The BNB Governing Council set the countercyclical capital buffer rate applicable to credit risk exposures in the Republic of Bulgaria at 1.5% for 2023 Q3

PRESS RELEASE

23 June 2022

The BNB Governing Council set the countercyclical capital buffer rate applicable to credit risk exposures in the Republic of Bulgaria at 1.5% for 2023 Q3, 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 92.7% at the end of 2022 Q1. Its deviation from the long-term trend is negative (-30.1 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 does not adequately reflect 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.

Against the background of low interest rates and intense loan supply, lending activity in the household segment has continued expanding at elevated rates in 2022 Q1. Continuation of the observed pace of credit growth may give rise to higher level of indebtedness, which given the pronounced trend toward change in the interest rate cycle could have adverse impact on borrowers' debt servicing capacity, leading to an increase of non-performing loans and impairments in the event of potential economic downturn. In response to these risks, in 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 and 1.5% from 1 January 2023. The decisions for the increases of the countercyclical buffer rate have been announced 12 months before coming into effect in accordance with Article 5, paragraph 5 of BNB Ordinance No. 8, with the buffer rate remaining at its current 0.5% level until the end of 2022 Q3.

In view of the risks related to the continuing elevated credit growth rates and the uncertainty in the economic outlook, the countercyclical capital buffer rate at 1.5% for 2023 Q3 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.

Further information about the methodology used and previous decisions is available on the BNB website under the section Capital Buffers.