Banks will choose – more capital or reducing bad loans

The Bulgarian national bank (BNB)  will be able to impose additional capital requirements on banks with more non-performing loans. This is stated in a report of the International Monetary Fund (IMF) in support of banking supervision, which is published by the BNB. 

According to an assessment, made by the Central Bank, supervision may require additional capital and reserves depending on the risk profile of each bank. The BNB will assess credit institutions every three months on several key indicators of the portfolio. Rating criteria include non-performing loans, consumer loans, mortgages, and the ratio of their growth to the value of collateral, loans to small and medium-sized companies, corporations and credit concentrations to individual sectors and economic groups. The BNB monitors the coverage of bad loans with provisions, how much they have overdue more than 360 days, as well as the assets acquired as collateral.

Depending on the results supervisors will calculate an add-on to the risk-weighted assets of the bank. It will range from 0 to 1.5%. For the banks with very bad receivables and few provisions there will be a risk assessment for management and internal control. It is divided into four categories, and a capital add-on will be imposed only on the second two – rating 3 and rating 4. Rating 3 means “medium to high risk” and carries a 1.25% surcharge and 4 is already “high risk” with 2.75% more capital.

The IMF considers the methodology is in line with the Bulgarian banking system. According to the criteria it is possible that banks with a high volume of bad loans to receive a low surcharge if they have adequate risk management. The bad news is for those with large volumes of uncollected claims and weak management – they will have to make improvements. The international institution relies on this to improve the quality of risk management.

The new requirements are complementary to those for which the BNB is already following due European regulations. If necessary, banks will need to increase their capital – from shareholders or they must attracting new ones. It is possible that new forms of supervision may partly restrict lending or at least take more risks. Surely the IMF guidelines will have an effect on the debt market – banks will have an even greater incentive to transfer bad loans to specialized companies.

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