STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

1. Twinning project funded by The European Union STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS Strengthening prudential supervision in response to the crisis Rumen Simeonov Deputy Governor,Bulgarian National Bank

2. THE COORDINATED EU RESPONSE TO THE CRISIS GLOBAL SOLUTIONS TO THE CRISIS REGULATORY PACKAGE INSTITUTIONAL CHANGES EXIT FROM FINANCIAL SUPPORT MEASURES NATIONAL VERSUS EU MEASURES BULGARIAN RESPONSE Outline STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

3. Common principles and main lines of actions agreed on ECOFIN Council - October 7, 2008: public intervention has to be decided at national level but must be part of a coordinated framework cross-border effects of national decisions have to be taken into account recapitalization of vulnerable systemic financial institutions distortion of treatment between US and European banks due to differences in accounting rules must be avoided. deposit guarantee protection - at least 50,000 euro The coordinated EU response to the crisis STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

4. Registration and oversight of rating agencies Common guidelines for transparency about risk exposures Improvements of the “executive-pay” model Clear guidelines on valuation, applied consistently Strengthening cross-border stability arrangements - EU wide MoU Enhanced effectiveness of supervision and convergence and harmonization in the implementation of rules. The coordinated EU response to the crisis STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

5. 15 November 2008 - G20 Declaration outlines the strategy for reforming the existing financial architecture Main G-20 proposals: Strengthen the regulatory systems, prudential oversight and risk management All financial markets, products and participants to be regulated or subject to oversight Promote integrity in financial markets Enhance international cooperation - college of regulators A global crisis requires global solutions STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

6. Lessons from the crisis and the need for regulatory reform Need for common EU supervisory response Need for changes in the accounting framework Improving quality of capital Dealing with the cyclicality of finance Liquidity issues Transparency & disclosure of important information Supervisory cooperation Introduction of new tools for early intervention and crisis management Stress tests Regulatory reform STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

7. 2009: Directive 2007/44/EC – changes in the assessment of acquisitions and increase of holdings in the financial sector; 2010: CRD II (Directives 2009/111/ЕC, 2009/83/ЕC and 2009/27/ЕC) – changes in own funds items, large exposures, supervisory arrangements, crisis management, securitisation, technical risk management provisions; 2011: CRD III (not yet approved and numbered) – changes in the Trading book capital requirements, re-securitisations and the supervisory review of remuneration policies; 2011: Directive 2009/110/ЕC – putting electronic money institutions outside the credit institutions area; CRD IV (no Commission proposal yet) – as regard quality of capital, liquidity risk standards, counterparty credit risk and dynamic provisioning. Regulatory package STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

8. 25 February 2009 - De Larosière Report 31 recommendations: Towards a new regulatory agenda – to reduce risk and improve risk management; to improve systemic shock absorbers; to weaken pro-cyclical amplifiers; to strengthen transparency; and to get the incentives in financial markets right. Towards stronger coordinated supervision – macro-prudential and micro-prudential, built on existing structures but much stronger and coordinated Towards effective crisis management – to build confidence among supervisors with agreed methods and criteria. De Larosière Report STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

9. 23 September 2009 – The EU Commission proposals for a new European financial supervisory architecture: European System of Financial Supervisors (ESFS) - a network of national financial supervisors working in tandem with new European Supervisory Authorities (ESAs) European Systemic Risk Board (ESRB) – to monitor and assess potential threats to financial stability that arise from macro-economic developments and from developments within the financial system as a whole Building on the “De Larosière Report” STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

10. Micro supervision – individual banks The EU supervisory reform Macro supervision – systemic risks, financial stability ESFS ECB EBA - banking ESMA – securities markets ESRB EIOPA – insurance, pension funds National Supervisory Authorities

11. The newly proposed EU regulatory framework allows the application of network approaches Lamfalussy model D e Larosiere model ( from 2010 / 2011 г.) ECB Council EC Parlament ESRB - European Systemic Risk Board EBC EIOPC ESC EFCC ESFS – European System CEBS CEIOPS CESR of Fina ncial Supervisors implementati on The EU supervisory reform STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

12. 02 December 2009 - ECOFIN Council agreed the following principles for exit strategies: Phasing out of the public support measures in order to avoid negative spill-over effects The timing of exit should take into account all relevant factors and individual Member State’s circumstances The phasing out of support should normally start with government guarantees. Existing legal framework should be taken into account, including the relevant state aid decisions and the legitimate interest to minimize the potential loss of public money Exit from financial support measures STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

13. National versus EU measures STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

14. National versus EU measures STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

15. THE BUFFERS OF THE BULGARIAN BANKING SYSTEM MEASURES TOWARDS THE BANKING SYSTEM CHANGES IN REPORTING CULTURE Bulgarian response STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

16. The conservative application of the capital adequacy regime in Bulgaria and the maintenance of increased capital requirements by banks provided for a “cushion” against unexpected losses during the crisis: 12% minimum capital adequacy ratio Non-inclusion of interim profit until 2008 Increased risk weights in Retail and Mortgages Conservative approach to usage of prudential filters Reduced reliance on hybrids and other non typical capital instruments Introduction of a specific supervisory provisions, aimed at capturing the amount of potential future losses The buffers of the Bulgarian banking system STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

17. Some of the most important steps to insure the smooth functioning of the banking systems were: Reduction of the minimum reserves requirement in 2008; Increased frequency of on-site visit, focused on risk areas; Increased dialogue with the bank managers; Banks to keep additional capital above the regulatory minimum; Banks to keep liquidity ratios above the regulatory minimum; Requiring regular stress tests under different assumptions Measures towards the banking system STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

18. Increased dialogue with home supervisors, focused on issues of the local subsidiary Issuing recommendation for non-distribution of dividends by banks; Raising the minimum guaranteed amount of customer deposits to 50,000 EUR in 2009 Widening the scope of supervision – introduction of registration requirements for other financial institutions (e.g. leasing, cash credit, etc.) No state aid or government guarantees were provided to commercial banks during the crisis Measures towards the banking system STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

19. Raising the importance of supervisory reporting as a key function in commercial banks - it should not be a secondary task of the accounting department; Difference between financial and supervisory reporting - COREP is a tool for supervisory reporting and FINREP is a tool for financial reporting; Supervisory reporting is best done by risk managers; Changes in reporting culture STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

20. Bulgarian banking system Size Profitability Structure (2009)* All sums in thousands EUR

21. Bulgarian banking system Regulatory Capital Credit Growth  All sums in thousands EUR

22. Looking forward to working with you! Thank you! STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS