The BNB Governing Council set the countercyclical capital buffer rate applicable to credit risk exposures in the Republic of Bulgaria at 2.0% for 2025 Q2

PRESS RELEASE

28 March 2024

The BNB Governing Council set the countercyclical capital buffer rate applicable to credit risk exposures in the Republic of Bulgaria at 2.0% for 2025 Q2, 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 measuring 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 77.1% at the end of 2023 Q4. Its deviation from the long-term trend is negative (-30.6 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.

Lending activity in the household sector has remained elevated, in particular in the segment of loans for house purchase, with the intensified banks' loan supply adding to the increase of loan demand. Prolonged periods of elevated credit activity could lead to rising borrowers' indebtedness and accumulation of credit risk in banks' balance sheet, which may result in an increase of non-performing loans and impairment costs in the event of adverse developments in the economic environment. In the coming months, lagged effects of the euro area monetary policy tightening are expected, though only partially given the prospects of upcoming turn in the global interest rate cycle. The initiated by the BNB process of raising minimum reserve requirements since mid-2023 is also expected to contribute to the increase in domestic interest rates. While this could mitigate the effects which elevated credit growth poses in terms of indebtedness and accumulation of credit risk in banks' balance sheet, in a short run the probability of credit risk materialisation remains substantial. In view of the uncertainty in the economic outlook, the volatility of commodities prices and the risks of a slowdown in foreign demand, debt servicing capacity could weaken, leading to an increase of non-performing loans and impairments. Therefore, credit institutions should apply lending standards (LTV, LTI, DSTI, etc.) and timely and adequate provisioning based on conservative assumptions, which take into account the risks stemming from unfavourable developments in the economic environment.

In 2021, the BNB Governing Council raised the countercyclical capital buffer rate applicable to domestic credit risk exposures to 1.0% in effect from 1 October 2022 and to 1.5% from 1 January 2023, with the countercyclical buffer rate further increased in September 2022 to 2.0% in effect from 1 October 2023. In view of the persistently high credit growth rates and the uncertainty in the economic outlook, the countercyclical capital buffer rate at 2.0% for 2025 Q2 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.