against a reported decline in self employed in agriculture, while in services and construction the number of employees continued to increase. Unemployment rate fell to 4.6 per cent on average in the first half of 2019 from 5.6 per cent in the first six months of 2018. The trend toward a sustainable increase in labour demand amid limited supply continued to contribute to average wage increase, which accelerated its growth on an annual basis in both nominal terms (11.6 per cent) and real terms (8.8 per cent).

At the end of the first half of 2019 the annual rate of consumer price inflation accounted for 2.3 per cent and remained unchanged from December 2018. Food and services had a major positive contribution to inflation in June.

Favourable labour market conditions amid uncertainty ensuing from the external environment and the lack of sufficiently safe alternatives of bank deposits helped maintain high rates of broad money growth since early 2019. Annual growth of non-government sector’s deposits in the banking system accounted for 7.2 per cent in June 2019 with household deposits still contributing most significantly. Credit to non-financial corporations and households continued growing at comparatively high rates, reflecting the strong demand by corporations and households and still low interest rates. Loans to households rose year on year by 8.1 per cent, with annual growth rate of housing loans tending to accelerate reaching 11.8 per cent in June. The growth rate of loans to non-financial corporations tended to slow down gradually to 4.6 per cent, reflecting mainly the lower amount of bad and restructured loans.

In the first six months of 2019 the surplus on the cash based consolidated fiscal programme was BGN 3223 million. The strong budget position improvement from the corresponding period of the previous year (by BGN 1510 million) was due to the faster growth rate of budget revenue (16 per cent) compared to that of budget expenditure (8.9 per cent). The accumulated cash surplus was mainly used to boost government’s liquid resources with funds on fiscal reserve deposits rising by BGN 2256 million, reaching BGN 11,269 million.

In managing gross international reserves, the BNB maintained a conservative policy to ensure high security and liquidity. By the end of June of 2019 the market value of gross international reserves was EUR 25,183.40 million: an increase of EUR 111.23 million on the end of 2018. The BNB continued investing the vast majority of assets into euro area core country government bonds and government guaranteed debt, and short-term deposits with first class foreign banks. By the end of the first half about 62 per cent of international reserves were invested into assets with the highest AAA long term credit rating. In the first six months net income from international reserves management was positive and amounted to EUR 177.48 million or 0.80 per cent of total return for the review period. Broken by component, net income comprised earnings from international reserve investment in the original currency worth EUR 11.78 million, earnings from currency imbalance in the amount of EUR 158.27 million and the net financial result of liabilities which was positive worth EUR 7.43 million.

Implementing, operating, and overseeing efficient payment systems is an important central bank duty. National payment systems functioned effectively and provided payment flow continuity. In the first half of 2019 RINGS, a real-time gross settle-ment system, operated by the BNB, processed 85.5 per cent of payments in Bulgaria. RINGS payments numbered 535,447, up 7.2 per cent on the first half of 2018, their total value reaching BGN 516,054 million (up 12 per cent on the same period of 2018). The number and value of payments processed by BORICA and BISERA also rose in the first six months of 2019 on the corresponding period of the previous year. The national system component of the Trans-European Automated Real-time Gross

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settlement Express Transfer system for the euro run by the BNB – TARGET2-BNB – processed 139,130 payments (up 5.5 per cent on the first six months of 2018) for EUR 232,238 million (up 8.2 per cent on the first half of 2018). The BNB regulates and oversees payment system operators, securities settlement systems operators in payment operations, payment institutions, electronic money institutions, and other payment service providers. In the first half of 2019 the Bank started an inspection of a payment service provider and completed one inspection of an institution.

The Bank has a monopoly on banknote and coin issue in Bulgaria. Its currency is mandatorily acceptable as legal tender at face value without restriction. BNB issue and cash operations include: banknote printing, coin minting, accepting, delivering, repaying, processing, authenticity and fitness checking of Bulgarian banknotes and coins and foreign currency, exchanging damaged Bulgarian banknotes and coins, and scrapping unfit Bulgarian banknotes and coins. In late June 2019, 464.9 million bank-notes (up 5.56 per cent on June 2018), amounting to BGN 16,917.9 million (up 10.03 per cent on June 2018) and 2503.3 million coins (up 6.50 per cent on June 2018), worth BGN 435.8 million (up 12.90 per cent on June 2018) were in circulation. As part of its cash circulation integrity and security functions, in the first half of 2019 the Bank conducted one inspection of a service provider to check compliance with regulations on quality of banknotes and coins in cash circulation.

The Bank regulates and supervises banks in Bulgaria to maintain banking system stability and protect depositors’ interests. In the half year of 2019 off-site supervision focused on current monitoring of credit institutions risk profile and assessment of their financial position and on the 2018 supervisory review and evaluation process (SREP) of banks and the Pillar 2 capital determination process which were launched over the period under review. The main purpose of the on-site supervisory inspec-tions was to review banks’ capital adequacy and liquidity position with regard to credit risk and credit concentration risk. Monitoring the implementation of super-visory measures imposed during previous inspections remained an important focus of on-site inspections. As a result of inspection conclusions, recommendations were forwarded to some banks to enhance credit risk and credit concentration risk man-agement and to conduct stress tests for internal capital adequacy assessment. Macro-prudential supervision activities focused on monitoring the trends in international environment along with the processes and inherent risks affecting banking system stability. In order to strengthen banking sector’s resilience to potential adverse devel-opments in the economy, in March the BNB Governing Council increased to 1 per cent the countercyclical capital buffer applied to resident credit risk exposures with effect from 1 April 2020. In the first half of 2019 the BNB’ specific supervisory activi-ties were aimed at preventing the use of the banking sector for money laundering and terrorist financing.

In the first half of 2019 the BNB participated in the process related to Bulgaria’s request of 18 July 2018 for accession to the Single Supervisory Mechanism (SSM) by establishing close cooperation with the ECB. The BNB provided expert assistance to ECB concerning Bulgarian banking system specificities with regard to the asset quality review (AQR) and stress tests performed by the ECB of six selected Bulgarian banks. The results for each of the six banks were published on the ECB’s website. In the context of close cooperation work continued on the alignment of BNB’s supervi-sory and prudential policies with those of the ECB, including the internal rules and processes and information flows between the two institutions.

In the first half of 2019 the banking sector in Bulgaria performed financial inter-mediation in compliance with the capital and liquidity requirements. The first half year saw a further increase in banking system asset value (by BGN 3.0 billion to BGN

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108.6 billion) and improvements in asset quality indicators. By end-June 2019 the share of gross non-performing loans and advances in total gross loans and advances declined to 7.2 per cent (7.6 per cent by end-December 2018). The residual credit risk measured by the amount of net non-performing loans and advances also con-tinued to fall, remaining fully covered by the capital exceeding minimum regula-tory requirement. By the end of the first half of 2019 the banking system reported a BGN 917 million profit, with ROA and ROE accounting for 1.69 per cent and 12.97 per cent, respectively. Banking sector consolidation continued with the acquisition of Société Générale Expressbank (hereinafter ‘Expressbank’) by DSK Bank EAD and the approval by the BNB Governing Council of the direct acquisition of Piraeus Bank Bulgaria AD by Eurobank Bulgaria AD.

In the first half of 2019 the BNB as the body responsible for resolving credit institu-tions focused on preparing, reviewing and developing resolution plans. Work contin-ued on developing and improving the internal methodological framework, to ensure a common approach in assessments and analyses used in recovery plans and discharge of other Bank obligations under the LRRCIIF. In accordance with the requirements of this Law, in March the BNB Governing Council set the total 2019 amount of annual bank contributions to the Bank Resolution Fund at BGN 137,257 thousand. Follow-ing Bulgaria’s request to join the SSM by establishing close cooperation with the ECB, work continued to prepare the BNB for joining the Single Resolution Mechanism (SRM) and consequently the Single Resolution Fund (SRF). Work was performed according to a specific Action Plan based on three pillars: (1) drafting and approv-ing relevant amendments to the LRRCIIF; (2) preparations for joining the SRF; (3) preparing the bank resolution planning process after joining the SRM.

By participating in the committees and working groups of the European System of Central Banks (ESCB), the European Commission, the EU Council, the European Systemic Risk Board (ESRB), the European Banking Authority (EBA), and the national Council for European Affairs, the BNB contributed to formulating Bulgar-ian standpoints on key economic governance areas and the financial sector. In the first six months of 2019 the BNB’s representatives made an expert contribution to the negotiations on reforming EBA’s mandate and reviewing the ESRB objectives and tasks. The BNB representatives continued to provide their expertise to the Ministry of Finance (MF) teams on EC legislative proposals on financial services.

In the first half of 2019 the BNB continued to collect, process, analyse and disseminate the official monetary and interest statistics, the external statistics, the statistics on quarterly financial accounts of all institutional sectors, the government finance statis-tics, the statistics on non-bank financial institutions, including leasing companies and investment funds, specialised lenders and insurance and reinsurance undertakings. In addition to compilation of statistical data, the BNB was actively involved in a number of national, European and international fora discussing and solving methodological issues in the area of statistics. In the first half of 2019 monetary statistics methodo-logical requirements were updated with regard to International Financial Reporting Standard 16 enactment and implementation.

The BNB maintains the Central Credit Register (CCR): an information system on customer debt to Bulgarian banks, other financial institutions, and payment and elec-tronic money institutions extending loans under Article 19 of the Law on Payment Services and Payment Systems. In the first six months of the year banks, financial institutions, payment institutions, electronic money institutions and government and judicial authorities authorised to electronic access to the CCR conducted 4522 thousand searches on 3894 thousand individuals and 628 thousand legal entities, their average monthly number reaching 754 thousand. In early June 2019 the BNB started

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to provide CCR electronic services to natural persons. The Bank maintains the Reg-ister of Bank Accounts and Safe Deposit Boxes (RBASDB): an electronic information system on bank account numbers, holders and attorneys, data on account preser-vation orders, bank deposit box holders and attorneys. The RBASDB information system included records of 1.507 million new accounts, 1.497 million closed accounts and of 920.7 thousand account preservation orders placed as of 30 June 2019. In the first six months of 2019 bodies and institutions entitled to Register’s information sys-tem access conducted searches on 355,040 individuals. There were 1270 applications for CCR statements: 1219 by individuals and 51 by legal entities.

Acting as fiscal agent and official depository the BNB maintains, develops and improves electronic systems for budget and fiscal reserve information servicing, auc-tions, settlement and securities trade servicing, the Register of Special Pledges, and external debt transactions. In the second quarter of 2019 the third and last stage of the system for conducting government securities auctions (GSAS) upgrade project was completed, thus ensuring its technological and functional modernisation in line with the agreements reached with the MF. The completion of the project allowed the new version of the system to be launched in April and government securities auctions as announced by the MF in June 2019 to be conducted via the upgraded GSAS.

Economic research and projections support the Bank’s management in making deci-sions and delivering economic policy stance. In the first half of 2019 Research Plan implementation addressed developing and expanding BNB instruments used to pre-pare macroeconomic simulations and designing a satellite model reflecting effects of long-term structural changes in the Bulgarian economy.

The BNB competitive human resource management system is developed and main-tained by ensuring a favourable working and social environment, attracting appropri-ate candidates and retaining qualified employees by providing career development opportunities. In the first half of 2019 employees numbered 889 from 884 at the end of June 2018. University graduates led staff educational attainment structure at 75 per cent, while there were no major changes in the age structure.

BNB internal audit conforms to the International Standards for the Professional Practice of Internal Auditing, the Code of Ethics of Internal Auditors, ESCB Internal Auditor Committee Rules and Internal Auditor Rules approved by the BNB Govern-ing Council. There were five audits by June 2019. Audits sought assurance of adequate and effective control, corporate governance and management of inherent risks to ensure: effective attainment of objectives and tasks; reliability and integrity of finan-cial and operational information; effective and efficient operations and programmes; asset safeguarding; legal, regulatory, internal rule, policy, procedure and contractual observance. Implementation of past audit recommendations at a local level was moni-tored under the ESCB Internal Auditors Committee Programme.

The BNB budget underpins Bank performance. In the first half of 2019 the BNB spent BGN 45,642 thousand or 40.4 per cent of budget, including currency circulation costs of BGN 9013 thousand. The Bank invested BGN 1022 thousand or 2.9 per cent of annual item budget. Investment programme funds relate to procurement procedures, some still in preparation or under way, and thus not fully taken during the half year.

Consolidated financial statements present the Bank’s financial position as of 30 June 2019.

Economic D

evelopment in the First H

alf of 2019

15

I. Economic Development in the First Half of 2019

The External Environment

The decrease in global PMI, which started in 2018, continued in the first half of 2019 signalling a slowdown in global economic activity. The fall in global PMI was driven to a large degree by the industrial production index, which decreased under the neutral limit of 50 points at the end of the first half of the year. The downward trend in PMI was clearly pronounced mainly in developed countries. The decline over the first half of the year was ascribable to expectations of a more lasting slowdown in industrial production growth, the increased uncertainty to world trade developments related to international trade conflicts, a possible UK leaving the EU without a deal and risks of a more substantial slowdown in China’s growth.

Major Macroeconomic Indicators (per cent, non-seasonally adjusted data)

Real GDP Growth Rate Inflation (end of period)

Unemployment rate (average for period )

2017 20182019

2017 20182019

2017 20182019

I II I II I II

EU 2.6 2.0 1.6 1.2 1.6 1.6 1.6 1.6 7.6 6.8 6.8 6.2

Euro Area 2.5 1.9 1.1 1.0 1.3 1.5 1.4 1.3 9.1 8.2 8.1 7.5

New EU Member States 4.9 4.3 4.4 3.9 2.0 1.7 2.5 2.6 4.7 3.8 3.7 3.2

ЕU-3 1.9 1.6 2.2 1.1 2.7 2.0 1.8 1.9 4.7 4.4 4.2 1.3

United States 2.4 2.9 2.7 2.3 2.1 1.9 1.9 1.6 4.4 3.9 4.1 3.5

Japan 1.9 0.8 1.0 1.0 1.0 0.3 0.5 0.7 2.8 2.4 2.4 2.4

China 6.8 6.6 6.4 6.2 1.6 2.1 2.3 2.7 3.9 3.8 3.7 3.6

Notes: New EU Member States are countries joining since 2004 less those now in the euro area. The ЕU3 are the United Kingdom, Sweden, and Denmark. New EU Member States and ЕU-3 indicators are cal-culated by weighing time series by country weights in group GDP for growth, in group labour force for unemployment, and the weights of the EU countries in HICP calculated by Eurostat for inflation. Real GDP growth is calculated on an annual basis according to non-seasonally adjusted data, with the excep-tion of the USA, for which seasonally adjusted data are used. Quarterly unemployment data are sea-sonally adjusted. Unemployment data for the UK are not available for the second quarter of 2019. Data published on 26 September 2019 are used.Sources: Eurostat, Bureau of Economic Analysis, Bureau of Labour Statistics, Statistics Bureau of Japan, the Na-tional Bureau of Statistics of China, BNB computations.

Global industrial output growth continued to slow down in the first half of 2019 to 1.2 per cent on average for the period (3.6 per cent in the first half of 2018).1 Growth slowdown was broad-based across geographical regions and industrial output posted a year-on-year decline in Japan, the euro area, Latin America and Asia’s emerging market economies (excluding China). The world trade volume remained almost unchanged from the first half of 2018.2 Foreign trade in Japan and all emerging mar-ket economies, with the exception of Latin America, exhibited a decline. Overall, developed economies reported a slight year-on-year increase.

The slowdown in the euro area economic activity, observed in 2018, continued in the first half of 2019. The average real GDP growth rate in the first half of 2019 was lower on an annual basis than that reported in the first half of 2018 due mainly to

1 Based on CPB data: Netherlands Bureau for Economic Policy Analysis 20 September 2019.2 Ibid.

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the negative contribution of net exports amid decreasing external demand growth. Fixed capital investment and private consumption contributed most substantially to enhanced economic activity.3 GDP growth moderated in all euro area countries, excluding Lithuania. Italy reported a fall in economic activity on an annual basis. In Germany economic growth slightly increased in real terms compared with the same period of 2018 (0.8 per cent in the first quarter and 0.0 per cent in the second quar-ter). The unemployment rate in the euro area4 fell to 7.8 per cent on average in the first six months of 2019 (8.6 per cent in the same period of the previous year), with Greece recording the highest value (18.0 per cent) and Germany the lowest value in the euro area (3.3 per cent).

In real terms, growth in the US economic activity also moderated in the first half of 2019 on an annual basis, though slower than in the euro area. The weaker economic activity was impacted by the higher negative contribution of net exports and the lower positive contribution of private consumption as compared with the first half of 2018. The US unemployment rate continued to decrease reaching 3.8 per cent on average in the first six months (4.1 per cent in the same period of 2018).

Prices of major commodity groups and raw materials in international markets rose in US dollars5 on an annual basis over the first six months of 2018. Brent crude fell both in US dollars (6.9 per cent) and euro (0.4 per cent). Factors responsible for the downward dynamics of the oil price were the lower global demand and increasing supply from non-OPEC countries. The fall in crude oil prices was partly curbed by factors such as the agreement between OPEC and other oil producing countries on production cuts, expectations for an extension of its term and the US restrictions on petroleum imports from Iran and Venezuela. The food price index in US dollars decreased on an annual basis by 5.2 per cent. Given the euro depreciation against the US dollar food prices in euro posted a 1.5 per cent rise on an annual basis. The dynamics across food price index sub-components was divergent, with prices of meat and cereals rising both in US dollars and euro. Between January and June 2019 the dollar metal price index fell by 5.9 per cent on the first half of 2018 (0.8 per cent growth in euro). The fall in metal prices in US dollars was a result of the slowdown in global industrial production growth, lower demand from China and the recovered production in key sector undertakings after temporary disruptions.

In June 2019 global inflation was 1.9 per cent6 on an annual basis, its rate insignifi-cantly moderating from the end of 2018 (2.0 per cent).

Euro area annual inflation7 in June 2019 decreased to 1.3 per cent (1.5 per cent in December 2018), reflecting mainly slower growth of energy prices. Core inflation (excluding food, energy, alcohol and tobacco products) slightly accelerated to 1.1 per cent (0.9 per cent in December 2018). At the end of the first half year Latvia led the euro area annual inflation at 3.1 per cent, Greece trailing at 0.2 per cent.

US Consumer Price Index (CPI) inflation8 fell to 1.6 per cent in June 2019 from 1.9 per cent in December 2018. In the first half year inflation measured by the per-sonal consumption expenditure price index slowed to 1.4 per cent on an annual basis (2.1 per cent in the first half of 2018) and remained under the target set by the Fed-eral Open Market Committee (FOMC).

3 Based on non-seasonally adjusted data. GDP data for Luxembourg are not available for the second quarter of 2019.

4 Unemployment data for Italy and Cyprus are not available for the second quarter of 2019.5 Hereinafter referred to as the US dollar.6 Based on 24 September 2019 seasonally adjusted World Bank data.7 Measured by the HICP.8 Non-seasonally adjusted data.

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Taking into account increasing risks to global economic growth and deterioration of economic activity indicators and inflationary expectations, the European Cen-tral Bank and the US Federal Reserve System stated that they may launch monetary stimulus measures in the second half of the year.9 In the first half of the year the ECB Governing Council left unchanged the interest rates on main refinancing operations, the marginal lending facility and the deposit facility at nil, 0.25 and -0.40 per cent but changed their forward guidance. At the March meeting the ECB Governing Council stated that the key interest rates were expected to remain at their current levels at least until the end of 2019. In addition, a new series of TLTRO III will be launched in September 2019. In June the ECB Governing Council expected the reference interest rates to remain unchanged at least until the end of the first half year of 2020 and in any case for as long as necessary to ensure the sustainable increase of inflation to the target set by the ECB. At the meeting the modalities of TLTRO III were announced.

In the first half of 2019 the US Federal Reserve retained its target range for the federal funds rate at 2.25–2.50 per cent. In June the US Federal Open Market Committee declared its stronger readiness for a possible change in the monetary policy, taking into account the increased uncertainty surrounding sustainable economic growth prospects, the favourable US labour market situation and the convergence of infla-tion to the 2.0 per cent target. Concurrently, measures to discontinue the US Federal Reserve System balance sheet normalisation were launched in the first six months of the year.

Federal Reserve System and ECB Interest Rates(per cent)

Sources: the ECB, the Federal Reserve System.

9 For details on ECB and US Federal Reserve monetary policies, see Chapter II.

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Main Stock Exchange Indices in the First Half of 2019

Note: US dollars, December 2018 = 100.

In the first half of 2019 the EURO STOXX 50 and STOXX EU ENLARGED and Dow Jones and NASDAQ tended to increase, more strongly in US indices.10 Despite lower expectations about global economic growth, increased uncertainty to world trade conflict developments and ambiguities over Brexit, the US and euro area stock mar-ket indices exhibited a rise in the first half of the year compared with end-2018. The major factor behind the upward dynamics of indices was the market participant expectations for extending the economic stimuli by leading central banks.

The Bulgarian Economy

In the first six months of 2019 the real GDP growth rate in Bulgaria accelerated to 4.2 per cent on an annual basis from 3.4 per cent in the first half of 2018.11 The strengthened economic activity in Bulgaria was mainly ascribable to the high positive contribution of net exports, while the annual growth rate of household consumption and fixed capital investment slowed down.12

In the first half of the year exports of goods and services rose by 4.3 per cent year on year and played a key role in real GDP growth. Exports dynamics reflected primarily the discontinued effect of one-off supply side factors, which had depressed exports of good in the first six months of 2018.13 The slowdown in economic activity which occurred in early 2018 in some Bulgaria’s important trade partners, such as Turkey

10 For more information on government bond markets, see Chapter II.11 GDP data published by the NSI on 5 September 2019 are used.12 The BNB Economic Review quarterly publishes detailed information and analyses on major macroeco-

nomic indicators in Bulgaria.13 One-off factors involved mainly the reduced production of petroleum products in the first half of 2018 as

a result of a key sector company refurbishing its facilities.

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and the euro area, continued to have a dampening effect on exports of goods. Imports of goods and services increased slightly by 0.3 per cent, due to the effect of specific one-off factors on some groups of goods14 and slower domestic demand. This made net exports’ contribution to GDP growth of 2.7 percentage points in real terms from -3.9 percentage points in the first half of 2018. The contribution of government con-sumption to real GDP growth was positive at 1 percentage point, reflecting higher operating, personnel and healthcare costs since early year. The decrease in inventories had a low negative contribution to the strengthening of economic activity in Bulgaria.

Real GDP Growth Rate and Contribution by Component of Final Use(compared to the same period last year, non-seasonally adjusted data)

2018 2019

January – June July – December January – June

Change (per cent)

Contribution, percentage

points

Change (per cent)


points

Change (per cent)


points

GDP 3.4 - 2.9 - 4.2 -Final consumption 6.9 5.5 5.2 3.9 2.3 1.9

Household consumption 7.9 4.9 4.9 2.9 1.4 0.9NPISH consumption 7.4 0.0 16.3 0.1 6.3 0.0Final consumption expenditures by general government 2.5 0.2 3.7 0.3 5.3 0.5Collective consumption 4.1 0.3 8.3 0.6 5.4 0.5

Gross fixed capital formation 8.5 1.6 5.0 0.9 1.0 0.2Physical changes in inventories - 0.2 - 0.1 - -0.6Exports (goods and services), net - -3.9 -2.0 - 2.7

Exports (goods and services) -0.7 -0.5 -0.8 -0.5 4.3 2.8Imports (goods and services) 4.8 3.4 2.6 1.5 0.3 0.2

Sources: the NSI, the BNB.

Real GDP Growth Rate and Contribution by Component of Final Use

(per cent, percentage points on corresponding quarter of previous year, non-seasonally adjusted data)


14 The NSI foreign trade statistics showed that raw materials and energy resources groups had negative con-tribution to nominal growth of imported goods.

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In the first six months of 2019 household consumption was supported by increased employment and higher labour income, as well as by low interest rates stimulating further consumer credit demand. Concurrently, deteriorated consumer confidence had a limiting effect on consumption due to more pessimistic households’ assess-ments of the general economic situation in Bulgaria and their financial position in the following 12 months15. Real annual final household consumption expenditure rose by 1.4 per cent (7.9 per cent in the first half of 2018).

Gross fixed capital formation grew by 1.0 per cent annually in real terms in the first six months of the year compared with 8.5 per cent in the first half of 2018. As to the type of assets investments in machines, information and communication equipment,16 and in residential buildings contributed more significantly to the increased gross fixed capital formation. Factors limiting private investment growth involved the economic uncertainty in Bulgaria’s important trading partners and worsening assessments of firms’ current business situation and their expectations about future production activity. Investment activity in Bulgaria benefited from a further increase in govern-ment investments under EU programmes and national capital expenditure, as well as by high capacity utilisation and preserved favourable financing conditions for corporations.

In the first half year gross value added growth in the economy was 3.4 per cent in real terms17. The services sector and industry and agriculture, to a lesser extent, had a significant positive contribution to the enhanced economic activity. In the sector of services, general government18 and real estate operations had the largest contributions to value added growth in the economy.

Gross Value Added Growth Rate in Real Terms and Contributions by Industry

(per cent, percentage points on corresponding quarter of prior year, non-seasonally adjusted data)


15 EU seasonally adjusted data.16 This refers to the information and communication technology equipment, weapons systems and other

machinery and equipment group.17 The contribution of adjustments to real GDP growth was 1.2 percentage points.18 General government, education, and human health and social work activities under the economic activities

classification at level A10.

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Gross Value Added Growth Rate in Real Terms and Contributions by Industry(compared to the same period last year, non-seasonally adjusted data)

2018 2019

January – June July – December January – June

Change (per cent)


points

Change (per cent)


points

Change (per cent)


points

Gross value added 3.1 - 2.9 - 3.4 -Agriculture and forestry -1.5 0.0 -0.9 -0.1 2.6 0.2Industry* 1.4 0.4 1.1 0.3 2.3 0.6Services 4.0 2.6 4.0 2.7 3.9 2.6

* Industry and construction.Sources: the NSI, the BNB.

The number of employees in the economy rose by 0.2 per cent on an annual basis in the first six months of 2019 (0.7 per cent in the first half of 2018). Comparatively low growth of employees was mainly attributable to the fall in selfemployed in agri-culture, while in services and construction the number of employees continued to increase. A more significant rise in employees over the six-month period was recorded in construction, which complied with the reported annual increase in real value added amid growing house prices, and those in the information and communication sector. Employees in manufacturing exhibited a slight decrease on an annual basis.

Unemployment, estimated by Employment Agency registrations, fell to 5.8 per cent on average from 6.5 per cent in the first half of 2018. NSI Labour Force Survey data show the unemployment rate as defined by the International Labour Organization also falling to 4.6 per cent, from 5.6 per cent on average a year earlier. Long-term (over a year) unemployment also continued to fall but its share in total number of unemployed in Bulgaria rose to 56.0 per cent (55.4 per cent in the corresponding period of 2018) due to a stronger decline in the number of short-term unemployed. The economic activity rate of the 15–64 age group rose to 72.9 per cent (71.2 per cent in the first half of 2018), the number of discouraged persons of the same group falling to 62 thousand persons on average (88 thousand in the first half of 2018).

In the first six months of 2019 labour productivity in the total economy accelerated its growth rate to 4.0 per cent on an annual basis, from 2.7 per cent in the correspond-ing period of 2018.19 Labour productivity rose most strongly in agriculture, forestry and fisheries and in some services sub-sectors (financial and insurance activities, real estate activities and arts, entertainment and recreation). Labour productivity recorded a slight annual decline in the construction sector.

The trend toward a sustainable increase in labour demand amid limited supply continued to contribute to wage growth. Additional factors behind higher wages involve increased minimum wage from early 2019 and wage increases in the public sector. Nominal wage growth in the overall economy accelerated on an annual basis to 11.6 per cent in the first half of the year (4.8 per cent in the same period of the previous year). Wages grew in all sectors, with the sub-sectors growing at a relatively higher rate than the average one for the economy. In the first half of 2019 real wage20 rose 8.8 per cent on an annual basis, accelerating its growth rate from the same period

19 Real GDP measures labour productivity in the overall economy. Sector labour productivity is calculated based on sector value added in real terms.

20 Real wage deflated by the HICP.

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of 2018 (2.8 per cent). Compensation per employee picked up 11.4 per cent on an annual basis, from 5.5 per cent in the first six months of 2018.

Faster growth of compensation per employee than labour productivity growth in the overall economy pushed up nominal unit labour costs to 7.1 per cent from 2.8 per cent in the first half of 2018. Real terms unit labour costs rose 0.2 per cent on an annual basis against a decrease of 0.4 per cent in the same period of last year.

Unit Labour Costs(moving average, 2010 = 100)


Between January and June 2019 gross operating surplus for the total economy acceler-ated its growth rate to 8.3 per cent on an annual basis, from 4.5 per cent in the cor-responding period of 2018. The services sub-sectors contributed most substantially to the growth of gross operating surplus, with the exception of wholesale and retail trade; repair of motor vehicles and motorcycles; transportation and storage; accom-modation and food service activities; information and communication; professional activities and research; administrative and support service activities which posted a fall.

The GDP deflator was positive in the first half of 2019 at 6.9 per cent against 3.2 per cent in the same period of 2018. Values of the deflator were positive in all sectors, with higher than average growth for the economy was reported in the sub-sectors of finan-cial and insurance activities; general government; education; human health and social work activities; arts, entertainment and recreation and in construction. In the first half of 2019 individual GDP deflators by final consumption expenditure component grew year on year. The government consumption deflator posted the highest growth rate compared with the first half of 2018. The deflator of total exports of goods and services rose stronger than that of imports of goods and services. Consequently, the terms of trade were favourable for the Bulgarian economy.

At the end of the first half of 2019 the annual rate of consumer price inflation accounted for 2.3 per cent and remained unchanged from December 2018.21 Food and services had a major positive contribution to inflation in June: 1.0 and 0.9 per-centage points respectively. The fall in Brent crude oil price in euro by 12.9 per cent on an annual basis in June (-8.6 per cent in December 2018) played a key role in the low negative contribution of energy products to inflation.

21 The analysis employs HICP data.

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In the first six months of 2019 the annual growth rate in the food price index accel-erated to 4.4 per cent from 2.4 per cent at the end of 2018, with higher inflation reported both in processed and unprocessed food. Amid poorer 2018 wheat harvests in Bulgaria and higher prices of imported cereals the bread and cereals group again contributed most strongly to overall annual inflation in consumer prices. The higher inflation in the group of unprocessed food compared with the end of the previous year was driven by the meat and meat products group, which was a result of the upward dynamics in the price of pork consistent with higher international prices in the first half of the year.

Core inflation (excluding food, energy products, goods and services with administra-tively controlled prices, and tobacco) was 2.3 per cent annually in June against 2.5 per cent in December 2018. Services inflation slowed down to 3.7 per cent from 5.0 per cent by end-2018, reflecting lower prices of telecommunication services, the reduced positive contribution of prices in insurance connected with travel22 and the lower inflation in transport services. The lower contribution of transport services was due to the slower inflation rate in air and passenger automobile transport amid the fall in international oil prices. Broken by services sub-component, catering (due to the upward dynamics in food) and short-stay accommodation services had the largest positive contributions to the overall inflation. In the first half of 2019 the deflation observed in non-food goods since early 2010 was reversed and in June the annual inflation in this group accounted for 0.5 per cent (-0.5 per cent in 2018). Non-durable goods continued to contribute positively to inflation in non-food goods. Concurrently, the negative contribution of the motor vehicle prices contracted significantly. Prices of durable goods (excluding motor vehicles) continued to decrease, though at slower rates.

The annual inflation in the group of goods and services with administratively con-trolled prices (including tobacco) slowed down to 1.6 per cent in June 2019, from 2.3 per cent in December 2018 reflecting mainly the lower positive contribution of tobacco products due to the exhausted base effect from increases in excise duties on cigarettes in early 2018.

Annual Inflation Rate and Contributions by Major Group of Goods and Services

(per cent, on an annual basis; percentage points)


22 The reduced positive contribution of prices in insurance connected with travel reflected mainly the exhausted base effect from a 2018 Supreme Court of Cassation ruling widening the circle of those entitled to claim compensation for the death of relatives, which resulted in a price increase in the first half of 2018.

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HICP Inflation Accumulated since the Year’s Start and Contributions by Major Goods and Services Groups to It

January–June 2018 January–June 2019

Inflation (per cent) 1.4 1.5Rate of inflation

by group (per cent)Contribution

(percentage points)Rate of inflation

by group (per cent)Contribution

(percentage points)

Food 1.0 0.25 2.9 0.70 Processed food 0.5 0.08 1.9 0.31 Unprocessed food 2.1 0.18 5.0 0.40Services 2.2 0.55 0.9 0.24 Catering 1.8 0.10 2.5 0.14 Transport services 2.1 0.07 0.1 0.00 Telecommunication services 1.2 0.05 -3.3 -0.16 Other services 2.8 0.33 2.1 0.27Energy products 6.0 0.50 4.0 0.32 Transport fuels 7.3 0.48 5.6 0.35Industrial goods -0.5 -0.09 0.6 0.12Goods and Services with Administratively Controlled Prices 0.6 0.11 0.3 0.05Tobacco products 2.9 0.13 0.8 0.03

Notes: This structure corresponds to the Eurostat classification; tobacco products and goods and services with administratively controlled prices are shown separately. The index of goods and services with administratively controlled prices is calculated through the elementary aggregates level in the consumer basket. Sources: the NSI, the BNB.

Balance of payments preliminary data show that in the first half of 2019 the total balance of the current and capital accounts was positive at EUR 2454.0 million. The surplus rose significantly from the first half of 2018, which was mainly attributable to the lower trade deficit.

The lower trade balance deficit on the corresponding period of 2018 was driven by higher growth in real exports of goods and services compared to imports amid favour-able terms of trade. Half year foreign trade figures show nominal goods exports rising 4.5 per cent on an annual basis and nominal imports 0.6 per cent. The mineral prod-ucts and fuels group contributed most strongly to growth of exported goods, which may be explained by the low base in the corresponding period of the previous year, when a key sector company cut significantly the production due to a scheduled repair of production capacities.23 Machines, transportation vehicles, appliances, instruments and weapons, and chemicals, plastics and rubber contributed substantially to exports growth. Concurrently, growth of imports of goods by use was significantly contracted by the fall in imported raw materials24 and lower imports of energy resources.

The higher surplus on the net services trade item compared with the first half of 2018 also added to the increase in the total current and capital account balance. Over the review period exports of services rose on an annual basis (5.3 per cent), while imports of services decreased (-6.8 per cent). The telecommunications, computer and information services group contributed most to growth of services exports. As regards services imports, the largest negative contribution was reported in insurance and pension services.

23 NSI data on production and supplies of oil and oil products.24 The fall in imported raw materials was partly attributable to lower production of copper products due to

an unscheduled repair of a key sector company at the end of 2018 and a scheduled repair in May and June for a period of 22 days.

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The net secondary income of the balance of payments current and capital accounts showed an increase in the surplus from the first half of 2018, reflecting mainly higher current and capital transfers received under EU programmes. The deficit on the net primary income item decreased on the January–November 2018 period mainly as a result of lower outflows under the dividends and distributed profits item.25

In the first half of 2019 the balance of payments financial account recorded a sur-plus of EUR 1177.9 million driven by Bulgarian residents’ foreign assets increasing stronger than foreign liabilities to non-residents. Transactions of other sectors26 (increasing their foreign assets mainly in the form of portfolio investments) and those of banks (with the strongest increase in foreign assets reported in the form of other investments27) contributed most significantly to the increased assets on the financial account. An increase in foreign liabilities was recorded only in other sectors ascrib-able mainly to direct investments in Bulgaria.

Preliminary balance of payments data for the first half year put direct investment liabilities (reporting direct investment into Bulgaria) at EUR 468.2 million, up EUR 147.1 million compared to the first half of 2018.

In June 2019 Bulgaria’s gross external debt rose EUR 832.8 million from the end of 2018 to EUR 34.0 billion or 58.6 per cent of GDP. Foreign debt dynamics was driven by higher intercompany loans and increased other sectors’ debt28, whereas the general government sector and banks reported a decrease in foreign debt.

All current, capital, and financial transactions led to a decrease in BNB international reserves by EUR 100.3 million for the January–June 2019 according to balance of payments data (valuation adjustments and price revaluations excluded). If changes in international foreign reserves on the BNB Issue Department balance sheet are taken into account, including valuation adjustments and price revaluations, as of June they rose by EUR 111.2 million on the end of 2018.

Favourable labour market conditions amid uncertainty ensuing from the external environment and the lack of sufficiently safe alternatives of bank deposits helped maintain high rates of broad money growth since early 2019. In May and June annual growth of broad monetary aggregate M3 slightly slowed down to 7.8 per cent in June (8.8 per cent at the end of 2018) mainly attributable to the decreasing contribution of deposits with an agreed maturity of up to two years. Very low deposit rates reflected economic agents’ preferences to save mostly in overnight deposits because of the flex-ibility they provide in savings withdrawals. The contribution of money outside MFIs to total M3 growth remained relatively stable, approaching the levels reported at the end of 2018.

Overall annual growth of non-government sector’s deposits in the banking sys-tem accounted for 7.2 per cent in June 2019 (7.3 per cent at the end of 2018), with household deposits contributing most significantly to this growth. By the end of first half year they reached BGN 53.1 billion, growing by 8.2 per cent on an annual basis (7.7 per cent in December 2018). In May and June annual growth of deposits of non-financial corporations slowed down due both to the negative contribution of deposits with agreed maturity and lower positive contribution of overnight deposits. In June total deposits of non-financial corporations reached BGN 23.2 billion, their growth rate slowing to 2.6 per cent from 5.2 per cent at the end of 2018. In the first half of

25 Preliminary data subject to revision; revisions usually show an increase in outflows to non-residents.26 Sectors other than central banks, other monetary financial institutions and general government.27 Investment other than direct and portfolio investment. 28 Sectors other than central banks, other monetary financial institutions and general government.

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2019 both corporations and households again preferred to save mostly in national currency.

Annual Rate of Change in М3 and Contribution by Component(per cent, percentage points)

Source: the BNB.

Annual Growth of Non-government Sector Deposits and Contribution by Sector (per cent, percentage points)

Source: the BNB.

Credit to non-financial corporations and households continued to grow at compara-tively high rates in the first half of 2019, accounting for 6.0 per cent on an annual basis in June (7.7 per cent by end-2018). This dynamics was driven by the strong demand by corporations and households and still low interest rates. Loans to non-financial corporations posted year-on-year growth of 4.6 per cent in June 2019 (5.4 per cent at the end of 2018). The gradual slowdown in these loans reflected mainly the lower amount of bad and restructured loans, and to a lesser degree, the slower rise in overdraft. Concurrently, the annual growth rate of standard loans to non-financial corporations accelerated. Loans to households rose year on year by 8.1 per cent in June 2019, from 11.2 per cent at the end of 2018. The exhausted effect of a new reporting unit included in the scope of monetary statistics in April 2018 had a

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strong effect on the dynamics of loans to households.29 The exhaustion of this effect prompted a significant slowdown in growth of consumer loans in April 2019, fol-lowed by a stabilisation. The annual growth rate of housing loans tended to accelerate reaching 11.8 per cent in June (11.4 per cent by the end of 2018). Concurrently, other credit continued to contribute negatively to the household loan dynamics largely as a result of government repayment of loans extended under the National Programme for Energy Efficiency of Multi-family Residential Buildings which exceeded the volume of new loans under this programme.

Annual Non-financial Corporation Credit Growth and Contributions by Loan Type

(per cent, percentage points)

Source: the BNB.

According to the summarised results of the BNB quarterly lending survey, demand for loans by both corporations and households continued to increase over the first half of 2019. Higher demand for corporate loans was driven primarily by corpora-tions’ needs for working capital and inventories, low interest rates, the need of funds for investment purposes and refinancing, restructuring or renegotiating of debts. Major factors behind the enhanced demand for consumer loans in the first half of 2019 involved demand for financial resources by households for purchasing durable goods, the favourable macroeconomic environment and low interest rates. In addition to the overall macroeconomic environment and low interest rates, favourable housing market prospects and household demand for funds for purchasing first or additional home contributed strongly to the higher demand for housing loans.

29 As from April 2018, the other monetary financial institutions sector includes BNP Paribas Personal Finance S.A., Bulgaria branch, with balances reclassified from the sector of other financial intermediaries. The reclassification results from BNP Paribas Personal Finance EAD specialised in lending being transformed through merger into the new credit institution. Until March 2018, it was included in the sector of other financial intermediaries for the purposes of monetary statistics.

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Annual Household Credit Growth and Contributions by Individual Loan Type

(per cent, percentage points)

Source: the BNB.

On the supply side, banks left almost unchanged lending standards in approving credit applications both of corporations and households. At the same time, banks reported further easing of credit conditions in terms of interest rates and interest rate spread and, to a lesser extent, in terms of fees and commissions charged. Stand-ards for consumer loans tightened in terms of premia for riskier loans, and those for housing loans in terms of collateral requirements and, to a lesser degree, in terms of the maximum amount and term of the loan. Major factors behind the eased banks’ lending policy (lending standards and conditions) over the first half of 2019 included high liquidity and enhanced competition in the banking sector, rising volume and decreasing cost of attracted resources and lowered risk assessment. Risk assessments reflected the overall macroeconomic environment improvement, increased borrow-ers’ solvency, favourable prospects in the housing market and lower collateral risk. Concurrently, weaker banks’ credit risk appetite was a factor for tightening corporate and household lending over the reporting period.

In the first six months the banking system retained its strong liquidity position, with the liquid asset ratio (LCR)30 accounting for 260.6 per cent (294.1 per cent in Decem-ber 2018).

Banks’ transactions with the BNB in reserve currency (euro) are their main instru-ment for lev liquidity management under Bulgaria’s currency board. This takes advantage of the main currency board function: buying and selling levs for euro at the fixed exchange rate under the Law on the Bulgarian National Bank31. In the first half of 2019 net BNB purchases of euro from banks were EUR 0.4 billion.32

Between January and June 2019 the volume of the interbank money market transac-tions was BGN 16.6 billion, down 41.5 per cent on the corresponding period of last year. Deposits comprised 81.1 per cent of the turnover, with government securities

30 The liquidity coverage ratio for the banking system is calculated as the ratio of the liquidity buffer to net liquidity outflows. For further information on liquidity reporting requirements, see the BNB quarterly Banks in Bulgaria.

31 See Chapter Two.32 Data refer to all bank transactions in foreign currency, including liquidity management operations related

to the transfer of own funds from lev accounts with the BNB to own accounts with the BNB in euro and vice versa.

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repos at 18.9 per cent. Overnight transactions dominated deposits between banks comprising 67.7 per cent of all deposit transactions.

Between January and June 2019 the average interest rate on interbank deposits and repurchase agreements rose insignificantly from the corresponding period of 2018 to -0.47 per cent. LEONIA Plus developments33 also remained relatively stable tending to slightly increase over the period. Since EONIA remained unchanged in the first half of 2019 the spread between LEONIA Plus and EONIA slightly narrowed amount-ing to -8 basis points in June 2019.

Overnight Interbank Money Market Rates(per cent, monthly average amount)

Note: LEONIA Plus replaced LEONIA on 1 July 2017. LEONIA Plus monthly values are calculated as an arithmetic average for days when overnight unsecured lending transactions are concluded in the interbank market in levs. Sources: the BNB, the ECB.

In the first half of 2019 the surplus on the cash based consolidated fiscal programme was BGN 3223 million.34 The strong budget position improvement from the cor-responding period of the previous year (by BGN 1510 million) can be explained by faster growth of budget revenue compared to budget expenditure.

Total revenue and grants under the consolidated fiscal programme for the January–June 2019 period grew 16.0 per cent annually driven mainly by the upward dynamics in tax revenue (up 10.4 per cent). Increasing employment and labour income coupled with the increase in the maximum and minimum amount of social security income and minimum wage introduced since the beginning of the year played a significant role in the sustainable rise in revenue from social security and health insurance con-tributions (11.5 per cent) and from personal income tax (9.5 per cent). Despite the weak dynamics of household consumption, the first half year saw an indirect tax rise, with VAT and excise revenue increasing year on year by 8.8 and 18.3 per cent. Non-tax revenue also contributed substantially to the increase in total budget revenue, reflecting mostly the changes in collecting revenue in the Electric Power System Secu-rity Fund’s budget introduced in July 2018. Increased grant revenue also fostered, though to a lesser extent, the good implementation of budget revenue, which reflected the accelerated absorption of funds under EU programmes at the end of the previous and the beginning of the current year.

33 LEONIA Plus (LEv OverNight Interest Average Plus) reports real transactions in unsecured overnight deposits in Bulgarian levs on the interbank market.

34 Based on quarterly reports on the implementation of budget, published on the Ministry of Finance website.

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In the first half of 2019 total expenses on the consolidated fiscal programme rose by 8.9 per cent driven mainly by personnel costs (3.3 percentage points), social payments (2.0 percentage points) and subsidies (1.6 percentage points). The dynamics of gov-ernment current expenditure was affected by both public sector wage growth focused on wages in the sector of education started in early 2019 and the increase in old age pensions for length of service and age, effective as of 1 July 2018, and the changed distribution of subsidies from the Security of the Electricity System Fund. Develop-ments of government capital spending also contributed to higher budget expenditure, though to a lesser extent35. Between January and June 2019 they grew 14.1 per cent on an annual basis, reflecting mainly capital expenditure under EU programmes, and to a smaller degree, investments in the national budget.

The cash surplus accumulated in the first half of 2019 was mainly used to increase liquid holdings of the government. Funds on fiscal reserve deposits rose by BGN 2256 million to BGN 11,269 million, with total fiscal reserve, including certified expendi-ture claims on EU funds, advances and other payments reaching BGN 11,668 million at the end of June. The scope of the fiscal reserve includes resources in the State Fund for Guaranteeing the Stability of the State Pension System (the so-called Silver Fund). At the end of June the funds amounted to BGN 3081 million: up BGN 159 million from the beginning of the year. In the first half of 2019 the net government securities issue on the domestic market was negative at BGN -620 million against BGN 301 million issued since the start of the year.36

Consistent with historically lowest yields attained on government securities domestic primary and secondary markets, the yield of all Bulgarian Eurobonds traded in inter-national capital markets continued to fall. The January–June period saw the strongest yield decline in Eurobonds maturing in 2035 (by 103 basis points), whereas the fall in the yield of issues with a residual maturity from three to five years moved within 15 to 44 basis points.

The leading Bulgarian Stock Exchange SOFIX and BGBX40 indices remained rela-tively stable in the first six months of 2019. In June SOFIX fell by 1.1 per cent from the end of 2018 and BGBX40 slightly increased by 0.4 per cent. In June 2019 mar-ket capitalisation of the Bulgarian Stock Exchange, Sofia, was BGN 27.6 billion or 24.3 per cent of GDP, from 24.8 per cent of GDP at the close of 2018.

Bulgarian Stock Exchange Indices in the First Half of 2019

Sources: the BNB, Bulgarian Stock Exchange.

35 Including government reserve growth.36 For more information on government securities primary and secondary markets see Chapter XII.

Gross International R

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II. Gross International Reserves

The BNB manages its gross international reserves in line with the Law on the Bulgar-ian National Bank,37 investment constraints, business procedures and methodologies, and opportunities offered by international financial markets. Gross international reserves comprise the assets on the Issue Department’s balance sheet. Their role is to provide complete cover for monetary liabilities under the fixed exchange rate of the lev to the euro provided for by the Law on the Bulgarian National Bank.38 The excess of gross international reserves over monetary liabilities forms the Banking Depart-ment Deposit item or the net value in the Issue Department’s balance sheet.39

Gross International Reserves and Banking Department Deposit in the First Six Months of 2019(EUR million) (EUR million)

Note: The chart shows daily movements of the Issue Department balance sheet figure and the Banking Department deposit in the Issue Department balance sheet. Source: the BNB.

37 There were no Law on the BNB amendments to the regulatory framework of gross international reserve management.

38 The Law on the BNB Article 28, paragraph 2 defines the Bank’s monetary obligations as all circulating banknotes and coins issued by the BNB, and all balances of other entities’ BNB accounts, except the IMF. Article 28, paragraph 3 specifies what assets may comprise gross international reserves: monetary gold; Special Drawing Rights; banknotes and coins in freely convertible foreign currency; funds in freely convertible foreign currency held by the BNB on accounts with foreign central banks or other financial institutions or international financial organisations with one of the two highest ratings by two interna-tionally recognised credit rating agencies; securities issued by foreign countries, central banks, other for-eign financial institutions, or international financial organisations assigned one of the two highest ratings by two internationally recognised credit rating agencies; the balance on accounts receivable and payable on BNB forward or repo agreements with (or guaranteed by) foreign central banks, public international financial organisations or other foreign financial institutions with one of the two highest ratings from two internationally recognised credit agencies; and BNB futures and options which bind non-residents and which are payable in freely convertible foreign currency. The Law on the BNB stipulates that these assets are estimated at market value.

39 The Law on the BNB Article 28, paragraph 1 states that ‘the aggregate amount of monetary liabilities of the BNB shall not exceed the lev equivalent of gross international reserves,’ with the lev equivalent calculated on the basis of the fixed exchange rate.

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The Amount and Structure of Gross International ReservesBy the end of June of 2019 the market value of gross international reserves was EUR 25,183.40 million: an increase of EUR 111.23 million40 or 0.44 per cent. Major factors affecting the market value of assets include income from reserve management, income from foreign currency revaluation, and external cash flow effects.

External Cash Flows in Foreign Currency(EUR million)

January–June 2018 January–June 2019

I. Euro purchases and sales

At tills -32 -51 With banks -483 -841 purchases from banks 14,503 13,719 sales to banks -14,987 -14,560Subtotal I -516 -892II. Currency flows with banks, the MF, etc. Bank reserves (including minimum required reserves) -209 392 Government and other depositors 387 698Subtotal II 178 1,090Total I+II -338 198

Source: the BNB.

External foreign currency flows of EUR 198.14 million made a positive contribution to the international reserve increase in the first half of 2019. Of these, receipts into government and other budget organisations’ accounts were EUR 697.86 million (mainly EC transfers on its account with the BNB). Cash flows (EUR 392.45 million) on banks’ BNB accounts related to minimum reserve maintenance and generated excess reserves had also a positive effect. Banks’ net reserve currency sales of EUR 840.98 million partly offset the positive effect of the rest external foreign currency flows.

Over the reporting period the relative share of gold in gross international reserves grew on 2018 to 6.77 per cent on average, from 6.57 per cent in 2018. This dynamics reflected largely the 10.79 per cent increase in euro gold prices. Foreign currency inflows into the Issue Department balance sheet leading to a rise in the relative share of euro-denominated assets to 92.49 per cent also had an effect. A minimum increase was recorded in the share of US dollar assets to 0.18 per cent.

Currency Structure of Gross International Reserves (per cent)

CurrencyIssue Department balance sheet assets

2018 January–June 2019

EUR 92.69 92.49

USD 0.17 0.18

XAU 6.57 6.77

XDR 0.56 0.55

CHF 0.00 0.00

Note: Average values calculated on a daily basis for the period. Source: the BNB.

40 Balances in banks’ TARGET2 national system component accounts (worth some EUR 204.70 million at the end of June 2019), and the two tranches of SDR 611 million disbursed in August and September 2009 upon general SDR allocation by the IMF are not included in the analysis of changes in BNB gross international reserves below. For further details, see BNB Annual Report for 2009, p 26.


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There was no essential changes in gross international reserves structure by financial instrument.

Gross International Reserves by Financial Instrument (per cent)

Financial instruments 2018 January–June 2019

Vault cash* 3.52 3.63

Deposits** 35.52 35.28

Securities** 60.96 61.08

Note: Average values calculated on a daily basis for the period. * Account balances, payments, and monetary gold.** Including instruments in foreign currency and gold.Source: the BNB.

In the first half of 2019 most assets in the structure of international reserves by residual term to maturity continued to be invested in the maturity sector of up to a year (current accounts, short-term deposits in foreign currency and gold, and short-term securities). Their share averaged 66.61 per cent, down 0.51 percentage points on 2018, with those in the three to five-year maturity sector rising by 0.69 percentage points to 7.36 per cent.

Gross International Reserves by Residual Term to Maturity(per cent)

Maturity sectors 2018 January–June 2019

Up to a year 67.12 66.61One to three years 25.99 25.99Three to five years 6.67 7.36Five to ten years 0.22 0.04Over ten years 0.00 0.00

Note: Average values calculated on a daily basis for the period. Source: the BNB.

Gross International Reserves Risk and Return

The Market Environment

In the first six months of 2019 international financial market developments were marked by a volatility maintained at the previous year’s level. Global stock market indices recovered from the downward adjustment of end-2018, with some of them reaching historically highest levels. The increase in stock market indices was largely driven by market participants’ expectations of accommodative monetary policy meas-ures of the leading central banks whereby financing costs for corporations would be reduced and their economic activity increased. At the same time, these expectations led also to a robust rise in government securities demand. The significant surge in government bond markets resulted from several factors pushing up the global growth uncertainty, among which incoming data releases indicating slowing activity in global manufacturing, rising concerns about potential new protectionist measures in inter-national trade, the uncertainty surrounding Brexit and changing monetary policy stance of leading central banks. Geopolitical risks also increased (the uncertainty in Middle East surrounding US sanctions against Iran, protests in Hong Kong and politi-cal fragmentation in the EU) leading to rising demand for low risk assets.

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In the second quarter of 2019, amid worsening economic conditions and rising risks to global economic growth, both the ECB and the Federal Reserve System signalled a possible move to a monetary accommodative policy in the second half year, if infla-tion and inflation expectations retain their downward dynamics. The ECB Governing Council announced its intention to launch a new series of TLTRO III, and the ECB President suggested a possible monetary stimulus recovery in the second half of 2019. The Federal Open Market Committee also expressed its intention to move to a more active monetary policy. Changes in Federal Reserve System and ECB monetary policy stance corresponded broadly to and followed the movements in the economic situa-tion and market expectations.

In the first half year German sovereign bond yields declined significantly across all maturity sectors above six months. By half year’s end all German government bonds with under 15-year maturities traded at negative yields. At the same time, government bond yield spreads in other euro area countries broadly declined vis-à-vis German bonds, with changed information released by the ECB and especially ECB President’s June statement on readiness for new monetary policy stimuli by end-2019 contribut-ing most significantly to this.

US government bond yields dropped over the first half of 2019, with the fall in the two-year government bond yield exceeding that in ten-year government securities. This dynamics was driven mainly by the change in Federal Reserve information on the views of its members concerning the US economy and their individual projections of the federal funds rate. Incoming data releases reporting slowing economic growth in the USA and the increased uncertainty on US trade relations with major partners (mainly China and Mexico) were the key factors for decreasing yields in longer-term maturity sectors.

Euro area and US Central Bank Policies

In the first half of 2019 the ECB Governing Council kept unchanged its reference interest rates, while changing twice their forward guidance. At its monetary policy meeting of 7 March 2019, the ECB Governing Council announced that it expected interest rates to remain at their current levels at least until the end of 2019. In addi-tion, a new series of TLTRO III would be launched in September and held at least quarterly, ending in March 2021, and each operation would be with a maturity of two years. These Eurosystem’s credit operations would continue to be conducted as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the bank reserves maintenance period, starting in March 2021.

At its 6 June meeting, the ECB Governing Council changed the forward guidance on reference rates and announced its expectations that the key ECB interest rates would remain at their present levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to the ECB’s objective of below, but close to, 2 per cent over the medium term. TLTRO III modalities were announced, with the interest rate in each operation set at a level that is 10 basis points above the average rate applied in the Eurosystem’s main refinancing operations over the life of the respective TLTRO. For banks whose eligible net lend-ing exceeds a benchmark, the interest rate would be lower and could be as low as the average interest rate on the deposit facility over the life of the operation plus 10 basis points.

In the first half of the year the ECB President suggested a possible resumption of monetary stimulus measures over the second half year. After the 10 April meeting, the President declared ECB’s readiness to adjust all of its instruments, as appropriate,


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to ensure that inflation continues to move towards the Governing Council’s infla-tion target in a sustained manner. At the ECB Forum on Central Banking held in Sintra, Portugal, from 17 to 19 June 2019, the ECB President stated that the Gov-erning Council would discuss how monetary policy instruments should be adapted commensurate to the severity of the risks to price stability. Inflation expectations in the euro area decreased significantly, creating risks to the inflation target. The ECB President pointed out the possibilities to counteract these processes by using all monetary policy instruments, including cuts in reference interest rates and restarting the Asset Purchase Programme (АРР).

In the first half year the Eurosystem balance sheet figure rose by 0.5 per cent on the end of 2018 to EUR 4.69 trillion. Compared with the end of 2018, the amount of the four asset purchase programmes of the ECB decreased, as follows: by EUR 19.7 billion under the Public Sector Purchase Programme (PSPP), by EUR 0.7 billion under the Corporate Sector Purchase Programme (CSPP), by EUR 1.4 billion under the Covered Bond Purchase Programme (CBPP3), and by EUR 1.9 billion under the Asset-Backed Securities Purchase Programme (ABSPP). Euro area banking excess liquidity fell to EUR 1760 billion, from EUR 1786 billion at the end of 2018 and the effective Euro Overnight Index Averaged (EONIA) declined to -0.37 per cent, from -0.36 per cent on average for the second half of 2018. EURIBOR unsecured deposit rates decreased across various maturity sectors. By end-June the one-month deposit rate was -0.39 per cent (down 3 basis points on the end of 2018), and six- and twelve-month rates reached -0.31 and -0.21 per cent (down 7 and 10 basis points, respectively, from the end of 2018).

Over the review period the US Federal Open Market Committee kept unchanged its target range for the federal funds rate at 2.25–2.50 per cent. After its March meeting, the FOMC published the updated Federal Reserve’s balance sheet normalisation plan. It provides for a slower reduction in the Federal Reserve’s aggregate securities hold-ings from USD 30 billion to USD 15 billion per month beginning in May 2019, so that the process of normalising the size of the Federal Reserve’s government securities holdings to be completed by the end of September 2019. Concurrently, the process of reducing the size of Federal Reserve’s agency debt and agency mortgage-backed securities portfolio would continue, whereby starting from October up to USD 20 bil-lion monthly of principal proceeds would be reinvested in US government securities. At the June meeting, the information provided by the Federal Reserve was changed, omitting in the press release ‘patient’ in their approach to interest-rate decisions and moving to a more active monetary policy stance. In the first half year Federal Reserve members revised downwards their forecasts of the reference rate level compared to December 2018, with projections after the June meeting suggesting expectations of maintaining the target rate at its current level by end-2019 and a 50 basis points decrease by end-2020. The estimate of the long-run equilibrium level of the federal funds rate was also lowered from 2.75 to 2.50 per cent.

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Euro Area and US Sovereign Bond Yield Curve

In the first half year German sovereign bond yields declined significantly across all maturity sectors above six months. Compared to the end of 2018, two-year bond yields dropped by 14 basis points to -0.75 per cent, with ten-year yields falling by 57 basis points to -0.33 per cent. These developments led to a 43 basis point flattening in the German bond yield curve measured by the difference between ten and two-year yields. By half year’s end, all German government bonds with under 15-year maturi-ties traded at negative yields. Major factors behind lower long-term yields involved market participants’ concerns about slowing global economic growth and changing monetary policy stance of leading central banks. Weaker than expected macroeco-nomic data releases for the euro area in the first half year and downward revisions of economic growth projections by a number of institutions, such as the EC, the IMF and the ECB, contributed to the decrease in German government bond yields. Intensifying trade conflicts between the USA and their major trading partners along with the uncertainty around Brexit led to increasing demand for German government securities as a safe haven. Worsening prospects for global trade and economic growth had a negative effect on market inflation expectations in the euro area, resulting in changed expectations of market participants about cuts in euro area’s interest rates. The ECB President’s statement in Sintra also contributed to strengthening market expectations of more accommodative monetary policy measures.

Between January and June 2019 euro area government bond yield spreads broadly contracted vis-à-vis German yields. A more essential contraction was observed at the end of June when European Parliament elections showed that leading parliamentary groups retained their majority, which pushed down the political risk premium in the EU. The strongest drop was recorded in Spanish and Portuguese ten-year spreads (-45 and -63 basis points, respectively). Changes in Portuguese government securities were driven by the March increase in country’s credit rating from ВВВ- to ВВВ with a stable outlook assigned by S&P, reflecting the strong economic growth and increased primary budget surplus. The effect of civil riots in France which affected negatively nation’s economic activity and led to widening in French bond spreads at the end of 2018 weakened gradually. In March 2019 consumer confidence and French bond spreads recovered to levels close to those before the beginning of the protests. Ital-ian ten-year government bond spreads shrank by 7 basis points despite the political uncertainty and economic data signalling economic activity slowdown in 2019. A common factor for declining spreads of the countries from the euro area periphery, as defined by market participants, was the change in ECB future monetary policy guidance and especially the ECB President’s statement in Sintra signalling readiness to adopt new monetary policy stimulus by the end of 2019.

In the first half-year the US government bond yield curve measured by the ten and two-year bond yield difference dropped by 5 basis points on the end of 2018 to 20 basis points at the end of June. This change was due to the larger decline in US two-year yields than ten-year yields (73 basis points against 68 basis points). Two-year yield dynamics was driven mainly by the Federal Reserve information on the state of the US economy and individual projections of FOMC members concerning the federal funds rate. Worse than consensus expectations of market analysts on the economic growth in the USA and the increased uncertainty on US trade relations with major partners (China, Mexico and the EU) were the key factors for decreasing yields in longer-term maturity sectors. An additional driving factor was the Brexit-specific uncertainty.


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Government Bond Yields in the First Six Months of 2019(per cent)

Gold and Exchange Rates

At the end of June 2019 gold prices increased in both dollars and euro, reaching in June the highest value for the last six years. Dollar gold prices rose by 10.0 per cent to USD 1409.6 and euro prices grew by 10.7 per cent to EUR 1239.2 per troy ounce. It moved within the range of USD 1270 to 1426 and EUR 1119 to 1255 per troy ounce. Price growth was mainly observed in June under the influence of the increasing geopolitical uncertainty around trade conflicts between the USA and major trading partners and Iran’s reaction after Washington’s sanctions. Changed expectations of market participants about a possible decline in US federal funds rates and subsequent government bond price rises also contributed to the increase in gold prices.

The US dollar appreciated by 0.9 per cent against the euro to USD 1.14 per EUR 1, ranging from USD 1.11 to USD 1.15 per EUR 1 (from EUR 0.75 to EUR 0.90 per USD 1). Relatively weaker euro area economic data compared to the USA were the main driver of dollar appreciation against the euro. The move forward in time of market participants’ expectations regarding the first rise in ECB key rates also contributed to the appreciation of the dollar against the euro. In addition, deteriorated prospects for global trade and economic growth in June led to a change in ECB monetary policy stance and readiness to a shift towards monetary accommodation and relevant cuts in reference interest rates, while US investors decreased their expectations of a greater reduction (from 50 to 25 basis points) in reference rates.

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USD/EUR Exchange Rate in the First Six Months of 2019(EUR)

Troy Ounce Gold Price in US Dollars in the First Six Months of 2019(USD)

Troy Ounce Gold Price in Euro in the First Six Months of 2019(EUR)


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Major Types of Risk

Annual net value risk in the Issue Department balance sheet measured by the stand-ard deviation of net return was 6.37 per cent on an annual basis.

In the first half year international reserve interest rate risk measured by reserves’ average modified duration was 0.86 years. The duration maintained was 0.02 years shorter than the average for 2018. The relative interest risk limit of investment port-folios was set on the basis of not more than 0.25 per cent relative yield volatility.

The Law on the BNB stipulation that the sum of the absolute values of open foreign currency positions 41 in currencies other than euro, SDR, and monetary gold, should not exceed 2 per cent of the market value of monetary liabilities in these currencies constrained gross international reserve currency risk. There were minimal open posi-tions in foreign currencies in the reporting period, the open position in monetary gold posing the main currency risk to the BNB.

The Bank continued its conservative credit risk management policy in gross inter-national reserve investment. There were no major changes related to this type of risk, except temporary bans on investing into particular issuers’ securities. Since the start of the year, covered bonds issued by Norway’s financial institutions have been approved as an eligible investment instrument of secured debt class.

To achieve its main objective of very high international reserve security and liquidity, the BNB continues investing the main share of assets into euro area core country government bonds and government guaranteed debt, and into short-term deposits with first class foreign banks.

By the end of June 2019 about 62 per cent of international reserves were invested into assets with the highest AAA long-term credit rating.

Operational risk is managed by strict observance and control over investment con-straints and relevant business procedures in managing foreign exchange reserves.

Return and EfficiencyNet income from assets in euro is the sum of three components:

i) income from gross international reserves investment in the original currency; ii) currency imbalance income42; and iii) liabilities expenditure/income. BNB income from international reserve investment in the first half year was positive at EUR 11.78 million or 0.05 per cent yield for the period. This reflected mainly decreased euro interest levels compensating recent years’ negative yield of euro-denominated high credit quality bonds in which most BNB international reserves are invested. Earnings from currency imbalance were also positive to the amount of EUR 158.27 million, reflecting almost entirely movements in the market price of monetary gold in euro. The new October 2015 BNB interest policy made the net financial result from liabili-ties positive at 0.04 per cent for the first half year, corresponding to a EUR 7.43 mil-lion income. These three components brought net earnings from BNB international reserve management to EUR 177.48 million: total return of 0.80 per cent for the first half year.43

41 An open foreign currency position is the difference between the value of assets and liabilities in any cur-rency other than euro.

42 Currency imbalance income is a result of the effects of exchange rate movements on assets’ and liabilities’ open foreign currency positions.

43 Total return is obtained as a product, rather than a sum, of the return of relevant components.

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International Reserve Income and Return* in the First Half of 2019

PeriodNet income

(EUR million)Net return(per cent)

Income (EUR million)

Return (per cent)

Income (EUR million)

Return(per cent)

Expenditure (EUR million)

Return(per cent)

on assets on currency revaluation of assets and liabilities on liabilities

(1)+(2)+(3) (1) (2) (3)

First quarter 50.95 0.24 1.06 0.01 46.23 0.22 3.66 0.02

Second quarter 126.53 0.56 10.72 0.05 112.05 0.49 3.77 0.02

Total 177.48 0.80 11.78 0.05 158.27 0.71 7.43 0.04

* Return between time T0 and time TN is calculated by chain linked returns for this period. It is calculated using the following formula: R(T0,TN) = (1+r1)(1+r2)…(1+rN)–1. This formula complies with Global Investment Per-formance Standards (GIPS). Source: the BNB.

For operational management purposes, gross international reserves are split into portfolios by currency and investment goal, each with a benchmark, investment goals, and investment limits. The table below shows major BNB portfolios and results from their management.

Portfolio Return and Risk in the First Half of 2019

Portfolio

Return Volatility (risk)Information

ratio3Absolute(per cent)

Relative1

(basis points)Absolute

(basis points)Relative2

(basis points)

Investment 1, EUR 0.07 7 12 6 2.32Investment 2, EUR 0.07 8 12 7 2.26External manager А, EUR 0.65 21 69 10 4.27External manager B, EUR 0.50 6 69 10 1.19

Liquid, EUR -0.21 5 1 1 -

Liquid, XAU 0.05 4 2 2 -Liquid, USD 1.33 15 6 6 -

1 A portfolio’s positive relative return is the attained profit against benchmark return. Relative returns with a negative sign are interpreted as opportunity cost in portfolio management. Returns for a six-month period.

2 Relative volatility (relative risk) against benchmark indicates the degree of deviation of portfolio risk characteristics from benchmark through active portfolio management. The risk is on an annual basis.

3 Information ratio is the ratio between relative portfolio return and relative portfolio risk on an annual basis.

Source: the BNB.

To diversify management styles and reduce operational risk, most euro-denominated assets continued being distributed into two investment portfolios with identical benchmarks and investment limits, managed by different BNB teams. By the end of June 2019, 3 per cent of gross international reserves are managed by external man-agers – international financial institutions. Beside additional diversification, using external managers helped exchange expertise in international market investment management. Liquid portfolios are intended mainly to assist liquidity management objectives and BNB foreign currency payment needs.

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III. Payment Systems and Payment Oversight

The Law on the Bulgarian National Bank tasks the Bank with payment system organi-sation, support, and development by assisting the implementation, operation, and oversight of efficient payment mechanisms. The Bank’s major goals are curbing sys-temic risk and integrating Bulgarian payment systems into the European payment infrastructure.

Bulgaria’s lev payment systems are:• RINGS, a real-time gross settlement system operated by the BNB;• RINGS has these transaction settlement ancillary systems:

– BISERA, for settling customer transfers at a designated time, operated by BORICA AD;

– BORICA, for servicing bank card payments in Bulgaria, operated by BORICA AD.

Bulgaria’s euro payment systems are:• The TARGET2 national system component, TARGET2-BNB, run by the BNB;• The TARGET2-BNB settlement ancillary system:

– BISERA7-EUR, a system for servicing customer transfers to be settled at a designated time, operated by BORICA AD.

Bulgaria’s securities settlement systems, where the cash leg is settled in payment sys-tems run by the BNB, are:

• the book-entry government securities settlement system, run by the BNB;• the book-entry securities registration and servicing system, run by the Central

Depository.

Lev Payment Systems

In the first half of 2019 the RINGS real-time gross settlement system processed most lev payments in Bulgaria. On 30 June 2019 the BNB and 24 banks participated in RINGS.

In the first half of 2019 RINGS processed payments worth BGN 516,054 million, up 12 per cent on this time last year, their number reaching 535,447 or a 7.2 per cent rise on the first half of 2018. There were 480,828 customer payments or 89.8 per cent of the total for BGN 115,445 million (22.4 per cent of the total).

The daily average value of payments via the system was BGN 4230 million and their daily average number was 4389. The daily value peak was BGN 7785 million, with a daily number peak of 8611.

In the half year 73.4 per cent of payments by value were processed by noon and 88.2 per cent by 2:30 pm. The balance of 11.8 per cent went through by 5:30 pm. As regards system traffic, 83.5 per cent of the number of system payments were effected by 2:30 pm. RINGS offered 100 per cent availability44 in the period under review.

44 The ratio of time when the system is operational to scheduled operating time.

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RINGS Payment Number in the First Halves of 2018 and 2019

Source: the BNB.

RINGS Payment Value in the First Halves of 2018 and 2019(BGN million) (BGN million)

Source: the BNB.

Lev payment distribution in Bulgaria by payment system saw no changes from the first half of 2018. Over the period under review RINGS processed 85.5 per cent of the payments effected in Bulgaria. Values around 80 per cent are deemed optimal for the operation of real-time gross settlement systems. RINGS also processed 0.4 per cent of the total number of lev non-cash payments in Bulgaria.

In the first half of 2019 BORICA processed 83.4 million of payments effected via ATM and POS terminals, totalling BGN 7946.7 million: a rise of 19.2 per cent in number and 15.1 per cent in value on the corresponding period of 2018.

In the first half of 2019 BISERA processed 41 million of payments for BGN 79,717.1 million, up 6.7 per cent in number and 8.2 per cent in value on the first six months of 2018.

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Distribution of Lev Payments in Bulgaria by Payment System in the First Half of 2019

Source: the BNB.

Euro Payment Systems

TARGET2 provides real-time gross settlement for payments in euro, with settlement in central bank money. It is a Single Shared Platform (SSP) system, each participat-ing and connected central bank responsible for its system component. The BNB has operated the TARGET2-BNB national system component since 1 February 2010 and controlled participants’ business relations and coordination with the European Cen-tral Bank and participant banks.

By 30 June 2019 the system included the BNB, 19 direct participant banks, four addressable BIC holders, and three ancillary systems: the BISSERA7-EUR for settling customer transfers in euro at a designated time, the BNBGSSS for government securities settlement at the BNB, and the securities settlement system run by Central Depository (Central Depository AD).

In the first half of 2019 TARGET2-BNB processed 139,130 payments for EUR 232,238 million, including 122,418 customer payments for EUR 4953 million. Data show a rise of 8.2 per cent in total value and 5.5 per cent in total number of processed pay-ments on the first half of 2018.

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TARGET2-BNB Payment Number in the First Halves of 2018 and 2019

Source: the BNB.

TARGET2-BNB Payment Value in the First Halves of 2018 and 2019(EUR million) (EUR million)

Source: the BNB.

The value and number of other system component payments to banks were 86.4 and 94.8 per cent of payments processed through the national component. There were 1113 daily average TARGET2-BNB payments, worth EUR 1858 million. The daily value peak was EUR 5048 million, with a daily number peak of 2013.

The BISERA7-EUR ancillary system processes designated time customer euro trans-fers. In the first half of 2019 it processed 11,703 payments for EUR 88 million, down 58.2 per cent in value and 57.4 per cent in number on the first half of 2018.

To meet the requirements of Regulation (ЕU) No 260/2012 of the European Parlia-ment and of the Council, the BISERA7-EUR payment system for small payments in euro processes SEPA payments and offers interoperability with the SEPA Clearer, Equens and EuroELIXIR systems, allowing SEPA credit transfers between banks in Bulgaria and other EU Member States.

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Developing the Payment Services and Payment Systems Regulatory Framework

Over the review period the BNB amended Ordinance No 3 of 18 April 2018 on the Terms and Procedure for Opening Payment Accounts, Executing Payment Trans-actions and Using Payment Instruments. Amendments mainly concern: regulation of concluding framework contracts for remote payment services through qualified electronic signature under the Law on Electronic Document and Electronic Certifica-tion Services; alignment of the requirements to all payment service providers (banks, payment institutions and electronic money institutions) to assign an International Bank Account Number (IBAN) to payment accounts held by them, and implementa-tion of Commission Delegated Regulation (EU) 2018/389 supplementing Directive 2015/2366 of the European Parliament and of the Council on regulatory technical standards for strong customer authentication and common and secure open stand-ards of communication as of 14 September 2019.

Payment Systems Oversight

The Law on the BNB and the Law on Payment Services and Payment Systems task the Bank with regulating and overseeing payment system operators with settlement finality, payment service providers, and electronic money issuers in Bulgaria. The BNB grants licences and oversees compliance with national and European statutory requirements and relevant international principles, standards, and recommendations.

In the first half of 2019 the Bank started an inspection of a payment service provider which continued into the new year. The aim was to check whether the payment ser-vice provider complied with the Law on Payment Services and Payment Systems and its statutory instruments. Over the review period the Bank continued four inspections of payment service providers which were initiated in 2018. The Bank inspected one institution to establish whether it had provided payment services and/or had issued electronic money without due licence.

In the first six months of 2019 the spot inspection of BNB licensed payment service providers (banks, payment institutions and electronic money institutions) continued in order to establish compliance with the provisions of Regulation (EU) 2015/751 on interchange fees for card-based payment transactions.

In accordance with LPSPS Article 33, paragraph 6 data and information were requested from all payment institutions and electronic money institutions operating in Bulgaria through an agent and licensed by other EU Member States to determine the size of their operations.

The BNB Governing Council considered and decided on three applications for issuing licenses under the Law on Payment Services and Payment Systems in the first half of 2019. The license of Transcard Financial Services AD was amended by payment services in accordance with Article 4, item 3, letter ‘c’ and item 4, letter ‘c’: execution of credit transfers, including standing orders. The Bank refused to issue a license to a company for conducting activity as a payment institution and terminated a licensing procedure at the request of another company. The BNB withdrew the licence of Eur-omoney Transfer OOD to operate as a payment institution following its application.

By the end of the reporting period there were four payment institutions and five electronic money institutions licensed by the BNB.

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The half year saw these entries and deletions in/from registers under the LPSPS and BNB Ordinance No 16 of payment institutions and electronic money institutions licensed by the BNB:

– 92 agents were listed and 93 agents were delisted in the public register of licensed payment institutions and electronic money institutions operating in Bulgaria;

– six agents of payment institutions and electronic money institutions licensed by the BNB operating elsewhere in the EU were listed.

The period saw EU member competent authorities notifications of the following pay-ment institutions and electronic money institutions licensed elsewhere in the EU and eligible to operate in Bulgaria:

– 380 agents of payment institutions and electronic money institutions operating in Bulgaria were listed and 403 agents delisted;

– 83 payment institutions and electronic money institutions operating in Bulgaria were listed and three payment institutions and electronic money institutions delisted.

Over the review period work continued on applications filed by two service providers under Article 2, paragraph 3 of the LPSPS regarding offered payment instruments that can only be used in a restricted way.

The BNB enquired into 148 complaints submitted by members of the public and cor-porate payment service users. In six of them the Bank issued instructions. The other cases involved no breaches of the Law on Payment Services and Payment Systems and its statutory instruments, or were resolved in favour of payment service users through correspondence with providers.

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eserves at the BN

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IV. Banks’ Reserves at the BNB

In the first half of 2019 the average daily value of banks’ attracted funds for mini-mum reserve calculation purposes (excluding central and local government budget accounts) rose 8.5 per cent on a year earlier. The average daily value of funds attracted from residents (excluding central and local government budget funds) rose 8.8 per cent, and those from non-residents 5.1 per cent, funds attracted from non-resident banks rising 7.6 per cent. Funds attracted by banks from central and local budg-ets posted 16.1 per cent growth. The effective implicit ratio of minimum required reserves remained unchanged from the first half of 2018 at 9.4 per cent.45 Reserve assets held by banks to cover this ratio include funds in banks’ BNB accounts (8.3 per cent) and half of cash balances designated as reserves (1.1 per cent).

Structure of Attracted Funds in the Banking System*

* Average daily value of attracted funds for reserve calculation purposes.Source: the BNB.

Banks keep reserves in their own assets: BNB lev and euro accounts and half their cash balances, including in ATMs.46 In the first half year the share of lev-denominated reserve assets was 68.5 per cent on an average daily basis against 64.0 per cent a year earlier, while the share of euro reserve assets decreased to 22.6 per cent, from 28.0 per cent a year earlier. The share of cash balances designated as reserve assets, including in ATMs, rose from 7.9 per cent in the first half of 2018 to 8.9 per cent in the Janu-ary–June 2019 period.

45 BNB Ordinance No 21 on the Minimum Required Reserves Maintained with the BNB by Banks has left reserves on funds attracted from residents at 10 per cent of the reserve base, those from non-residents at 5 per cent, and those from central and local government budgets at nil since 4 January 2016.

46 Article 4 of Ordinance No 21 of the BNB.

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Banks’ Reserve Asset Structure under Article 4 of Ordinance No 21

Source: the BNB.

The excess reserve interest rate47 under BNB Ordinance No 21 remained at -0.60 per cent. Excess reserves on the BNB accounts continued to decrease. Between Janu-ary and June 2019 the average daily amount of banks’ excess reserves declined by BGN 686.6 million on the same period of 2018. Funds in banks’ BNB Ordinance No 21 accounts exceeded minima by 28.9 per cent on an average daily basis against 41.0 per cent a year earlier.

Banks’ Reserves at the BNB(BGN million)

Source: the BNB.

47 Article 5, paragraph 1 of Ordinance No 21 defines excess reserves as funds exceeding the reserve require-ment by more than 5 per cent holdings.

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V. Currency in Circulation

The Bulgarian National Bank has a monopoly on banknote and coin issue in Bul-garia.48 Its currency is mandatorily acceptable as legal tender at face value without restriction. The Bank prints banknotes, mints coins, and keeps and scraps uncircu-lated or withdrawn currency.

Pursuant to the LBNB Article 26, the BNB Governing Council decided to withdraw from circulation the commemorative coins issued in 2013 which ceased to be legal tender on 8 February 2019. They may be exchanged at BNB tills at face value with no limit to amounts and no charge until 31 December 2020.

Banknotes and Coins in Circulation (Outside BNB Vaults)

As of 30 June 2019 currency in circulation (outside BNB vaults)49 reached BGN 17,361.6 million, up 0.21 per cent (BGN 36.1 million) in the first half of the year, or 0.21 percentage points less than in the same period of 2018. Upward currency circulation trend on an annual basis continued, circulating cash rising by 10.10 per cent (BGN 1592.9 million), down 0.83 percentage points on the end of June 2018.

Banknotes and Coins in Circulation (Outside BNB Vaults) in the First Halves of 2018 and 2019

(BGN million)

Source: the BNB.

In late June 2019, 464.9 million banknotes were in circulation, amounting to BGN 16,917.9 million. Since early 2019, their number fell 11.7 million (2.46 per cent), and their value rose BGN 16.3 million (0.10 per cent). The number of circulat-ing banknotes rose 24.5 million or 5.56 per cent and value BGN 1542.8 million or 10.03 per cent in a year. By comparison, in the June 2017 to June 2018 period the rise was 23.9 million in number (5.73 per cent) and BGN 1501.0 million (10.82 per cent) in value.

48 Article 2, paragraph 5 and Article 25 of Law on the BNB.49 Legal tender banknotes, circulating, and commemorative coins issued after 5 July 1999, including those

withdrawn from circulation with no time restriction on exchange.

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Banknotes comprised 97.44 per cent of the total value of circulating currency by 30 June 2019, falling 0.11 percentage points in the first half of 2019. The BGN 20 and BGN 50 banknotes were most common. BGN 20 banknotes numbered 133.8 million and BGN 50 banknotes 133.3 million with 28.79 and 28.67 per cent shares in the total number of banknotes outside BNB vaults.

Individual Denomination Shares in the Total Number of Circulating Banknotes

Source: the BNB.

By mid-year the value of BGN 50 banknotes was BGN 6665.3 million, occupying the largest share (39.41 per cent) of circulating banknotes. BGN 100 and BGN 20 banknotes had 38.68 and 15.83 per cent shares.

The average banknote circulating at the end of June 2019 was worth BGN 36.38, up BGN 0.93 on the end of 2018. In a year its value rose BGN 1.48 or 4.24 per cent, reflecting higher growth in the number of high value banknotes (BGN 50 and BGN 100) and the BGN 2 bill’s rollover with a coin.

In late June, 2503.3 million coins circulated, worth BGN 435.8 million. Since the year’s start, their number rose 63.9 million (2.62 per cent), their value rising BGN 19.7 million (4.74 per cent). In a year circulating coins outside BNB vaults grew by 152.8 million (6.50 per cent), their value increasing by BGN 49.8 million (12.90 per cent). By 30 June 2019 the share of circulating coins was 2.51 per cent of the total value of banknotes and coins outside BNB vaults.

The upward trend in the number of circulating coins continued. The number of high nominal value coins (BGN 1 and BGN 2) continued to grow faster. Both in the first half of the year and in a year BGN 2 showed the highest percentage growth of 14.94 per cent and 40.14 per cent, respectively. Compared to the end of 2018 and end of June 2018, the number of BGN 2 grew by 7.3 million and 16.1 million, amounting to 56.1 million coins outside BNB vaults in late June 2019. The BGN 1 coin posted higher annual rise than the other coins (7.13 per cent). The lowest growth was recorded in the number of BGN 0.50 coins (3.18 per cent) over the one-year period. Low value coins grew steadily in the currency circulation on the beginning of the cor-responding year and on an annual basis. The annual rise of the other coins was within the range of 4.72 per cent for BGN 0.10 coins to 6.93 per cent for BGN 0.02 coins.

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Individual Nominal Value Shares in the Total Number of Circulating Coins

Source: the BNB.

The BGN 0.01 coins had the greatest 29.40 per cent share of circulating coins, with 736.1 million coins circulating outside BNB vaults by 30 June. The BGN 2 coin held the smallest share at 2.24 per cent.

By mid year the average coin in circulation matched its level of late 2018 at BGN 0.17, up BGN 0.01 in a year due to the launch of the BGN 2 coin.

The BNB launched two new BGN 10 silver commemorative coins planned in the 2019 Minting Programme under the Law on the BNB: Plovdiv – European Capital of Cul-ture, Bulgarian Revival – Evlogi and Hristo Georgiev. Commemorative coins outside BNB vaults were worth BGN 7.9 million, with their share comprising 0.05 per cent of currency in circulation.

Non-genuine Banknotes and Circulating Coins

In the first half of 2019 the BNB retained 523 non-genuine banknotes which had entered into circulation. The share of all retained non-genuine banknotes remained very low at 0.000112 per cent of total circulating banknotes by end-June 2019.

The BGN 20 banknote had the largest share of non-genuine banknotes retained in the first half of the year (59.46 per cent). As compared with the respective number of banknotes in circulation by the end of June 2019, the share of non-genuine BGN 20 banknotes amounted to 0.000232 per cent. Non-genuine BGN 10 and BGN 50 bank-notes occupied 20.84 per cent and 15.68 per cent of all retained non-genuine bank-notes. Non-genuine BGN 100 banknotes numbered 12 accounting for 2.29 per cent of all retained non-genuine Bulgarian banknotes over the review period. The six non-genuine BGN 5 and three BGN 2 comprised 1.73 per cent of all retained banknotes.

The non-genuine Bulgarian coins retained at the BNB numbered 268: 149 of BGN 2, 38 of BGN 1 and 81 of BGN 0.50. The share of retained non-genuine Bulgarian coins in the total number of circulating coins by 30 June 2019 was 0.000011 per cent.

Performing its statutory duty of assessing foreign banknotes and coins retained in Bulgaria, in the first half of 2019 the BNB retained: 1410 euro banknotes, 394 US dol-lar banknotes, and 103 assorted foreign non-genuine banknotes.

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BNB Issue and Cash Operations

BNB issue and cash operations include: banknote printing, coin minting, accepting, delivering, repaying, processing, authenticity and fitness checking of Bulgarian bank-notes and coins and foreign currency, exchanging damaged Bulgarian banknotes and coins, and scrapping unfit Bulgarian banknotes and coins.

Between January and June 29.9 million newly printed banknotes and 101.1 million newly minted coins worth BGN 1026.7 million were supplied under contracts with producers. The Bank launched two commemorative coins planned in its minting pro-gramme under the Law on the BNB Article 25, paragraph 1.50

Over the same period banknotes and circulating coins deposited with the BNB came to BGN 8297.7 million, up BGN 351.8 million or 4.43 per cent on this time last year. In the first half of 2019 withdrawals were 8333.0 million, up BGN 321.0 million or 4.01 per cent on the corresponding period of 2018.

Between January and June 2019 banknote processing machines tested 380.7 million banknotes and 42.3 million coins. Compared with the same period of 2018, the num-ber of processed banknotes increased by 0.02 per cent, while that of processed coins decreased by 12.08 per cent. BGN 10 and BGN 20 banknotes and BGN 0.50, and BGN 1 coins were most often processed by nominal value.

Processing and fitness testing failed 22.7 million banknotes, down 3.5 million or 13.30 per cent on the same period of 2018. In the half year BGN 10 and 20 banknotes were most often retained as non-genuine at 38.01 and 35.00 per cent. Retained unfit coins numbered 555,800, down 115,100 or 17.15 per cent on this time last year.

The BNB purchased EUR 0.12 million of reserve currency, including EUR 0.09 mil-lion from budget organisations and EUR 0.03 million from individuals. BNB reserve currency sales were EUR 51.31 million, including EUR 3.73 million to budget organi-sations and EUR 47.58 million to individuals.

The BNB conducted one service provider check to ensure compliance with Ordinance No 18 on the Control over Quality of Currency in Circulation and instructions on its implementation. The BNB tested 347 sorting machines and customer operated machines in line with identification and fitness standards into six credit institutions and four service providers under Ordinance No 18 and conducted functionality tests at machine manufacturers and their authorised representatives.

50 See the BNB website for new banknote and circulating and commemorative coin issues: www.bnb.bg/NotesAndCoins/index.htm.

http://www.bnb.bg/NotesAndCoins/index.htm

http://www.bnb.bg/NotesAndCoins/index.htm

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VI. Maintaining Banking System Stability and Protecting Depositor Interests

Assessment of the State of the Banking System51

In the first half of 2019 the banking sector was engaged in financial intermediation in compliance with the capital and liquidity requirements. The downward trend in residual credit risk measured by net non-performing loans and advances in the bank-ing system balance sheets was maintained, while loans and total assets grew further.

Banking capital position continued exceeding minimal regulatory and prudential requirements with increasing capital adequacy ratios. Banks had Common Equity Tier 1 above the required minimum and adhered to capital buffer requirements.

Banking liquidity position remained stable, with the liquid coverage ratio in all credit institutions exceeding the regulatory level of 100 per cent.

Over the period the absolute amount of non-performing loans and advances and their share in total loans and advances continued to decrease. The coverage ratio of gross non-performing loans and advances through impairments was maintained at a level of around 50 per cent.

As of 30 June 2019 banking system profit increased 14.4 per cent from the first half of 2018, with total net operating income rising 6.8 per cent. The indicator of return on assets (ROA) also increased despite lower interest margins.

Banking sector consolidation continued. Over the first six months of 2019 DSK Bank acquired Société Générale Expressbank (hereinafter ‘Expressbank’), while Eurobank Bulgaria AD acquired Piraeus Bank Bulgaria AD, legal takeover being forthcoming. As a result, one-off operations were reported impacting the dynamics of balance sheet indicators and banking sector’s regulatory capital.

Between January and June 2019 banking system assets increased by BGN 3.0 billion (2.9 per cent) to BGN 108.6 billion. The amount and share of loans and advances increased, as did investments in subsidiaries, joint ventures and associates, and tangi-ble assets. In the structure of assets, the share of cash, cash balances at central banks and other demand deposits declined to 16.6 per cent, and that of debt securities to 12.3 per cent.

In the first half of 2019 the big five banks’ asset share rose to 59.9 per cent in banking system’s balance sheet. The market share of local equity banks fell to 21.5 per cent, that of EU subsidiary banks and branches rising to 75.1 per cent. The market share of non-EU banks and branches reached 3.3 per cent.

51 Based on individual supervisory statements as of end-June 2019 and end-December 2018 submitted by 16 September and 7 March 2019.

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Domestic and Foreign Bank Market Shares by Asset Size

Source: the BNB.

Over the period under review banking system’s total gross loans and advances52 rose by BGN 1.5 billion (1.7 per cent) to BGN 90.6 billion. Claims on all institutional sectors, excluding those on central banks increased. The currency structure of gross loans and advances shows lev-denominated items falling 2.1 percentage points to 56.1 per cent and the euro share increasing 1.6 percentage points to 38.1 per cent. By end-June 2019 the shares of resident and non-resident claims accounted for 84.1 and 15.9 per cent, from 85.3 and 14.7 per cent in December 2018.

Dynamics of Selected Balance Sheet Indicators(annual and semi-annual changes)

(per cent)

Source: the BNB.

The gross credit portfolio (excluding loans and advances to credit institutions and central banks) rose BGN 2.2 billion to BGN 63.1 billion. Loans to non-financial cor-porations and loans to households increased most significantly (by BGN 1.0 billion and BGN 914 million, respectively).

52 Source: the BNB (Macroprudential Form 1 – MPF1).

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Banking system deposits rose by BGN 2.1 billion to BGN 91.8 billion by end-June 2019. This growth was largely driven by funds attracted from households, ris-ing BGN 1.5 billion and their share reaching 59.8 per cent of total deposits. Funds attracted from other financial corporations and credit institutions increased by BGN 513 million and BGN 202 million, while declines were reported in non-financial corporation’s deposits (by BGN 93 million) and general government’s deposits (by BGN 55 million.). The foreign currency structure shows lev-denominated deposits declining from 59.0 to 58.7 per cent and euro deposits remaining at 33.2 per cent. The share of resident deposits rose to 91.8 per cent (91.1 per cent at end-2018) in the structure of deposits by source and non-resident deposits went down to 8.2 per cent (8.9 per cent at end-2018).

Banking balance sheet equity amounted to BGN 14.1 billion, growing by BGN 232 million or 1.7 per cent over the first half of the year. Paid-up capital, premium reserves and accumulated other comprehensive income posted growth. Asset quality indicators improved further over the first half year through sales, repayments, write-offs of non-performing loans at the expense of accumulated impairment, resolution measures, etc.

Non-performing Loans and Advances in Total Loans and Advances(per cent)

Source: the BNB.

Between January and June 2019 gross non-performing exposures, including loans, advances and securities fell by BGN 316 million (4.6 per cent) to BGN 6.5 billion. Non-performing loans and advances, mostly in the categories of unlikely to be paid back or past due over 90 days and past due 180 days, posted declines. By end-June the share of gross non-performing loans and advances in total gross loans and advances accounted for 7.2 per cent (7.6 per cent by end-2018). These developments were driven by the increase in total gross loans and advances by BGN 1.5 billion (1.7 per cent) to BGN 90.6 billion. Impairment coverage ratio of gross non-performing loans and advances accounted for 50.8 per cent by the end of the review period (51.4 per cent by end-2018). Net non-performing loans and advances53 (residual credit risk) declined by BGN 111 million (3.4 per cent ) on end-2018 to BGN 3.2 billion. The share of net non-performing loans and advances in total net loans and advances at

53 Net non-performing loans and advances are calculated using an EBA methodology: gross non-performing loans and advances less accumulated impairment for this category. In calculating the share of net non-performing loans and advances, their net value is used along with that of total loans and advances.

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the end of June was 3.7 per cent (3.9 by end-December 2018). Residual banking bal-ance sheet credit risk remained fully covered by the capital exceeding the regulatory minimum.

Non-performing Loans and Advances by Sector

Source: the BNB.

The quality of bank assets other than loans remained good. The share of the most liquid balance sheet aggregate of cash, cash balances with central banks and other demand deposits remained significant, while debt instruments issued by the general government continued to prevail in banks’ securities holdings portfolio.

Banks’ profits for the first half of 2019 amounted to BGN 917 million, up BGN 116 million (14.4 per cent) on the same period of last year. Return on assets (ROA) was 1.69 per cent and return on equity (ROЕ) came to 12.97 per cent. Banks’ net operat-ing income rose by BGN 137 million (6.8 per cent) to BGN 2.1 billion compared to the same period of last year. Net interest income and net fee and commission income, as a share of net operating income, were 64.7 and 25.6 per cent, from 67.5 and 26.0 per cent at end-June 2018.

Return on Assets and Return on Equity (per cent)

Source: the BNB.

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Net Operating Income Structure (per cent)

Source: the BNB.

As of 30 June 2019 interest income rose by BGN 26 million (1.7 per cent) on an annual basis, with return on interest bearing assets declining from 3.55 to 3.35 per cent. In the context of increasing attracted funds, interest expenditure decreased by BGN 7 million (4.6 per cent) on the same period of last year due to interest liabilities costs falling from 0.25 to 0.20 per cent.

The efficiency ratio (administrative expenditure and depreciation costs to net operat-ing income) improved to 44.5 per cent compared to 45.7 as of 30 June 2018 due to both increased operating income and declined administrative expenditure. At the same time, banks’ depreciation costs rose, largely reflecting the change in finance lease accounting, according to International Financial Reporting Standard 16 (IFRS 16).

In the first half of 2019 banks’ impairment charges of financial assets which are not carried at fair value through profit or loss were BGN 183 million, down BGN 24 mil-lion from the end of June 2018.

In the first six months the capital position of the banking system remained stable. Capital indicators were influenced by one-off technical factors related to consolida-tion, regulator changes54, in force since the beginning of the year and the determina-tion of additional capital requirements55 under Pillar 2.

Over the first half regulatory capital grew by BGN 2.0 million (17.0 per cent) to BGN 13.6 billion. Common equity capital increased by BGN 2.0 billion to BGN 12.9 billion and Tier 1 capital reached BGN 13.1 billion.

Total risk exposures picked up BGN 9.3 billion (16.2 per cent) to BGN 66.4 billion. The share of credit risk weighted exposures rose from 89.3 per cent at end-2018 to 89.7 per cent at the end of June 2019, as did that of exposures to position, currency and commodity risks: from 0.8 per cent by end-2018 to 1.3 per cent at the end of June 2019. The share of operational risk exposures declined from 9.8 per cent at end-2018

54 As of early 2019 a higher risk weight to exposures to Member States’ central governments or central banks should apply where exposures are denominated in a currency other than the domestic one (under Arti-cles 114, 136 and 138 of Regulation (ЕU) 575/2013), and a 4 per cent capital requirement for foreign exchange risk (Article 354 of the same Regulation). On 1 January 2019 higher O-SII buffer rates became effective.

55 In March 2019 based on the completed supervisory review and evaluation process (SREP) and according to the EBA methodology, the BNB Governing Council set an additional capital requirement under Pillar 2 of the regulatory framework (in force from the second quarter of 2019).

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to 9.0 per cent at the end of June 2019. The increase in capital ratios was attributable to the higher capital growth rate compared to that in total risk exposures.

Selected Capital Indicators(per cent) (per cent)

Source: the BNB.

As of 30 June 2019 banking sector’s common equity tier 1, tier 1 capital and total capital adequacy ratios amounted to 19.36, 19.72 and 20.54 per cent compared to 18.99, 19.41 and 20.38 per cent by end-2018. The amount of capital surplus above the regulatory requirements and capital buffers was BGN 3.8 billion, and the banking leverage ratio rose to 11.41 per cent, from 10.11 per cent at end-2018.

Banks’ liquidity remained at levels significantly exceeding the regulatory require-ments, with liquidity coverage ratio accounting for 260.6 per cent at end-June 2019 against 294.1 per cent in December 2018.

Selected Liquidity Indicators under Commission Delegated Regulation (EU) 2015/61*(BGN million) (per cent)

* Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to liquidity coverage requirement for credit Institutions.Source: the BNB.

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Between January and June the liquidity buffer (the liquidity coverage ratio numera-tor) decreased by BGN 1.9 billion, or 6.3 per cent to BGN 27.8 billion. Reserves in the central bank with an option for withdrawal declined in the liquidity buffer structure. Over the period the share of assets in the central government increased to 51.1 per cent (44.5 per cent at the end of 2018), and that of reserves in the central bank with an option for withdrawal declined to 41.6 per cent (45.3 per cent by 31 December 2018).

The liquidity coverage ratio denominator (net liquidity outflows) rose by BGN 584 million (5.8 per cent) to BGN 10.7 billion over the period. At the end of June 2019 the share of liquidity buffer in balance sheet assets accounted for 26.4 per cent, from 28.9 per cent at end-2018.

Overview of Financial Institutions Recorded in the BNB Register under Article 3a of the LCI as of 30 June 2019

The total number of institutions recorded in the Register under Article 3a of the LCI increased further reaching 205 at the end of the period, including financial institu-tions from EU Member States conducting activities on the territory of the Repub-lic of Bulgaria via a branch or directly (Articles 24 and 27 of the LCI) and a fund established under the procedure of the Law on the Bulgarian Development Bank. The BNB recorded six financial institutions with commercial registration in Bulgaria. One foreign EU passported financial institution declared that it would operate directly on the territory of the country. The BNB declined to register five entities due to unclear origins or unproven own funds in generating the contributions to company’s capital. Six financial institutions failed to comply with the requirement to maintain statu-tory own funds and therefore a time-limit for remedying the violation was set. Two companies failed to comply with a BNB’s prescription, resulting in a procedure for deleting them from the Register.

Breakdown of Financial Institutions’ Assets by Type of Business

Source: the BNB.

Total assets of this sector rose to BGN 8.9 billion, accounting for 8.2 per cent of bank-ing system assets. Leasing companies (47) had the highest market share, followed by lenders (124), whose assets increased by 25 per cent on the same period of the previ-ous year. The assets of entities acquiring credit claims, including factoring, posted an

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increase over a one year period. The 20 largest financial institutions’ assets continued to hold a large market share at 76.1 per cent.

The carrying amount of sector’s credit portfolio went up 13.1 per cent on the same period of 2018, reaching EUR 7.1 billion. Claims on loans and financial leasing retained their good quality, with performing unimpaired loans occupying 74.2 per cent of sector’s gross portfolio. The share of loans and receivables in foreign currency continued dropping to 39.1 per cent of the item’s balance sheet value in levs and currency.

In the year to June 2019 attracted funds increased 18.3 per cent year on year to BGN 6.5 billion. By source, funds attracted from banks accounted for 70 per cent of all funds attracted by the sector. Over the half year the share of attracted resources from domestic banks continued increasing to reach 60 per cent of all funds attracted from banks.

Structure of Attracted Funds from Banks (per cent)

Source: the BNB.

As of June 2019 sector’s profits rose 15.6 per cent on an annual basis, amounting to BGN 192 million. Return on assets (ROA) remained at 4.3 per cent, while return on equity (ROЕ) increased to 19.5 per cent.

Sector’s equity grew by 11.7 per cent year on year to BGN 1.98 billion. Lending insti-tutions continued to occupy a major share (49.6 per cent) of sector’s capital position, maintaining the previous years’ gradual downward trend. By end-June the 20 top companies continued to comprise more than half (55.9 per cent) of sector’s equity.

Banking Supervision’s Activity

Off-site Supervision

Current Monitoring of Credit Institutions’ Risk Profile

In the first half of 2019 off-site supervision focused on current monitoring of credit institutions’ risk profile and assessments of their financial position. Dynamics of key risk indicators was monitored on a quarterly basis along with analyses of the level and trends of risks assumed by banks including their effects on credit institutions’ viabil-ity. In this context, analytical reports on each bank for the fourth quarter of 2018

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and first quarter of 2019 were drafted and the relevant supervisory review for the same periods was carried out. They focused on substantial changes in the financial parameters measuring the level and degree of risks to the capital: credit and concen-tration risks, market and operational risks, including liquidity risk. The main features of banks’ business model were assessed along with business lines’ contribution to income generation and factors affecting ROA and ROE levels.

Supervisory Review and Evaluation Process

In the first half of 2019 the supervisory review and evaluation process (SREP) of banks and Pillar 2 additional capital determination process were launched.

Over the review period supervisors carried out annual reviews and assessments of banks’ Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP) reports for 2018. Reliability assessments of ICAAP and ILAAP were taken into account in determining the capital and liquidity adequacy ratings as part of the overall rating of each credit institution.

A review and assessment of banks’ funding plans with a reference date as of 31 Decem-ber 2018 were also carried out, covering projections of assets, liabilities and capital dynamics in a three-year horizon (2019–2021).

Over the period a review and assessment of an updated recovery plan of a local bank took place and a letter with the main review conclusions and findings was sent to its management.

Work on Drafting Opinions and Follow-up of Supervisory Measures

In the first six months of 2019 opinions were drafted on the pre-approval issued by the BNB to include 2018 annual profits in banks’ capital before a decision to that end is made by the relevant General Shareholder Meeting. The BNB sent notices of non-objection to banks willing to pay dividends provided that these institutions maintain a capital adequacy ratio above the minimum regulatory levels.

Follow-up of the implementation of supervisory measures and recommendations resulting from on-site inspections continued over the period.

Meetings Held With Audit Firms’ Representatives

In the half year meetings with audit firms’ representatives took place according to the EBA guidelines56. Discussions dealt with the control environment, bank processes efficiency, audit committee commitment, the model for applying IFRS 9, and other key issues.

On-site Inspections

During the first half of 2019 the BNB conducted five on-site inspections initiated in the previous year. They were mainly intended to carry out supervisory assessments of capital adequacy and in some cases of the liquidity position with regard to credit risk and credit concentration risk.

Monitoring the implementation of supervisory measures imposed during previous inspections formed an important on-site focus involving supervisory prescriptions to overcome weaknesses in operation and risk control. Inspection findings show that recommendations from previous inspections have been implemented and actions

56 Guidelines on communication between competent authorities supervising credit institutions and the statutory auditor(s) and the audit firm(s) carrying out the statutory audit of credit institutions (EBA/GL/2016/05).

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have been undertaken to improve internal governance and committees’ work, compli-ance with supervisory requirements, internal rules, etc. Based on inspection conclu-sions, recommendations were forwarded to some banks to enhance credit risk and credit concentration risk management and to conduct stress tests for internal capital adequacy analysis. As regards the ongoing monitoring of credit risk, recommenda-tions involved an increased frequency and quality of borrowers’ financial condition analyses along with recognising and reporting eligible security for provisioning. Other recommendations involved enhancing data quality in reporting and the need of developing or supplementing internal methodologies for internal capital adequacy assessments.

Breaches found in some banks related to underestimated credit risk, incorrect clas-sification of credit exposures and inaccurate identification of exposure classes and risk weights in reporting for regulatory purposes. These banks submitted opinions on the findings and recommendations contained in the inspection reports, as well as information on removed infringements of regulations.

Based on inspection findings, supervisory measures in force demanded the respective credit institutions to undertake corrective actions concerning the credit risk assess-ment, internal capital adequacy assessment, capital position strengthening and other measures aimed at enhancing business model sustainability.

Documentary checks were performed in three banks upon their request in view of the approval of internal models developed by banks for regulatory purposes. Supervisory analyses and assessments were prepared in order to obtain a regulatory approval of significant changes in the approaches for measuring the regulatory capital with regard to the credit risk in two banks and the operational risk in one bank. The results of internal model checks in these banks were used in the joint decisions made by super-visory colleges. These decisions entitle the respective banking group and in particular the domestic subsidiary bank to implement the intended changes for the purposes of Pillar 1.

Macroprudential Supervision

In line with its macroprudential mandate, the BNB continued to monitor closely the trends in the Bulgarian economy and international environment affecting the bank-ing sector. Main indicators of the banking system state were published in monthly press-releases and Banks in Bulgaria quarterly containing a risk assessment for the banking sector. In the first half of the year a number of analytical materials were drafted, including an analysis of real estate mortgage-backed loans to households and the Annual Banking Business Aspects Survey. Research topics dealt with the specifici-ties of bank debt securities and equity instruments portfolios.

The Bank also monitored major indicators measuring the adequate level of the coun-tercyclical capital buffer for Bulgarian banks. In order to strengthen banking sector’s resilience to potential adverse developments, the BNB Governing Council increased to 1 per cent the countercyclical capital buffer57 applied to resident credit risk expo-sures with effect from 1 April 2020.

Daily monitoring of the liquidity positions of credit institutions continued over the review period.

57 For more information on capital buffers, see the BNB website: http://www.bnb.bg/BankSupervision/index.htm.

http://www.bnb.bg/BankSupervision/index.htm

http://www.bnb.bg/BankSupervision/index.htm

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Specific Supervisory Activities

In the first half of 2019 the BNB continued its efforts to prevent the use of the banking sector for money laundering and terrorist financing and to maintain and improve control mechanisms, while introducing new legal requirements into banks’ operations. Anti-money laundering and counter-terrorist financing legislation was amended with the aim of achieving full harmonisation of national legislation with the requirements laid down in Directive (EU) 849/2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing. The amendments set additional requirements to credit institutions. The main aspects of supervisory activities were presented at the meeting with banks’ representatives, highlighting the latest regulatory changes in money laundering and terrorist financing prevention.

Planned supervisory inspections in three banks focused on money laundering and terrorist financing prevention, while applying a risk-based approach. No significant deficiencies were found during the on-site inspections. The BNB issued 12 recom-mendations with regard to total five breaches aimed, in particular, at improving organisation and due diligence of customers.

Over the same period six ad hoc inspections were conducted. One of them was performed jointly with the State Agency of National Security Financial Intelligence Directorate on the grounds of Article 108 of the Law on Measures against Money Laundering. The other five off-site inspections conducted on signal in three banks focused on the evaluation of actions related to due diligence of non-resident custom-ers. Off-site inspections ascertained banks’ compliance with legal framework.

The standing joint working group preparing a national risk assessment of money laundering and terrorist financing continued its work.

The European Banking Authority peer-reviewed BNB’s procedures for risk-based supervision of countering money laundering and terrorist financing. The competent authorities of each EU Member State should undergo a peer review, aimed at assess-ing supervisory practices efficiency and adequacy and the degree of compliance with EU legislation and EBA guidelines. The conclusions from these reviews will form the basis for harmonising European regulators’ supervisory approach.

Within the framework of money laundering and terrorist financing prevention activi-ties, the BNB interacted with the Financial Supervisory Authority of Norway (Finan-stilsynet) and held a meeting with representatives of a German commercial bank.

Over the period under review the BNB conducted two inspections of credit insti-tutions and one inspection of a non-bank financial institution providing mortgage loans. The check for compliance with the requirements of the Law on Real Estate Loans for Consumers (LRELC) established that the inspected credit institutions had put in place adequate rules and procedures for assessing borrower creditworthiness. Employees’ wages are in compliance with the requirements laid down in the LRELC and EBA guidelines. Minor shortcomings were found in professional staff training. An administrative infringement notice was issued to one non-bank financial institution for non-compliance with the requirements of the LRELC.

Sixteen legal entities were inspected and found to act as credit intermediaries falling within the scope of the LRELC. As a result, some of the entities removed the improper information from their advertising materials, while correspondence continued with those entities which had not yet revised the information published.

Over the review period ten new Bulgarian and one EU Member State legal entities willing to act as intermediaries under the LRELC were registered. One applicant

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company was denied registration under the LRELC due to non-compliance with the requirements of the law. Credit intermediation market developments show an increasing number of consumers using credit intermediaries’ services. Mortgage loans extended through credit intermediaries reached 12 per cent of all newly extended mortgage loans in the banking system.

Over the first half of 2019 legal entities (both resident and non-resident) showed higher interest in operating as a financial institution. Over the same period signals against financial institutions for creating undue liabilities on citizens were checked. Most of the cases were referred to the competent authorities or claimants were instructed to submit the relevant information to the law enforcement authorities, the Consumer Protection Commission, the Commission on Personal Data Protection.

Issue of Licences, Permits, and Approvals

There were no new bank operations licences or bank licensing procedures in the first half of 2019.

Following the August 2018 application procedure by DSK Bank EAD for direct acqui-sition of 99.7352 per cent and by OTP Bank AD, Budapest, Hungary for indirect acquisition of Société Générale Expressbank AD paid up equity, the BNB Governing Council approved the acquisition in February (Resolution No 57 of 28 February 2019) after assessing compliance with the criteria under Article 28a, paragraph 3 of the LCI.

Following the December 2018 application procedure by Eurobank Bulgaria AD for direct acquisition of 99.9819 per cent and by Eurobank Ergasis SA for indirect acquisition of Piraeus Bank Bulgaria AD paid up equity, the BNB Governing Coun-cil approved the acquisition in March (Resolution No 107 of 28 March 2019) after assessing compliance with the criteria under Article 28a, paragraph 3 of the LCI.

In the first six months of 2019, following the BNB General Council resolutions, two banks were allowed to include 2018 profits into Common Equity Tier 1. Two other banks were allowed to include capital instruments in СЕТ 1.

In May 2019 one bank obtained an approval by the BNB Governing Council under Article 71, paragraph 3 of the LCI to amend its statutes.

In the period under review the BNB Governing Council imposed supervisory meas-ures on four banks for supervisory framework breaches.

There were management and supervisory board changes at: United Bulgarian Bank (a new management board member and executive director), UniCredit Bulbank AD (a new executive director, a new supervisory board member and management board member), Tokuda Bank AD (a new supervisory board member and a new manage-ment board member and executive director), DSK Bank EAD (a new management board member and two new management board members and executive directors), Expressbank AD (two new management board members and executive directors), Piraeus Bank Bulgaria AD (three new board of directors members and two new board of directors members and executive directors), Allianz Bank Bulgaria AD (a new supervisory board member), T.C. Ziraat, Sofia Branch; (a new branch manager), Investbank AD (a new management board member and executive director).

From January to June 2019 11 new EU Member State credit institutions exercised the freedom to provide services under the mutual recognition of single European pass-port through notices to the BNB from their licensing authorities, bringing the number of received direct services notices in Bulgaria to 321. The BNB Banking Supervision Department also registered and handled nine complaints from banks’ customers.

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Regulatory Framework Work

Banking supervision activities continued to be based on the European regulatory framework applicable to credit institutions focused on the consistent implementation of EC delegated acts, as well as EBA guidelines and ESCB recommendations.

Work on amending the regulatory framework on the operation and supervision of credit institutions continued. Amendments to the Law on Accountancy concerning the applicable accounting basis for banks and financial institutions in relation to the application of international accounting standards were adopted.

In April the BNB Governing Council adopted Ordinance No 20 on the Issuance of Approvals to the Members of the Management Board (Board of Directors) and Super-visory Board of a Credit Institution and Requirements for Performing their Duties. The Ordinance improves the existing legislation bringing it into conformity with the latest amendments in the LCI and the requirements of the Guidelines on the assess-ment of the suitability of members of the management body and key function holders issued by the EBA and the European Securities and Markets Authority.

The BNB Governing Council also adopted Ordinance No 10 on the Organisation, Governance and Internal Control of Banks. The Ordinance is based on the current regulations concerning the internal control of banks extending the requirements to banks’ internal organisation in accordance with the provisions of the LCI and Guide-lines on internal governance issued by the EBA.

The Ordinance details the requirements to banks’ policies, rules and procedures for internal organisation and governance, specifying their minimum content. It provides for banks to organise their activities and develop internal policies, rules and proce-dures according to the size, nature, scale and complexity of banks’ activities and the risks they are exposed to. The ordinance lays down specific criteria to be taken into account in order to ensure compliance with bank’s risk profile and business model.

The adopted amendments to Ordinance No 4 of 2010 on the Requirements for Remu-nerations in Banks provide that the obligation to set up a remuneration committee applies only to significant banks where the number of board members is higher and efficient distribution of committee’s functions between its members is possible.

The amendments to Ordinance No 7 of 2014 on Organisation and Risk Management of Banks lays down the requirements on the repute, qualification and professional experience to the head of risk management function. Again, banks’ obligation to establish a risk committee applies only to significant banks. The ordinance lays down the minimum number of committee members and a requirement for independent members.

In the first half of 2019, along with the amendments to ordinances, the BNB Govern-ing Council adopted resolutions to implement a number of guidelines issued by the EBA, such as guidelines on management of non-performing and forborne exposures, resolution measures, high risk exposures, common procedures and methodologies for supervisory review and evaluation process, criteria for the securitisation to be eligible as simple, transparent and standardised, as well as stress testing of credit institu-tions and interest risk management. Within the compliance procedure, the EBA was informed of decisions taken.

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Activities Related to the Comprehensive Assessment of the ECB in the Context of Bulgaria’s Request for Establishing Close Cooperation between the ECB and the BNB in View of Bulgaria’s Integration into the Single Supervisory Mechanism

In the first half of 2019 the BNB participated in the process related to Bulgaria’s request of 18 July 2018 for accession to the Single Supervisory Mechanism by estab-lishing close cooperation with the ECB.

The BNB provided expert assistance to the ECB concerning Bulgarian banking sys-tem specificities with regard to the asset quality review and stress test performed by the ECB of six selected Bulgarian banks: UniCredit Bulbank AD, DSK Bank EAD, United Bulgarian Bank AD, First Investment Bank AD, Central Cooperative Bank AD and Investbank AD. The ECB carried out a comprehensive assessment of the selected banks based on its methodology and macroeconomic scenarios for the stress test purposes. The results for each of the six banks were published on 26 July 2019 on the ECB’s website.

In the context of close cooperation, work continued on the alignment of BNB’s super-visory and prudential policies with those of the ECB, including the internal rules and processes and information flows between the two institutions. Thus, the BNB work is a continuity of the banking supervision reform process, which was launched in 2015 and is expected to continue throughout 2019.

In the first half of the year the BNB participated in meetings with ECB’s representa-tives in the context of the AQR. The submitted information on the six banks, subject to the review, covered main risk assessments, financial position data and specific information on each bank. The following stages of the AQR process included both on-site visits to banks, and data verification and confirmation, as requested by the ECB.

The following topics were discussed at the meetings: prioritisation, supervisory activ-ities planning, resources allocation based on risk assessment; stages of the ongoing supervisory activities, including a SREP, ICAAP and ILAAP review and assessment, recovery plans and interaction of the off-site supervision with the resolution authority of credit institutions within the BNB. The activity on issuance of approvals for bank acquisition and merger was also presented. Experts exchanged views on the structure, organisation, processes and regulatory framework of the supervisory policy of both parties, including the supervisory reporting and data quality assessment process.

The meeting between the BNB and ECB representatives focused on mechanisms for information exchange between the regulatory authorities on the prevention of money laundering and terrorist financing.

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VII. BNB Activities on Resolution of Credit Institutions

The Law on the Recovery and Resolution of Credit Institutions and Investment Firms (LRRCIIF) tasks the Bulgarian National Bank with resolving credit institutions.

In the first six months of 2019 the BNB as the body responsible for resolving credit institutions focused on preparing and reviewing resolution plans. In the beginning of each year the BNB collects from credit institutions information required for drafting resolution plans. BNB reporting templates were brought into line with Regulation (EU) No 2018/162458, which provides for collecting standardised credit institution information required for assessing resolvability and preparing resolution plans. With the entry into force of Commission Delegated Regulation (EU) 2019/34859, specifying a generally applicable combination of certain quantitative and qualitative criteria for applying simplified requirements under Article 25 of the LRRCIIF, internal rules were adopted to specify relevant conditions and criteria for credit institutions licensed in Bulgaria and the content of simplified requirements for developing resolution plans.

As part of the overall process of building and improving the internal methodologi-cal framework, while complying with the LRRCIIF and Delegated Regulation (EU) 2016/1450,60 a methodology was developed and adopted in the first half year to set out the minimum requirement for own funds and eligible liabilities (MREL) of credit institutions for which the BNB is the group level resolution authority. This methodo logy will establish a uniform approach to the main MREL components, i.e. the amount of losses which a credit institution would normally incur in taking a resolution action and the amount of capital needed to meet ongoing prudential requirements after resolution in order for this credit institution to still meet licensing conditions, carrying on its activities and maintain market confidence. The methodol-ogy also sets out a requirement for liabilities with equal ranking as part of the MREL to ensure a fair treatment of creditors.

Based on a comprehensive approach in preparing resolution plans for 2019 and a critical functions methodology, 20 credit institutions licensed in Bulgaria were assessed during the first six months of the year. Results of implementing the meth-odology identified less than ten critical functions at eight credit institutions, ten to 20 critical functions at seven credit institutions, and over 20 critical functions at two credit institutions. Three credit institutions did not provide functions that could be reasonably assessed as critical. Results of calculations are still to be comprehensively implemented in the assessment for 2019, which involves choosing from resolution or liquidation under insolvency proceedings at an individual institution level.

58 Commission Implementing Regulation (EU) 2018/1624 of 23 October 2018 laying down implementing technical standards with regard to procedures and standard forms and templates for the provision of infor-mation for the purposes of resolution plans for credit institutions and investment firms pursuant to Direc-tive 2014/59/EU of the European Parliament and of the Council, and repealing Commission Implementing Regulation (EU) 2016/1066.

59 Commission Delegated Regulation (EU) 2019/348 of 25 October 2018 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the criteria for assessing the impact of an institution’s failure on financial markets, on other institutions and on funding conditions, effective from 23 March 2019.

60 Commission Delegated Regulation (EU) 2016/1450 supplementing Directive 2014/59/EU of the European Parliament and of the Council with regard to regulatory technical standards specifying the criteria relating to the methodology for setting the minimum requirement for own funds and eligible liabilities.

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As a resolution authority of subsidiary banks of parent companies from the EU, the BNB participated in international resolution colleges for EU cross-border banking groups. In the first half of 2019 the BNB, jointly with the group-level resolution authority and other resolution authorities of EU subsidiary companies (resolution colleges), continued its work on assessing the opportunities for resolution and review-ing resolution plans of seven banking groups and their subsidiaries licensed in Bul-garia. Reflecting changes in the structure of some banking groups due to sales of their subsidiaries in Bulgaria,61 the BNB terminated its participation in two of resolution colleges. In the second half year and in early 2020 joint decisions on resolution plans will be taken within the remaining five colleges in which the BNB is represented as a resolution authority. All updated resolution plans for 2018 are projected to include assessments of banking group resolvability, significant corporations in relevant bank-ing groups and business model analyses, identified critical functions of significant corporations, and their preferred resolution strategy and instrument. During the review of 2018 plans, subsidiaries that are licensed in Bulgaria and included in these five banking groups were determined as significant with identified critical functions.

With regard to all banking groups holding subsidiaries licensed in Bulgaria, the group-level resolution authority initiates adoption of a joint decision on the MREL on a consolidated basis for the respective parent undertaking for 2018. Reflecting its formal policy, the Single Resolution Board (SRB) as a group-level resolution author-ity within four of the five resolution colleges set binding MREL targets62 for 2018 not only on a consolidated but on an individualised basis for significant subsidiar-ies in the framework of the Single Resolution Mechanism. The BNB, in its capacity as a resolution authority of subsidiaries in Bulgaria within the five resolution col-leges, calculated MREL on an individual basis, while applying the approved MREL methodology. At this stage, MREL calculation is not subject to a joint decision with the other resolution authorities, and is not therefore binding but is for information purposes only. It is intended to provide at an early stage credit institutions and their EU parent companies with information on potential MREL – subject of a future joint decision which in turn would enable them to bring their business plans and objec-tives in line with provision of sufficient funding for MREL when it becomes binding. Calculated MREL levels for 2018 as of 31 December 2017 moved within the range of 14.1–18.3 per cent of total liabilities and own funds or 27.8–33.4 per cent of risk weighted assets.

Under the LRRCIIF, in March 2019 the BNB Governing Council set the total 2019 amount of annual bank contributions to the Bank Resolution Fund (BRF) at BGN 137,257 thousand. In April this sum was apportioned to individual banks given their risk profile. All banks paid their due contributions into the Fund within the term set in the LRRCIIF, with accumulated BRF funds exceeding BGN 548 million.

Following Bulgaria’s request to join the SSM by establishing close cooperation with the ECB, work continued to prepare the BNB for joining the SRM and consequently the SRF. Participation in the SRM and the SRF stems from the direct application of Regulation (EU) No 806/2014,63 with effect from the date of establishing close cooperation with the ECB.

61 Direct acquisition by DSK Bank ЕАD of shares representing 99.7352 per cent of the registered share capital of Société Générale Expressbank (Société Générale Group) making it a subsidiary of DSK Bank and part of the OTP Group; direct acquisition by Eurobank Bulgaria AD of 99.9819 per cent of Piraeus Bank Bulgaria AD (Piraeus Bank Group) paid up equity, making it a subsidiary of Eurobank Bulgaria and part of Eurobank Ergasias Group.

62 MREL – 2018 SRB Policy for the second wave of resolution plans, published on 16 January 2019.63 Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing

uniform rules and a uniform procedure for the resolution of credit institutions and certain investment

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Between January and June 2019 the BNB as a resolution authority jointly with SRB representatives continued working on a joint action plan with a timetable based on three distinct pillars: (1) drafting and approving relevant amendments to the Law on the Recovery and Resolution of Credit Institutions and Investment Firms (LRRCIIF); (2) preparations for joining the SRF; (3) preparing the bank resolution planning pro-cess after joining the SRM.

On 24 April 2019 the National Assembly adopted a draft law amending the LRRCIIF (published in Darjaven Vestnik, issue 37 of 7 May 2019) introducing provisions for enforcement of Regulation (EU) No 806/2014. These provisions are projected to enter into force upon establishing close cooperation with the ECB with the aim to ensure legal certainty, completeness and clarity in national legislation in compliance with Regulation (EU) No 806/2014. For the purposes of SRM participation preparations, a transitional provision to the LRRCIIF provides for an exchange of information, prior to Bulgaria’s joining the SRM, between the BNB and the SRB, on the one hand, and credit institutions and the SRB, on the other, at the request of the BNB acting in its capacity as a resolution authority. With the adoption of LRRCIIF amendments, the work on the first pillar of the action plan was completed.

The BNB role in the second pillar focused on technical and expert support to the SRB in terms of establishing the amount of the first contribution of Bulgaria to the SRF under the ratified agreement on the transfer and mutualisation of contributions to the SRF in establishing close cooperation with the ECB and joining the SRM.64 In the first half year the BNB contributed actively to the SRB in ensuring required financial information from credit institutions with a view to setting the first Bulgaria’s contri-bution to the SRF.

Work on the third pillar of the action plan was intended to encompass joint actions with the SRB for BNB participation in the SRM related to identification of credit institutions falling within the scope of direct responsibilities and tasks of the SRB, familiarising with SRB procedures and division of responsibilities and tasks between the SRB and national resolution authorities within the SRM.

firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010.

64 Law on Ratification of the Agreement on the Transfer and Mutualisation of Contributions to the Single Resolution Fund (adopted on 8 November 2018, published in the Darjaven Vestnik, issue 96 of 2018).

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VIII. Participating in the ESCB and EU Bodies

In the first half of 2019 the activity of EU bodies was focused on the implementa-tion of measures for building a deeper Economic and Monetary Union (EMU), and completing the Banking Union and Capital Markets Union.

The BNB representatives provided their expertise to the Ministry of Finance teams on EC legislative proposals on financial services.

The measures aimed at reducing risk in the banking sector involved an agreement reached with the active participation of BNB’s representatives on the EC 2016 package on prudential supervision and resolution of credit institutions. In building the Capi-tal Markets Union measures were proposed to strengthen the European supervisory authorities (ESAs) powers and the convergence of supervisory practices, as well as to enhance the European Banking Authority (EBA) role in the context of anti-money loundering and combating the financing of terrorism. The BNB’s representatives made an expert contribution to the negotiations on reforming EBA’s mandate and reviewing the ESRB objectives and tasks. As a result, in April 2019 the European Parliament and the Council of the EU agreed on reforms of the European financial supervisory system.

The European System of Central Banks

The BNB Governor sits on the ECB General Council with EU central bank governors and the ECB President and Vice President. In the first half of 2019 the two sessions of the ECB General Council examined EU economic development and financial sec-tor performance, and ECB key documents: the report on the economic outlook and monetary policies of non-euro area Member States, the report on compliance with the ban on monetary financing by central banks, and the report on public finance.

BNB representatives sat on 12 ESCB committees65, 51 working groups, and the Human Resource Conference and Heads of Administration Conference. Bank rep-resentatives on ESCB bodies, committees, and working groups helped elaborate ECB legal instruments on monetary and banking policy, payment and settlement systems, statistical reporting and research, and other central banking issues. The Bank also helped formulate ECB standpoints in written consultations with EU Member States on legislative bills within ECB purview.

During the review period Bulgaria consulted the ECB in writing on the draft Law amending the Law on the Recovery and Resolution of Credit Institutions and Invest-ment Firms, the Law on the BNB and the Law on Bank Deposit Guarantee. The draft law introduces provisions implementing Regulation (EU) No 806/2014 of the European Parliament and of the Council establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010.

65 The Accounting and Monetary Income Committee (AMICO), the Financial Stability Committee (FSC), the Banknotes Committee (BANCO), the Eurosystem/ESCB Communications Committee (ECCO), the Information Technology Committee (ITC), the Internal Auditors’ Committee (IAC), the International Relations Committee (IRC), the Legal Committee (LEGCO), the Market Operations Committee (MOC), the Monetary Policy Committee (MPC), the Market Infrastructure and Payments Committee (MIPC), the Statistics Committee (STC).

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The European Systemic Risk Board, the European Banking Authority, and Colleges of Supervisors

The BNB Governor and BNB Deputy Governor are members of the ESRB General Board. Debate at the two General Board meetings in the first half of 2019 focused mainly on assessment of risk to financial stability in the context of existing geopoliti-cal uncertainty, at both global and European level. Reassessment of risk premia in global financial markets, deteriorating economic outlook including vulnerability of financial institutions’ balance sheets were identified as the main risks to EU financial stability. It was emphasized that slower growth would have negative effects on EU financial institutions’ profitability and affect private and public sector debt sustain-ability. The General Board continued to monitor the development of the derivatives market and discussed the mid-term risks arising from vulnerabilities in the residen-tial real estate (RRE) sector in the European Economic Area. In the context of 2018 annual review of major trends, the General Board members noted that in implement-ing EU macroprudential policy Member States’ measures are mostly restrictive, with countercyclical capital buffer, systemic risk buffer and limited loan-to-property-value ratio being the most frequently used instruments.

The March General Board considered two reports: on the contribution of complex regulation to systemic risk; and on channels through which ETFs can affect systemic risk. The General Board adopted Recommendation amending the Recommendation on closing real estate data gaps in order to include a new sub-recommendation to Eurostat, to harmonise the definitions used with those in the EU legislation and change the timelines for reporting the recommendation implementation. It approved the adverse scenarios for the forthcoming stress tests of the occupational retirement institutions, central counterparties and money market funds. The results of the 2018 insurance sector stress tests were discussed, highlighting the importance of publishing individual results in view of improving transparency and achieving equal treatment.

The June meeting looked at systemic risks and vulnerabilities related to non-bank financial intermediation, including with regard to the interdependence, liquidity and indebtedness as well as the spillover effects of EU banks’ stress tests.

In addition to the ESRB General Board, Bank representatives made comments and proposals on documents discussed within the Advisory Technical Committee and its Instruments Working Group, clarifying the Bulgarian experience in implementing regulatory instruments (e.g. capital buffers), and participated in ESRB working group meetings and task forces, preparing positions on topics discussed, including on writ-ten procedures and consultations.

Over the period BNB experts continued to sit on supervisory colleges organised by the ECB and the German Federal Financial Supervisory Authority (BaFin) discussing the SREP results as of 31 December 2018 in order to reach joint decisions on the capital and liquidity of bank groups with subsidiaries in Bulgaria. Under the commitments to the supervisory college, BNB experts organised meetings with the joint supervisory team concerning one of the subsidiaries of an European bank group. Over the period the discussions on 2018 recovery group plans were concluded, followed by signing of joint decisions.

Within the off-site supervision BNB’s representatives sat on two meetings and one conference call in the context of EBA’s Subgroup on Analysis Tools to the EBA Stand-ing Committee on Oversight and Practices. The topics considered included the qual-ity of the reporting templates on a consolidated basis of the four banks reporting to the EBA according to the criteria set out in EBA Decision No 130 of 23 September

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2015 with regard to validation rules for reporting. Subject of debate was the annual review of transparency and comparative analysis as well as the results of EBA the-matic reports on funding plans and asset encumbrance. The need of adapting risk key indicators in EBA risk reports (dashboard) according to the regulatory changes in reporting templates was also discussed. The BNB interacted with EBA team on the expected substantial changes in the financial position of a reporting bank in view of the forthcoming presentation of consolidated reports of the bank group in Bulgaria as a result of a business combination.

Within the framework of the prudential supervision the exchange of expertise and information on the EU supervisory architecture continued with special attention to initiatives for improving data provision on real estate market. The BNB regularly exchanged statistical information with the ECB and EBA.

Under the special supervision the BNB continued to participate actively in commit-tees and working groups of the EBA and EC on anti-money laundering and coun-tering terrorist financing, consumer protection and financial innovation. The topics discussed contributed to updating the methods of supervision in the areas concerned. BNB representatives took part also in the ECB seminar on the imposition of admin-istrative penalties.

With regard to the regulatory framework, standing committees and working groups of the EC and EBA jointly with BNB experts continued their work on the discus-sion and elaboration of common oversight policies and standards, the assessment and convergence of national practices on the introduction and implementation of the EU prudential and supervisory framework.

BNB experts helped in the coordination of Bulgarian language versions of the amend-ments to the Capital Requirements Directive and Capital Requirements Regulations (CRD and CRR), to the Bank Recovery and Resolution Directive (BRRD) and to the Regulation on the Single Supervisory Mechanism (SRMR), collectively known as ‘risk mitigation measures’.

The Ecofin Council and Economic and Financial Committee (EFC)

In the first half of 2019 the Council of the EU continued strengthening the EMU and completing the Banking Union by gradually reducing and sharing risks in the finan-cial sector in order to further enhance banks’ resilience to possible shocks. Over the reporting period the regulatory framework for risk mitigation in the banking sector (the ‘banking package’)66 was finally approved, amending capital requirements legis-lation (Regulation (ЕU) No 575/2013 and Directive 2013/36/ЕU), providing for more stringent rules with regard to capital and liquidity positions of credit institutions and strengthening the framework for their recovery and resolution (Directive 2014/59/ЕU and Regulation No 806/2014). Legislative measures, negotiated with the participation

66 Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, and Regulation (EU) No 648/2012; Directive (EU) 2019/878 of the European Parliament and of the Coun-cil of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding com-panies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures; Directive (EU) 2019/879 of the European Parliament and of the Council of 20 May 2019 amending Directive 2014/59/EU as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms and Directive 98/26/EC, Regulation (EU) 2019/877 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 806/2014 as regards the loss-absorbing and recapitalisation capacity of credit institutions and investment firms.

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of BNB experts, included requirements approved by the Basel Committee on Banking Supervision and the Financial Stability Committee.

BNB representatives participated in intensive discussions of the Working Group on Financial Services to the EU Council on the 2018 package of measures to tackle non-performing loans in the EU. It consists of a proposal for a regulation amend-ing Regulation (EU) No 575/2013 as regards minimum loss coverage for non-per-forming exposures, proposal for a Directive on credit servicers, credit purchasers and the recovery of collateral. In the course of negotiations a substantial progress was achieved with the regulation introducing a backstop for NPLs approved by the EU Council on 9 April 2019 and published subsequently in the Official Journal of the European Union67. A common approach was agreed in the EU Council with the participation of the BNB on the proposal for a directive as regards the secondary markets for non-performing loans in the EU, while the requirements to the acceler-ated extrajudicial collateral enforcement procedure continue to be discussed within the Financial Services working group.

Work continued on the technical aspects of the legislative proposal for the creation of a European Deposit Insurance Scheme (EDIS) as part of the measures for further risk sharing in the banking system and building Banking Union’s third pillar in the euro area. Upon a decision of the Eurogroup of January 2019 the debate on the creation of EDIS moved to a political level within the newly set up high-level working group on the EDIS to the Economic and Financial Committee.

In the first half of 2019 as a result of negotiations with BNB participation the legisla-tive package of measures aimed to enhance the effectiveness of the existing Euro-pean System of Financial Supervision (ESFS) was endorsed, providing for reforms and strengthening the capacity of European supervision authorities (ESAs) and the ESRB. The measures adopted cover amendments to the tasks, powers, management and financing of ESAs and ESRB, including additional provisions introduced by the EC which enhance the EBA role vis-à-vis the financial sector risks arising from money laundering.

A Deputy Governor represents the BNB on the Economic and Financial Committee. Discussions focused on overcoming challenges in the banking sector, the operational preparation on Brexit and cases related to the fight against money laundering involv-ing EU credit institutions. Committee’s participants examined also the progress in building the Capital Markets Union, and in particular the sustainable financing, the technological innovations used in financial services (fintex) and the resulting chal-lenges to financial sector’s functioning and structure. In the context of establish-ing the banking union, further improvement of the supervision framework and the framework for resolution of credit institutions were debated. Progress was achieved by adopting the banking package in April 2019 and implementing the Action Plan to tackle the non-performing loans in the EU. New challenges included the increased geopolitical risk, the risk of revocation of reforms already implemented and the slower economic growth. Committee’s members regularly reviewed the actions aimed at building the Capital Markets Union, including the impact on it as a result of Brexit. They also prepared the annual assessment of capital and payments free movement. Topics discussed included the economic situation review, risks to financial stability, EU financial sector trends, and EU government debt markets. Consideration was also given to the international role of the euro, the 15th General Review of IMF Quotas as

67 Council Regulation (EU) 2019/630 of the European Parliament and of the Council of 17 April 2019 amend-ing Regulation (EU) No 575/2013 as regards minimum loss coverage for non-performing exposures (OJ L 111/4, 25.04.2019).

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well as the proposals included in the Report of the G20 Eminent Persons Group on Global Financial Governance.

Finance and economy ministers and central bank governors took part in the Bucha-rest informal EU ECOFIN Council in April. The BNB Governor and a Deputy Gov-ernor attended the meeting. During the first working session participants debated the priorities in the next institutional cycle in order to reach consensus on the steps to ensure an inclusive growth and convergence between EU Member States. In the context of building the Capital Markets Union and the steps undertaken to achieve its objectives, participants considered the benefits and challenges in an increasingly digitised and green economic environment framework.

At the Council of Ministers’ Council for European Affairs the BNB helped formulate Bulgarian standpoints on key economic governance areas and the financial sector.

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IX. International Relations

The Law on the Bulgarian National Bank entitles the Bank to participate organisa-tionally and contribute financially to international organisations furthering currency, monetary, and credit policy cooperation. Where Bulgaria participates in international financial institutions, the BNB is sovereign fiscal agent and depository.

The Bulgarian National Bank holds equity in the Bank for International Settlements (BIS). The BNB Governor sat on BIS central bank governors’ regular meetings: a major forum for cooperation and debate on world economic developments and pros-pects, and international financial markets. The BIS Governors allocated net profit at the Annual General Shareholder Meeting in late June 2019, the BNB receiving EUR 2.4 million dividend for its 8000 shares.

The Governor represents Bulgaria on the IMF Board of Governors. Bulgaria’s IMF quota is SDR 896.3 million or 10,428 voting shares: 0.21 per cent of IMF voting shares.

In January 2019 the BNB signed a Memorandum of Cooperation with the People’s Bank of China. Its aim is to strengthen relations and enhance cooperation between the two central banks.

On 26 March 2019 the central bank of Germany jointly with the BNB, other national central banks of the ESCB and the ECB officially launched a technical cooperation programme with central banks and supervisory authorities of countries in the West-ern Balkans – EU candidates and potential candidates: Albania, Bosnia and Her-zegovina, Montenegro, North Macedonia, Serbia and Kosovo. This is a two-year programme financed by the EU via the Instrument for Pre-Accession Assistance and managed by the Deutsche Bundesbank. It is intended to further strengthen the capac-ity of beneficiary institutions and improve policy instruments through applying the best international and European standards in various areas of central bank activities. Over the review period BNB experts delivered lectures to beneficiaries on consumer financial protection, financial inclusion and statistics.

In April 2019 the BNB contributed USD 10,000 to the Group of Thirty.

Helping step up regional cooperation, the Bank participated at summit level in the Central Banks Governors’ Club of Central Asia, Black Sea Region and Balkan Countries.

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X. Statistics

The BNB compiles statistical information under Article 42 of the Law on the Bulgar-ian National Bank and as ESCB member under Article 5 of the Statute of the ESCB and the ECB. The Bank adheres to harmonised European standards based on interna-tional statistical methodology of relevant leading institutions (the ECB, Eurostat, the IMF, the BIS, the OECD, the UN, and the World Bank).

The BNB collects, processes, analyses and disseminates official monetary68 and inter-est69 statistics, external sector statistics70, quarterly financial account statistics for all institutional sectors71, government finance statistics72, and statistics on non-bank financial institutions, including leasing companies and investment funds73, specialised lenders and insurance and reinsurance undertakings74.

In the first half of 2019 the Bank continued to disseminate up-to-date data on its web-site and by regular communications with the ECB, Eurostat, the ESRB, the IMF, the BIS, and other national and international institutions.

Compiled statistical data are also used for economic research and forecasting, finan-cial stability analyses, major BNB operations, and a number of foreign publications and reports like the ECB and Eurostat statistical database, the ECB Annual Report, the Convergence Report, and the Macroeconomic Imbalance Procedure Scoreboard. In the first half of 2019 all statistical data were published on the BNB website as scheduled.

In addition to the compilation of statistical data, the BNB was actively involved in a number of national, European and international fora discussing and solving methodo-logical issues in the area of statistics. All statistical data published by the BNB were accompanied by the relevant metadata which were periodically revised where necessary. In the first half of 2019 monetary statistics methodological requirements were updated with regard to IFRS 16 enactment and implementation.

In line with ESCB priorities and objectives and amendments to the Register of Institu-tions and Affiliates Data (RIAD), the statistical database continued to be developed and improved, including individual reference data at the BNB: the Register of Domestic Economic Agents and the Bulgarian securities database. Along with analytical options at the national level, these databases allow the BNB to fulfil its commitments to the ESCB in managing the data for Bulgaria in the Register of Institutions and Affiliates

68 Pursuant to Regulation (EU) No 1071/2013 of the European Central Bank of 24 September 2013 concern-ing the balance sheet of the monetary financial institutions sector (recast).

69 Pursuant to Regulation (EU) No 1072/2013 of the European Central Bank of 24 September 2013 concern-ing statistics on interest rates applied by monetary financial institutions (recast).

70 Pursuant to Regulation (EC) No 184/2005 of the European Parliament and of the Council of 12 January 2005 on Community statistics concerning balance of payments, international trade in services and foreign direct investment and Guideline of the ECB of 9 December 2011 on the statistical reporting requirements of the European Central Bank in the field of external statistics (ECB/2011/23).

71 Under the European System of Accounts (ESA 2010) provided for in Regulation (EC) No 549/2013 of the European Parliament and of the Council of 21 May 2013, Guideline of the European Central Bank of 25 July 2013 on the Statistical Reporting Requirements of the European Central Bank in the Field of Quarterly Financial Accounts (ECB/2013/24) and subsequent amendments.

72 Pursuant to ESA 2010 Guideline of the ECB of 25 July 2013 on government finance statistics (ECB/2013/23) and subsequent amendments.

73 Pursuant to Regulation (EU) No 1073/2013 of the ECB of 18 October 2013 concerning statistics on the assets and liabilities of investment funds.

74 Pursuant to Regulation (EU) No 1374/2014 of the European Central Bank of 28 November 2014 on statisti-cal reporting requirements for insurance corporations (ECB/2014/50).

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Database and the Centralised Securities Database (CSDB)75. This contains reference information on credit institutions, money market funds, financial vehicle corporations, investment funds and their management companies, payment service providers and payment system operators, insurance and reinsurance companies, and holding com-panies and head offices. In the first half year domestic pension funds and Bulgarian non-financial corporations which had issued securities became RIAD reported units in stages. This allows RIAD issuer reference data to link with CSDB securities data.

In the first half of 2019 the Bank volunteered to help ESCB national central banks iden-tify and supplement RIAD reference information on resident institutional unit parties to credit relations as part of the AnaCredit project76 on granular credit and credit risk data. The BNB actively participated in the ECB Securities Holdings Statistics project (SHS)77 which is important for both gathering various statistical data and analysing financial stability.

In the first half year the Bank continued developing and elaborating the Integrated Sta-tistical Information System (ISIS) and the Information System for Monetary and Inter-est Rate Statistics (ISMIRS). They automate management, improve the reliability and high quality of statistical information the BNB receives, processes and disseminates, and greatly reduce the administrative burden on individuals and legal entities by offer-ing electronic submission of statistical reports and declarations. Early 2019 changes to ISIS improved electronic submission and signature of access applications, declarations, change requests and statistical reports. In line with this, BNB guidelines for providing electronic statistical information were updated.

The BNB attaches great importance to the quality of the statistical data compiled by it. It follows the principles of the Public Commitment on European Statistics by the European System of Central Banks, based on the fundamental principles of UN offi-cial statistics. The Bank took part in ECB and European Statistical System reports on quality assessment measuring compliance with the principles of central bank statistical products and national statistical institutes through set indicators: accessibility and clar-ity, punctuality, reliability, comparability, and coherence. The published reports ensure transparency and allow for a comparative analysis of the quality of these statistical products for all EU Member States.

At the end of June 2019 the ECB and Eurostat published their fifth Annual report on the quality of statistical data underpinning the indicators used in the macroeconomic imbalances procedure, including BNB statistics on the balance of payments, the inter-national investment position, and quarterly financial accounts. The BNB as coordina-tor for Bulgaria also adheres to the requirements of the IMF Data Quality Assessment Framework, part of the Special Data Dissemination Standard Plus (SDDS Plus) which Bulgaria has joined.

In the field of statistics, the BNB cooperates with the NSI and the Ministry of Finance, national and international statistical authorities and central banks. In the first half of 2019 the Bank contributed significantly to the revision preparation in cooperation with the NSI aiming at data comparability (benchmark revision) between both quarterly and annual financial accounts, and quarterly financial accounts and the rest of the world account.

75 Pursuant to Guideline and Recommendation of the ECB of 26 September 2012 on the data quality manage-ment framework for the Centralised Securities Database (ECB/2012/21 and ECB/2012/22).

76 Pursuant to Regulation (EU) No 2016/867 of the European Central Bank of 18 May 2016 on the collection of granular credit and credit risk data (ECB/2016/13).

77 Pursuant to Regulation (EU) No 1011/2012 of the European Central Bank of 17 October 2012 concerning statistics on holdings of securities (ECB/2012/24) and subsequent amendments, Guideline of the ECB of 22 March 2013 concerning statistics on holdings of securities (ЕCB/2013/7) and subsequent amendments, Recommendation of the ECB of 2 August 2016 on the data quality management framework for statistics on holdings of securities (ECB/2016/24).

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XI. The Central Credit Register and the Register of Bank Accounts and Safe Deposit Boxes

The Central Credit Register

The Bulgarian National Bank maintains an information system on customer debt to banks, financial institutions, payment institutions and electronic money institutions extending loans under Article 21 of the Law on Payment Services and Payment Sys-tems (reporting units). BNB Ordinance No 22 establishes the operation, scope, terms, procedure and timeliness of information flows to and from the CCR. The Register maintains data on all loans extended by reporting units, irrespective of their amount. Real time customer debt information includes loan status and arrears for five years back.

On 30 June 2019 the CCR had 214 participants: 26 banks, 185 financial institutions, two payment institutions and an electronic money institution. Eight new financial institutions and an electronic money institution were included and a bank and a financial Institution were deleted from the CCR information system in the first half year.

On 30 June the CCR listed 5622 thousand loans (against 5552 thousand by end-June 2018), with their balance sheet exposure reaching BGN 80,047 million (BGN 73,383 million a year earlier). Borrowers numbered 2519 thousand, of whom 2300 thousand natural persons, 100 thousand legal entities, 111 thousand non-residents without registration (BULSTAT/PIK/PIN), and 8 thousand self-employed persons practising liberal professions or crafts.

As of 30 June 2019 residual debt of up to BGN 5000 predominated with natural persons (59.9 per cent), while debts of BGN 5000 to 50,000 predominated with legal entities (34.5 per cent).

Electronic Searches by Participants in the CCR Information System (Monthly)(number)

Source: the BNB.

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In the first half of 2019 banks, financial institutions, payment institutions, electronic money institutions and government authorities with electronic access to the CCR conducted 4522 thousand searches on 3894 thousand natural persons and 628 thou-sand legal entities. The average monthly number of searches was 754 thousand.

BNB Ordinance 22 on the Central Credit Register grants individuals (including for probate purposes) and legal entities access to CCR information. From January to the end of June 2019 there were 8654 applications for CCR statements: 8483 by natural persons and 171 by legal entities.

CCR Searches Based on Submitted Applications (Monthly)(number)

Source: the BNB.

In early June the BNB started to provide CCR electronic services to natural persons. Requests for electronic statements from the Register may be submitted by natural persons holding a qualified certificate for electronic signatures issued by a certifica-tion service provider under the Electronic Document and Certification Services Law. Fees charged for electronic services account for 50 per cent of those submitted on paper. For the 5–30 June period, 139 natural persons obtained electronic statements on CCR information.

The CCR develops in step with changing international and Bulgarian criteria for lending developments. To boost quality and reliability, data are constantly analysed and the information system is regularly upgraded. This offers to reporting units more comprehensive information on existing and potential customer debt and more accu-rate credit risk assessments.

The CCR has established and maintains close cooperation with partner ESCB credit registers and successfully exchanges information to bring technological and meth-odological performance up to best practice. CCR information compiling and mainte-nance follows relevant best practices.

The CCR cooperates with the World Bank under the Doing Business project, with the ECB, ESCB, the IMF under the Access to and Use of Financial Services Survey, and with other international bodies for research, statistical analyses and annual surveys.

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The Register of Bank Accounts and Safe Deposit Boxes

The BNB maintains an electronic information system on bank account numbers, holders and attorneys, data on account preservation orders, bank deposit box hold-ers and attorneys. BNB Ordinance No 12 on the Register of Bank Accounts and Safe Deposit Boxes establishes the operation, scope, terms, procedure and timeliness of information flows to and from the CCR.

Banks and foreign bank branches in Bulgaria, and the BNB submit information to the Register. The information on bank accounts and safe deposit box hires is provided in real time, with banks submitting weekly data to the BNB.

As of 30 June 2019 the Register logged 15.98 million bank accounts and 33.06 thou-sand safe deposit box hires, from 16.08 million and 32.4 thousand in June 2018. The RBASDB information system included records of 1.507 million new accounts, 1.497 million closed accounts (from 1.461 million and 1.648 million in June 2018) and also of 920.7 thousand account preservation orders placed as of 30 June 2019.

The Law on Credit Institutions grants Register information access to the bodies and institutions under Article 56a of the LCI with regard to performing their duties, as well as to private and state bailiffs in enforcement proceedings. Technical conditions necessary for authorised bodies to gain electronic access to the system are available. By 30 June 2019 electronic statements accounted for 98.6 per cent of all statements (98 per cent in the same period of 2018).

In the first six months bodies and institutions entitled to access under Article 56a, paragraph 3 of the LCI conducted searches on 355,040 individuals, with the average monthly number of searches reaching 59,173.

RBASDB Searches by Bodies and Institutions under Article 56а, paragraph 3 of the Law on Credit Institutions

(number)

Source: the BNB.

BNB Ordinance No 12 on the Register of Bank Accounts and Safe Deposit Boxes grants natural persons (including for probate purposes) and legal entities access to information on available bank accounts and safe deposit boxes. From January to the end of June, 1270 applications for register disclosures were filed, of which 1219 by natural persons and 51 by legal entities. In early June 2019 the BNB started to

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provide electronic RBASDB services to natural persons. Requests for electronic state-ments from the Register may be submitted by natural persons holding a qualified certificate for electronic signatures issued by a certification service provider under the Electronic Document and Certification Services Law. Fees charged for electronic ser-vices account for 50 per cent of those submitted on paper. For the 5–30 June period, 48 natural persons obtained electronic statements from the RBASDB.

The RBASDB continuously improves and develops following regulatory initiatives and upgrades to increase the quality and reliability of maintained information using the best EU practices in creating and operating bank account registers.

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XII. The Fiscal Agent and State Depository Function

In line with the Law on the BNB the Bank acts as the fiscal agent and depository pursuant to contract. These commitments call for a continuing improvement of the GSAS system for conducting government securities auctions; the ESROT electronic system for registering and servicing government securities trading; the GSSS gov-ernment securities settlement system; the Register of Special Pledges; the AS ROAD automated system for registering and servicing external debt and the IOBFR system for budget and fiscal reserve information servicing.

Revenue raised in the first half of 2019 by system participants under the Tariff of Fees and Commissions Charged on Processing Government Securities Transactions and by the MF under Article 43 of the Law of the BNB was BGN 1062.8 thousand against BGN 942.9 thousand a year ago.

Information Service

Providing state budget information under the MF contract involved issuing 480 state-ments on budget entity operations and balances at the BNB and Bulgarian banks via the custom designed IOBFR system. At 30 June 2019 summarised information sets the overall balance of budget entities’ accounts (including municipalities) at BGN 13,117.5 million,78 up 13.5 per cent on 30 June 2018. At end-June BGN 10,819.0 million or 82.5 per cent was in BNB accounts and the rest with 18 domestic banks.

Budget Entities’ Accounts with Domestic Banks (BNB excluded)(BGN million)

Source: the BNB.

Budget entities’ account balances outside the central bank rose by 9.3 per cent on 30 June 2018, of which 75.9 per cent at five banks.

78 Foreign currency account balances are recalculated in levs at the BNB exchange rate on 30 June 2019.

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Approximately 86.0 per cent of budget funds at the BNB and other domestic banks formed the fiscal reserve’s79 liquidity portion80: BGN 11,245.7 million on 30 June 2019. Of this, BGN 6076.0 million was allocated to earmarked funds: the State Fund for Guaranteeing the Stability of the State Pension System (the Silver Fund), the MF National Fund, the State Fund Agriculture – Paying Agency, and the Teachers’ Pen-sion Fund.

Structure of Bank Account Balances within the Fiscal Reserve Scope(BGN million)

Source: the BNB.

Standing Minister of Finance and BNB Governor joint instructions task the Bank, on behalf of the Ministry of Finance to monitor security pledged by banks under the Law on Public Finance and tally it with IOBFR balances on budget entities’ accounts daily.

The AS ROAD system maintains up-to-date information on the government’s foreign financial obligations on which the Bank, as part of its agency functions, is calculat-ing and paying agent.81 Based on that information and upon MF clearance, there were payments of EUR 163.2 million, comprising EUR 28.0 million principal and EUR 135.2 million interest. Obligations registered in AS ROAD on 30 June 2019 were EUR 7822.7 million.

Servicing Government Securities Trading

MF issuing policy involved two auctions for BGN denominated government securities via the GSAS system. They offered two long-term issues: a 10.5-year issue at 0.5 per cent annual interest and a 20-year issue at 1.5 per cent annual interest.

The total nominal value of government securities offered for sale was BGN 400 mil-lion. Over 54 per cent of bids were by banks (BGN 389.2 million) with BGN 331.1

79 According to § 1, item 41 of the Additional Provisions of the Law on Public Finance the fiscal reserve is an indicator comprising both the balances of all budget entities’ bank accounts (excluding municipalities and their budget spending units) and other assets and claims on EU funds.

80 Comprises the balances of all Bulgarian budget entities’ bank accounts, excluding municipalities and their budget spending units.

81 Under the government debt agency agreement between the BNB and MF.

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million by non-bank institutions. Government bond sales volume was BGN 300.6mil-lion, or 75.2 per cent of the scheduled volume. Primary dealer banks bought nearly 32 per cent of all sold bonds82. Average annual yields of 10.5-year and 20-year issues were 0.41 per cent and 1.60 per cent, respectively.

Volume of Transactions in Tradable Government Securities in the First Six Months

(BGN million)

Source: the BNB.

ESROT registered corporate event payments on behalf and on account of the issuer to a total amount of BGN 1035.2 million83 or down BGN 139.9 million (11.9 per cent) compared to the same period of 2018. The 17 circulating MF issues had an overall nominal value of BGN 4810.3 million84 or 14.8 per cent less than in June 2018. Bond currency structure changed due to the last issued bonds for structural reform (ZUNK bonds) maturing in January which were EUR and USD-denominated redeemable in levs. BGN-denominated government securities redeemable in levs occupied the largest relative share of 77.9 per cent, followed by EUR-denominated government securities redeemable in euro at 22.1 per cent. The maturity structure underwent no change from end-June 2018, medium and long-term bonds comprising 12.5 and 87.5 per cent.

In the first six months of 2019 the nominal value of government securities registered in ESROT was BGN 9775.5 million, down 20.1 per cent on the same period of 2018.

Repos had the largest share at 87.0 per cent, including one-day ones (51.2 per cent), mostly in lev-denominated government securities. Bond sales and purchases were BGN 962.3 million. Of this, transactions between ESROT participants came to BGN 550.2 million, those between participants and customers were BGN 412.1 mil-lion and those between ESROT participants’ customers85 accounted for BGN 311.5 million.

82 Primary dealers selected under MF and BNB Ordinance No 15 as of 30 June 2019 numbered 9.83 The lev equivalent of payments on foreign currency denominated government securities issues was calcu-

lated at the BNB rate on the date of payment.84 The lev equivalence of government securities denominated in foreign currency is shown at the BNB rate for

30 June 2019.85 The ESROT system registered no transactions between customers of the same participant.

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For the first six months secondary market liquidity ratio86 was 2.0 from 2.1 for the same period of 2018. ESROT participants encountered no problems and provided government bonds and cash in levs and euro for the delivery versus payment (DvP) settlement of government securities transactions, the average settlement ratio87 being 100 per cent.

Between January and June there were BGN 2922.7 million of blocking and unblock-ing operations in domestic government securities registered in ESROT and related to securing funds in budget entities’ bank accounts and registered pledges under the Law on Special Pledges from BGN 4192.4 million for the same period of 2018.

Reflecting the decreased circulating domestic government securities compared to the corresponding period of 2018, at the end of the first half government securities port-folio investment declined in all bond holder categories: banks (down BGN 449.6 mil-lion), insurance corporations and pension funds (down BGN 223.2 million), non-bank financial institutions, corporations and individuals (BGN 149.4 million) and foreign investors (up BGN 14.9 million). This changed the share of individual gov-ernment bond holder categories on 30 June 2019 to: 65.7 per cent with banks; 19.6 per cent with insurance corporations and pension funds, 13.7 per cent with non-bank financial institutions, corporations and individuals, and 1.0 per cent with foreign investors, from 63.9, 20.6, 14.4 and 1.1 per cent as of 30 June 2018.

Holders of Government Securities Issued in the Domestic Market

Notes: The lev equivalence of government securities issues denominated in foreign currency is calculated on the basis of the BNB exchange rate valid for the last business day of the relevant period. According to BNB and ESROT participants data.Source: the BNB.

Over the review period the ESROT offered 100 per cent availability,88 with no call for contingency rules for interaction between systems operated by the BNB.

On 30 June 2019 there were 929 accounts in the government securities settlement system under BNB Ordinance No 31 on Government Securities Settlement. Of them, 17 were for government securities of the issuer (the MF), 264 for participants’ own

86 Liquidity ratio is the ratio between the volume of secondary market government bond transactions con-cluded over the period and the volume of government securities circulating at the close of the period.

87 Settlement ratio is the ratio of the number of transactions settled on a specific date to all transactions subject to registration and settlement within the system for the reporting period.

88 The ratio of time when the system is operational to scheduled operating time.

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government securities portfolios, 147 for encumbered bonds, and 223 for partici-pants’ customers. Account nominals tallied with the amount of outstanding issues at BGN 4810.3 million.89

System Development

In the second quarter of 2019 the third and last stage of the GSAS upgrade project was completed, thus ensuring its technological and functional modernisation in line with the agreements reached with the MF. This stage covered mainly test prepara-tion, organisation and implementation with primary government securities dealers, installation of production and backup system environment, data migration and sys-tem preparation and launch. To test the functionality of the upgraded system and its interfaces with relevant systems 27 test auctions involving primary government securities dealers were carried out under conditions agreed in advance with the issuer. The completion of the project allowed the new version of the system to be launched in April and government securities auctions as announced by the MF in June 2019 to be conducted via the upgraded GSAS.

Over the review period work continued on drafting a new instruction on the imple-mentation of Article 152 of the Law on Public Finance to replace the current instruc-tion DDS No 09/31.07.2015 on banks’ periodic statements of budget entities’ opera-tions and funds and daily securing of funds in these accounts.

User Committee of the Government Securities Registration and Settlement System at the BNB was set up for the period 12 February 2019-12 February 2021 in line with the requirement of Article 28 of Regulation (EU) 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012. List of Committee’s members and its Rules of procedure were published on the BNB website.

89 The lev equivalence of government securities issues denominated in foreign currency is shown at the BNB rate for 30 June 2019.

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XIII. Research

Economic research, Bulgarian economic development analyses, and macroeconomic forecasts prepared by BNB experts support the Bank management decisions and eco-nomic policy formulation. Specialised research under the 2019–2020 BNB Research Plan supported Bank operations by analysing specific economic processes and issues and improving available forecasting and modelling tools.

In the first half of 2019 Research Plan implementation addressed developing and expanding BNB instruments used to prepare macroeconomic simulations and design-ing a satellite model reflecting effects of long-term structural changes in the Bulgarian economy. Honing the basic model for BNB macroeconometric forecasting continued over the half year. Research results featured in technical reports and Bank seminars for experts from relevant bodies, academia, and non-governmental organisations.

In the first half of 2019 the BNB continued to encourage the research potential of Bulgarian economic science and practice in the area of macroeconomics and finance through its Discussion Papers research series. The Discussion Papers Editorial Board reviewed two submissions for subsequent publication: Financial Cycle in the Bulgarian Economy and Its Interaction with the Business Cycle by Tania Karamisheva, Gergana Markova, Boyan Zahariev and Svilen Pachedzhiev and Labour Market Functioning and Matching Efficiency in Bulgaria over the Period 2004–2017: Qualification and Regional Aspects by Ventsislav Ivanov, Desislava Paskaleva and Andrey Vassilev.

The BNB quarterly Economic Review presents information and Bulgarian economic forecasts, analyses of the balance of payments flow dynamics, monetary aggregates, their link with the development of the real economy, and their bearing on price stabil-ity. It also analyses external developments directly affecting the Bulgarian economy. The Economic Review also carries quantitative assessments of anticipated short-term developments in a set of key macroeconomic indicators. The Review also carries the results of BNB analyses of particular economic issues as highlights and topical research. Over the first half year it included a topical research paper on methods for assessing the cyclical position of the Bulgarian economy.

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XIV. Human Resource Management

The effective management of human resources enables the BNB to make full use of staff capabilities and knowledge: the major factor for successful fulfilment of the BNB objectives, functions and tasks. Hence, maintaining and developing competitive human resources continue to be a key Bank policy over the first half of 2019.

In line with BNB Governing Council decisions, the first half year saw some changes intended to improve the Bank organisational structure. With effect from 1 May 2019, the Fiscal Services Department was transformed into a Directorate under the Banking Department. To optimise activities and enhance efficiency in the Issue Department, on 3 June 2019 the Issuing Policy and Control Directorate was merged into the Issue and Cash Directorate.

To effectively fulfil its functions and tasks, it is vital for the BNB to employ and retain qualified and motivated staff. In this respect, main priorities related to attracting appropriate candidates, retaining highly qualified employees by providing profes-sional and career development, while applying a supportive and fair remuneration system and providing a favourable, well organised and dynamic working and sociable environment.

Staff Structure as of 30 June (per cent, number)

Source: the BNB.

In the half year the number of employees rose slightly to 889, from 884 by end-June 2018. Thirty-two employees left, with ten eligible for old age pension, from 30 in the first half of 2018 (five of them retired). Thirty-eight new employees joined against 34 in the same period of 2018.

Hum

an Resource M

anagement

89

University graduates led the staff educational attainment structure at 75 per cent. As of 30 June 2019 twenty-seven BNB employees read for doctorates, from 25 in the same period of 2018.

The staff grading structure remained broadly unchanged, the Specialist grade having the largest share at 61 per cent, followed by Support staff (approximately 22 per cent) and Managerial grades (slightly above 17 per cent).

The age structure changed insignificantly from the first six months of 2018. The share of employees of up to 30 fell by slightly above 1 per cent. Employees between 31 and 40 also decreased insignificantly. The share of the 41–50 group remained practically static, with the group of over 51 rising by 1.5 per cent.

The breakdown by sex shows an increasing share of women by 1 per cent to 65 per cent, that of men reaching 35 per cent by end-June.

To stimulate professional and career development and exchange experience across business areas, the Bank promoted staff mobility, 26 employees moving across struc-tural units. Three BNB employees worked on ECB short-term assignments.

Wages continued reflecting performance and each employee’s individual contribu-tions to Bank targets and tasks.

The annual schedule offered employees plentiful opportunities to take a variety of training and qualification boosting programmes, i. e. distance learning, professional courses and seminars in Bulgaria and abroad, language courses, information technol-ogy courses, and courses for specific responsibilities.

It familiarised new employees with the Bank’s corporate culture, topical tasks and challenges, internal rules, and general administrative procedures.

Over the half year, 18 employees, of whom five reading for doctors’, six for mas-ters’, and seven for bachelors’ degrees, boosted their educational attainments without discontinuing work. Seven BNB employees took part in three distance learning and certification programmes focusing on financial analyses, information security and internal audit.

Bank employees took part in various specialised courses and seminars organised by the ESCB, international financial institutions, and training centres. Courses and sem-inars focused on: banking supervision, financial stability and macroprudential policy, monetary policy and financial programming, currency circulation management, payment and settlement systems, financial markets, asset management and market operations, modelling and forecasting, accounting, audit, and internal control. Bank employees continued to participate in courses, seminars, and working meetings on ESCB committees and working groups and European supervisory bodies.

They also attended specialised courses and seminars in Bulgaria: state-of-the-art practices in applying international financial reporting standards, employment rela-tions, social and health insurance, personal data protection, public tender procedures, risk assessments, etc.

There were advanced business English and English conversation courses to improve speaking and communication skills. Information technology seminars focused on cyber security, construction and maintenance of the necessary network infrastructure and developing digital or other technologies.

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Health and safety at work were again among BNB priorities of human resource man-agement policy, with training in the first half year targeting comprehensive activities on protecting the health and safety of employees.

With students, the BNB continued providing career opportunities and encourag-ing knowledge acquisition and research. Twenty-seven applicants enquired into the annual postgraduate scholarship programme: 11 for doctors’ and 16 for masters’ degrees. The Bank awarded two doctor’s degree scholarships. In March the Bank pre-sented traditionally its career development programmes on traineeships, scholarships, guest researchers, recruitment procedures and working conditions at the National Career Days annual student and youth professional forum.

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XV. BNB Internal Audit

There were five audits between January and June 2019: four under the BNB Govern-ing Council’s annual Internal Audit Programme, and one under the ESCB Internal Auditors Committee Programme.

Audits sought assurance of adequate and effective control, corporate governance, and management of risks inherent in relevant activities to ensure:

– effective attainment of objectives and tasks; – reliability and completeness of financial and operational information;– effective and efficient operations and programmes;– safeguarding assets;– legal, regulatory, internal rule, policy, procedure, and contractual observance.

Audits under Annual Internal Audit Directorate Programme

BNB Functions Audits

Internal services Procurement organisation and procedures in the BNB

Information and communication technologies Foreign Exchange Reserve Management System – TREMA

Implementation of monetary policy and asset management

Auditing international reserves management by the Treasury Directorate to the Issue Department

Follow-up process Follow-up on recommendations from past audits under the BNB Internal Audit Programme

Source: the BNB.

Implementation of past audit recommendations at a local level was monitored under the ESCB Internal Auditors Committee Programme.

In the first half of 2019 the BNB Chief Auditor organised and coordinated Internal Audit Directorate work with external auditors and the Republic of Bulgaria Court of Auditors team.

BNB Internal Audit continued to submit opinions on draft internal regulations con-cerning major BNB functions.

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XVI. BNB Budget Implementation in the First Half of 2019

The BNB Budget for 2019 was adopted by the BNB Governing Council under Resolu-tion No 299 of 28 November 2018.

The report on Bank’s budget implementation comprises two sections pursuant to the Governing Council Internal Rules on Drafting, Implementing, and Reporting the BNB Budget: BNB Operating Expenditure and Investment Programme.

І. BNB Operating Expenditure

BNB half year operating expenditure was BGN 45,642 thousand or 40.4 per cent of approved annual budget.

Currency circulation cost BGN 9013 thousand or 25.9 per cent of annual budget for this item and 19.8 per cent of Bank’s operating expenditure budgeted for the report-ing period. Minting occupied the largest share at BGN 7392 thousand, of which BGN 7170 thousand on circulating coins. Commemorative coins cost BGN 222 thou-sand in line with the BNB Governing Council Commemorative Coin Programme for 2019. Expenses on new banknote production were BGN 1369 thousand. Cash processing consumables cost BGN 37 thousand. Plovdiv Municipality, Cash Services Company, and State Mint premise rentals for issue and cash operations cost BGN 176 thousand, while cash machine spares and servicing cost BGN 38 thousand. Funds were also spent on designing new issues of banknotes and coins.

Materials, services, and depreciation cost BGN 15,102 thousand or 40.2 per cent of annual item budget and 33.1 per cent of half year operating expenditure.

Materials totalled BGN 366 thousand or 30.6 per cent of approved funds under this item and 0.8 per cent of total operating expenditure. Specialised fleet fuel and spares and office consumables occupied the largest shares in this group at BGN 110 thou-sand and BGN 86 thousand, respectively.

External services cost BGN 9431 thousand or 42.4 per cent of annual item budget and 20.7 per cent of half year operating expenditure. Software maintenance subscriptions at BGN 1957 thousand, spending on security and fire protection at BGN 1460 thou-sand, and office equipment maintenance at BGN 1148 thousand were notable in this group. Property and refuse collection levies and other charges were BGN 907 thou-sand. Mandatory TARGET2 modules amounted to BGN 656 thousand. Major build-ing maintenance cost BGN 602 thousand. Bloomberg, Reuters, internet, and other system provision cost BGN 572 thousand and electricity BGN 471 thousand. Mail and telephone expenditure was BGN 289 thousand, with a trend towards optimising and modernising BNB voice services. BORICA AD subscriptions cost BGN 265 thousand. Heating and water bills were BGN 156 thousand. Health and safety at work and spe-cial clothing cost BGN 112 thousand. Court and legal services expenses were BGN 87 thousand. Parking bay and freight vehicle garaging cost BGN 62 thousand. The Bank spent BGN 60 thousand on banking and economic periodicals and economics pub-lication translations. External vehicle costs (repair works and spares) were BGN 59 thousand. Property insurance premia accounted for BGN 54 thousand. Machines and equipment repair expenditure was BGN 12 thousand. Expenses on public announce-ments and BNB museum were BGN 12 thousand over the half year.

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udget Implem

entation in the First Half of 2019

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Depreciation cost BGN 5305 thousand or 37.5 per cent of annual budget, its relative share reaching 11.6 per cent of total operating expenditure.

Payroll, social, and healthcare spending was BGN 17,948 thousand or 55.2 per cent of budget funds under this item and 39.3 per cent of Bank’s total operating expenditure for the reporting period. The BNB reported BGN 2421 thousand of current retire-ment obligations and unused paid leave under IAS 19, Income of Hired Persons.

Social expenses were BGN 1525 thousand or 64.9 per cent of annual budget and 3.3 per cent of Bank half year operating expenditure.

Other administrative expenditure (inland and foreign business travel, training and representative expenses) was BGN 601 thousand or 23.2 per cent of budget and 1.3 per cent of BNB’s total operating expenditure. Inland travel worth BGN 18 thousand involved mainly regional cash centre logistics and checks. Foreign travel unrelated to the ESCB and other EU bodies cost BGN 147 thousand. The annual BNB Staff Educa-tion and Professional Training Programme cost BGN 394 thousand. BNB employees took part in various distance learning programmes, professional courses and seminars organised by leading European central banks, international financial institutions, and international training centres. The Bank’s representative and protocol expenses were BGN 42 thousand.

ESCB participation cost BGN 1453 thousand or 48.0 per cent of annual budget and 3.2 per cent of BNB operating expenditure. The annual European Banking Authority membership fee was BGN 1015 thousand. ESCB committee and working group and other EU body travel and training cost BGN 384 thousand and BGN 18 thousand, respectively.

ІІ. The Investment Programme

The Bank invested BGN 1022 thousand or 2.9 per cent of annual item budget.

Machine and equipment, vehicle, and other equipment investment came to BGN 496 thousand, or 6.6 per cent of approved funds and 48.5 per cent of total investment for the review period. These funds were spent on upgrading security, cash operations equipment and supply of air-conditioning.

Funds invested into information and communication systems totalled BGN 526 thousand or 4.0 per cent of annual budget and 51.5 per cent of half year invest-ment expenses. They were intended to ensure a safe and sustainable technological infrastructure. Software spending of BGN 508 thousand went on developing existing information systems and purchasing programme product licences. Hardware cost BGN 19 thousand, mainly for printers and other computer equipment.

Investment programme expenditure involves implementation of interconnected actions depending directly on starting and completing those of the previous period. At the time of preparing the Report, some of procurement procedures were in prepa-ration or underway, and thus planned funds remained unused in the half year.

The constructor selection contract for the Plovdiv Cash Centre was objectively signed at the end of the reporting period, and construction works are therefore expected to be finalised during the next review period. Hence, over the first six months no funds were spent on new construction, refurbishment and modernisation and on public procurement for the purchase of machinery and other equipment that are contingent on implementing construction activities.

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BNB Budget Implementation as of 30 June 2019

Indicators

Report 30 June 2019

(BGN thousand)

Budget 2019(BGN

thousand)

Implementation(per cent)

Section I. Operating expenditure 45,642 112,849 40.4

Currency circulation 9,013 34,846 25.9

Materials, services, and depreciation 15,102 37,546 40.2

Staff 17,948 32,496 55.2

Social expenditure 1,525 2,351 64.9

Other administrative expenditure 601 2,585 23.2

ESCB membership 1,453 3,025 48.0

Section II. Investment programme 1,022 35,024 2.9

Construction, refurbishment, and modernisation 0 14,200 0

Machines, equipment, vehicles, and other equipment 496 7,541 6.6

BNB information systems 526 13,279 4.0

Investment related to ESCB membership 0 4 0

Source: the BNB.

XVII. BNB Consolidated Financial Statements as of 30 June 2019 (Unaudited)

Statement of Responsibilities of the Governing Council of the Bulgarian National Bank _______________________________________ 96

Consolidated Statement of Comprehensive Income for the Period Ended 30 June 2019 (Unaudited) ___________________________ 97

Consolidated Statement of Financial Position for the Period Ended 30 June 2019 (Unaudited) ___________________________ 98

Consolidated Statement of Cash Flows for the Period Ended 30 June 2019 (Unaudited) __________________________ 99

Consolidated Statement of Changes in Equity for the Period Ended 30 June 2019 (Unaudited) __________________________ 100

Notes to the Consolidated Financial Statements ___________________________ 101

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Statement of Responsibilities of the Governing Council of the Bulgarian National Bank

The Governing Council of the Bulgarian National Bank is responsible for preparing and approving financial statements to present the Bank’s financial position and performance for the period.

The financial statements of the Bulgarian National Bank approved by the its Governing Council are prepared in accordance with the International Financial Reporting Standards adopted by the European Commission.

The Governing Council of the Bulgarian National Bank is responsible for maintaining proper accounting records to disclose with reasonable accuracy at any time the financial position of the Bulgarian National Bank. It has overall responsibility for taking such steps as are reasonably open to it to safeguard the assets of the Bulgarian National Bank and to prevent or detect fraud and other irregularities.

Dimitar Radev

Governor of the Bulgarian National Bank

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B C

onsolidated Financial Statements as of 30 June 2019

97

Consolidated Statement of Comprehensive Income for the Period Ended 30 June 2019 (Unaudited)

(BGN’000)

Note 30 June 2019 30 June 2018

Interest income 7 127,419 132,241Interest expense 7 (37,056) (33,660)Net interest income 90,363 98,581

Fee and commission income 4,620 4,323Fee and commission expense (2,268) (1,997)Net fee and commission income 2,352 2,326

Net (losses)/gains from financial assets and liabilities reported at fair value in the profit or loss 8 255,021 (153,141)incl. provisions for expected credit loss (506) -Other operating income 9 18,379 19,595

Total income from banking operations 366,115 (32,639)Administrative expenses 10 (57,758) (65,103)

Profit/(loss) for the period 308,357 (97,742)

Other comprehensive income

Other comprehensive income that can be reclassified into profit or loss at a future point in time - -

Other comprehensive income that cannot be reclassified into profit or loss at a future point in time (154) (640)Other comprehensive income, total (154) (640)Total comprehensive income for the period 308,203 (98,382)

Profit attributable to: Equity holder of the Bank 308,234 (97,760) Non-controlling interest 123 18Profit/(loss) for the period 308,357 (97,742)

Total comprehensive income attributable to: Equity holder of the Bank 308,080 (98,400) Non-controlling interest 123 18Total comprehensive income for the period 308,203 (98,382)

The accompanying notes on pages 101 to 137 form an integral part of the Consolidated Financial Statements.

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Consolidated Statement of Financial Position for the Period Ended 30 June 2019 (Unaudited)

(BGN’000)

Note 30 June 2019 31 December 2018

ASSETS

Cash and deposits in foreign currency 11 18,888,497 19,833,248Gold, instruments in gold, and other precious metals 12 3,189,295 2,884,283Financial assets at fair value through profit or loss 13 26,982,870 26,120,165Investments 14 2,196,710 2,182,608Tangible assets 15 149,334 154,065,Intangible assets 16 5,733 5,323Other assets 17 89,016 84,871Total assets 51,501,455 51,264,563,

LIABILITIES

Currency in circulation 18 17,361,567 17,325,475Liabilities to banks and other financial institutions 19 12,866,662 15,267,214Liabilities to government institutions and other borrowings 20 13,105,419 10,719,427Borrowings against Bulgaria’s participation in international financial institutions 21 3,369,418 3,349,973Other liabilities 22 182,519 294,432Total liabilities 46,885,585 46,956,521

EQUITY

Capital 23 20,000 20,000Reserves 23 4,590,774 4,283,069Non-controlling interest 24 5,096 4,973

Total equity 4,615,870 4,308,042

Total liabilities and equity 51,501,455 51,264,563


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99

Consolidated Statement of Cash Flows for the Period Ended 30 June 2019 (Unaudited)

(BGN’000)

Note 30 June 2019 30 June 2018

OPERATING ACTIVITIESNet (loss)/profit 308,357 (97,742)Adjustments

Dividend income 9 - (4,572)Depreciation 15, 16 6,981 6,604(Profit)/loss on disposal of tangible assets (30) (79)(Profit)/loss on financial assets and liabilities arising from market movements (378,114) 54,653(Profit)/loss of associates (1,958) -Other adjustments 1,461 (1,658)

Net cash flow from operating activities before changes in operating assets and liabilities (63,303) (42,794)Change in operating assets

(Increase) in gold, instruments in gold and other precious metals (1,788) (968)Decrease/(increase) in financial assets at fair value through profit or loss (782,472) (2,642,193)(Increase) in financial assets available for sale– Republic of Bulgaria’s quota in the IMF - -(Increase)/decrease in other assets (3,886) (1,147)

Change in operating liabilitiesIncrease in currency in circulation 36,092 65,519(Decrease)/increase in due to banks and other financial institutions (2,400,552) (691,824)(Decrease)/increase in due to government institutions and other liabilities 2,385,992 436,698Increase in debt to international financial institutions for the increase of the Republic of Bulgaria’s quota in the IMF - -(Decrease)/increase in other liabilities (111,913) (42,168)

Net cash inflow/(net cash outflow) from operating activities (941,830) (2,918,877)

INVESTMENT ACTIVITIES Acquisition of tangible and intangible assets (2,662) (3,155)Dividends received - 4,572

Net cash inflow/(net cash outflow) from investing activities (2,662) 1,417

FINANCING ACTIVITIESPayments to the state budget - -Net cash flow (used in) financing activities - -Net increase/(net decrease) in cash and cash equivalents (944,492) (2,917,460)Cash and cash equivalents at beginning of period 19,881,661 20,997,724Cash and cash equivalents at the end of period 11, 17 18,937,169 18,080,264


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Consolidated Statement of Changes in Equity for the Period Ended 30 June 2019 (Unaudited)

(BGN’000)

Capital

Revaluation of non-

monetary assets

Special and other reserves

Total capital and

reserves

Non-controlling

interest Total equity

Balance as at 1 January 2019 20,000 133,463 4,208,260 4,361,723 4,857 4,366,580

Profit/(loss) for the period - - (97,760) (97,760) 18 (97,742)Other comprehensive income: other income - (676) (640) (1,316) - (1,316)Other comprehensive income, total - (676) (640) (1,316) - (1,316)Total comprehensive income for the period - (676) (98,400) (99,076) 18 (99,058)Contributions by and distributions to owners:

contribution to the budget of the Republic of Bulgaria - - - - - -dividend paid by subsidiaries to minority shareholders - - (480) (480) - (480)

Transactions with owners, total - - - - - -

Balance as at 30 June 2018 20,000 132,787 4,109,380 4,262,167 4,875 4,267,042

Balance as at 1 January 2019 20,000 135,282 4,147,787 4,303,069 4,973 4,308,042

(Loss)/profit for the period - - 308,357 308,357 - 308,357Other comprehensive income: other income - (395) (154) (549) 123 (426)Other comprehensive income, total - (395) (154) (549) 123 (426)Total comprehensive income for the period - (395) 308,203 307,808 123 307,931Contributions by and distributions to owners:

contribution to the budget of the Republic of Bulgaria - - - - - -dividend paid by subsidiaries to minority shareholders - - (103) (103) - (103)

Transactions with owners, total - - (103) (103) - (103)

Balance as at 30 June 2019 20,000 134,887 4,455,887 4,610,774 5,096 4,615,870


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Notes to the Consolidated Financial Statements

1. Statute and Principal ActivitiesThe Bulgarian National Bank (the ‘Bank’) is 100 per cent owned by the Bulgarian state and is the central bank of the Republic of Bulgaria. The operation of the Bank is governed by the Law on the Bulgarian National Bank (LBNB), which has been effective since 10 June 1997.Under this Law, the principal activities of the Bank may be summarised as:• Maintaining price stability through ensuring national currency stability;• Exclusive right to issue banknotes and coins; • Regulation and supervision of other banks’ activities in the country with a view to bank-

ing system stability maintenance;• Establishment and operation of efficient payment systems;• Regulation and supervision of the activity of payment system operators, payment insti-

tutions and electronic money institutions in the country;• The Bank shall not extend credit and guarantees in any form whatsoever, including

through acquisition of debt instruments, to the Council of Ministers, municipalities, as well as to other government and municipal institutions, organisations and enterprises;

• The Bank may not provide credit to banks except in the case of liquidity risk threatening to affect the stability of the banking system;

• The Bank may not deal in Bulgarian government securities;• The Bank may not issue Bulgarian levs in excess of the Bulgarian lev equivalent of the

gross international reserves;• The Bank acts as the fiscal agent and depository for the state.The Governing Council of the BNB approved the Consolidated Financial Statements, set out on pages 97 to 137 on 29 November 2019.

2. Applicable StandardsThese consolidated financial statements have been prepared in accordance with Interna-tional Financial Reporting Standards (IFRS) as adopted by the European Commission.

3. Basis of PreparationThe consolidated financial statements are presented in Bulgarian levs rounded to the nearest thousand (BGN’000), which is the functional currency of the Bank. They are prepared on a historical cost basis, except for the following items, which are measured on an alternative basis as at each reporting date:

Items Measurement basis

Derivative financial instruments Fair valueNon-derivative financial instruments at fair value through profit or loss Fair value

Tangible non-current assetsRevalued amount, which is the asset’s fair value at the revaluation date less subsequent depreciation and impairment loss

Defined benefit liability Present value of the defined benefit liability

Use of estimates and judgementsIn preparing these Consolidated Financial Statements, the Bank has made judgements, esti-mates and assumptions that affect the reported amounts of assets and liabilities, incomes and expenses, and the disclosure of contingent receivables and payables as at the Financial Statements date. These estimates, judgements and assumptions are based on data available as at the date of the Consolidated Financial Statements; therefore, actual future results may differ from these estimates.The estimates and main assumptions are revised on an ongoing basis and are recognised prospectively.

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JudgementsThe Bank has estimated and classified currency in circulation as financial liability (ref. note 18).

Assumptions and estimation uncertaintiesMeasurements of the present value of long-term obligations to retiring staff (following a defined benefit plan) use certified actuarial calculations based on mortality assumptions, rate of staff turnover, future level of salaries and discount factor. These assumptions may lead to adjustments in the next financial year; management, however, considers them to be reasonable and appropriate for the Bank (ref. Note 10).Bank assumptions and estimates are based on the existing parameters at the time of prepara-tion of the financial statements. Existing circumstances and assumptions about future devel-opments may change due to market changes or circumstances beyond the Bank’s control. Such changes are reflected in assumptions when they occur.

Determination of expected credit losses (ECL) on financial assets with a low credit riskInstruments with a low credit risk are those for which the risk of default is low, the capacity of a counterparty to perform its contract obligations in a short term is stable, long-term negative changes in economic conditions are unlikely to change the capacity to repay obliga-tions. For short-term receivables from banks and debt instruments reported at amortised value or at fair value in ‘other comprehensive income’, the Bank accepts at the reporting date that the possibility of default is unlikely, so it determines for them 12-month credit losses. In case that the low credit risk criteria are no longer met in subsequent reporting periods, the Bank conducts an analysis of the changes in credit risk compared to the initial recognition to assess the need for an adjustment instrument on losses over the life of the instrument. Definition of instruments as such with a low credit risk requires judgment. In developing this judgment, the Bank uses all reasonable and supportable information accessible to it.

Determination of expected credit losses (ECL) on deposit receivables As reported in ref. note 6(b) Credit risk, the Bank has developed a Policy to Assessing Changes in Credit Quality and Determining Expected Credit Losses on Financial Instru-ments. The Bank classifies its risky assets into three risk phases depending on changes in credit risk after initial recognition of the asset and, accordingly, assesses the expected credit losses on the basis of 12-month probability of default if there is no changed credit quality (phase 1) and based on the probability of default for the expected lifetime of the instrument (phase 2 and phase 3) where there is a significant increase in credit risk. When determining how much the credit risk is increased compared to the initial recognition of the asset, the Bank uses all reasonable and supportable information that is available. Loss on non-performance is a judgment for damages that the Bank will suffer in the event of default. It is based on the difference between the contractual cash flows and the cash flows that the Bank expects to receive. Significant judgment is needed in determining the time and amount of expected cash flows. The management uses judgments based on historical experience of losses on assets with an inherent credit risk and objective circumstances of impairment similar to those in the portfolio in calculating future cash flows.In determining the amount of expected credit losses, the Bank uses forward-looking infor-mation on expected future changes in certain economic conditions and indicators, as well as assumptions about how changes in these indicators would affect the probability of default. The ‘probability of default‘ parameter is key for calculating the amount of expected credit losses and reflects the probability that the counterparty will not fulfil its contractual obliga-tions on a certain time horizon. The Bank has developed internal models to determine the probability of default on loans, based mainly on historical information, for the period for which such is available. The assessment of the correlation between historical indicators of default and projected economic indicators is a significant estimate. Bank’s historical experi-ence in credit losses and expectations of economic conditions may also not be representative of real losses in the future.

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Fair value of the financial instrumentsWhen fair values of financial assets and liabilities in the statement of financial position cannot be obtained from active markets, they are determined by using various valuation methods, which include the use of mathematical models. Basic data on these models are derived from indicators that are observed in financial markets where possible. Otherwise, assumptions about establishing fair value are made. Assumptions take into account factors related to liquidity, volatility of longer-term derivatives and discount rates, early payments and default assumptions related to asset-backed securities.Some of the Bank’s accounting policies and disclosures require fair value measurements of financial and non-financial assets and liabilities. For information on fair value measure-ments see note 6(e) and note 15.

New and amended standards and clarifications as of 1 January 2018 The following new standards, clarifications and amendments to the existing standards issued by the International Accounting Standard Board (IASB) and accepted by the EU are in force throughout the reporting period:

IFRS 9 Financial Instruments: Classification and Measurement This standard is effective for annual periods beginning on or after 1 January 2018, with ear-lier adoption permitted. In July 2014 the IASB published the final version of IFRS 9 “Finan-cial Instruments” which replaced IAS 39 Financial Instruments: Recognition and Measure-ment and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the financial instruments accounting project: classification and measurement, impairment and hedge accounting. Except for hedge accounting, retrospective application of the standard is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions.The Bank adopted the new standard in the reporting period and has not restated the com-parative information for 2017 with regard to financial instruments within the scope of IFRS 9. The initial effect is disclosed in note 5(m).

IFRS 15 Revenue from Contracts with Customers IFRS 15 replaces IAS 11 Construction Contracts, IAS 18 Revenue and related clarifications and applies to revenue arising from contracts with customers (with limited exceptions). According to IFRS 15, revenue is recognised to reflect a transfer of promised goods or ser-vices to a customer at an amount reflecting the amount of consideration to which the Bank expects to be entitled in exchange for these goods or services. IFRS 15 requires more detailed disclosures, including allocated consideration for the deal between separate performance obligations, information about the separate performance obligations, changes in contract assets and liabilities account balances between periods, as well as key judgments and esti-mates. Application of this standard has no significant effect on the financial position and equity of the Bank. Fee and commission income policies are disclosed in note 5(a).

IFRS 15 Revenue from Contracts with Customers (Clarifications) The clarifications apply for annual periods beginning on or after 1 January 2018, the earlier application permitted. The objective of the clarifications is to clarify IASB’s intentions when developing the requirements in IFRS 15 particularly, identifying performance obligations, amending the wording of the ‘separately identifiable’ principal, analysing the guidance on principal versus agent consideration, as well as application of the control principle and new licensing requirements, providing additional guidance for accounting of intellectual prop-erty and royalties. The clarifications also provide additional practical expedients for entities that earlier apply IFRS 15 fully retrospectively or that elect to apply the modified retrospec-tive approach. Application of clarifications has no significant effect on the financial position or performance of the Bank.

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IFRS 2 Share-based Payment (Amendments): Classification and Measurement of Share-based Payment Transactions The amendments are effective for annual periods beginning on or after 1 January 2018, with earlier application permitted. The amendments provide requirements on the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, on share-based payment transactions with a net settlement feature for withholding tax obligations and on modifications to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. The amendments have no effect on the financial position or performance of the Bank.

IFRS 4 Insurance Contracts (Amendments): Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts The amendments are effective for annual periods beginning on or after 1 January 2018. The objective of these amendments is to address issues arising from the different effective dates of IFRS 9 “Financial Instruments” and the upcoming new insurance contracts standard IFRS 17 Insurance Contracts. The amendments introduce two alternative options – the temporary exemption and the overlap approach. The amendments have no effect on the financial posi-tion or performance of the Bank.

IFRIC 22 Foreign Currency Transactions and Advance ConsiderationThe interpretation is effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. This interpretation addresses how to determine the date of the transaction for the purpose of determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. The interpretation has no effect on the financial position or performance of the Bank.

IAS 40 Investment Property (Amendments): Transfers of Investment PropertyThe amendments are effective for annual periods beginning on or after 1 January 2018, with earlier application permitted. The amendments clarify transfers of property to, or from, investment property when there is a change in the use of such property which is supported by evidence. The amendments have no effect on the financial position or performance of the Bank.

Annual Improvements to IFRSs 2014–2016 Cycle

IAS 28 Investments in Associates and Joint Ventures: Measuring an Associate or Joint Venture at Fair ValueThe amendments have no effect on the financial position or performance of the Bank.

New and amended standards and clarifications as of 1 January 2019 The following new standards interpretations and amendments to existing standards issued by the International Accounting Standards Board and adopted by the EU are applicable to the reporting period:

IAS 28 Investments in Associates and Joint Ventures (Amendments): Long term Interest in Associate and Joint VenturesThe amendments are effective for annual periods beginning on or after 1 January 2019 with earlier application permitted. The amendments clarify that an entity applies IFRS 9 Finan-cial Instruments to long-term interests in an associate or joint venture that, in substance, form part of the net investment in the associate or joint venture but to which the equity method is not applied. An entity applies IFRS 9 to such long-term interests before it applies IAS 28. In applying IFRS 9, the entity does not take account of any adjustments to the car-rying amount of long-term interests that arise from applying IAS 28. These amendments issued on 12 October 2017, adopted by the EU on 8 February 2019, are published in the EU’s

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Official Journal on 11 February 2019. These amendments have no effect on the financial position or the performance of the Bank.

Annual Improvements to the IFRSs 2015–2017 CycleIn the 2015-2017 annual improvements cycle, the IASB issued amendments to standards which are effective for annual periods beginning on or after 1 January 2019 with earlier application permitted.A summary of amendments and related standards are provided below:• IFRS 3 Business Combinations and IFRS 11 Joint Arrangements: clarification on previ-

ously held interest in a joint operation;• IAS 12 Income Taxes: clarification on income tax consequences of payments on financial

instruments classified as equity;• IAS 23 Borrowing Costs: clarification on borrowing costs eligible for capitalisation.The improvements to IFRSs 2015–2017 cycle issued on 12 October 2017, adopted by EU on 14 February 2019, are published in the EU’s Official Journal on 15 March 2019. These improvements have no effect on the financial position or performance of the Bank.

IFRS 16 Leases IFRS 16 was published in January 2016, approved by the EU in October 2017, effective since January 1, 2019, replaces IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC-15 Operating Leases – Incentives, SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for recognition, measurement, presentation and disclosures of leases and requires lessees to account all lease contracts based on uniform balance method, that is similar to the accounting treatment of finance lease in accordance with IAS 17. The Standard provides two exemptions from recognition of lease contracts – leases of low value assets (e.g. laptop computers) and short-term leases (e.g. lease with a lease term of 12 months or less). At the initial date of the lease the lessee recognizes a liability to make lease payments (i.e. the lease liability) and an asset representing the right to use the underlying asset (i.e. the right-of-use asset). The lessees will be required to recognize separately interest expenses on the lease liability and depreciation expense on the right-of-use asset. These changes have no impact on the financial position or performance of the Bank.

IFRIC 23 Uncertainty over Income Tax Treatments The Interpretation was adopted by the EU on 23 October 2018 and effective for annual periods beginning on or after 1 January 2019 with earlier application permitted.The interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12. The Interpretation provides guidance on considering uncertain tax treatments separately or together, examination by tax authori-ties, the appropriate method to reflect uncertainty and accounting for changes in facts and circumstances. The interpretation has no effect on the financial position or performance of the Bank.

IFRS 9 Financial Instruments: Classification and Measurement (Amendments): Prepayment Features with Negative Compensation The amendments were adopted by the EU on 22 March 2018 and are effective for annual periods beginning on or after 1 January 2019 with earlier application permitted. They pro-pose an amendment to IFRS 9 for particular financial assets that would otherwise have contractual cash flows that are solely payments of principal and interest but do not meet the eligibility requirement as a result of prepayment features with negative compensation. Specifically, for a financial asset that contains a prepayment option that may result in the payment of a reasonable negative compensation amount, the amendments require the finan-cial asset to be measured at amortised cost or at fair value through other comprehensive income, subject to the assessment of the business model in which it is held. It is not expected that these amendments would impact the financial position or performance of the Bank.

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IAS 19 Employee Benefits (Amendments): Plan Amendment, Curtailment or Settlement These amendments are effective for annual periods beginning on or after 1 January 2019 with earlier application permitted. The amendments require the entities to use updated actuarial assumptions to determine current service cost and net interest for the remain-der of the annual reporting period after a plan amendment, curtailment or settlement has occurred. The amendments also clarify how the accounting of the plan amendment, curtail-ment or settlement affects application of the asset ceiling requirements. The purpose of the amendments is to clarify that after amendment or reduction of the plan with defined income the entity should apply the updated assumptions about the net asset or liabilities revaluation under a defined income plan for the remaining part of the reporting period. These amend-ments, issued on 7 February 2018, have been endorsed on 13 March 2019 by the EU, are published in the EU’s Official Journal on 14 March 2019. The Bank has analysed the process of assessing the impact of these amendments on its financial position or performance and considers that the changes have no material effect on the Bank’s performance.Adoption of the new standards, improvements and amendments to the existing standards did not result in changes in the BNB accounting policy, except for the application of IFRS 9. The effect of IFRS 9 Financial Instruments is disclosed in note 5(m).

4. Basis of Consolidation Subsidiaries

Subsidiaries are the entities controlled by the Bank. Control over an entity exists when the Bank is exposed to or has rights over the variable return from its participation in that entity, and is able to influence that return through its powers. The financial statements of the subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The share of the net assets of the Bank’s sub-sidiaries, which corresponds to the minority shareholders’ proportionate share, is disclosed separately from Capital and Reserves under the Non-controlling Interest itemThe Bulgarian National Bank holds a majority of the Printing Works of the BNB AD and Bulgarian Mint EAD. The accounts prepared for the group contain the accounts of the par-ent company and subsidiaries. The BNB consolidated report eliminates all receivables and payables, income and expenses, as well as intragroup balances and transactions, including sales.

AssociatesAssociates are those entities in which the Bank has significant influence, but which are neither a subsidiary enterprise, nor a joint venture. Investments in associates are accounted for in the Bank’s consolidated financial statements using the equity method as an amount corresponding to the Bank’s share in the associates’ own funds as of the end of the reporting period. The Bank’s share of associates’ net results subsequent to acquisition is disclosed in ‘profit or loss’ as investment income/expenses and is added to/subtracted from the carrying value of the investment. The BNB participation in other associated companies is accounted at the price of acquisi-tion. The Bank consolidates on an annual basis the accounts of associated companies in which its share is 20 per cent or more than 20 per cent on the basis of the equity method.

Transactions eliminated on consolidationAll receivables and payables, income and expenses, as well as intragroup profits, result-ing from inter-company transactions within the group, are eliminated, unless they are immaterial.

5. Significant Accounting Policiesa) Income recognition

Interest income and expense are recognised on an accrual basis in accordance with the Bank’s interest rate policy and in accordance with concluded agreements with international financial institutions and customers of the Bank. Interest income and expense are recog-nized in the income statement. Interest income and expense also include the amortisation of the discount and premium calculated on the basis of the effective interest rate.

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Interest income on foreign securities held in the BNB portfolio includes interest rates on interest coupons of securities issues.Interest income on deposits includes interest income on deposits in foreign currency and in gold.Income from and expenses on fees and commissions from financial services of the Bank are recognised in the income statement of the Bank at the moment of provision of the respec-tive service.In accordance with IFRS 15, revenue from contracts with customers is recognised when the Bank has fulfilled its performance obligations by transferring the promised services to the customer. Revenue is recognised at an amount reflecting the consideration expected to be received in return.No changes in the valuation and recognition of fees and commissions have occurred as a result of the entry of IFRS 15.Other financial income/expenses include income and expenses from sales and changes in the fair value of financial assets and liabilities held for trading and assets available for sale.Interest income and expenses are recognised in ‘profit or loss’ using the effective interest rate method. The effective interest rate is the rate which precisely discounts the estimated future cash payments and income over the term of the financial asset or liability to the carrying amount of the asset or liability. The effective interest rate is determined on the initial recog-nition of the financial asset or liability and does not change thereafter.The calculation of the effective interest rate includes all commission, received or paid, as well as discounts and premiums that are an integral part of the effective interest rate. Transaction costs include incremental costs directly attributable to the acquisition, issue or derecogni-tion of a financial asset or liability.Interest income and expense presented in the statement of profit or loss include:• interest on financial assets and financial liabilities measured at amortised cost calculated

on an effective interest basis;• interest on available-for-sale investment securities calculated on an effective interest

basis. Dividend income is recognised in profit or loss when the Bank establishes the right to receive a dividend. Fee revenue is deferred and recognised in each of the separate financial periods. Profits and losses arising from changes in the fair value of financial instruments at fair value through profit or loss are recognised in the income statement. Revenue from a grant related to depreciable assets is recognised as income for future periods upon receipt of the grant and subsequently recognised in the income statement over the relevant periods, systematically over the useful life of assets and proportionate to the depre-ciation charge for the same assets. Expenses related to depreciable assets incurred during the current period are deferred over the useful life of the assets. Revenue from a grant related to non-depreciable assets is recognised as income for future periods upon receipt of the grant and is then recognised in the income statement for the periods in which the relevant expense is accounted for.Foreign currency differences arising from available-for-sale investments are recognised in profit or loss.Net gains/losses from financial assets and liabilities at fair value through profit or loss includes net gains from operations in securities, net gains from operations in foreign cur-rency, net revaluation gains on securities, net gains from gold revaluation, net gains from revaluation of futures, and net gains from revaluation of assets and liabilities denominated in foreign currency.

b) Recognition of assets and liabilities Bank’s assets and liabilities are stated at their initial cost or fair value. Subsequent revalua-tions are carried out by evaluating different types of assets and liabilities in different peri-ods in order to determine the fair value. Adjustments to the accounting records, as well as the relevant recognition records in the revaluation reserve are reported in accordance with

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International Financial Reporting Standards. Where it is not possible to determine the fair value, the historical cost of acquisition less the losses resulting from the impairment of the asset is taken.International Financial Reporting Standards do not require presentation of assets in a speci-fied balance sheet format and may be designated as underlying assets (tangible fixed assets, intangible assets, inventories, investment property, borrowing costs for asset acquisition, impairment of assets) and assets that are classified as financial instruments.

c) Financial instrumentsThe Bank may recognise a financial asset or liability in its balance sheet if, and only if it becomes a party to the contractual terms of the financial instruments used. The Bank derecognises a financial asset from its balance sheet:• when it loses control over the contractual rights that constitute the financial asset;• when the obligation stated in the contract is extinguished, cancelled or expired.

i) ClassificationFor the purposes of subsequent measurement of financial assets, the BNB uses the following business models:• financial assets held to collect contractual cash flows;• financial assets held to collect contractual cash flows and for sale.The business model of the financial assets held to collect the contractual cash flows includes all current accounts of the Bank with foreign correspondents, and the cash flows under the model used for these assets represent only principal and interest payments. These financial assets are measured at amortised cost.The business model of financial assets held to collect contractual cash flows and for sale includes: deposits, securities and investment. Assets in this group are measured as follows:• deposits: at amortised cost;• securities: at fair value through profit or loss;• investment: at fair value in other comprehensive income.

ii) RecognitionThe Bank recognises trading financial assets and investments, the Bank’s loans and receiva-bles, and financial liabilities at amortised cost from the settlement date. All other financial assets and financial liabilities are accounted when the Bank becomes a party to the financial instruments contracts. Financial assets and liabilities are recognised in off-balance-sheet accounts from the trade date to the date of their settlement and are recorded in the BNB balance sheet at the set-tlement date (value date). The initial recognition is at acquisition cost, i.e. the fair price paid on acquisition. Transaction costs are included in the acquisition cost of all assets and liabilities. From that moment on, any changes in their fair value are recognised by the Bank as income or expense.

iii) Amortised cost measurementAssets measured at amortised cost are initially recognised at acquisition cost, then measured at amortised cost, which is the initial measurement of the asset adjusted for the amortised premium or discount using the effective interest rate method. The discount/premium is amortised for each position individually and recognised in the income statement of the Bank. On a daily basis, interest is calculated and recognised in the income statement of the Bank.

iv) Fair value measurement and disclosure principlesFair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market and, if no such market is available, then in the most advantageous and accessible market on the measure-ment date. The fair value of a liability reflects the effect of non-performance risk.

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Whenever possible, the Bank measures the fair value of an instrument using quoted prices in an active market of that instrument. A market is considered as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.If no quoted price in an active market is available, the Bank uses the most relevant observ-able inputs and makes minimum use of unobservable data. The aim of using a valuation technique is to estimate the price that would be obtained in an orderly transaction between market participants. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Bank, incorporates all factors that market participants would consider in determining a price, and is consistent with accepted economic methodologies for pricing financial instruments.Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The Bank calibrates valuation techniques and tests them for validity using prices from observable current market transac-tions in the same instrument or based on other available observable market data.The best indicator of the fair value of a financial instrument at initial recognition is the transaction price, i.e. the fair value of the consideration given or received. When the Bank finds a difference between the fair value at initial recognition and the transaction price, and the fair value is neither evidenced by a quoted price in an active market for identical assets or liabilities, nor based on a valuation technique using only data from observable markets, then the financial instrument is initially recognised at fair value adjusted with the differ-ence between the fair value at initial recognition and the transaction price. This difference is subsequently recognised in profit or loss on an appropriate basis over the life maturity of the instrument but not later than when the valuation is supported wholly by observable market data or the transaction is closed out. The Bank recognises assets and long positions at a bid price and liabilities and short positions at an ask price when assets or liabilities measured at fair value have a bid and an ask price.Where the Bank has positions in a group of financial assets and financial liabilities, it is exposed to market risks and a credit risk. On the basis of the net exposure to either market or credit risks, the Bank measures them at fair value on the basis of a price that would be received to sell a net long position or paid to transfer a net short position for a particular risk exposure. These portfolio-level adjustments are allocated to the individual assets and liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio.Where the Bank has positions with offsetting risks, mid-market prices are used to measure them and a bid or ask price adjustment is applied only to the net open position as appropri-ate. Fair value reflects the credit risk of the instrument and includes adjustments to take account of the credit risk of the Bank entity and the counterparty where appropriate. Fair value estimates obtained from models are adjusted for any other factors, such as liquidity risk or model uncertainties, to the extent that the Bank believes a third-party market par-ticipant would take them into account in pricing a transaction.The Bank recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

v) Derecognition The Bank derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the rights to the receipt of the contractual cash flows from the financial asset in the transaction in which substantially all risks and rewards of ownership of the financial asset are transferred. Any holding in transferred financial assets, which has been originated or kept by the Bank, is recognised as a separate asset or liability.The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expired. The Bank enters into transactions whereby it transfers assets recognised in its statement of financial position, but retains either all or the substantial risks and rewards of the trans-ferred assets or a part of them. If a part of or all substantial risks and rewards are retained,

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then the transferred assets are not derecognised from the statement of financial position. Transfers of assets with retention of a part of or all substantial risks and rewards are, for instance, securities lending or repurchase agreements.In transactions where the Bank neither retains nor transfers all substantial risks and rewards of ownership of a financial asset, it derecognises the asset if it does not retain the control of that asset. The rights and obligations retained in the transfer are recognised separately as assets and as liabilities, respectively. In transactions where control of the asset is retained, the Bank continues to recognise the asset to the extent of its continuing involvement, deter-mined by the extent to which the Bank is exposed to changes in the value of the transferred asset.In certain transactions the Bank retains the obligation to service the transferred financial asset for a fee. The transferred asset is derecognised if it meets the derecognition criteria. An asset or liability is recognised for the servicing contract, depending on whether the servic-ing fee is more than adequate (asset) or is less than adequate (liability) for performing the servicing.

vi) OffsettingFinancial assets and liabilities are offset, and the net amount is presented in the statement of financial position when the Bank has a legal right to offset the recognised amounts and intends to settle the asset or liability on a net basis.Income and expenses are presented on a net basis only when permitted under IFRSs, or for gains and losses arising from a group of similar transactions, such as in the Bank’s trading operations.

vii) Impairment of assets

Approach applied until 1 January 2018 Financial assets which are not carried at fair value through profit or loss are reviewed at each reporting date to determine whether there is evidence of impairment. Financial assets are impaired if there is objective evidence of impairment as a result of a loss event that occurred after the initial recognition of the asset and that the loss event had an impact on the future cash flows which can be reliably estimated. Objective evidence of impairment loss on financial assets, including equity instruments, is a default or a borrower’s inability to repay his obligations, restructuring of loans under unfavourable financial conditions for the Bank, indications that a borrower or the issuer of a financial instrument would go out of business, disappearance of an active security market, or other public information. Furthermore, in case of a continuous or significant fall in the market value of an investment in equity instruments, there is objective evidence of impair-ment of these equity instruments.The Bank considers the need of impairment of loans or investments held to maturity at both individual and group level. All individually significant loans and investments held to maturity are evaluated for specific impairment. All individually significant loans and investments held to maturity on which no specific impairment losses have been charged are evaluated on a portfolio basis. Loans and held-to-maturity investments that are not individually significant are collectively assessed for impairment by grouping together loans and held-to-maturity investment securities with similar risk characteristics.

Approach applied after 1 January 2018 In assessing collective impairment the Bank uses statistical modelling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modelling. Default rates, loss rates and the expected timing of future recoveries are regularly bench-marked against actual outcomes to ensure that they remain appropriate. Impairment losses from assets carried at amortised cost are measured as the difference between the carrying amount of the financial asset and the present value of the estimated future cash flows discounted by the original effective interest rate of the asset. Impair-

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ment losses are recognised in profit or loss and reflected in an allowance account against “loans and receivables”. Interest on the impaired asset continues to be recognised through unwinding of the discount, but on the amortised cost. When a subsequent event reduces impairment loss, the reduction in the impairment loss is reversed through profit and loss.Impairment losses on investment securities held for sale are recognised by transferring the cumulative loss that has been recognised in equity to profit or loss. The cumulative loss that is transferred from equity and recognized in profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. If in a subsequent period, the fair value of an impaired debt security increases and the increase can be objec-tively linked to an event that occurred after the impairment loss had been recognised in profit and loss, then the impairment loss is reversed and the reversed amount is recognised in profit and loss.

viii) Financial assets and liabilities held to collect contractual cash flows and for sale Financial assets and liabilities held to collect contractual cash flows and for sale are rec-ognised initially at fair value in the statement of financial position, with transaction costs recognised in profit or loss. All changes in the fair value are recognised as net income from trading operations in profit or loss.

ix) Financial assets held within a business model whose objective is to hold financial assets to collect contractual cash flows

Financial assets held within a business model whose objective is to hold financial assets to collect contractual cash flows are initially recognised at acquisition cost and subsequently are carried at amortised cost which is the initial asset valuation adjusted for amortised pre-mium or discount using the effective interest rate method. Premium or discount is amor-tised for each individual item and is recognised in the Bank’s income statement. Interest is calculated or recognised on a daily basis in the Bank’s income statement.

x) Investments held for saleAvailable-for-sale investments are non-derivative assets that cannot be classified in any other category of financial assets. All other available-for-sale investments are carried at fair value.Differences in the fair value are recognised directly in equity until the investment is sold or fully impaired.

d) Gold and other precious metalsThe BNB as a central bank maintains particular volumes of gold as part of Bulgaria’s inter-national reserves. In compliance with the requirements of the Law on the BNB, the Bank may take any necessary action in connection with the acquisition, possession and sale of gross international reserves, including monetary gold. Consequently, monetary gold as part of international reserves may be immediately used by the BNB without further constraints which determines it as a monetary asset. Pursuant to the requirements of the ‘General Pro-visions for Defining the Valuation Basis in the Financial Statements’ to the IFRS, as well as in the absence of specific IFRS to determine the treatment of such a transaction, the Bank defines the recognition and valuation of the monetary gold as an asset reported at fair value through profit or loss as the most reliable and appropriate base for a subsequent valuation of this financial asset. Gold and other precious metals are measured at market value based on the London Bullion Market fixing in euro at the reporting date.

Monetary goldGold in standard form (monetary gold) is initially recognised at acquisition cost. Monetary gold and other gold instruments are valued daily at the latest market value posted on the wholesale gold market in London, the UK. Unrealised gains and losses on the revaluation of the monetary gold and other gold instruments of the Bank are recognised in the income statement.

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e) Equity investmentsFor the purposes of measuring the equity investments subsequent to initial recognition, they are classified as held-for-trading financial assets and measured at fair value.Details of investments held by the Bank are set out in note 14.

f) Property, plant, equipment and intangible assetsThe policy pursued by the Bank is to present land, buildings and other groups of fixed tan-gible assets in the statements of financial position at revalued amount as per the alternative approach allowed in IAS 16 “Property, Plant and Equipment”.The Bank recognises an intangible asset if it meets the criteria for recognition under Inter-national Financial Reporting Standards. Intangible assets are presented in the statement of financial position at acquisition cost, including paid duties, non-recoverable taxes, as well as direct costs of preparing the asset for its intended use, less accumulated amortisation and impairment losses.Land and buildings are measured at fair value which is regularly assessed by professionally qualified valuers. The revaluation of property is done asset by asset, and any accumulated depreciation at the revaluation date is derecognised against the gross carrying amount of the asset, and the net amount restated to the revalued amount of the asset. When the value of assets increases as a result of revaluation, the increase is reflected directly in other compre-hensive income. When the value of assets decreases as a result of revaluation, the decrease is recognised by decreasing the revaluation reserve in equity, and in case of a shortage, the difference is recognised as an expense in the statement of comprehensive income.

i) Subsequent costsThe separately accounted for costs incurred to replace a component of an item of property, plant and equipment are capitalised. All other subsequent costs are capitalised only when future economic benefits embodied in the item of property, plant and equipment will flow to the Bank. All other costs are recognised in ‘profit or loss’ as incurred.

ii) Depreciation and amortisationThe depreciation/amortisation shall be carried out from the day of initial asset recognition according to the straight-line method for the expected useful life. Land is not depreciated. The Governing Council of the BNB approves the annual depreciation rates presented below:

(per cent)

Buildings 2–4Plant & equipment 3–15Computers 30–33.3 Fixtures and fittings 15–20 Motor vehicles 8–25Intangible fixed assets 20–25

Expenditures incurred for the acquisition of property, plant, equipment and intangible assets are not depreciated until they are brought into use.

iii) Recoverable amount of assets The recoverable amount of the Bank’s fixed assets is the higher of the net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using the Bank’s incremental borrowing rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

iv) Reversals of impairmentImpairment losses of tangible fixed assets are reversed when a change occurs in the estimates used to determine the recoverable amount and may be reversed only up to that carrying amount of the asset before recognising impairment losses.

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v) Derecognition and sales An item of property, plant or equipment is derecognised from the Bank’s balance sheet at the time of its sale or when the asset is definitively disposed of and no other economic benefits are expected. Gains or losses arising from derecognition or disposal of tangible fixed assets are determined as the difference between the sale proceeds and the carrying amount of the asset and are recognised as income or expense in the income statement. Tangible fixed assets withdrawn from active use and held for sale are reported at their carrying amount at the date when the asset is retired from active use.

vi) Inventories Inventories are assets held by the Bank that will be used in the core business, in the process of providing services. Inventories are reported in the Bank’s balance sheet at a historical price that includes the sum of all purchase costs and costs associated with their delivery to their current location and condition. Purchase costs include a purchase price at invoice, import duties, non-refundable taxes and excise duties. Delivery costs include shipping and handling costs. Write-off of inventories is carried out using the weighted average method.In the event of a fall in market prices, in the case of physical damage to inventories, when the products are aged, the value of inventories is adjusted, i.e. they are valued at the lower net realisable value.In the end of the reporting period, the net realisable value of inventories is valued, and if it is lower than the supply, the difference is related to current expenses. For each subse-quent reporting period, a new estimate of net realisable value is made. If during the relevant reporting period, there are conditions for an increase in the value of the inventory, its recov-ery is up to the amount that it had before the decrease. This reversal of the book value is accounted for as an increase in inventories and other current income.

g) Foreign exchangeGains and losses arising in foreign currencies are translated to BGN at the official rates of exchange on the transaction date. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated at the official exchange rate of the Bank on that day. Foreign currency gains and losses resulting from the revaluation of monetary assets and liabilities are recognised in profit or loss. Non-monetary assets and liabilities denomi-nated in foreign currency are retranslated to the functional currency at the exchange rate at the date that the fair value was determined.Outstanding forward contracts in foreign currency are marked to market. The gains and losses on revaluation of outstanding forward contracts are recognised in profit or loss. The exchange rates of the major foreign currencies as of 30 June 2019 and 31 December 2018 are as follows:

Currency 30 June 2019 31 December 2018US dollar 1 : BGN 1.71866 1 : BGN 1.70815Euro 1 : BGN 1.95583 1 : BGN 1.95583Special drawing rights 1 : BGN 2.38930 1 : BGN 2.37568 Gold 1 troy ounce: 2420.95 1 troy ounce: 2190.59

h) TaxationThe Bank is not subject to income tax from its core activities. Income tax from subsidiaries for the period comprises current tax and deferred tax. Current tax comprises tax payable calculated on the basis of the expected taxable income for the period, using the effective tax rate or the current one at the reporting date. Deferred tax is derived using the balance sheet liability method on all temporary differences between the amounts used for taxation purposes and the carrying amounts of assets and liabilities.The deferred tax is calculated using tax rates which are expected to be applied for the period of asset realisation or liability settlement. The effect on the deferred tax from changes in the tax rates is recorded in the statement of comprehensive income up to the amount already charged or reported directly as other comprehensive income.

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A deferred tax asset is recognised to the extent that is probable that future taxable profits will be available against which the unused tax losses or tax credit can be utilised. The deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

i) ProvisionsProvisions related to ongoing legal cases or other obligations are reported when the Bank has assumed a legal or constructive obligation as a result of some past events, the repayment of which is likely to be associated with lost economic benefits. Provisions are charged only when the Bank is able to reliably determine the size of future outgoing cash flows.

j) Profit distribution policy of the BankThe Bank’s policy of distribution of profit from banking operations is defined in the Law on the BNB. Internal rules for preparation of financial statements and accounting policies were adopted upon a decision of the Governing Council effective from 1 January 2007, which are in compliance with Article 36, paragraphs 1 and 2 of the Law on the BNB. According to these rules, the Bank allocates to special reserves unrealised net gains and losses arising from revaluation of assets and liabilities denominated in foreign currency or gold. Accord-ing to the requirements of Article 8, paragraph 2 of the Law on the BNB, the Bank sets aside 25 per cent of the excess of its annual revenue over its annual expenditure into a Reserve Fund. According to Article 8, paragraph 3 of the Law on the BNB, after the allocation to the Reserve Fund, the Bank may allocate reserves to cover market risk losses and other reserves upon a decision of the Governing Council. Subsequent to the allocation of reserves as required by the Law on the BNB, the Bank stipulates the remainder to be paid into the State Budget. The distribution of excess of revenue over expenditure is set out in note 23.

k) Cash and cash equivalentsFor the purpose of the statement of cash flows, cash and cash equivalents consist of cash in hand, current accounts and time deposits with maturities of less than three months.

l) Employee benefits The Bank has the obligation to pay certain amounts to each employee who retires in accord-ance with the requirements of Article 222, § 3 of the Labour Code in Bulgaria. Accord-ing to these Labour Code requirements, on termination of the employment contract of an employee who has become entitled to retirement, the employer is obliged to pay him/her compensation amounting to twice his/her gross monthly salary. If, at the date of retirement, the employee has been employed by the Bank for ten or more years, the amount of the com-pensation is six gross monthly salaries. As at the date of the statement of financial position, the Bank’s Management estimates the approximate amount of the potential expenditures for all employees based on an actuarial report using the projected unit credit method. The estimated amount of the obligation and the main assumptions, on the base of which the esti-mation of the obligation has been made, is disclosed to the Financial Statements in note 10.

Termination benefits Termination benefits are recognised as an expense when the Bank is committed demonstra-bly, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for volun-tary redundancies are recognised as an expense if the Bank has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value.

Short-term employee benefitsShort-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under a short-term cash bonus or profit-sharing plans if the Bank has a pre-sent constructive obligation to pay this amount as a result of past services provided by the employee, and the obligation can be estimated reliably. The Bank recognises as a liability the

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undiscounted amount of the estimated costs related to annual leave expected to be paid in exchange for the employee’s service for the period completed.

m) Effect of applying IFRS 9 financial Instruments IFRS 9 introduces a new approach to the classification of financial assets based on contrac-tual cash flow characteristics and the Bank’s business model for managing them. All recog-nised financial assets within the IFRS 9 range must be subsequently carried at amortised cost or fair value, depending on the business model and the characteristics of their cash flows. Initially, the Bank recognised financial assets and liabilities at the acquisition price, which is the fair price paid at acquisition. BNB uses the following business models for further evalu-ation of financial assets: • financial assets held to collect contractual cash flows;• financial assets held for the purposes of collecting contractual cash flows and for sale. The business model is evaluated on the date of initial application of the standard. The evalu-ation whether cash flows of debt instruments consist only of the principal and interest is based on the facts and circumstances of the initial recognition of assets.Accounting for financial liabilities remains substantially unchanged compared with that in IAS 39, except for the treatment of differences arising from changes in own credit risk for financial instruments designated to account for fair value in profit or loss. Under IFRS 9, these differences are recognised in other comprehensive income without subsequent reclas-sification in the income statement. As of the date of present statements, the Bank does not account financial liabilities in this category.Regarding the Bulgarian National Bank, adoption of IFRS 9 requirements with respect to classification and subsequent reporting of its financial instruments did not result in signifi-cant changes and therefore had no material impact on the statement of financial position and /or capital.Financial assets measured at fair value through profit or loss until the implementation of IFRS 9 up to 2017 continue to be reported in a similar manner. Debt instruments pre-sented as available-for-sale under IAS 39 retain their fair value through other comprehensive income as the business model underlying them aims to provide ongoing liquidity by holding them to collect contractual cash flows and for sale, where necessary.For equity instruments reported as available-for-sale, the Bank chose the fair value account-ing option in other comprehensive income at the initial application of the standard as it intends to hold them in the near future. Equity instruments reported at acquisition cost under IAS 39 were measured at fair value upon initial application of IFRS 9. Expected credit losses on financial instruments as a result of the application of IFRS 9 are calculated based on the methodology adopted by the BNB Governing Council. The Bank reports a credit loss on financial assets reported in the amortised cost category which as at 30 June 2019 amounted to BGN 8518 thousand.

n) New standards and clarifications issued but not yet effective and not early adopted Already published standards which are not yet in effect or have not been previously applied by the Bank at the date of these financial statements are briefly presented below. It is dis-closed how reasonably they are expected to impact disclosures, the financial position or performance when the Bank adopts these standards for the first time. It is expected to hap-pen when they come into effect.

IFRS 17: Insurance Contracts The standard is effective for annual periods beginning on or after 1 January 2021 with earlier application permitted if both IFRS 15 Revenue from Contracts with Customers and IFRS 9 Financial Instruments have also been applied by the Bank. IFRS 17 Insurance Con-tracts establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts issued. It also requires similar principles to be applied to reinsurance contracts held and investment contracts with discretionary participation features issued. The objective is to ensure that entities provide relevant information in a way that faithfully represents those contracts. This information gives a basis for users of financial statements to assess the effect that contracts within the scope of IFRS 17 have on the financial position,

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financial performance and cash flows of the Bank. The standard has not been yet endorsed by the EU. It is not applicable for the Bank.

Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associ-ates and Joint Ventures: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture. A full gain or loss is recognised when a transaction involves a business or a partial gain or loss is recognized when a transaction involves assets that do not constitute a business. The IASB postponed the effective date of this amendment indefinitely pending the outcome of its research project on the equity method of account-ing. The amendments have not yet been endorsed by the EU. It is not expected that these amendments would impact the financial position or performance of the Bank.

IFRS 3 Business Combinations (Amendments): Definition of a business The amendments are effective for annual periods beginning on or after 1 January 2020 with earlier application permitted. The amendments clarify the minimum requirements for a business and narrow the definition of a business. The amendments also remove the assess-ment of whether market participants are capable of replacing any missing elements, add guidance to help entities assess whether an acquired process is substantive and introduce an optional fair value concentration test. These amendments have not yet been endorsed by the EU. It is not expected that these amendments would impact the financial position or performance of the Bank.

Amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors: Definition of ‘Material’ The amendments are effective for annual periods beginning on or after 1 January 2020 with earlier application permitted. The amendments clarify the definition of material and how it should be applied by including in the definition guidance that until now has featured elsewhere in IFRS Standards. The amendments also specify that materiality will depend on the nature or magnitude of information. These amendments have not yet been endorsed by the EU. The Bank will analyse and assess the impact of these amendments on its financial position or performance.

The Conceptual Framework for Financial Reporting The IASB issued the revised Conceptual Framework for Financial Reporting on 29 March 2018, which is effective for annual periods beginning on or after 1 January 2020. The Con-ceptual Framework sets out a comprehensive set of concepts for financial reporting, stand-ard setting, guidance for preparers in developing consistent accounting policies and assis-tance to others in their efforts to understand and interpret the standards. The main amend-ments introduced in the revised Conceptual framework for financial reporting are related to measurement, including factors, which should be considered when choosing measurement basis, and to presentation and disclosure, including income and expenses which should be classified in other comprehensive income. The Conceptual framework also provides updated definitions for asset and liability and criteria for their recognition in the financial state-ments. The Conceptual framework for financial reporting has not yet been endorsed by the EU. The Bank will analyse and assess the impact of these amendments on its financial position or performance.

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6. Financial Risk Management Policy Disclosure

a) Introduction and overview

Introduction to the financial risk management policyThe Bank is exposed to the following types of risk in relation to the financial instruments operations:• credit risk;• liquidity risk;• market risk;• operational risk.This note provides information on the Bank’s goals, exposures to each of the above types of risk and the policies and processes for risk measurement and management.

General provisions of risk managementIn the process of management of the gross international reserves, the Bank aims to achieve high security and liquidity of the assets, first, and then to maximise returns in the situa-tion of the current global financial markets. Its investment strategy depends mainly on the specific function of a central bank operating under a currency board arrangement and in full compliance with the requirements of the Law on the BNB.The major portion of BNB’s international reserves is invested in assets of comparatively low credit risk, such as discount and coupon securities issued by highly rated issuers (govern-ments, government agencies or supranational financial institutions), and short-term foreign currency or gold deposits placed with first-rate foreign banks. The remaining portion is held in SDRs on BNB accounts with the IMF and in monetary gold kept in the Bank’s vaults. A specialised international reserves risk management unit is responsible for preparing and submitting for approval a draft of strategic asset structuring, setting up benchmark for the international reserves and investment management limits. On a quarterly basis, an overall review is made of the changes in the market conditions, the amount and structure of inter-national reserves, and if required, the investment limits and model portfolios (benchmarks) are updated. The monitoring of underlying limits, rules, and procedures is undertaken on a daily basis. Reports are regularly prepared for both the needs of international reserves operating management and providing updated information to the Bank’s management.All approved financial instruments and asset classes in which the BNB may invest, are speci-fied in internal documents. The documents define the main portfolios and the respective model portfolios (benchmarks), all limits for credit, interest rate, currency and operational risk, and give a list of the foreign financial institutions which are counterparties of the Bank.The international reserves management is also governed by business procedures and rules of behavior regulating the performance of the functions and tasks of the main structural units involved in the process.

b) Credit riskThe BNB is exposed to credit risk through its trading operations and investment activi-ties and in cases where it acts as an intermediary on behalf of the government or other public institutions. The Bank assumes credit risk also in operations of purchases and sales of foreign currency with banks. In general, this credit risk is associated with the prob-ability of insolvency of a BNB’s counterparty or the insolvency of an issuer, in whose debt instruments the Bank has invested its own funds. The credit risk in managing BNB’s gross international reserves is assessed in line with the requirements in Article 28, paragraph 3 of the Law on the BNB. According to these requirements, the BNB may invest in debt instru-ments issued by foreign governments, central banks, other foreign financial institutions or international financial organisations whose debts are rated with one of the top two grades by two internationally recognised credit rating agencies and are payable in freely convert-ible currency in line with an internally developed methodology as per the requirements of Article 28 of the LBNB.

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According to these requirements, the approved types of financial instruments for investment of funds in managing the international reserves are as follows:• investment programmes with central banks;• automatic borrowings/lending of securities with the main depository;• tri-party repo agreements with specially designated counterparties of the BNB carried

out through the Bank’s main depository as a third party;• deposits in foreign currency (time deposits and funds on current accounts) with BNB

counterparties, including central banks or supranational financial institutions;• deposits in gold (time deposits and funds on current accounts) with BNB counterparties,

including central banks or supranational financial institutions;• commercial securities (of up to one year term to maturity), issued by governments

or government guaranteed institutions, supranational financial institutions, specialised financial agencies, banks, and other financial institutions;

• bonds issued by governments or government guaranteed institutions, supranational financial institutions, specialised financial agencies, banks and other financial institu-tions – issuers of covered bonds. All bonds must be with a one-off payment of their face value on the maturity date and without any embedded option;

• purchases and sales of foreign currency with a value date of up to two business days.Two basic types of limits are set which are calculated on the basis of the market value of foreign currency reserves: (i) a maximum or minimum limit on the weight of each asset class in the Issue Department balance sheet, and (ii) an individual maximum acceptable exposure of the BNB to a country, as well as an individual exposure to an issuer/counter-party (concentration limit).

c) Liquidity riskLiquidity risk arises in the funding of the Bank’s core activities and in the management of positions. It is primarily manifested in two aspects: the first aspect is risk for the Bank of being unable to meet its obligations when due and the second aspect comprises the risk of its being unable to sell an asset on international markets at a fair value within an appropriate time frame in compliance with the respective market conventions.The BNB is striving to maintain a balance between the maturity of attracted funds and that of assets by means of investments in financial instruments of a different maturity structure. The instruments for attracting funds, which are provided to customers on the liability side, are primarily deposit/investment accounts and settlement accounts. The Bank maintains a minimum level of liquidity by type of currency on a daily basis to ensure all BNB payments in foreign currency. To better manage the risk arising from liquidation of positions in finan-cial instruments, the latter are grouped by liquidity rank subject to the level of difficulty (i.e. discount from the fair value), at which they could be sold on the market in time of crisis. Limits are set for the different types of financial instruments based on the liquidity ranks.As part of its overall liquidity risk management strategy, the Bank has defined requirements for the management of a portfolio of liquid assets denominated in euro and for maintain-ing assets denominated in other currencies for the purposes of meeting its cash inflows and outflows.The Bank’s financial assets and liabilities, analysed by residual term to maturity from the date of the statement of financial position to the date of any subsequent agreement or con-tractual maturity, are as follows:

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(BGN’000)

Up to 1 month

From 1 to 3 months

From 3 months to

1 year

From 1 to 5 years

Over 5 years

Undefined maturity Total

As of 30 June 2019Financial assetsCash and deposits in foreign currency 17,529,730 389,967 976,616 - - (7,816) 18,888,497

incl. effect of applying IFRS 9 - - - - - (7,816) -Gold, instruments in gold, and other precious metals 2,491,616 698,381 - - - (702) 3,189,295

incl. effect of applying IFRS 9 - - - - - (702) -Financial assets at fair value through profit or loss 1,490,020 1,054,646 10,819,304 13,600,382 18,518 - 26,982,870Financial assets at fair value in other comprehensive income 234,453 - - - - 1,962,257 2,196,710Other assets 33,130 1,219 14,292 - - - 48,641Total financial assets 21,778,949 2,144,213 11,810,212 13,600,382 18,518 1,953,739 51,306,013

Financial liabilitiesCurrency in circulation - - - - - 17,361,567 17,361,567Liabilities to banks and other financial institutions 12,866,662 - - - - - 12,866,662Liabilities to government institutions and other borrowings 2,192,519 19,963 10,892,937 - - - 13,105,419Borrowings against Bulgaria’s par-ticipation in international financial institutions - - - - - 3,369,418 3,369,418Total financial liabilities 15,059,181 19,963 10,892,937 - - 20,730,985 46,703,066Asset-liability maturity mismatch 6,719,768 2,124,250 917,275 13,600,382 18,518 (18,777,246) 4,602,947

As of 31 December 2018 Financial assetsCash and deposits in foreign currency 18,445,863 807,613 586,677 - - (6,905) 19,833,248

incl. effect of applying IFRS 9 - - - - - (6,905) -Gold, instruments in gold, and other precious metals 2,885,390 - - - - (1,107) 2,884,283

incl. effect of applying IFRS 9 - - - - - (1,107) -Financial assets at fair value through profit or loss 1,818,476 2,189,323 7,598,911 14,476,775 36,680 - 26,120,165Financial assets at fair value in other comprehensive income 233,117 - - - - 1,949,491 2,182,608Other assets 24,780 5,439 18,164 - - - 48,383Total financial assets 23,407,626 3,002,375 8,203,752 14,476,775 36,680 1,941,479 51,068,687

Financial liabilitiesCurrency in circulation - - - - - 17,325,475 17,325,475Liabilities to banks and other financial institutions 15,267,214 - - - - - 15,267,214Liabilities to government institutions and other borrowings 1,566,563 29,446 9,123,418 - - - 10,719,427Borrowings against Bulgaria’s par-ticipation in international financial institutions - - - - - 3,349,973 3,349,973Total financial liabilities 16,833,777 29,446 9,123,418 - - 20,675,448 46,662,089Asset-liability maturity mismatch 6,573,849 2,972,929 (919,666) 14,476,775 36,680 (18,733,969) 4,406,598

The outstanding contractual maturities of the Bank’s financial liabilities are as follows:

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(BGN’000)

Book valueGross nominal outgoing cash

flow

Up to 1 month

From 1 to 3 months

From 3 months to 1 year

From 1 to 5 years

Over 5 years

As of 30 June 2019Currency in circulation 17,361,567 17,361,567 - - - - 17,361,567Liabilities to banks and other finan-cial institutions 12,866,662 12,866,662 12,866,662 - - - -Liabilities to government institutions and other borrowings 13,105,419 13,091,209 2,192,504 19,951 10,878,754 - -Borrowings against Bulgaria’s par-ticipation in international financial institutions 3,369,418 3,369,418 - - - - 3,369,418

46,703,066 46,688,856 15,059,166 19,951 10,878,754 - 20,730,985

As of 31 December 2018

Currency in circulation 17,325,475 17,325,475 - - - - 17,325,475Liabilities to banks and other finan-cial institutions 15,267,214 15,267,214 15,267,214 - - - -Liabilities to government institutions and other borrowings 10,719,427 10,706,393 1,566,530 29,430 9,110,433 - -Borrowings against Bulgaria’s par-ticipation in international financial institutions 3,349,973 3,349,973 - - - - 3,349,973

46,662,089 46,649,055 16,833,744 29,430 9,110,433 - 20,675,448

d) Market risk

Market risk All financial instruments are subject to market risk, i.e. the risk of impairment as a result of changes in the market conditions. The instruments are evaluated on a daily basis at fair market value which best reflects current financial market conditions for the respective type of financial instrument. The Bank manages its portfolios in response to changing market conditions and to changes in the liability structure of Issue Department balance sheet. Mar-ket risk exposure is managed in accordance with the risk limits specified in the document Investment Limits and Benchmarks for the Management of the Gross International Reserves.The table below presents one important measure of market risk, i.e. Value at Risk (VaR). VaR is an indicator of the maximum loss over a certain period of time (holding period) and with a certain probability (called a confidence level or confidence interval). The VaR used in this report is based on a 95 per cent confidence level and a one-day holding period.To calculate the total risk, currency risk and interest rate risk, the empiric distributions, derived from time series of 30 daily observations of total income, currency income and interest income of assets, respectively have been used. The correlation between the currency and interest rate risk is also presented. For each of the parameters, the value as of the last date for the period, the average value for the whole period and the minimum and maximum values have been calculated.

(BGN’000)

As of 30 June 2019 Average Maximum Minimum

Currency risk (17,130) (17,635) (31,166) (6,151)Interest rate risk (4,181) (2,677) (4,692) (1,007)Correlation (per cent) 0.42 0.45 0.70 (0.18)Overall risk (17,959) (19,292) (31,701) (8,809)

As of 31 December 2018 Average Maximum Minimum

Currency risk (9,207) (17,391) (32,028) (7,268)Interest rate risk (3,822) (3,930) (11,335) (1,552)Correlation (per cent) 0.14 0.16 0.69 (0.45)Overall risk (11,948) (19,339) (38,264) (7,920)

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Interest rate riskThe Bank’s operations are subject to the risk of interest rate fluctuations, which impact the prices of interest-earning assets (including investments) and interest-bearing liabilities. Modified duration is used as a key measurement for absolute interest rate risk. Modified duration measures the effect of the change in the market value of an asset (liability) in per-centage points in response to a 1 basis point (1/100th of 1 per cent) change in the interest rate levels. In addition, portfolios’ technical parameters such as protuberance (convexity), duration in a fixed point of the yield curve, etc. are monitored on a daily basis. For each portfolio held by the BNB, the interest rate is limited by a model portfolio (benchmark) and by the investment limits for a maximum deviation of the interest rate from that of the respective benchmark. The relative interest risk limit of investment portfolios has been set on the basis of the risk measure, i.e. relative yield volatility measure.Assets and liabilities with floating interest rates involve the risk of changes in the base which serves to determine the interest rates.

(BGN’000)

TotalFloating

rate instru-ments

Fixed rate instruments

Up to 1 month

From 1 to 3 months

Over 3 months

As of 30 June 2019Interest-earning assetsCash and deposits in foreign currency 18,673,593 3,312,030 13,994,134 390,208 977,221Gold, instruments in gold, and other precious metals 1,906,690 - 1,208,311 698,379 -Financial assets at fair value through profit or loss 27,136,979 402,962 1,503,916 1,052,335 24,177,766Financial assets at fair value in other comprehensive income 234,453 - 234,453 - -Other interest-earning assets 48,641 33,130 - 1,219 14,292Total 48,000,356 3,748,122 16,940,814 2,142,141 25,169,279Interest-bearing liabilitiesLiabilities to banks and other financial institutions 12,866,662 - 12,866,662 - -Liabilities to government institutions and other borrowings 11,074,590 - 154,556 19,999 10,900,035Borrowings against Bulgaria’s participation in international financial institutions 1,459,565 1,459,565 - - -Total 25,400,817 1,459,565 13,021,218 19,999 10,900,035Interest-bearing asset/liability gap 22,599,539 2,288,557 3,919,596 2,122,142 14,269,244

As of 31 December 2018Interest-earning assetsCash and deposits in foreign currency 19,756,780 2,358,080 16,002,179 808,631 587,890Gold, instruments in gold, and other precious metals 1,723,837 - 1,723,837 - -Financial assets at fair value through profit or loss 26,310,866 393,136 1,839,849 2,217,447 21,860,434Financial assets at fair value in other comprehensive income 233,117 - 233,117 - -Other interest-earning assets 48,383 24,780 - 5,439 18,164Total 48,072,983 2,775,996 19,798,982 3,031,517 22,466,488Interest-bearing liabilitiesLiabilities to banks and other financial institutions 15,267,214 - 15,267,214 - -Liabilities to government institutions and other borrowings 9,436,112 - 277,893 29,513 9,128,706Borrowings against Bulgaria’s participation in international financial institutions 1,451,245 1,451,245 - - -Total 26,154,571 1,451,245 15,545,107 29,513 9,128,706Interest-bearing asset/liability gap 21,918,412 1,324,751 4,253,875 3,002,004 13,337,782

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For managing interest rate risk and the band of interest rate changes, the sensitivity of financial assets and liabilities to various standard and non-standard interest rate movement scenarios are monitored.The standard scenarios include the following changes in yield curves: (i) a 100 basis points instant and parallel increase; (ii) a 100 basis points instant parallel decrease; (iii) a 50 basis points parallel increase in the yield curves for a period of 12 months; and (iv) a 50 basis points parallel decrease in the yield curves also for a period of 12 months. The second two scenarios assume that the change in yields takes place at the beginning of the period, and over the one-year period the yield curve remains unchanged. The analysis of the sensitivity of the Bank’s assets (to first approximation) to changes in interest rates, assuming a constant spread of assets and liabilities and parallel shifts in the yield curves of the relevant assets, is as follows:

(BGN’000)

100 b.p. intra-day instant parallel

increase

100 b.p. intra-day instant

parallel decrease

50 b.p. parallel increase in the beginning of the

period

50 b.p. parallel decrease in the beginning of the

period

As of 30 June 2019 (357,125) 357,125 (190,463) (273,368)

As of 31 December 2018 (352,903) 352,903 (177,760) (234,910)

Currency riskFor the Bank, a currency risk exists where there is a mismatch between the currency struc-ture of assets and that of liabilities. The Bank is exposed to currency risk when entering into transactions in financial instruments denominated in foreign currencies other than the euro.With the introduction of the currency board arrangement in Bulgaria and the fixing of the Bulgarian currency to the euro, the Bank’s financial statements, prepared in Bulgarian levs, are affected by movements in the exchange rate of the lev against the currencies other than the euro. To minimise currency risk, there is a limit to the mismatches between the currency structure of assets and that of liabilities. According to Article 31, paragraph 3 of the Law on the BNB, the total market value of assets in a foreign currency other than the euro, SDR and monetary gold, may not deviate by more than +/-2 per cent from the market value of the liabilities denominated in these currencies. (BGN’000)

30 June 2019 31 December 2018

AssetsBulgarian lev and euro 44,641,589 44,729,176US dollar 77,304 75,110Japanese yen 311 80Pound sterling 137 236SDR 3,632,500 3,610,906Gold 3,148,832 2,848,174Other 782 881

51,501,455 51,264,563Liabilities, capital and reservesBulgarian lev and euro 47,896,434 47,682,094US dollar 78,246 76,711Japanese yen 1 1Pound sterling 3 -SDR 3,526,512 3,505,542Other 259 215

51,501,455 51,264,563Net positionBulgarian lev and euro (3,254,845) (2,952,918)US dollar (942) (1,601)Japanese yen 310 79Pound sterling 134 236SDR 105,988 105,364Gold 3,148,832 2,848,174Other 523 666

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e) Using accounting judgements and assumptionsThe Governing Council discusses the development, selection and disclosure of substantial accounting policies and assumptions, as well as their application.These disclosures supplement the notes to the financial risk management.Management’s major priorities in the next few years will still be to maintain monetary and financial system stability in the country, keep the Bank’s stable liquidity position and to improve continuously Bank’s valuation methods and techniques, international reserves management and control on international financial markets.

1) Determination of fair values The determination of fair values of financial assets and liabilities for which there is no observable market price requires the use of valuation techniques described in the accounting policy. For financial instruments that trade infrequently and whose price is not transparent, the fair value is less objective and requires an expert’s judgement depending on liquidity, concentration, market factors uncertainty, pricing assumptions, and other risks affecting the particular instrument.

2) Valuation of financial instrumentsThe Bank measures the fair value of financial instruments using the following hierarchy of methods:• Level 1: Quoted market price or closing price for positions for which there is a reliable

market;• Level 2: Valuation techniques based on observable market information about the yield

curve. This category of methods is used to measure debt securities for which there is no reliable market.

• Level 3: Valuation techniques, where inputs on financial assets and liabilities are not based on observable market data.

The fair values of financial assets and liabilities traded in international financial markets for which there is available market information are based on market quotations or closing market prices. The use of observable market prices and information reduces the need for management judgement and estimation and also reduces the uncertainty associated with determination of fair values. The availability of actual market prices and information varies depending on products and markets and changes because of specific events and the general conditions of financial markets. The Bank determines the fair values of all other financial instruments for which there are no current market quotes by using a valuation technique based on a net present value. The net present value is computed by means of market yield curves and credit spreads, where necessary, for the relevant instrument. The purpose of the valuation techniques is to determine a fair value which reflects the price of the financial instrument on the reporting date.The Bank has established a control framework with respect to the measurement of fair val-ues. The fair values of financial instruments controls are set by an independent risk analysis and control unit. Specific controls include: checking the actual price information; regular reviews of current valuation models and, if necessary, development, approval and introduc-tion of new valuation models; follow-up verification by means of analysis and comparison of data from various information sources, etc.The table below analyses financial instruments reported at fair value using valuation models. The data does not include equity instruments reported at acquisition cost (note 14).

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(BGN’000)

Level 1 Quoted market prices

on active markets

Level 2 Valuation techniques (using market data)

Total

As of 30 June 2019Cash and deposits in foreign currency 18,888,497 - 18,888,497 incl. effect of applying IFRS 9 (7,816) - -Gold, instruments in gold, and other precious metals 3,189,295 - 3,189,295 incl. effect of applying IFRS 9 (702) - -Financial assets at fair value through profit or loss 25,237,392 1,745,478 26,982,870Total 47,315,184 1,745,478 49,060,662

As of 31 December 2018Cash and deposits in foreign currency 19,833,248 - 19,833,248 incl. effect of applying IFRS 9 (6,905) - -Gold, instruments in gold, and other precious metals 2,884,283 - 2,884,283 incl. effect of applying IFRS 9 (1,107) - -Financial assets at fair value through profit or loss 25,070,918 1,049,247 26,120,165Total 47,788,449 1,049,247 48,837,696

Financial instruments not measured at fair value, but by applying a level of the fair value hierarchy where a fair value measurement is categorised, are analysed as follows: (BGN’000)

Level 1 Quoted market prices

on active markets

Level 2 Observable inputs other

than quoted pricesTotal

As of 30 June 2019Liabilities to banks and other financial institutions - 12,866,662 12,866,662Liabilities to government institutions and other borrowings - 13,105,419 13,105,419Borrowings against Bulgaria’s participation in international financial institutions - 3,369,418 3,369,418Total - 29,341,499 29,341,499

As of 31 December 2018Liabilities to banks and other financial institutions - 15,267,214 15,267,214Liabilities to government institutions and other borrowings - 10,719,427 10,719,427Borrowings against Bulgaria’s participation in international financial institutions - 3,349,973 3,349,973Total - 29,336,614 29,336,614

The fair value of liabilities to banks and other financial institutions and of liabilities to gov-ernment institutions is approximately equal to the reporting value as they are short-term.

The fair value of the liabilities for participation in international financial institutions is approximately equal to their reporting value as they are interest-free and of no definite maturity.

f) Maturity structure of assets and liabilitiesThe Bank’s assets and liabilities, analysed by residual term to maturity from the date of the statement of financial position to the date of any subsequent agreement or contractual maturity, are as follows:

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(BGN’000)

Up to 1 month

From 1 to 3 months

From 3 months to

1 year

From 1 to 5 years

Over 5 years

Undefined maturity Total

As of 30 June 2019Financial assetsCash and deposits in foreign currency 17,529,730 389,967 976,616 - - (7,816) 18,888,497

incl. effect of applying IFRS 9 - - - - - (7,816) -Gold, instruments in gold, and other precious metals 2,491,616 698,381 - - - (702) 3,189,295

incl. effect of applying IFRS 9 - - - - - (702) -Financial assets at fair value through profit or loss 1,490,020 1,054,646 10,819,304 13,600,382 18,518 - 26,982,870Financial assets at fair value in other compre-hensive income 234,453 - - - - 1,962,257 2,196,710Tangible assets - - - - - 149,334 149,334Intangible assets - - - - - 5,733 5,733Other assets 33,130 1,219 14,292 - - 40,375 89,016Total financial assets 21,778,949 2,144,213 11,810,212 13,600,382 18,518 2,149,181 51,501,455

Financial liabilitiesBanknotes and coins in circulation - - - - - 17,361,567 17,361,567Liabilities to banks and other financial institu-tions 12,866,662 - - - - - 12,866,662Liabilities to government institutions and other borrowings 2,192,519 19,963 10,892,937 - - - 13,105,419Borrowings against Bulgaria’s participation in international financial institutions - - - - - 3,369,418 3,369,418Other liabilities - - - - - 182,519 182,519Total financial liabilities 15,059,181 19,963 10,892,937 - - 20,913,504 46,885,585Asset-liability maturity mismatch 6,719,768 2,124,250 917,275 13,600,382 18,518 (18,764,323) 4,615,870

As of 31 December 2018Financial assetsCash and deposits in foreign currency 18,445,863 807,613 586,677 - - (6,905) 19,833,248

incl. effect of applying IFRS 9 - - - - - (6,905) -Gold, instruments in gold, and other precious metals 2,885,390 - - - - (1,107) 2,884,283

incl. effect of applying IFRS 9 - - - - - (1,107) -Financial assets at fair value through profit or loss 1,818,476 2,189,323 7,598,911 14,476,775 36,680 - 26,120,165Financial assets at fair value in other compre-hensive income 233,117 - - - - 1,949,491 2,182,608Tangible assets - - - - - 154,065 154,065Intangible assets - - - - - 5,323 5,323Other assets 24,780 5,439 18,164 - - 36,488 84,871Total financial assets 23,407,626 3,002,375 8,203,752 14,476,775 36,680 2,137,355 51,264,563

Financial liabilitiesBanknotes and coins in circulation - - - - - 17,325,475 17,325,475Liabilities to banks and other financial institu-tions 15,267,214 - - - - - 15,267,214Liabilities to government institutions and other borrowings 1,566,563 29,446 9,123,418 - - - 10,719,427Borrowings against Bulgaria’s participation in international financial institutions - - - - - 3,349,973 3,349,973Other liabilities - - - - - 294,432 294,432Total financial liabilities 16,833,777 29,446 9,123,418 - - 20,969,880 46,956,521

Asset-liability maturity mismatch 6,573,849 2,972,929 (919,666) 14,476,775 36,680 (18,832,525) 4,308,042

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7. Interest Income and Expense (BGN’000)

30 June 2019 30 June 2018

Interest income– securities 96,175 104,155– deposits 31,210 28,085– other 34 1

127,419 132,241Interest expense

– deposits 37,056 33,660– other - -

37,056 33,660

As of 30 June 2019 there are no interest expenses paid on government deposits in foreign currency, neither on deposits of other organisations in foreign currency (as of 30 June 2018 – no interest expenses either).Interest expenses paid on deposits include interest paid of BGN 5441 thousand on deposits and current accounts with foreign correspondent banks as a result of using negative refer-ence interest rates (30 June 2018: BGN 14,389 thousand). In addition BGN 1947 thousand (30 June 2018: BGN 1247 thousand) interest paid on the technical account of the national system component TARGET2-BNB at the ECB are included. Over the review period, the ECB Governing Council continued to set negative interest rates for the Eurosystem’s deposit facility and during the reporting period the interest rate was fixed at -0.40 per cent.

8. Net Gains/(Losses) from Financial Assets and Liabilities at Fair Value through Profit or Loss

(BGN’000)

30 June 2019 30 June 2018

Net (losses) from operations in securities (128,502) (127,138)

Net gains from operations in foreign currency 202 204

Net revaluation gains/(losses) on futures 8 (127)

Net revaluation gains/(losses) on securities 80,233 (5,038)

Net revaluation gains on foreign currency assets and liabilities 362 1,218

Net revaluation gains/(losses) on gold 303,224 (22,260)

Provisions for expected credit losses * (506) -

255,021 (153,141)

* Initial application of IFRS 9 as of 1 January 2018. In accordance with the selected transition methods, comparative information has not been restated.

Net gains/(losses) from financial assets and liabilities carried at fair value through profit or loss as at 30 June 2019 are largely attributable to revaluation of gold of BGN 303,224 thou-sand due to an increase in the market price of gold from BGN 2190.59 per troy ounce as of 31 December 2018 to BGN 2420.95 as of 30 June 2019. Net losses from operations in securities amounted to BGN 128,502 thousand. The main factor for that is the lower market yields on securities from their coupon yield which led to be traded at premium above their face value.During the reporting period the market yield on the securities is characterised by mixed movements across issuers, maturity sectors and quarters. The market yield increased between 5 and 30 basis points on the short-term securities in which the BNB primarily invested, while market yields decreased between 3 and 18 basis points on the bulk of securi-ties of other issuers. The net effect from revaluation of securities resulting from these move-ments was positive: BGN 80,233 thousand.

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9. Other Operating Income (BGN’000)

30 June 2019 30 June 2018

Income from subsidiaries 15,051 13,732

Income from associates 1,958 -

Income from sale of coins 553 638

Dividend income - 4,572

Other income, net 817 653

18,379 19,595

In 2019 BNB’s dividends from its participation in Bulgarian Mint EAD and Printing Works AD were BGN 232 thousand and BGN 2282 thousand, respectively, which are eliminated for the purposes of consolidated financial statements.Financial income from subsidiaries of BGN 15 thousand and income from reallocated remu-neration from the ECB in relation to TARGET2 of BGN 462 thousand are included in the other net income.

10. General Administrative Expenses (BGN’000)

30 June 2019 30 June 2018

Staff expenditure 23,205 20,426

Administrative expenses 25,091 27,782

Depreciation 6,981 6,742

Other expenses 2,481 10,153

57,758 65,103

The number of employees of the Bank and its subsidiaries is 1151 as of 30 June 2019 (30 June 2018: 1157), including the BNB staff of 887 (30 June 2018: 884).Staff expenditure include salaries, social and health insurance costs charged under the local legislation provisions as of 30 June 2019, and social activities costs, respectively for the BNB: BGN 19,473 thousand (30 June 2018: BGN 16,724 thousand), for the BNB Printing Works AD: BGN 2310 thousand (30 June 2018: BGN 2232 thousand), and for the Bulgarian Mint EAD: BGN 1422 thousand (30 June 2018: BGN 1470 thousand). Staff expenditure includes remunerations paid to the BNB Governing Council members to the amount of BGN 691 thousand as of 30 June 2019 (30 June 2018: BGN 549 thousand), as follows:

(BGN’000)

30 June 2019 30 June 2018

Total gross remuneration expenses* 630 549

including bonuses up to established thresholds in accordance with Article 23, paragraph 3 of the LBNB under BNB Governing Council’s resolution of 30 July 2015** 186 136

Expenses on BNB Governing Council members’ retirement/termination benefits 61 -

Total gross remuneration paid to the BNB Governing Council members 691 549

* Remunerations are before tax.** http://www.bnb.bg/PressOffice/POPressReleases/POPRDate/PR_20150730_1_EN

With the adoption of the annual BNB budget for 2019, the amount of monthly remunera-tions of the Governing Council members is defined, as follows: Governor: BGN 16,849; Deputy Governors: BGN 14,442; other Governing Council members: BGN 4814.

http://www.bnb.bg/PressOffice/POPressReleases/POPRDate/PR_20150730_1_EN

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Based on actuarial calculations, the Bank has accrued obligations to retirement and unused annual leave as of the end of the current six-month period to the amount of BGN 2257 thou-sand (30 June 2018: BGN 2004 thousand). Accruals of subsidiaries retirement and unused annual leave as of 30 June 2019 are BGN 200 thousand (30 June 2018: BGN 67 thousand).Staff retirement liabilities calculated based on actuarial valuation and pursuant to IAS 19 Employee Benefits are given below: (BGN’000)

30 June 2019 30 June 2018

Defined benefit liabilities as of 1 January 3,311 2,810Plan benefits paid (196) (69)Current service costs 220 189Interest costs 8 6Re-measurements - - Actuarial (gain)/loss arising from experience adjustment 203 254 Actuarial (gain) arising from change in demographic assumptions - - Actuarial loss/(gain) arising from changes in financial assumptions 63 (15)Actuarial (gain)/loss recognised in expenses - -

Defined benefit liabilities as of 30 June 3,609 3,175

Costs recognised in profit or loss (BGN’000)

30 June 2019 30 June 2018

Current service costs 220 189

Interest costs 8 6

Actuarial (gain)/loss - -

Re-measurements - -

Total 228 195

Actuarial assumptions The key actuarial assumptions as of the Financial Statements date are as follows (weighted average): (per cent)

30 June 2019 30 June 2018

Discount interest rate as of 30 June 0.22 0.72Future salary growth 4.50 4.50

Distribution of BNB staff liabilities (subsidiaries excluded) by residual term

30 June 2019 30 June 2018

Up to 1 year 519 413From 1 to 3 years 431 456From 3 to 5 years 291 288From 5 to 10 years 525 422Over ten years 940 784Total 2,706 2,363

Administrative expenses include BNB’s currency circulation expenses of BGN 9013 thou-sand as of 30 June 2019 (30 June 2018: BGN 14,421 thousand).

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11. Cash and Deposits in Foreign Currency (BGN’000)


Cash in foreign currency 240,318 96,926

Current accounts in other banks 3,312,075 6,775,887

incl. effect of applying IFRS 9 (240) (805)

Deposits in foreign currency 15,336,104 12,960,435

incl. effect of applying IFRS 9 (7,576) (6,100)18,888,497 19,833,248

Cash and deposits in foreign currency with correspondents are disclosed, as follows: (BGN’000)


Euro area residents In EUR 10,753,783 12,872,516

incl. effect of applying IFRS 9 (5,105) (4,516)In other currencies - 71,836

incl. effect of applying IFRS 9 - (46)10,753,783 12,944,352

Non-euro area residentsIn EUR 6,589,136 5,426,761

incl. effect of applying IFRS 9 (2,667) (2,343)In other currencies 1,545,578 1,462,135

incl. effect of applying IFRS 9 (44) -8,134,714 6,888,896

18,888,497 19,833,248

Deposits in foreign currency with correspondents with counterparty’s credit rating graded by at least two of the six internationally recognised credit rating agencies – Standard&Poor’s, Fitch Ratings, Moody’s, DBRS, R&I and JCRA – are disclosed, as follows: (BGN’000)

Short-term counterparty’s credit rating 30 June 2019 31 December 2018

Investment graded deposits by the counterparty’s credit rating

А-1+ 1,757,483 1,953,864incl. effect of applying IFRS 9 (292) (318)

А-1 13,576,742 11,005,131incl. effect of applying IFRS 9 (7,284) (5,782)

15,334,225 12,958,995

The disclosure by credit rating does not include demand deposits with external managers.The BNB maximum exposure to credit risk is equivalent to the book value of cash on cur-rent accounts and deposits.

12. Gold, Instruments in Gold, and Other Precious Metals


’000 troy ounces BGN’000 ’000 troy ounces BGN’000Gold bullion in standard form 513 1,242,051 513 1,123,867Gold deposits in standard form 788 1,906,079 785 1,723,201

incl. effect of applying IFRS 9 (702) (1,107)Gold in other form 16 38,425 16 34,552Other precious metals 2,740 2,663

3,189,295 2,884,283

Gold in standard form includes gold held for safekeeping with a depository and deposits. Deposits in gold are held with banks whose liabilities are rated with one of the two highest ratings given by two internationally recognised rating agencies and bear interest between 0.03 per cent and 0.22 per cent annually.

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Gold in other form includes commemorative gold coins of BGN 32,351 thousand.Other precious metals include silver commemorative coins of BGN 378 thousand and plati-num commemorative coins of BGN 2215 thousand.

13. Financial Assets at Fair Value through Profit or Loss (BGN’000)

Securities at fair value through profit or loss 30 June 2019 31 December 2018

Foreign treasury bills, notes and bonds 26,982,870 26,120,165

26,982,870 26,120,165

Securities comprise of both coupon and discount securities denominated in EUR. The maxi-mum coupon interest of the EUR-denominated securities was 0.79 per cent as of 30 June 2019 (31 December 2018: 0.79 per cent).As of 30 June 2019, similarly to 31 December 2018 there were no securities pledged as col-lateral on futures transactions.Securities issued by foreign governments and other issuers or relevant issuers with credit rating graded by at least two of the six internationally recognised credit rating agencies – Standard&Poor’s, Fitch Ratings, Moody’s, DBRS, R&I and JCRA – are disclosed, as follows: (BGN’000)

Issue/issuer credit rating 30 June 2019 31 December 2018

Investment graded securities by the issue/issuer credit rating

ААА 25,037,980 24,624,997АА+ 438,448 160,096АА 1,502,356 1,335,072AА- 4,086 -

26,982,870 26,120,165

14. Financial Assets at Fair Value in Other Comprehensive Income (BGN’000)


Republic of Bulgaria’s quota in the IMF 2,141,530 2,129,322Equity investments in international financial institutions 30,550 30,613Investments in associates 24,630 22,673

2,196,710 2,182,608

The Republic of Bulgaria’s quota in the IMF is SDR 896,300 thousand (31 December 2018: SDR 896,300 thousand). The amount of BGN 234,453 thousand of the Republic of Bul-garia’s quota in the IMF represents the reserve tranche held with the IMF (31 December 2018: BGN 233,117 thousand). The IMF pays remuneration (interest) to those members who have a remunerated reserve tranche position, with the average rate reaching 1.12 per cent (31 December 2018: 0.93 per cent).Equity investments in international financial institutions include the equity investment in the Bank for International Settlements (BIS), Basel, and 25 per cent of the equity invest-ment in BIS Basel is paid up. As of 30 June 2019 the current value of SDR 10,000 thousand shares amounts to BGN 23,757 thousand, while as of 31 December 2018 it was BGN 23,757 thousand (ref. note 28). The capital subscribed, but not paid-in has an option to be paid in within three months upon a decision of the BIS Board of Governors.Equity investments in international financial institutions do not exceed 10 per cent of the subscribed share capital of the respective institution. Investments in international financial institutions also include BNB’s participation in the ECB. As of 1 January 2007 (when the Republic of Bulgaria joined the EU), the Bulgarian National Bank has a share in the ECB capital. As of 30 June 2019 the amount of the BNB paid-up share in the ECB capital is EUR 3455 thousand or BGN 6757 thousand.

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Pursuant to Article 28 of the Statute of the ESCB and of the ECB, only ESCB NCBs are entitled to participate in the ECB capital. Capital subscription follows the requirements and the key set forth in Article 29 of the Statute of the ESCB and of the ECB, i.e. the share of each NCB in the ECB capital is determined in percentage and corresponds to the share of the respective Member State in the EU’s total population and GDP (in equal proportions). The percentage is adjusted every five years and whenever a new Member State joins the EU. As of 30 June 2019, the BNB’s capital share in the ECB subscribed capital is 0.8511 per cent, which corresponds to EUR 92,131.6 thousand.As a non-euro area NCB, the BNB is required to pay up the minimum percentage of its subscribed capital in the ECB, which is pursuant to Article 47 of the Statute of the ESCB and of the ECB (as set out by the ECB General Council) and represents the BNB contribu-tion to the ECB operational costs. As of 29 December 2010 this percentage amounts to 3.75 per cent. Unlike euro area NCBs, the BNB is not entitled to the ECB’s distributable profit, nor is it required to fund any loss of the ECB. Upon joining the euro area, the BNB will be required to pay up the remaining 96.25 per cent of its capital subscription to the ECB, which is EUR 88,676.6 thousand.The Bank exercises a significant influence on the financial and operational policies of the associates listed below, and its investments in domestic companies are analysed, as follows:

Associates Share holding, per cent Principal activity

BORICA AD 36.11 Interbank card payments

Cash Services Company AD 20.00 Handling of sealed parcels of Bulgarian coins and banknotes transferred from the BNB and the banks

15. Tangible AssetsThe fair value of land and buildings is categorised as Level-3 fair value based on the input data for the given assessment technique.For the remaining asset classes Plant and Machinery, Equipment, Vehicles, Fixtures and Fittings, the fair value is considered to be their present value on the Bank’s balance sheet as most of them were bought in the last four years and their book value is close to their fair value.When revaluating tangible fixed assets, the Bank derecognises the accrued depreciation at the expense of the gross book value of the assets, and their net value is recalculated against the revalued amount.

(BGN’000)

Land and buildings

Plant and equipment

IT equip-ment

Office equipment

Other equip-ment (includ-

ing motor vehicles)

Assets under con-struction

Total

As of 1 January 2019 184,096 92,828 49,982 10,047 8,754 2,591 348,298Additions 4 245 16 7 7 834 1,113Disposals - (862) (5) - (37) - (904)Transfers 73 185 11 12 337 (618) -Revaluation - - - - - - -As of 30 June 2019 184,173 92,396 50,004 10,066 9,061 2,807 348,507

Depreciation and impairment lossAs of 1 January 2019 (61,537) (71,031) (45,982) (8,892) (6,792) - (194,234)

Additions (2,591) (1,548) (1,369) (87) (247) - (5,842)

Disposals - 861 5 - 37 - 903

Revaluation - - - - - - -

As of 30 June 2019 (64,128) (71,718) (47,346) (8,979) (7,002) - (199,173)

Net book value as of 30 June 2019 120,045 20,678 2,658 1,087 2,059 2,807 149,334

Net book value as of 31 December 2018 122,559 21,798 4,000 1,155 1,962 2,591 154,065

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Land and buildings

Plant and equipment

IT equip-ment

Office equipment

Other equip-ment (includ-

ing motor vehicles)

Assets under con-struction

Total

As of 1 January 2018 184,096 91,053 48,237 9,984 8,233 2,142 343,745Additions - 4,055 22 24 16 5,475 9,592Disposals - (4,752) (120) (54) (298) - (5,224)Transfers - 2,269 1,843 93 803 (5,026) (18)Revaluation - 203 - - - - 203

As of 31 December 2018 184,096 92,828 49,982 10,047 8,754 2,591 348,298

Depreciation and impairment lossAs of 1 January 2018 (56,320) (73,244) (42,728) (8,721) (6,711) - (187,724)

Additions (5,217) (2,505) (3,373) (224) (379) - (11,698)

Disposals - 1,073 119 53 298 - 1,543

Revaluation - 3,646 - - - - 3,646

As of 31 December 2018 (61,537) (71,030) (45,982) (8,892) (6,792) - (194,233)



In applying IAS 16 Property, Plant and Equipment and BNB’s Internal Rules for Financial Statements and Accounting Policy, as of December 2013 a review was made of the book value of tangible fixed assets stated in the Bank’s balance sheet. The fair value of land and buildings was determined by an external, independent and licensed assessor of recognised professional qualification and experience in assessing property of location and category similar to the assessed ones. As of 30 June 2019, the fair value of land and buildings did not differ materially from their book value as at the same date; therefore, it is considered that the present book value of land and buildings on the Bank’s balance sheet fairly reflects their market value. The fair value of fully amortised tangible fixed assets as of 30 June 2019 was BGN 83,257 thousand (31 December 2018: BGN 80,102 thousand).

16. Intangible Assets(BGN’000)

Software Other intangible assets

Development costs Total

As of 1 January 2019 54,732 174 272 55,178Additions 1,036 4 509 1,549Disposals - - - -Transfers 776 - (776) -As of 30 June 2019 56,544 178 5 56,727

Depreciation and impairment lossAs of 1 January 2019 (49,691) (164) - (49,855)Charge for the period (1,137) (2) - (1,139)On disposals - - - -As of 30 June 2019 (50,828) (166) - (50,994)

Net book value as of 30 June 2019 5,716 12 5 5,733Net book value as of 31 December 2018 5,041 10 272 5,323

As of 30 June 2019, software includes licenses purchased by the BNB to the total amount of BGN 82 thousand (31 December 2018: BGN 1303 thousand), and software products to the amount of BGN 1730 thousand (31 December 2018: BGN 1365 thousand).

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(BGN’000)

Software Other intangible assets

Development costs Total

As of 1 January 2018 52,064 174 63 52,301Additions - - 2,877 2,877Disposals - - - -Transfers 2,668 - (2,668) -

As of 31 December 2018 54,732 174 272 55,178

Depreciation and impairment lossAs of 1 January 2018 (47,714) (161) - (47,875)Additions (1,977) (3) - (1,980)Disposals - - - -As of 31 December 2018 (49,691) (164) - (49,855)

Net book value as of 31 December 2018 5,041 10 272 5,323Net book value as of 31 December 2017 4,350 13 63 4,426

As of 31 December 2018, software includes licenses purchased by the BNB to the total amount of BGN 1303 thousand (31 December 2017: BGN 486 thousand), and software products to the amount of BGN 1365 thousand (31 December 2017: BGN 1170 thousand).

17. Other Assets (BGN’000)


Cash held by subsidiaries with local banks 48,672 48,413

Investments of subsidiary undertakings in joint ventures and associates 11,311 8,791

Commemorative coins for sale 317 414

Inventories 23,365 19,215

Accounts receivable 2,418 5,113

Deferred charges 1,509 1,446

Other receivables 1,424 1,47989,016 84,871

Cash held by subsidiaries with local banks comprise receivables of BGN 42,257 thousand of the BNB Printing Works AD and BGN 6415 thousand of the Bulgarian Mint EAD.Investments of subsidiary undertakings in joint ventures and associates include a non-mon-etary contribution in the form of banknote production equipment to the capital of François-Charles Oberthur Group with which BNB Printing Works AD has established a joint venture for banknote production.

18. Banknotes and Coins in Circulation (BGN’000)


Banknotes and coins in circulation 16,917,869 16,000,000

Coins in circulation 443,698 1,325,475

17,361,567 17,325,475

19. Liabilities to Banks and Other Financial Institutions (BGN’000)


Demand deposits from banks and other financial institutions

- in BGN 9,479,910 12,147,527

- in foreign currency 3,386,752 3,119,687

12,866,662 15,267,214

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Demand deposits include BGN 7,529,531 thousand representing the required reserves, which all local banks are required to maintain on accounts with the BNB (31 December 2018: BGN 7,148,799 thousand).On 26 November 2015 the Governing Council of the Bulgarian National Bank adopted a new Ordinance No 21 on the Minimum Required Reserves Maintained with the Bulgar-ian National Bank by Banks which came into force as of 4 January 2016. The new BNB Ordinance No 21 removed the recognition of banks’ funds in the TARGET2-BNB national system component as reserve assets. Pursuant to Article 42 of Ordinance No 3 of the BNB this position includes also the banks’ participation in the Guarantee Mechanism for Settlement of Payments of the participants in the system operated by BORICA and processing card related payments, amounting to BGN 140,640 thousand (31 December 2018: BGN 108,288 thousand).

20. Liabilities to Government Institutions and Other Borrowings (BGN’000)


Current accounts – in BGN 1,808,220 1,134,858 – in foreign currency 222,609 148,456Time deposit accounts – in BGN 8,475,000 5,816,000 – in foreign currency 2,599,590 3,620,113

13,105,419 10,719,427

Government’s deposits and current accounts with the Bank comprise funds held on behalf of the state budget and other government organisations. The Bank applies interest rates in line with the General Terms and Conditions of the Bulgarian National Bank on accepting cash deposits and servicing bank accounts, budget organisations and other customers adopted by a resolution of the BNB Governing Council of 26 November 2015.

21. Borrowings against Bulgaria’s Participation in International Financial Institutions

Borrowings against Bulgaria’s participation in the IMF as of 30 June 2019 amount to BGN 1,901,723 thousand, or SDR 795,933 thousand (as of 31 December 2018: BGN 1,890,882 thousand, or SDR 795,933 thousand). Borrowings from the IMF are denominated in SDRs. Borrowings related to Bulgaria’s quota in the IMF are non-interest bearing with no stated maturity. This note includes account No 1 and account No 2 of the IMF in levs amounting to BGN 5440 thousand (31 December 2018: BGN 5243 thousand).Bank’s borrowings from the IMF of the general and special allocation of SDRs amount to SDR 474,586,534 and SDR 136,829,102, respectively. Repayment will take place on IMF’s demand. Under Article XX of the IMF Statute, the Bank receives interest on the existing SDRs and pays a fee on its borrowings from the general and special allocation at the same interest rate.

22. Other Liabilities(BGN’000)


Funds of EU institutions and bodies 2,865 3,479Salaries and social security payable 6,942 4,751Deferred income 554 1,329Other liabilities 172,158 284,873

182,519 294,432

Funds of EU institutions and bodies include European Commission’s funds and European Investment Bank’s funds. Pursuant to Article 9 of Council Regulation No 1150 of 2000 and

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Bulgaria’s participation in the funding of the EU budget, the Bank opened accounts of the European Commission. As at 30 June 2019 the funds on these accounts were BGN 2865 thousand (31 December 2018: BGN 3479 thousand).

23. Capital and ReservesThe capital of the Bank is determined by the Law on the BNB and amounts to BGN 20,000 thousand. Non-monetary asset revaluation reserves comprise the net change in fair value of property, equity investments and other non-monetary assets.Pursuant to Article 36 of the Law on the Bulgarian National Bank, unrealised gains/losses arising from the revaluation of assets and liabilities denominated in foreign currency or gold are transferred to a special reserve account and form special reserves. Other reserves include 25 per cent of the annual excess of revenue over expenditure after the allocation to special reserves and reserves established in accordance with a resolution of the BNB Governing Council. As of 30 June 2019 profit distribution in accordance with the profit distribution policy dis-closed in note 5 (j) is as follows:

(BGN’000)

30 June 2019 30 June 2018

Profit/(loss) for the period 308,357 (97,742)

Allocation to special reserve under Article 36 of the Law on the BNB:

Unrealised (gain)/loss from gold revaluation (303,224) 22,260

Unrealised (gain)/loss from revaluation of financial assets at fair value through profit or loss (80,233) 13,421

Unrealised (gain) from foreign currency valuation (362) (1,218)

Other unrealised loss 498 127

Result after allocation to special reserve (74,964) (63,152)

24. Non-controlling InterestThe BNB Printing Works AD is a joint-stock company with two shareholders: the BNB and the Government represented by the Ministry of Finance. The BNB holds 95.6 per cent of the company’s capital and the government holds the remaining 4.4 per cent of the company’s capital.

25. Monetary Liabilities and Gross International Reserves (BGN’000)


Gross international reserves

Cash and foreign currency denominated deposits 18,888,497 19,833,248

Monetary gold and other instruments in gold 3,148,130 2,847,067

Security investments 26,982,870 26,120,165

Equity investments and quota in the IMF 234,453 233,117

49,253,950 49,033,597

Monetary liabilities

Currency in circulation 17,361,567 17,325,475

Liabilities to banks 12,865,190 15,264,723

Liabilities to government institutions 10,812,827 8,608,047

Other liabilities 2,296,928 2,117,350

43,336,512 43,315,595

Excess of gross international reserves over monetary liabilities 5,917,438 5,718,002

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Interest receivable and interest payable are carried to the relevant financial assets and liabilities.Monetary gold and other instruments in gold are revalued on a daily basis based on the euro fixing of the London Bullion Market closing price.

26. Related Party Transactions

Bulgarian Government

International Monetary FundAs of 30 June 2019, the Republic of Bulgaria has not received funds under IMF agreements.The Republic of Bulgaria’s quota in the IMF is secured by promissory notes jointly signed by the Bank and the government (ref. note 21).

Government bank accountsGovernment budget organisations have current accounts and time deposits with the Bank (ref. note 20).

Fiduciary activitiesIn accordance with the Law on the BNB and under the terms agreed upon with the Minister of Finance, the BNB acts as an agent in government or government-guaranteed debts. With regard to this role, the BNB performs agent and central depository services related to the administration and management of government securities issued by the Ministry of Finance. The Bank receives commission for providing these services. These government securities are not assets or liabilities of the BNB and are not recognised in its consolidated statement of financial position. The Bank is not exposed to any credit risk relating to government securities as it does not guarantee them. As of 30 June 2019, the par value of the government securities held in custody was BGN 4810 million (31 December 2018: BGN 5454 million).

27. Subsidiaries Included in Consolidated Financial Statements(per cent)

Ownership interest 30 June 2019 31 December 2018

Bulgarian Mint EAD 100 100

BNB Printing Works AD (ref. note 24) 95.6 95.6

Net income from subsidiaries for the period comprises net profit of BGN 415 thousand from the Bulgarian Mint EAD (31 December 2018: BGN 232 thousand) and BGN 6915 thousand of net profit from the BNB Printing Works AD (31 December 2018: BGN 2650 thousand).

28. Commitments and Contingencies

1) Participation in the Bank for International SettlementsThe Bank holds 8000 shares of the capital of BIS, Basel, each amounting to SDR 5000. Twenty-five per cent of the equity investment in BIS, Basel is paid up. The capital subscribed but not paid in is with an option to be paid in within three months following a decision of the BIS Board of Governors. The contingent amount as of 30 June 2019 is BGN 71,270 thousand (31 December 2018: BGN 71,270 thousand).

2) IMF quotaThe IMF quota is secured by promissory notes jointly signed by the Bank and the govern-ment of the Republic of Bulgaria amounting to BGN 1,922,999 thousand.

3) Capital commitmentsAs of 30 June 2019 the Bank has committed to BGN 15,737 thousand to purchase non-current assets (31 December 2018: BGN 3224 thousand).

4) Other commitments and liabilitiesThere are no other outstanding guarantees, letters of credit or commitments to purchase or sell either gold, other precious metals or foreign currency.

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5) Other contingent liabilitiesThe BNB is being sued in relation to alleged compensation for delayed payment of deposits above the guaranteed amount or for challenging money transfers by customers of Corporate Commercial Bank AD (in bankruptcy) to a total amount of around BGN 67 million (31 December 2018: BGN 61 million). Currently, in Bulgaria there is no settled case-law on similar issues including a number of open points as to the applicable law and the procedural rules for their examination. The Court proceedings are at an early stage and most of them have been stayed pending until Bulgarian courts hear and determine questions referred for a preliminary ruling.Two court proceedings have been instituted against the BNB before a Federal Court of the State of New York in alleged of compensation of USD 400 million for actions of Corporate Commercial Bank AD (in bankruptcy) conservators appointed in 2014. Both cases are at an early stage, and the question of the federal court’s jurisdiction is still pending.Therefore and based on available information on both cases, Bank’s management considers that no reliable assessment of the likely outcome of legal proceedings could be made and, consequently, no provisions for these contingent liabilities should be made.

29. Events Occurred after the Reporting DateThere are no events after the reporting date that require additional disclosure or adjustments to the Bank’s Financial Statements.

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Information under Article 17, Paragraph 5 of the Law on the BNB Concerning Resolutions Adopted by the BNB Governing Council in January–June 2019

Reporting and Budget

RESOLUTION No 121 of 28 MarchThe report on the implementation of the BNB budget for 2018 was approved.

RESOLUTION No 130 of 4 AprilThe BNB Annual Report for 2018 was approved on first reading.

RESOLUTION No 145 of 24 AprilThe BNB Annual Report for 2018 was approved.

Gross International Reserves

RESOLUTION No 9 of 24 JanuaryThe Governing Council of the BNB took note of the selected benchmark for dynamic asset structuring in the first quarter of 2019.

RESOLUTION No 153 of 24 AprilThe Governing Council of the BNB took note of the selected benchmark for dynamic asset structuring in the second quarter of 2019.

RESOLUTION No 195 of 30 MayThe BNB Governing Council took note of the International Reserve Management Report for the first quarter of 2019.

Payment Systems and Payment Oversight

RESOLUTION No 14 of 24 JanuaryThe licence granted by Resolution No 11 of 23 February 2012 of the Governing Council of the BNB to the Euromoney Transfer OOD to conduct activities as a payment institu-tion providing payment services under Article 4, item 6 of the Law on Payment Services and Payment Systems (LPSPS) is deemed cancelled as of 1 February 2019.

RESOLUTION No 36 of 7 FebruaryThe Governing Council of the BNB approved the start of the preparation of the BNB and participants of the TARGET2-BNB national system component to the consolidated platform of TARGET services until 21 November 2021.

RESOLUTION No 37 of 7 FebruaryThe BNB refused to issue a licence to Varchev Transfers EOOD for conducting activities as a payment institution.

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RESOLUTION No 59 of 28 FebruaryThe Governing Council of the BNB adopted Ordinance on Amendment of Ordinance No. 16 the BNB of 29 March 2018 on Granting Licenses and Approvals, Entry into the Register under Article 19 of the Law on Payment Services and Payment Systems, and Requirements to the Activity of Operators of Payment Systems with Settlement Finality.

RESOLUTION No 60 of 28 FebruaryThe Governing Council suggests that the BNB starts implementing until the end of the first half of 2019 Guidelines on the conditions to benefit from an exemption from the contingency mechanism under Article 33(6) of Regulation (EU) 2018/389 (RTS on SCA & CSC), (EBA/GL/2018/07 of 4 December 2018) issued by the European Banking Authority and published on its official website.

RESOLUTION No 63 of 28 FebruaryThe Governing Council took note of the calculated average amount of fees charged by banks on services under Appendix 1 to Article 34 of Ordinance No 3 of the BNB on payment accounts as of 31 December 2018 in relation to Article 120, paragraph 6 of the Law on Payment Services and Payment Systems and Article 35, paragraph 2 of Ordinance No 3 of the BNB.

RESOLUTION No 76 of 7 MarchThe Governing Council of the BNB decided to supplement the payment institution license of Transcart Financial Services AD issued by Resolution No 61 of 3 June 2010 of the Governing Council of the BNB with the payment services under Article 4, items 3 (c) and 4 (c) of the Law on Payment Services and Payment Systems.

RESOLUTION No 209 of 13 JuneThe Governing Council of the BNB adopted Ordinance on Amendment of Ordinance No 3 of 18 April 2018 on the Terms and Procedure for Opening Payment Accounts, Executing Payment Transactions and Using Payment Instruments.

RESOLUTION No 214 of 25 JuneThe Governing Council of the BNB adopted Ordinance on Amendment of Ordinance No 9 of 26 July 2017 on the information and documents which prove fulfilment of the requirements to temporary administrators or special managers of a bank.

***

Between January and June 2019 the Governing Council of the BNB took two resolutions related to the imposition of supervisory measures, performed supervisory inspections and other approvals and authorisations, and actions on administrative procedures.

The Circulation of Banknotes and Coins

RESOLUTION No 10 of 24 JanuaryThe list of selling prices of Bulgarian coins, issues 1951–2019, was approved.

The list of selling prices of Bulgarian banknotes, issues 1950–2006, was approved.


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RESOLUTION No 11 of 24 JanuaryPursuant to the Law on the BNB Article 26, the Governing Council of the BNB decided to withdraw from circulation the commemorative coins issued in 2013, which ceased to be legal tender on 8 February 2019.

Commemorative coins issued in 2013 will be exchangeable at BNB tills at nominal value with no limits to amounts and free of charge until 31 December 2020.

RESOLUTION No 53 of 28 FebruaryThe BNB Governing Council took note of the availability and movements in the BNB Strategic Stock of Banknotes for 2018.

RESOLUTION No 54 of 28 FebruaryThe Governing Council of the BNB decided to put into circulation, as of 3 June 2019, a silver commemorative coin ‘Evlogi and Hristo Georgiev’ of the Bulgarian Revival series.

RESOLUTION No 117 of 28 MarchThe Governing Council of the BNB adopted Ordinance No. 39 on the Nominal Value, Coverage, Form and Design of Banknotes and Coins Put into Circulation.

RESOLUTION No 136 of 4 AprilThe silver commemorative coin ‘Evlogi and Hristo Georgiev’, issue 2019, will be sold at BNB tills at BGN 78.

RESOLUTION No 206 of 13 JuneThe Governing Council of the BNB decided to put into circulation, as of 16 September 2019, a silver commemorative coin ‘150 Years Bulgarian Academy of Sciences’.

RESOLUTION No 222 of 25 JuneThe Governing Council of the BNB adopted the Commemorative Coin and Banknote Production Programme for 2020.

The Governing Council of the BNB approved the Preliminary Commemorative Coin and Banknote Production Programme for 2021–2022 as a basis for preparing annual programmes.

Maintaining Banking System Stability and Protecting Depositor Interests

RESOLUTION No 1 of 8 JanuaryThe Governing Council of the BNB took a decision to sign with the European Central Bank a multilateral agreement on the practical modalities and the terms of information exchange in compliance with Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing amending Regulation (EU) No 648/2012 of the European Parliament and of the Coun-cil, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC, as amended by Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU.

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RESOLUTION No 12 of 24 JanuaryThe Governing Council approved the Draft Joint Decision of the Bulgarian National Bank, the National Bank of Hungary, the National Bank of Romania, the National Bank of Croatia and the National Bank of Slovakia on the evaluation of the group recovery plan of OTP Bank Group.

RESOLUTION No 23 of 7 FebruaryThe Governing Council suggests that the BNB starts implementing from 1 January 2019 Guidelines on stress testing of institutions under Articles 108 and 109 of Direc-tive 2013/36/EU (EBA/GL/2018/04) issued by the European Banking Authority and published on its official website.

RESOLUTION No 24 of 7 FebruaryThe Governing Council suggests that the BNB starts implementing from 30 June 2019 Guidelines on the management of interest rate risk arising from non-trading book activities (EBA/GL/2018/02) issued by the European Banking Authority and published on its official website.

RESOLUTION No 25 of 7 FebruaryThe Governing Council suggests that the BNB starts implementing until the end of the first quarter of 2019 Guidelines on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress test-ing amending EBA/GL/2014/13 of 19 December 2014 issued by the European Banking Authority and published on its official website.

RESOLUTION No 26 of 7 FebruaryThe Governing Council approved the Joint Decision of the Bulgarian National Bank and the European Central Bank on determining the adequacy of liquidity and the adequacy of own funds, and the required own funds to be maintained by Eurobank Ergasias S.A.

RESOLUTION No 27 of 7 FebruaryThe Governing Council approved the Joint Decision of the Bulgarian National Bank and the European Central Bank on determining the adequacy of liquidity and the adequacy of own funds, and the required own funds to be maintained by Raiffeisen Bank Inter-national AG.

RESOLUTION No 28 of 7 FebruaryThe Governing Council approved the Joint Decision of the Bulgarian National Bank, the National Bank of Hungary, the National Bank of Romania, the National Bank of Croatia and the National Bank of Slovakia on determining the adequacy of liquidity of OTP Group.

The Governing Council approved the Joint Decision of the Bulgarian National Bank, the National Bank of Hungary, the National Bank of Romania, the National Bank of Croatia and the National Bank of Slovakia on determining the adequacy of own funds, and the required own funds to be maintained by OTP Group.

RESOLUTION No 29 of 7 FebruaryThe Governing Council approved the Joint Decision of the Bulgarian National Bank, the European Central Bank, the National Bank of the Czech Republic and National Bank of Hungary on determining prudential requirements of KBC Group NV.


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RESOLUTION No 30 of 7 FebruaryThe Governing Council approved the Joint Decision of the Bulgarian National Bank and the European Central Bank on determining the adequacy of liquidity and the adequacy of own funds, and the required own funds to be maintained by UniCredit S.p.A.

RESOLUTION No 31 of 7 FebruaryThe Governing Council approved the Joint Decision of the Bulgarian National Bank and the European Central Bank on determining the adequacy of liquidity and the adequacy of own funds, and the required own funds to be maintained by Piraeus Bank S.A.

RESOLUTION No 32 of 7 FebruaryThe Governing Council approved the Joint Decision of the Bulgarian National Bank and the European Central Bank on the evaluation of the group recovery plan of Piraeus Bank S.A. (as at 30 September 2018).

RESOLUTION No 103 of 28 MarchThe Governing Council of the BNB took note of the Report on the State of the Banking System (fourth quarter of 2018).

The Governing Council of the BNB took note of the publication of the Banks in Bul-garia Bulletin (October–December 2018).

RESOLUTION No 104 of 28 MarchThe countercyclical capital buffer rate applicable to credit risk exposures in the Republic of Bulgaria was set at 1 per cent, effective a of 1 April 2020.

RESOLUTION No 105 of 28 MarchThe BNB Governing Council took note of the Supervisory Review of Banks Report as of 31 December 2018.

RESOLUTION No 106 of 28 MarchThe Governing Council approved the direct acquisition by Eurobank Bulgaria AD of 99.9819 per cent of Piraeus Bank Bulgaria AD paid up equity.

The Governing Council approved the indirect acquisition by Eurobank Ergasis SA of 99.9819 per cent of Piraeus Bank Bulgaria AD paid up equity.

RESOLUTION No 108 of 28 MarchThe Governing Council approved the Joint Decision of the Bulgarian National Bank and the European Central Bank on the evaluation of the group recovery plan of Piraeus Bank S.A. (as at 30 September 2018).

RESOLUTION No 109 of 28 MarchThe Governing Council approved the Joint Decision of the Bulgarian National Bank and the European Central Bank on the evaluation of the group recovery plan of Eurobank Ergasias S.A. submitted in September 2018.

RESOLUTION No 110 of 28 MarchThe Governing Council approved the Draft Joint Decision of the Bulgarian National Bank and the European Central Bank on the evaluation of the group recovery plan of Raiffeisen Bank International.

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RESOLUTION No 111 of 28 MarchThe Governing Council approved the Draft Joint Decision of the Bulgarian National Bank and the German Federal Financial Supervisory Authority (BaFin) on the ade-quacy of liquidity and special liquidity requirements related to liquidity supervision of the ProCredit Group.

RESOLUTION No 112 of 28 MarchThe Governing Council approved the Draft Joint Decision of the Bulgarian National Bank, the European Central Bank, the Czech National Bank and the National Bank of Hungary on the evaluation of the group recovery plan of KBC Group NV (as of 30 September 2018).

RESOLUTION No 113 of 28 MarchThe BNB Governing Council approved a proposal on amending the Law on Credit Institutions.

RESOLUTION No 132 of 4 AprilThe Governing Council approved the Draft Joint Decision of the Bulgarian National Bank and the European Central Bank on the evaluation of the group recovery plan of UniCredit Group.

RESOLUTION No 148 of 24 AprilThe Governing Council adopted Ordinance No 20 on the Issuance of Approvals to the Members of the Management Board (Board of Directors) and Supervisory Board of a Credit Institution and Requirements for Performing their Duties.

RESOLUTION No 149 of 24 AprilThe Governing Council adopted Ordinance No 10 on the Organisation, Governance and Internal Control of Banks.

RESOLUTION No 150 of 24 AprilThe Governing Council approved Ordinance on Amendment of Ordinance No 4 of the BNB of 21 December 2010 on the Requirements for Remunerations in Banks.

RESOLUTION No 151 of 24 AprilThe Governing Council adopted Ordinance on Amendment of Ordinance No. 7 of the BNB of 24 April 2014 on the Organization and Risk Management in Banks.

RESOLUTION No 171 of 16 MayThe Governing Council suggests that the BNB starts implementing from 1 July 2019 Guidelines on specification of types of exposures to be associated with high risk (EBA/GL/2019/01) issued by the European Banking Authority.

RESOLUTION No 172 of 16 MayThe Governing Council suggests that the BNB starts implementing from 20 May 2019 Guidelines on the STS criteria for non-ABCP securitisation (EBA/GL/2018/09) issued in conjunction with Articles 20, 21 and 22 of Regulation (EU) 2017/2402 and published by the European Banking Authority.


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RESOLUTION No 173 of 16 MayThe Governing Council suggests that the BNB starts implementing from 20 May 2019 Guidelines on the STS criteria for ABCP securitisation (EBA/GL/2018/08) issued in conjunction with Articles 24 and 25 of Regulation (EU) 2017/2402 and published by the European Banking Authority.

RESOLUTION No 193 of 30 MayThe Governing Council suggests that the BNB starts implementing from 31 Decem-ber 2019 Guidelines on disclosure of non-performing and forborne exposures (EBA/GL/2018/10) issued by the European Banking Authority.

RESOLUTION No 194 of 30 MayThe Governing Council suggests that the BNB starts implementing from 30 June 2019 Guidelines on management of non-performing and forborne exposures (EBA/GL/2018/06) issued in conjunction with Article 74 of Directive 2013/36/ЕU by the European Banking Authority.

RESOLUTION No 216 of 25 JuneThe Governing Council set the countercyclical capital buffer rate applicable to credit risk exposures in the Republic of Bulgaria at 1 per cent for the third quarter of 2020.

RESOLUTION No 217 of 25 JuneThe BNB Governing Council took note of the Report on the State of the Banking Sys-tem (first quarter of 2019).

The BNB Governing Council took note of the publication of the Banks in Bulgaria Bul-letin (January–March 2019).

RESOLUTION No 218 of 25 JuneThe Governing Council approved the Draft Joint Decision of the Bulgarian National Bank, the National Bank of Hungary and the National Bank of Slovakia supervising OTP Bank Plc and its subsidiaries on significant changes to the Advanced Measurement Approach applied at group level for measuring operational risk.

RESOLUTION No 219 of 25 JuneThe Governing Council approved the Joint Decision of the Bulgarian National Bank and Bundesanstalt für Finanzdienstleistungsaufsicht, Germany (BaFin) on determining the adequacy of own funds and the required own funds to be maintained by ProCredit Holding Group.

***

Over the January to June 2019 period the Governing Council of the BNB adopted: – 20 resolutions pursuant to Article 11, paragraphs 1 and 3 of the Law on Credit

Institutions on approval for holding a position of member of a management body of a credit institution;

– 21 resolutions related to supervisory reviews pursuant to Article 79c of the Law on Credit Institutions;

– 10 resolutions pursuant to Article 76, paragraph 4 of the Law on Credit Institutions on coordinating the choice of an auditor of a credit institution;

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– 6 resolutions related to the imposition of supervisory measures, performed super-visory inspections and other approvals, authorisations and actions on administra-tive procedures.

– 5 resolutions pursuant to Article 26(2), in conjunction with Article 26(1)(c) of Regulation (EU) No 575/2013 concerning inclusion of credit institution’s net profit in common equity tier 1 capital;

– 2 resolutions under Article 71, paragraph 3 in conjunction with paragraph 1, item 6 of the Law on Credit Institutions on an approval of amendments to the Articles of Association of a credit institution.

BNB Activities on Resolution of Credit Institutions

RESOLUTION No 7 of 24 JanuaryThe Bulgarian National Bank as a resolution authority shall adhere to the following guidelines of the European Banking Authority: Final guidelines concerning the inter-relationship between the sequence of write-down and conversion under Directive 2014/59/EU and the Capital Requirements Regulation/Capital Requirements Directive (ЕВА/GL/2017/02); Final guidelines on the rate of conversion of debt to equity in bail-in (EBA/GL/2017/03); Final guidelines on treatment of shareholders in bail-in or write-down or conversion of capital instruments (EBA/GL/2017/04).

RESOLUTION No 74 of 7 MarchThe Governing Council of the BNB set the annual banking system contribution to the Bank Resolution Fund for 2019 at BGN 137,257,821.

RESOLUTION No 116 of 28 MarchThe Governing Council of the BNB adopted a methodology setting out the minimum requirement for own funds and eligible liabilities of credit institutions for which the Bulgarian National Bank is a resolution authority.

RESOLUTION No 135 of 4 AprilThe Governing Council of the BNB does not object for the National Bank of Serbia as a third-country resolution authority to be invited by the Single Resolution Board to participate as an observer in the resolution college of UniCredit Group.

RESOLUTION No 154 of 24 April The BNB Governing Council took note of the information provided by the Bulgarian Deposit Insurance Fund on the annual accounts of the Bank Resolution Fund for the year ending 31 December 2018.

RESOLUTION No 155 of 24 April The BNB set the individual annual contributions of credit institutions and branches of third country credit institutions to the Bank Resolution Fund for 2019.

RESOLUTION No 204 of 13 JuneThe BNB Governing Council adopted Methodology setting out critical functions of credit institutions and branches for which the BNB is the group level resolution author-ity for 2019.


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The Central Credit Register and the Register of Bank Accounts and Safe Deposit Boxes

RESOLUTION No 13 of 24 JanuaryThe Governing Council of the BNB took note of draft amendments to Articles 56 and 56a of the Law on Credit Institutions.

RESOLUTION No 176 of 16 MayThe Governing Council of the BNB adopted Ordinance on Amendment of Ordinance No 22 of 16 July 2009 on the Central Credit Register with the notes made thereto.

RESOLUTION No 177 of 16 MayThe Governing Council of the BNB adopted Ordinance on Amendment of Ordinance No 12 of 29 September 2016 on the Register of Bank Accounts with the notes made thereto.

Research

RESOLUTION No 34 of 7 FebruaryThe BNB Governing Council took note of the assessments of developments in major macroeconomic indicators in the first and second quarters of 2019 along with BNB forecasts of major macroeconomic indicators for 2018–2020 (based on data as at 18 December 2018) to be published in the Economic Review quarterly (issue 4 of 2018).

RESOLUTION No 35 of 7 FebruaryThe BNB awarded no master’s degree scholarships in 2019.

The BNB awarded two doctor’s degree scholarships in 2019.

RESOLUTION No 118 of 28 MarchThe Governing Council of the BNB took note of the Report on the BNB Research Plan (2017–2019) and the BNB Research Plan (2019–2020).

RESOLUTION No 157 of 24 AprilThe Governing Council of the BNB took note of the assessments of developments in major macroeconomic indicators in the second and third quarters of 2019 to be pub-lished in the Economic Review quarterly (issue 1 of 2019).

BNB Internal Audit

RESOLUTION No 224 of 25 JuneThe Governing Council of the BNB took note of the Chief Auditor’s Report on the activity of the BNB Internal Audit for 2018.

***In the January–June 2019 period the Governing Council of the BNB adopted decisions on internal rules of the Bank (7 decisions), representation in general meetings of com-panies in which the BNB holds participation (6 decisions), public procurements and contracts90 (5 decisions) and organisation of bank activities (66 decisions).

90 Detailed information on procurement procedures is available on the BNB website, About BNB, Public Procurement: http://www.bnb.bg/AboutUs/index.htm

http://www.bnb.bg/AboutUs/index.htm

ISSN 2367–4946Elements of the 50 lev banknote, issues 1999 and 2006, are used in cover design.

Documents

REPORT JANUARY – JUNE 2019 · Telex: 24090, 24091 Fax: (+359 2) 980 2425, 980 6493 Printed in the BNB Printing Centre ... Ecofin Economic and Financial Affairs Council of the European