For central banks, including the BNB, the past year was marked by efforts to control inflation and calm the financial markets by carefully implementing a more restrictive monetary policy aimed at limiting credit expansion and hence demand.
In Bulgaria, credit activity, although with more limited growth rates compared to 2022, remained high in the conditions of a sustainable increase in deposits, a slow transfer of the global process of interest rate increases to interest rates for households and a stable capital position of the banks. This is stated by the governor of the BNB, Dimitar Radev, in the quarterly newsletter of the Association of Banks in Bulgaria.
In the context of high inflation in our country, fueled in part by the fiscal expansion and the strong growth of wages and private consumption, the BNB raised to 12% the mandatory minimum reserves for the funds attracted by the banks, withdrawing liquidity from the money market and thus limiting lending opportunities. At the same time, to preserve the stability of the banking system against the risks posed by the financial and business cycle, the BNB has consistently increased the level of the anti-cyclical capital buffer from 0.5% in 2021 to 2.0% in 2023. Maintaining the sustainable capital position of banks also contributes of the systemic risk buffer at the level of 3%.
Against the background of the monetary policy measures taken, 2023 was another strong year for the banking system in our country. According to the European Banking Authority, the country's banking system is among the best capitalized in the European Union. The liquidity position remained very high with levels of liquidity coverage and net stable funding significantly above regulatory requirements. The banking system's profit is solid, with a major contribution from net interest income. At the same time, the share of non-performing exposures continued to decline to historically low levels in all major segments of the loan portfolio.
However, the continued strong growth of housing loans towards the end of 2023 creates conditions for an increase in household indebtedness, albeit from a relatively low level, and for a rapid accumulation of credit risk in the balance sheet of the banking system, which may necessitate the application of additional macroprudential measures by the BNB in 2024, such as the imposition of system-level requirements on borrowers, which banks are obliged to apply when granting loans to households.
This risk may be reinforced by other potential challenges facing the banking sector this year, such as a slowdown in the expected recovery of the European economy and a cooling labor market, combined with continued relatively high inflation, rising debt burdens and a higher share of non-performing loans. The materialization of these challenges would put pressure on bank earnings, whose significant gains in 2023 are due in no small part to one-off effects, including the delay in the pass-through of higher lending rates to deposit rates. Therefore, one-off positive effects on profitability should primarily be used to build additional buffers in 2024.
The BNB, for its part, is ready to further influence credit activity in our country both through the full range of macroprudential policy instruments and through the limited monetary policy instruments at its disposal. The purpose of their use, if necessary, would be two-fold: maintaining the buffers in the banking system at an adequate level and withdrawing additional liquidity, which would create the conditions for reducing consumer demand and crediting, thus suppressing inflation and increasing the probability of meeting the convergence criterion related to price stability.
In the current year, the BNB will actively continue to work on the final phase of preparations for Bulgaria's full membership in the Economic and Monetary Union of the EU (Eurozone), mainly in line with legislation, information connectivity, and logistical support for the processes of printing euro banknotes and minting of euro coins with a national side, their transportation and storage.
The perspective of the full integration of our country into the Eurozone puts our monetary regime on the threshold of a historically important change, which will qualitatively upgrade the way we conduct monetary policy in the country, Radev states.
The monetary conditions in our country during the transition between the two monetary regimes will depend not only on the developments in the Eurozone but also on the developments in the country, including inflation, economic growth, fiscal position, and credit risk.
However, what will largely determine the direction of our monetary policy in the short term is the moment of the country's accession to the Eurozone. If in the middle of the year the Council of the EU decides to accept Bulgaria into the Eurozone from January 1, 2025, we will proceed to a smooth and controlled reduction of the requirements for commercial banks regarding their mandatory minimum reserves in the BNB, reducing them to 1%, according to the regulated level for all eurozone countries. However, if the decision is postponed, it will mean an unfavorable development in terms of the level and trajectory of inflation, and will most likely lead to an additional tightening of monetary conditions in the country. Therefore, until the late spring of this year, all options are open, explained Radev.
The role of the BNB, with the country's acceptance into the Eurozone, will significantly change both in making decisions regarding monetary policy and in its implementation. In the Eurozone, decisions are taken centrally by the ECB and implemented decentralized by national central banks. Therefore, the BNB, through its governor, will participate in decision-making using the full range of monetary policy instruments, including setting the main monetary policy interest rate and conducting open market operations, and will apply them on the territory of the country.
At the same time, joining the Eurozone will ensure the direct and rapid transmission of the ECB's monetary policy to the Bulgarian economy, without the need for additional measures from the BNB, as is the current practice. There will also be no need to maintain huge liquidity buffers in the Bulgarian banking system, in practice frozen resources that would otherwise support the growth of the Bulgarian economy. Among other things, the need to maintain significant liquidity buffers stems from the normatively highly limited, in practice - currently non-existent, function of the BNB as a lender of last resort.
In conclusion, in 2024 the BNB will continue to work to achieve price stability and sustainability of the banking sector in our country, in the context of the prospect of our country joining the Eurozone, and taking into account the potential risks of deterioration of credit portfolios in the conditions of possible slower recovery of the world and European economy. Until the moment of our full membership in the eurozone, we will continue to apply countercyclical monetary policy instruments according to the possibilities of the Monetary Council, to maximally help the convergence of inflationary processes in our country to the reference values according to the Maastricht criteria and taking into account the secondary effects on the banking sector and economic activity. In a favorable scenario with a decision for Bulgaria to join the EMU from 1.1.2025, we will speed up the practical preparations for the introduction of the euro and the effective inclusion of the BNB in the activities of the ECB and the central banks of the euro area, and we will take steps for a smooth and controlled reduction of the requirements for commercial banks regarding their mandatory minimum reserves in the BNB, Radev also stated. /BGNES
