PRESS RELEASE
26 September 2023
The BNB Governing Council set the countercyclical capital buffer rate applicable to credit risk exposures in the Republic of Bulgaria at 2.0% for 2024 Q4, under an assessment of the countercyclical capital buffer rate in pursuance with Article 5, paragraphs 3 and 4 of BNB Ordinance No. 8 on Capital Buffers, the Combined Buffer Requirement, Restrictions on Distributions and the Guidance on Additional Own Funds.
Pursuant to Article 5, paragraph 3 of the BNB Ordinance No.8, setting of the countercyclical buffer rate shall take into account the reference indicator, calculated in accordance with paragraph 1, the European Systemic Risk Board (ESRB) guidelines as well as other variables that BNB considers relevant for addressing the cyclical systemic risk. With regard to data related to the reference indicator for the countercyclical buffer, the credit-to-GDP ratio calculated according to the methodology published on the BNB website stood at 81.6% at the end of 2023 Q2. Its deviation from the long-term trend is negative (-30.4 pp), which corresponds to zero value of the reference indicator.
As the standardised measure for the deviation of the credit-to-GDP ratio from its long-term trend does not adequately reflect the intensity of cyclical risks, assessments with regard to the countercyclical buffer rate take into account additional indicators which are focused on developments in the credit market, indebtedness, real estate market as well as the general economic outlook.
Lending activity has remained elevated, in particular in the segment of loans to households. In the coming months, the ongoing global process of monetary policy tightening is expected to be increasingly passed-through to domestic interest rates, thus dampening lending activity along with the initiated by the BNB process of raising minimum reserve requirements ratios since mid-2023. While this could mitigate the effects which prolonged periods of rapid credit growth pose in terms of indebtedness and accumulation of credit risk in banks’ balance sheets, in a short run the credit risk remains elevated. In view of the volatile energy prices, the risks of supply-chain disruptions and the expected slowdown in foreign demand, debt servicing capacity could weaken, leading to an increase of non-performing loans and impairments. Moreover, the trend of rising interest rates may affect the financial position of borrowers. Therefore, credit institutions should adhere to conservative policies with regard to lending, apply timely and adequate provisioning, and plan their capital trajectories taking into account the likelihood of an aggravation of risks or a potential emergence of additional unfavourable developments in the economic outlook.
In 2021, the BNB Governing Council raised the countercyclical capital buffer rate applicable to domestic credit risk exposures to 1.0% in effect from 1 October 2022 and to 1.5% from 1 January 2023, with the BNB among the first national authorities in the EU to increase the buffer rate after the releases, implemented in many countries in response to the effects of the COVID-19 crisis. The countercyclical buffer rate was further increased in September 2022 to 2.0% in effect from 1 October 2023. In view of the persistently high credit growth rates and the uncertainty in the economic outlook, the countercyclical capital buffer rate at 2.0% for 2024 Q4 is aimed at strengthening the resilience of the banking system to pressure on profitability and capital position caused by potential rise in non-performing loans and impairments.
Further information about the methodology used and previous decisions is available on the BNB website under the section Capital Buffers.