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22 October 2014

On 21 October 2014 the Bulgarian National Bank (BNB) sent its response to a letter received from the Chairman of the European Banking Authority (EBA), dated 17 October 2014, in which he has notified the BNB about a Recommendation to the Bulgarian National Bank and the Bulgarian Deposit Insurance Fund on actions necessary to comply with Directive 94/19/EC, adopted on the same date.

The BNB’s stance on the EBA Recommendation is as follows:

As the BNB has already stated in its previous communications with the EBA, the definition of ‘unavailable deposit‘ under Art. 1(3)(i) of Directive 94/19/EC on the Deposit Guarantee Schemes, may not be directly applied, insofar as it is not unconditional, sufficiently clear and precise, while these preconditions are identified by the CJEU as necessary to qualify for direct application. The definition itself entrusts no direct competences to a specific competent authority in a Member State; it merely states the characteristics of ’unavailable deposit‘. In compliance with the definition, the national legislation should specify the relevant competent authority and set forth its competences, including specific national measures to determine that the deposits are ‘unavailable’.

As the BNB has already pointed out, Directive 94/19/EC sets out minimum harmonization, and therefore transposition measures are required so as to achieve the result of the Directive, while also ensuring full compliance with the national legal framework and the legal system particularities.

The determination of ‘unavailable deposit’ under Art.1(3)(i) of Directive 94/19/EC is to be made by the ‘relevant competent authorities’ which, however, are designated under the national law and are vested with competences exhaustively listed in the national legislation.

In this respect, the only competence entrusted to the BNB under the relevant national legal provisions implementing Article 1(3)(i) of Directive 94/19/EC, is to revoke a bank’s license provided that the conditions laid down in Article 36 of the Law on Credit Institutions (LCI) are met. Revocation of the license of a bank is subject to appeal before the Bulgarian Supreme Administrative Court. Any other decision made by the BNB outside its scope of competences would be null and void. The BNB is not competent under the applicable national legislation to determine that deposits in a credit institution are unavailable in any other manner but by revoking the banking license.

The above stated is also applicable to the Bulgarian Deposit Insurance Fund /BDIF/, which is obliged to repay the guaranteed deposits under Article 23 of the Law on the Guaranteed Deposits in Banks (LGDB) only in cases where the BNB has revoked the license of the relevant bank. No other preconditions for repayment of deposits are envisaged under the effective legislation. Moreover, such a decision implies spending of billions of levs from the BDIF funds and cannot be approved without a clear and sound legal basis in the national legislation.

Any administrative authority can make its decisions and adopt administrative acts within the scope of its competences which are determined by the national law. Provided that the national law implementing the respective EU legislative act narrows its sense and fails to provide the designated competent authority with the full range of competences as required by that EU act, the national law should be amended.

The provisions of Article 1(3)(i) of Directive 94/19/EC, which is in fact a definition, requires national implementation measures in compliance with the national legal order and particularities. Such measures as stipulated under the Bulgarian legislation provide for a revocation of the banking license as a precondition for any repayment of deposits from the BDGF. No other national measures are available in the legislation transposing the provision of Article 1(3)(i) of Directive 94/19/EC.

Furthermore, the placement of a bank under conservatorship, including the suspension of execution of its obligations, is a national supervisory measure available under Section VIII of Chapter Eleven of the LCI. This measure is implemented with a respective administrative act which the BNB adopted in June 2014 in compliance with the conditions set forth under the law. The said act was not appealed before the court and entered into legal force. Under Article 115, para 3 of the LCI, this measure can be imposed for a maximum term of six months. Provided that this term is excessively long compared to the term for repayment of guaranteed deposits under Directive 94/19/EC, the national legislation obviously needs to be respectively amended.

In light of the aforesaid, the BNB states that although the alleged non-compliance with the EU law is attributable to the BNB and the BDIF, neither of the two institutions is competent to revise the national legislative acts ensuring the correction of the non-compliance. Such competences are conferred only to the Bulgarian Parliament.

It is noted that there are no legal rules and procedures under the national legislation that enable the BNB to allow partial access to deposits. As specified above, except for the provision of article 23 of the LGDB, no other preconditions for repayment of the deposits are set forth under the Bulgarian legislation. There are also no legal provisions on the basis of which in case of substantially insufficient liquid assets a partial repayment or distribution of these liquid assets could be implemented. In such circumstances, the Bulgarian legislature has not entrusted the BNB with the competence to allow or deny partial access to deposits. In this regard any decision made by the BNB would be arbitrary and might lead to legal uncertainty.

Furthermore, BNB has notified EBA that the assessment and the analysis of the assets of the KTB by the three audit firms, ‘Deloitte Bulgaria’ OOD, ‘Ernst and Young Audit’ OOD and ‘AFA’ OOD, are completed. The Governing Council of the BNB requested that the conservators book the results from the analyses and the assessment in full compliance with the International Financial Reporting Standards and until 31 October 2014 provide to the BNB the necessary regulatory reports so that the decisions stipulated under the LCI to be made.

Furthermore, the BNB has informed the EBA about the measures that have already been undertaken. BNB points out that Bulgaria has submitted a position, approved by the Council of Ministers, on the infringement procedure launched by the European Commission regarding the failure to comply with Directive 94/19/EC, about which Bulgaria was notified on September 26, 2014. With regard to the observation of the Commission for an incorrect transposition of Article 1(3) and Article 10(1)(1) of Directive 94/19/EC, Bulgaria has stated that while transposing the Directive 94/19/EC, it aimed at achieving the result set by the European legislative act, giving due regard to the specific provisions as well as to the spirit of the act as a whole. Nevertheless, the Bulgarian authorities have observed that there might be a non-compliance regarding the prompt access of the depositors to their deposits. In order to deal with the suggested non-compliance, a new Law on the DGS is being drafted. A respective time schedule for its enaction has been enclosed. A commitment has been made for the transposition of Directive 2014/59/EC on Establishing a Framework for Recovery and Resolution of Credit Institutions and Investment Firms by the end of 2014, which will introduce substantial changes in the conservatorship procedure, envisaged under the LCI.

The new legislation that is being drafted should give due regard to the concerns expressed by the EBA and the European Commission. BNB expresses its readiness to continue providing its expertise on the matter to assist the competent authorities in Bulgaria in the process of the legislative changes so as to ensure full compliance with the Union law.

We remind the Bulgarian public that pursuant to Regulation (EU) No 1093/2010 establishing the EBA, recommendations issued by the EBA are not obligatory and legally binding for the competent authorities. The recommendations aim at ensuring efficient, effective and consistent supervisory practices within the European System of Financial Supervision and consistent and coherent application of the Law of the EU. The procedure, envisaged under Articles 16 and 17 of Regulation (EU) No 1093/2010, stipulates that in case of non-compliance with an EBA’s recommendation within the set term, EBA notifies the Commission and the latter may issue a formal opinion.