site.btaBanking Supervision Not Efficient Enough, Auditors Conclude

Banking Supervision Not Efficient Enough, Auditors Conclude

Sofia, November 3 (BTA) - Banking supervision is not efficient enough to maintain the stability of the banking system and protect depositors' interests, according to the conclusions in a National Audit Office (NAO) report on the performance of the Bulgarian National Bank (BNB, the country's central bank) between 2012 and 2014, unveiled on Tuesday. The report was submitted to the National Assembly at the end of last week.

NAO makes 13 recommendations to the BNB Governing Council to improve its banking supervision performance, setting a one-year deadline for their fulfillment.

The report says that almost all banking supervision responsibilities are concentrated in the BNB Deputy Governor in charge of the Banking Supervision Department. The BNB Governing Council and the Governor are not involved in the supervision process, which creates a risk of inefficient supervision, NAO says.

The auditors have detected major problems affecting BNB's administrative capacity for supervision. While implementing a new regulatory framework called Basel III and having to carry out a considerable amount of new accounting activity, BNB unjustifiably reduced the number of its inspectors and distance supervision officers. This caused officers to double as both on-site inspectors and distance supervisors. The share of banks which were inspected on-site decreased considerably during the reporting period, from 68 per cent in 2012 to 43 per cent in 2014.

The report further says that BNB failed to take substantive action to verify the information reported by banks. Such information was verified automatically. The reports of two banks were excluded from this automated verification process without any valid reasons and without observance of the established procedure.

The BNB Banking Supervision Department lacks a system for managing the risks of non-compliance and fraud. There is no verification mechanism for declarations pursuant to the Conflict of Interest Act. This creates a risk of BNB officers supervising banks which are in a contractual relationship with them.

The report says that 27 comprehensive inspections were conducted between 2012 and 2014, which implies a decrease from earlier periods. Four banks were not inspected comprehensively over the three-year period and another nine banks were not inspected comprehensively during two consecutive years, with six banks undergoing only thematic or specialized checks.

The process of assigning and conducting on-site checks was inefficient, because: in the case of one bank, some of the working documents of supervision were filled out by employees of that bank; the possible connectedness between money borrowers and bank shareholders was not checked; the targeted use of loans was not tracked and loan repayment sources were not examined. All of this could potentially create breeding ground for fraud, NAO concluded.

Quarterly reports on the state of the banking system were not considered in a timely manner by the Governing Council members and were only adopted "for their own information." Individual reports on supervisory inspections were never submitted to the Governing Council, NAO noted.