Bulgaria’s Central Bank Raises Credit Buffer

The Bulgarian central bank said on Friday banks would have to accumulate more capital in 2021 to counter a build-up of systemic risks linked to low interest rates that could significantly boost lending.

The Bulgarian National Bank set the rate for the counter-cyclical capital buffer at 1.5% starting in January 2021, up from the 0.5% lenders have to put aside at present, which is planned to rise to 1.0% from next April.

The buffer is aimed at safeguarding the banking system against potential losses, stemming from a build-up of systemic risk during period of excessive credit growth.

“The prolonged low levels of interest rates could lead to a substantial increase in indebtedness, making the banking sector’s asset quality, profitability and capital position more susceptible to adverse developments in the economic environment,” the central bank said in a statement.

“The increase of the countercyclical capital buffer rate is aimed at strengthening the resilience of the banking sector to such developments,” it said.

Bulgaria, which hopes to join the euro zone’s “waiting room” next spring, has pegged its currency, the lev, to the euro. The country’s base interest rate has been set at zero since 2016.

The gross loan portfolio has increased by 7.3% at the end of October on an annual basis to 65.2 billion levs ($37.07 billion), central bank data showed.

Bulgarian banks, more than 70 percent owned by European Union banks, are overall well-capitalised, and the increase of the buffer is not expected to prompt any of the country’s 20 banks to raise additional capital.

Following health checks by the European Central Bank on six banks earlier this year as part of Sofia’s plans to adopt the euro, two local banks are working on plans to increase their capital.

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