1. Page 1 STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS Strengthening prudential supervision in response to the crisis Rumen Simeonov Deputy Governor, Bulgarian National Bank Twinning project funded by The European Union

2. Page 2 Outline THE COORDINATED EU RESPONSE TO THE CRISIS GLOBAL SOLUTIONS TO THE CRISIS REGULATORY PACKAGE INSTITUTIONAL CHANGES EXIT FROM FINANCIAL SUPPORT MEASURES NATIONAL VERSUS EU MEASURES BULGARIAN RESPONSE STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

3. Page 3 The coordinated EU response to the crisis Common principles and main lines of actions agreed on ECOFIN Council - October 7, 2008: public intervention has to be decided at national level but must be part of a coordinated framework cross-border effects of national decisions have to be taken into account recapitalization of vulnerable systemic financial institutions distortion of treatment between US and European banks due to differences in accounting rules must be avoided. deposit guarantee protection - at least 50,000 euro STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

4. Page 4 The coordinated EU response to the crisis Registration and oversight of rating agencies Common guidelines for transparency about risk exposures Improvements of the “executive-pay” model Clear guidelines on valuation, applied consistently Strengthening cross-border stability arrangements - EU wide MoU Enhanced effectiveness of supervision and convergence and harmonization in the implementation of rules. STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

5. Page 5 A global crisis requires global solutions 15 November 2008 - G20 Declaration outlines the strategy for reforming the existing financial architecture Main G-20 proposals: Strengthen the regulatory systems, prudential oversight and risk management All financial markets, products and participants to be regulated or subject to oversight Promote integrity in financial markets Enhance international cooperation - college of regulators STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

6. Page 6 Regulatory reform Lessons from the crisis and the need for regulatory reform Need for common EU supervisory response Need for changes in the accounting framework Improving quality of capital Dealing with the cyclicality of finance Liquidity issues Transparency & disclosure of important information Supervisory cooperation Introduction of new tools for early intervention and crisis management Stress tests STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

7. Page 7 Regulatory package 2009: Directive 2007/44/EC – changes in the assessment of acquisitions and increase of holdings in the financial sector; 2010: CRD II (Directives 2009/111/ЕC, 2009/83/ЕC and 2009/27/ЕC) – changes in own funds items, large exposures, supervisory arrangements, crisis management, securitisation, technical risk management provisions; 2011: CRD III (not yet approved and numbered) – changes in the Trading book capital requirements, re-securitisations and the supervisory review of remuneration policies; 2011: Directive 2009/110/ЕC – putting electronic money institutions outside the credit institutions area; CRD IV (no Commission proposal yet) – as regard quality of capital, liquidity risk standards, counterparty credit risk and dynamic provisioning. STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

8. Page 8 De Larosière Report 25 February 2009 - De Larosière Report 31 recommendations: –Towards a new regulatory agenda – to reduce risk and improve risk management; to improve systemic shock absorbers; to weaken pro-cyclical amplifiers; to strengthen transparency; and to get the incentives in financial markets right. –Towards stronger coordinated supervision – macro-prudential and micro-prudential, built on existing structures but much stronger and coordinated –Towards effective crisis management – to build confidence among supervisors with agreed methods and criteria. STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

9. Page 9 Building on the “De Larosière Report” 23 September 2009 – The EU Commission proposals for a new European financial supervisory architecture: European System of Financial Supervisors (ESFS) - a network of national financial supervisors working in tandem with new European Supervisory Authorities (ESAs) European Systemic Risk Board (ESRB) – to monitor and assess potential threats to financial stability that arise from macro-economic developments and from developments within the financial system as a whole STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

10. Page 10 The EU supervisory reform Micro supervision – individual banks Macro supervision – systemic risks, financial stability ECB ESRB ESFS EBA - banking ESMA – securities markets EIOPA – insurance, pension funds National Supervisory Authorities

11. Page 11 The EU supervisory reform The newly proposed EU regulatory framework allows the application of network approaches STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS ECB ESFS– EuropeanSystem of Financial Supervisors Council EC Parlament EBC EIOPC ESC EFCC implementati on CEBS CEIOPS CESR ESRB- European Systemic Risk Board Lamfalussy model DeLarosiere model (from 2010/ 2011г.)

12. Page 12 Exit from financial support measures 02 December 2009 - ECOFIN Council agreed the following principles for exit strategies: Phasing out of the public support measures in order to avoid negative spill-over effects The timing of exit should take into account all relevant factors and individual Member State’s circumstances The phasing out of support should normally start with government guarantees. Existing legal framework should be taken into account, including the relevant state aid decisions and the legitimate interest to minimize the potential loss of public money STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

13. Page 13 National versus EU measures STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

14. Page 14 National versus EU measures STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

15. Page 15 Bulgarian response THE BUFFERS OF THE BULGARIAN BANKING SYSTEM MEASURES TOWARDS THE BANKING SYSTEM CHANGES IN REPORTING CULTURE STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

16. Page 16 The buffers of the Bulgarian banking system The conservative application of the capital adequacy regime in Bulgaria and the maintenance of increased capital requirements by banks provided for a “cushion” against unexpected losses during the crisis: 12% minimum capital adequacy ratio Non-inclusion of interim profit until 2008 Increased risk weights in Retail and Mortgages Conservative approach to usage of prudential filters Reduced reliance on hybrids and other non typical capital instruments Introduction of a specific supervisory provisions, aimed at capturing the amount of potential future losses STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

17. Page 17 Measures towards the banking system Some of the most important steps to insure the smooth functioning of the banking systems were: Reduction of the minimum reserves requirement in 2008; Increased frequency of on-site visit, focused on risk areas; Increased dialogue with the bank managers; Banks to keep additional capital above the regulatory minimum; Banks to keep liquidity ratios above the regulatory minimum; Requiring regular stress tests under different assumptions STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

18. Page 18 Measures towards the banking system Increased dialogue with home supervisors, focused on issues of the local subsidiary Issuing recommendation for non-distribution of dividends by banks; Raising the minimum guaranteed amount of customer deposits to 50,000 EUR in 2009 Widening the scope of supervision – introduction of registration requirements for other financial institutions (e.g. leasing, cash credit, etc.) No state aid or government guarantees were provided to commercial banks during the crisis STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

19. Page 19 Changes in reporting culture Raising the importance of supervisory reporting as a key function in commercial banks - it should not be a secondary task of the accounting department; Difference between financial and supervisory reporting - COREP is a tool for supervisory reporting and FINREP is a tool for financial reporting; Supervisory reporting is best done by risk managers; STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

20. Page 20 Bulgarian banking system Total assetsChange Q3 200726,540,326- Q3 200835,457,373+33.60% Q3 200935,740,050+0.80% Profit (pre tax) Q3 2007483,558 Q3 2008625,744 Q3 2009355,366 Size ProfitabilityStructure (2009)*  All sums in thousands EUR

21. Page 21 Bulgarian banking system Own fundsChangeCap. adequacy Q3 20072,634,590- 13.85% Q3 20083,878,743+47.22%14.35% Q3 20094,806,729+23.92%17.34% Regulatory Capital Retail loansChangeCorp. loansChange Q3 20075,881,314- 10,790,387 - Q3 20088,572,246+45.75%16,046,307+48.71% Q3 20099,390,127+9.54%16,625,315+3.61% Credit Growth  All sums in thousands EUR

22. Page 22 Looking forward to working with you! Thank you! STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS