PRESS RELEASE
16 December 2021
The BNB Governing Council increased the countercyclical capital buffer rate applicable to credit risk exposures in the Republic of Bulgaria at 1.5% in effect from 1 January 2023, 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 96.1% at the end of 2021 Q3. Its deviation from the long-term trend is negative (-29.5 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 has limitations in measuring 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.
Loans to households have been growing at elevated rates, in particular in the segment of loans for house purchase. If continued, the observed pace of credit growth against the background of the current level of real interest rates may give rise to higher level of indebtedness, which could have adverse impact on borrowers’ debt servicing capacity and lead to an increase of non-performing loans and impairments in the event of potential economic downturn. In response to these risks, on 16 September 2021 the BNB Governing Council increased the countercyclical capital buffer rate applicable to domestic credit risk exposures at 1.0% in effect from 1 October 2022, with the buffer rate remaining at its current 0.5% level until the end of 2022 Q3.
The current practice of credit institutions to sustain high lending activity in the segments of residential real estate construction and loans secured by commercial and real estate, although justified in terms of individual credit decisions and covered by the existing liquidity and capital buffers of banks, has implications of systemic nature, which necessitates continuation of the proactive policy strategy to build-up buffer capacity against cyclical risks. In view of the continuing elevated credit growth rates and given the uncertainty in the economic outlook, the increase of the countercyclical capital buffer rate from 1.0% to 1.5% in effect from 1 January 2023 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. In accordance with Article 5, paragraph 5 of BNB Ordinance No. 8, the decision on the increase of the countercyclical buffer rate is announced 12 months before coming into effect.
Further information about the methodology used and previous decisions is available on the BNB website under the section Capital Buffers.