site.btaECB Supervisory Board Chair Buch: Banks in Bulgaria Are Well Capitalized

Banks in Bulgaria are well capitalized, and this is good considering the challenges facing Europe and the world, Chair of the Supervisory Board of the European Central Bank (ECB) Claudia Buch, who is also Chair of the ECB Single Supervisory Mechanism (SSM), said in a BTA interview. SSM is part of the broader European banking union of which all eurozone countries are members. Bulgaria is also a member of the banking union.

The full text of the interview follows:

Professor Buch, Bulgaria has been part of the banking union for four years now, and the ECB directly supervises our largest banks. What are your impressions related to the banking market in our country?

I am very glad to be here. It is the first time the Chair of the SSM comes to visit Bulgaria. It is part of a series of country visits I do. I go to all the countries that are part of the of the SSM. I am very glad that Bulgaria, as you have said, has been part of our family for four years. But it is the first time that I am here. 

So, coming to your question, I am very glad to see how well capitalized Bulgarian banks are. This is thanks to the SSM effort, but also to the [effort] of national authorities. This is really important because, Bulgaria, Europe, and the world in general, are facing economic challenges. We have climate related risks, we have to deal with geopolitical risks. Bulgaria, as a small open economy, of course, is exposed to external shocks and that is why it is good to see that the banks are well capitalized. This is crucially important in terms of resilience, so that any future shock can be buffered by the banks themselves. We also actually have a lot of evidence that better capitalized banks can also lend more and in a better way to the real economy. So, I think there is a benefit for all of us. But, of course, banking supervision is not just about capital and liquidity. It is also about making sure that there is good bank risk management, that banks have good governance structures. This is also something we pay very close attention to in the SSM, European supervision, and with the colleagues here from national competent authorities in Bulgaria.

In recent years, the level of mortgage interest rates in Bulgaria has remained low, even lower than those in the euro area. Do you think this poses any risk and what measures can be taken?

What we have seen over the past years is really a very low level of interest rates, in general, before the big increase in interest rates. During this period there have been a lot of vulnerabilities in the financial system that have been building up because low interest rates provide incentives to borrow more and, maybe, to take more risk, as well. There is this famous term, this ‘search-for-yield’ and that is why I think it is very good that Bulgaria has relatively high capital buffers. The countercyclical capital buffers, I think these are really the right policies to deal with this increase and vulnerabilities. Interest rates are much higher now than they used to be and higher than, perhaps, many of us have expected. That is, of course, also the response to the higher inflation rate that we have seen over the past years. And now the question is how long it takes until these higher interest rates feed their way through the financial system, through the banks’ balance sheets. We have seen in many countries that the transmission into deposit rates has been relatively slow. 

Also, the lending rate [in Bulgaria] is closely tied to the deposit rate. So that might be a reason why also the pass-through into lending rates is a bit slower here than in other countries. But again, I'm not expert on Bulgarian economy. I am sure there are other people who know much more about [it]. 

In any case, when it comes to the pass-through to lending rates, I think we also must consider the loan demand. In many of our countries, loan demand is relatively weak. That also constrains the banks’ ability to increase lending rates.

Now, coming to the risks, I think it is clearly something that needs to be monitored. Credit growth in this country is still relatively high and I think there is always an issue about the housing market we have seen in many, many episodes before that there can be financial stability risks coming from the housing market. It is important to monitor credit conditions, and to see what the loan-to-value ratios, debt-to-income ratio ratios are. It would also be then for the national authorities to act in case they see a deterioration of lending conditions and use borough-based measures when called upon because they really target the demand side of the land market. […] It is really important to very carefully monitor what is happening on the [interbank] lending market.

So how do you assess the interaction with the Bulgarian National Bank and do you think the institution is ready to join the euro area as Bulgaria is aiming for this?

I know this is a very important discussion for this country, which I fully understand, and I have to say, even though I come from the ECB, I come from the supervisory side of the ECB, so we are not directly involved in these decisions and also not writing the integration report. As you know, the ECB will write an integration report going through the criteria that have to be fulfilled in terms of price stability and fiscal stability, and then it is for the political authorities to decide. But of course, when I look at it from the supervisory perspective, it is important that if, at some point, countries join the euro area, they also have a sound and stable financial system. This is why we have a close cooperation agreement. […] We are very glad to cooperate and closely work with the with the colleagues [from the Bulgarian national authorities] but this does not have immediate implications for the decision on [Bulgaria’s] euro accession, which is for other people and other bodies to take.

It has been 10 years since the establishment of ECB’s Supervisory Board. What mechanisms does the institution have in place to prevent future systematic crises such as the one we saw during and before the Great Recession when banks were bailed out with taxpayers’ money?

This has been a big lesson from the global financial crisis. We want to make the financial system, the banking system in particular, more stable. We do not want to see the bailouts that we have seen, as you have mentioned, in many cases during the global financial crisis when taxpayers’ money was being used to cover the losses that banks have experienced. We have actually done a lot, globally. There has been a big reform agenda in G-20, with better capitalized banks resolution policies that also aim to prevent the ‘too big to fail’ problem that often the large banks are being rescued.

From that perspective, globally, we are in a better place now and Europe has done a lot of institutionally. I talk about the banking union, we did not have the banking union at the time of the financial crisis. So, we have new institutions, we have given power to the European level, quite closely cooperating with national authorities, so all this is a big progress. We have higher buffers in the banking system, not just when the banks are in operation, but also for the potential failure of a bank because supervision is about making failure less likely. However, we cannot prevent it, so we also have to deal or think about what to do when banks are coming under distress. All this is very good news. It does not mean we can sit back and stop working now because we know there are new risks out there, so we always have to be vigilant and make sure that we also understand when there are risks in other parts of the financial system. We are in a better position. Now we have a strong foundation, but we also have to make sure that we are good and effective supervisors so it stays like this.