site.btaECB: Bank Deposit Guarantee Act Impairs BNB's Institutional and Financial Independence

ECB: Bank Deposit Guarantee Act
Impairs BNB's Institutional and
Financial Independence


Sofia, December 10 (BTA) - Acting on a request from the
Bulgarian National Bank (BNB) for an opinion on the draft law
amending the Law on the Bank Deposit Guarantee, the European
Central Bank (ECB) says: "The draft law impairs the
institutional and financial independence of the BNB and may also
impair its functional independence."

The BNB published the ECB's opinion on its website.

The draft law amends the Law on the bank deposit guarantee by
introducing new measures to address the financing of a shortfall
in the financial resources of the Bulgarian Deposit Guarantee
Fund (BDGF), the ECB says. Under the Law on the Bank Deposit
Guarantee, each bank is obliged to pay an annual premium to the
Fund equal to 0.5 per cent of its total deposit base for the
preceding year, as determined on an average daily basis. If
there is a shortfall in the Fund's financial resources, its
management board may decide to establish a higher annual premium
of up to 1.5 per cent of a bank's total deposit base.

The draft law provides that if the Fund's financial resources
are insufficient to cover its liabilities under the Law on the
Bank Deposit Guarantee, its management board must, within three
days of identifying the shortfall, take a decision to cover the
shortfall by increasing the annual premium up to a limit of 2
per cent of each bank's total deposit base, for a period of up
to 3 years. The Fund's management board will require the banks
to make such annual premium payments in advance, within a set
period of time and at an increased rate. The amount payable in
advance by each bank is to be deducted from the annual premium
due for the following years. The draft law further stipulates
that, in the event of an additional shortfall, the BNB must
cover it within 10 days.

The ECB says: "First, the draft law interferes with the
investment, management and reporting of reserves, which is a
task of the BNB under the Law on the BNB in order to guarantee
the soundness of the national currency and the fixed exchange
rate in Bulgaria. Second, depending on the amount of the loan
and the period of time for which it is granted, which remain
unspecified in the draft law, granting such a loan may
considerably limit the financial resources available to the BNB
and its reserves, posing a threat to the performance of its
tasks relating to the European System of Central Banks, as well
as to the stability of the currency board in Bulgaria and thus
to the BNB's price stability mandate. Third, the provision
specifying the exact source within the BNB's financial resources
to be used by the BNB to grant a loan to the Fund interferes
with the BNB's powers to administer its own financial
resources."

The opinion says: "The ECB underlines the importance of
safeguarding compliance with the prohibition on monetary
financing laid down in Article 123(1) of the Treaty on the
Functioning of the European Union. This prohibits central banks
from providing overdraft facilities or any other type of credit
facility to the public sector, including any financing of the
public sector's obligations vis-a-vis third parties. The ECB has
consistently emphasised that the only compatible forms of
central bank financing of a national deposit guarantee scheme
for credit institutions are: (a) intraday credit in line with
the general rules on provision of such credit by the central
bank; and (b) short-term emergency liquidity financing under
strict conditions established in the ECB's convergence reports,
i.e. if such funding is short term, addresses urgent situations,
systemic stability aspects are at stake and decisions are at
the central bank's discretion."

"The draft law does not contain such conditions and makes no
reference to the maximum duration of a loan provided by the BNB
to the Fund. Therefore, the BNB's obligation to provide a loan
to the Fund in an amount required to cover the additional
shortfall in the Fund's financial resources is incompatible with
the prohibition on monetary financing," the ECB says.

It further comments: "The draft law provides that the loan that
the BNB is obliged to provide to the Fund should be granted from
the financial resources of the BNB's Banking Department and
from the 'reserve'. The draft law does not provide any
indication as to what this 'reserve' contains. Furthermore, the
draft law does not provide for an upper limit on the value of
the loan and does not provide the BNB with the discretion to
decide whether or not to grant the loan." PK/DD

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