Bulgaria ready to act should bank stress tests reveal problems: central bank

SOFIA (Reuters) - Bulgaria’s central bank expects an ongoing asset quality review and upcoming stress tests on the country’s lenders to boost the banking sector’s credibility, but is also ready to act if any of the banks show problems, its governor told Reuters.

The Balkan country launched health checks on its 22 commercial banks following the collapse of its fourth largest lender in 2014. The results will be published in August.

“We expect the asset quality review will confirm the soundness of our banking system,” Governor Dimitar Radev said in an interview for the Reuters Eastern Europe Investment Summit.

“At the same time, we are fully prepared to address any potential remaining issues at individual banks within the already well-established bank recovery and resolution framework.”

Radev has said Bulgaria is much better prepared to deal with any banking issue than it was in 2014, when a bank run led to the collapse of Corporate Commercial Bank and triggered the country’s biggest financial turmoil since the 1990s.

The total capital adequacy of Bulgaria’s banking system stood at 22.9 percent at the end of March, while its liquidity was 37 percent, central bank data showed.

Bulgaria has adopted the European Union’s bank recovery and resolution regime and established the institutions to allow for market based solutions and bail-ins if needed.

Separately, the finance ministry has set up a fiscal backstop of about 5 billion levs ($2.85 billion) that could be used to support banks if problems cannot be resolved through market transactions.

The outcome of the checks is likely to boost consolidation in Bulgaria’s fragmented banking sector, Radev said.

Health checks would also help banks to better assess credit risks and lead to a drop in the rate of non-performing loans (NPL) that stood broadly unchanged at about 20 percent of total loans at the end of March, he added.

Radev noted there was adequate coverage for NPLs in terms of both provisions and capital surplus, which combined covered over 100 percent of NPLs at the end of March.

“This should mitigate credit risk at a system level,” he said, adding he expected the asset review and stress tests to consolidate a downward trend in NPLs.

Radev said the bank forecast economic growth of 2.2 percent this year, down from 3.0 percent last year. The 2016 forecast could be upwardly adjusted, after annual growth of 2.9 percent in the first quarter, if the external environment improves and internal demand continues to grow.

The tests, along with a pending Financial Sector Assessment Program(FSAP) by the International Monetary Fund and the World Bank, will help shape discussions on how and when Bulgaria will move on its aim to join the euro zone.

EU member Bulgaria has no target date for adopting the euro and western diplomats have said it needs to show its banks are well supervised and that it is serious about combating corruption and organized crime before applying.

“Our focus now is on the preconditions that need to be met in the banking sector: strong banking supervision, a well established framework for bank recovery and resolution and of course independent review of the financial situation,” he said.

“However, we keep in mind that the range of prerequisites goes beyond the banking sector and, furthermore, the process of joining the euro is a two-way street,” he said.

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Editing by Alexandra Hudson